CH B AR THE LEONARD DAVIS INSTITUTE R ES E RI EF of HEALTH ECONOMICS Penn LDI 20 5 16 . - No Transparency and Negotiated Prices: The Value of Information in Hospital-Supplier Bargaining Matthew Grennan, Ashley Swanson National Bureau of Economic Research, Working Paper No. 22039, February 2016 KEY FINDINGS: LDI RESEARCH BRIEF Hospitals that join a pricing database are able to reduce the negotiated prices they pay to medical technology companies. Reductions are concentrated among hospitals previously paying high prices relative to other hospitals and for products purchased in relatively large volumes. Transparency may offer significant savings on medical devices. THE QUESTION largest purchase volumes; they saved about $70 per stent. These price effects are driven by increased likelihood of How does price transparency affect negotiated prices renegotiation and by larger price decreases when hospitals in business-to-business markets? In the first empirical renegotiate. The findings suggest that benchmarking works analysis of its kind, LDI Senior Fellows Ashley Swanson by solving the asymmetric information problem and helping and Matthew Grennan estimate how benchmarking hospitals learn about suppliers; its effect on the relationship information could be useful to hospital buyers in their between hospitals and their negotiators is less clear. negotiations with medical technology companies. They explore two mechanisms for possible savings: first, by Overall, by obtaining this price information, hospitals reducing “asymmetric information” about seller bargaining were able to achieve 26 percent of the savings that would parameters (that is, not knowing the lowest price a seller have occurred if prices were set at the average level. would accept); and second, by helping hospitals solve the The benchmarking database provided hospitals with “agency problem” with their procurement negotiators (that information to help them identify high-volume products is, allowing hospitals to monitor negotiator performance for which they were paying higher than average prices and restructure financial incentives). Taking coronary stents and could see significant savings in a renegotiation. as their example, the authors look at whether hospitals that join a price benchmarking database, which contains average THE IMPLICATIONS pricing based on data submitted by member hospitals, can achieve savings in future negotiations with suppliers. Price transparency has been discussed as a way to reduce consumer health expenditures, but these new findings shed THE FINDINGS light on how transparency can change business-to-business negotiations, which are relatively opaque. The study The authors find that price transparency led to lower prices for hospitals in the upper quintile of price for a given demonstrates the potential for information transparency product; they saved about $30 per stent. Furthermore, to reduce variation in the cost of medical devices across price reductions were greater for hospitals with the hospitals. The potential savings are significant, since Research to Improve the Nation’s Health System. DATA DRIVEN. POLICY FOCUSED. ldi.upenn.edu since hospital supplies have accounted for a quarter of the AUTHORS growth in hospital inpatient costs in recent years. Matthew Grennan, PhD is an Assistant Policymakers have called for greater transparency in Professor of Health Care Management medical technology markets, and intermediaries offering at Wharton. Dr. Grennan’s research benchmarking data have emerged. The authors focused focuses on competitive strategy and on coronary stents as an example of the high-tech, high- industrial organization economics, where dollar “physician preference items” at the center of policy he is especially interested in health care, discussions regarding health care costs and transparency of business-to-business markets, and innovation. device pricing. Hospitals spend about $2 billion annually on stents (about 2 percent of hospital supply spending). Information transparency could extend to other expensive Ashley Swanson, PhD is an Assistant product categories, such as orthopedics, which see high Professor of Health Care Management price variation across facilities. at Wharton. Dr. Swanson is an applied LDI RESEARCH BRIEF microeconomist studying the industrial THE STUDY organization of health care. Her research primarily focuses on the effects of The authors analyzed 2009-2014 ECRI Institute data for information and incentives on both the supply side and the hospital purchase orders for coronary stents at 508 hospital demand side of health care markets. facilities (16 percent of U.S. hospitals) that perform cardiac catheterization services. The dataset exists because sample hospitals subscribed to a voluntary price-benchmarking database between 2009-14. The database provided hospitals with access to monthly submissions made by other member hospitals about the prices and quantities of each item they purchased. Upon joining, new member hospitals were asked to submit retrospective price and quantity data for the past 12 months. This allowed the authors to look at the impact of database membership on price and quantity when new products enter the market, comparing hospitals with or without access to the benchmarking information. Grennan M, Swanson A. Transparency and Negotiated Prices: The Value of Information in Hospital-Supplier Bargaining. National Bureau of Economic Research, Working Paper No. 22039, February 2016. DOI: 10.3386/w22039 Connect With Us: ldi.upenn.edu Since 1967, the Leonard Davis Institute of Health Economics (LDI) has been the leading university institute dedicated to data-driven, • ldi.upenn.edu/health-policysense policy-focused research that improves our nation’s health and health • @PennLDI care. 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