Negotiated Rates and Leverage

Medicare sets its prices by rule. Commercial prices are the outcome of a bilateral negotiation between a health plan and a provider organization, and the result depends almost entirely on what each side can credibly threaten.

What each side is actually threatening

The plan’s threat is exclusion: agree to this rate or be left out of the network, losing the volume those members represent. The provider’s threat is the mirror image: refuse and your members will find our hospital missing from their network, and they will complain to their employer.

Whichever threat is less credible determines the price. A hospital that is the only trauma center within ninety miles cannot credibly be excluded, because a plan that dropped it would be unsellable. A plan covering a small share of the local population cannot credibly threaten a large system, because losing that volume is tolerable.

What the evidence shows

Research on health systems and commercial prices found that “hospital prices are higher in more concentrated hospital markets, while lower in more concentrated insurer markets.” The interaction is the interesting part: “the negative relationship between insurer concentration and hospital prices is attenuated in highly concentrated hospital markets, suggesting that insurers’ bargaining leverage is lessened at greater levels of hospital consolidation.”

In plain terms, a large insurer normally extracts lower prices, but not when facing a dominant hospital system. Concentration on the provider side neutralizes concentration on the payer side.

Consolidation has a measurable price effect even when the merging hospitals do not compete with each other. One study of cross-market mergers found that “six years after acquisition, cross-market hospital mergers had increased acquirer prices by 12.9% (CI: 0.6%-26.6%) relative to control hospitals,” rising to “16.3% (CI: 4.8%-29.1%)” for serial acquirers. The same study found the mergers “had no discernible impact on mortality and readmission rates for heart failure, heart attacks and pneumonia.”

Worth remembering: that pair of findings is the single most important empirical fact in this course. Cross-market mergers cannot be justified by local efficiency, because the hospitals were not competing. What they produce is bargaining leverage against payers, and the measured result was higher prices with no detectable quality gain. When a health system says consolidation will improve care and lower costs, this is the evidence against which that claim should be tested.

What this means for value-based contracting

Any value-based arrangement in the commercial market sits on top of a negotiated fee schedule. A shared savings contract with a system whose underlying rates are 300 percent of Medicare is a mechanism for slowing growth from an already high base, not for correcting the base. The contracting course made this point in general terms, and it is sharpest here: the unit price and the payment model are separate negotiations, and winning one does not win the other.

Key takeaways

• Commercial prices are bargained, and the outcome turns on whose exclusion threat is credible.
• Prices rise with hospital market concentration and fall with insurer concentration, but insurer leverage weakens against dominant systems.
• Cross-market mergers raised acquirer prices 12.9 percent after six years, and 16.3 percent for serial acquirers, with no discernible mortality or readmission effect.
• A value-based contract layered on high underlying rates slows growth without correcting the base.

Sources

• Li et al., How do hospitals exert market power? Evidence from health systems and commercial health plan prices, Health Affairs Scholar 2025 (opens in a new tab)
• Arnold et al., New evidence on the impacts of cross-market hospital mergers on commercial prices and measures of quality, Health Services Research 2025 (opens in a new tab)