Physician Prices, Hospital Prices, and Treatment Choice in Labor and Delivery

We study the effect of changing the price differential for cesarean versus vaginal deliveries paid by commercial insurers to hospitals and physicians on cesarean rates. Using eight years of claims data containing negotiated prices, we exploit within hospital–physician group–insurer price variation arising from contract renegotiations over time. We find that increasing the physician price differential by one standard deviation ($420) yields a 12 percent increase in the odds ratio for cesarean delivery. Increasing the hospital price differential by one standard deviation ($5,805) for births delivered by hospital-exclusive physician groups yields a 31 percent increase in the odds ratio. Our findings confirm and extend the prior literature on behavioral responses to physician and hospital prices in the context of private insurers, and point to further research questions to understand the hospital-physician principal-agent problem and the future of accountable care organizations.