Hospital and Health Maintenance Organization Financial Agreements for Inpatient Services: A Case Study of the Minneapolis/St. Paul Area

With nearly a quarter of the population enrolled in Health Maintenance Organizations (HMOs) the Minneapolis/St. Paul metropolitan area provides a unique opportunity for studies dealing with the effects of prepaid health plans on the health care marketplace. This study explores one aspect of that market; discounts obtained by HMOs for hospital inpatient service. Using information gathered from structured interviews with the 7 HMOs and 30 hospitals in the Twin Cities area, the study addressed three areas of inquiry: (1) the nature of discount contracts between hospitals and HMOs, (2) the roles played by each party in initiating the contracts, and (3) factors influencing the establishment of the contracts. While each of the HMOs was found to have at least one hospital contract under which they received inpatient services for other than full-billed charges, the amount of the discount was not substantial In the majority of cases. Other factors such as hospital location and ability to provide a full range of services appear to be as important as financial discounts when HMOs select a hospital for inpatient services. It appears that hospitals played the lead role in initiating hospital/HMO contracts during the formative HMO years, but this initiative shifted to the HMOs as they gained market shares and bargaining power. Hospitals and HMOs agree that the most important factor influencing hospital willingness to consider discount contracts was and still is the surplus bed availability in the area. This surplus of beds has been exacerbated by a continued decline in hospital utilization. These conditions coupled with increased HMO market shares has recently resulted in intensified contract negotiations and further discounts for inpatient services.