Peering Behind the Veil: Trends in Types of Contracts Between Private Health Plans and Hospitals

Contracting between private health plans and hospitals has been described as “chaos behind a veil of secrecy.” Contract types — e.g. discounted charges versus per diems — profoundly influence providers’ incentives and health plan spending, but remain largely hidden. We develop a novel algorithm that classifies inpatient claims as one of three contract types — discounted charges, fixed rates, or per diems — and apply it to the 2009-2014 Colorado All Payer Claims Database. Of $1.9 billion in payments by private health plans for inpatient care in Colorado, $1.1 billion could be classified, and, of classifiable payments, 42% were fixed rates, 41% were discounted charges, and 16% were per diems. From 2009 to 2014, the share of private payments classified as fixed rates increased sharply in Colorado, from 11% to 43%, while discounted charges declined from 69% to 29%. We also describe the distribution of contract types across types of hospitals and clinical conditions, and payers. To test the validity of our algorithm, we apply it to Colorado Medicare fee-for-service (FFS) claims (2014 only), and Colorado Medicaid FFS claims (2009-2014)–both — both of those programs are known primarily to pay for hospital inpatient care using fixed rates. Reassuringly, our algorithm classifies more than three quarters of both Medicare and Medicaid FFS payments as fixed rates, and exceptions to the fixed-rate classification align with known special payment provisions.