The Impact of Preferred Provider Incentives on Demand and Negotiated Prices

This paper studies the impact of a preferred network design on procedure-level spending for lab services. This plan structure, termed the "Site of Service" design, employes a two-tiered cost-sharing schedule for lab tests: patients incur no out-of-pocket costs at preferred providers but face a deductible at non-preferred providers. Using event-study methods and administrative data on two large carriers, I find that these tiered incentives lead to a considerable reduction in the price paid per lab, with effect size ranging from 14% to 36% across groups and time. I find that the preferred provider program generates savings both by steering consumers towards less expensive providers and by putting downward pressure on negotiated prices. Notably, I present explicit causal evidence linking the preferred network to substantial negotiated price cuts. I find that these price dynamics account for about half of the overall program savings while the steering mechanism accounts for the remainder.