In Competitive Markets, Price, Not Quality, Guides Health Plans' Choices

This 1994–1997 project, conducted by Jack A. Hadley, PhD, and researchers at Georgetown University School of Medicine, Washington, evaluated managed care plans' use of selective contracting to purchase tertiary care services.

Hadley and his research team examined how managed care organizations negotiate contracts with tertiary care hospitals for coronary artery bypass graft surgery and neonatal intensive care, in order to understand the importance of quality and price factors in the negotiations.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO).

Key Findings

  • Researchers reported the following findings in a Findings Brief available on the HCFO website.

    • Managed care organizations employed similar negotiating processes for both coronary artery bypass graft surgery and neonatal intensive care. As a result, researchers suggest that these findings may be relevant in evaluating delivery of other tertiary care services.
    • Managed care organization market penetration was the strongest factor in whether price or quality was the priority in completing a contract.
    • As the level of HMO market competition increased, so did the proportion of HMOs that reported being actively involved in the care process through monitoring both length of stay and pre- and post-stay costs.
    • Researchers found that hospitals that charged higher prices to the managed care company for either coronary artery bypass graft surgery or neonatal infant care were less likely to be awarded a contract by a managed care organization.
    • In many areas, hospitals are not able to maintain needed patient volume unless they have contracted with managed care organizations. However, such contracts are not a guarantee that a health plan will send patients to a particular hospital.