Who Contracts on Diagnosis Related Groups and How Are They Priced? Evidence From Hospital Price Transparency

To examine which hospital-payer contracts include Diagnosis Related Group (DRG) codes and whether they set prices as a consistent multiple of hospital list prices or Medicare's DRG fee schedule.

We study the cash rates and negotiated contracts (including commercial group, Medicare Advantage, Medicaid Managed Care, and individual market health plans) of US general and surgical acute care hospitals. We develop bunching and regression-based methods to classify the pricing bases of DRGs within contracts. We show the unadjusted and regression-adjusted variation in DRG inclusion and pricing across hospital and insurer characteristics.

Hospital price transparency data from Turquoise Health (May 2024) is joined with hospital characteristics from the American Hospital Association, insurer market concentration from Clarivate, and Medicare DRG rates. We observe 4033 hospitals with 157,313 hospital-health plan contracts and 3902 sets of cash rates.

About 17% of hospitals do not include DRGs in any of their negotiated contracts or cash rates, while 54% include them in some, but not all contracts. Nearly half (48%) of hospitals exclude DRGs from their cash rates. Among commercial group contracts with DRGs, 25%-27% benchmark their DRG prices to hospital list prices, while 32%-36% are based on Medicare's fee schedule. Medicare Advantage contracts are more likely to be benchmarked to Medicare (64%), while most hospitals base their cash rates on list prices (85%). Hospitals facing less competition had lower rates of DRG contracting but were observed to be more likely to negotiate prices based on list prices conditional on including DRGs.

Our findings suggest that hospital market power may influence hospital-health plan negotiations beyond the average price levels. Policies aimed at standardizing these contracts must account for the wide variation in payment and pricing bases currently used in the private market.