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Variations in Hospital Payments in One State

By January 29, 2010Commentary

Many industry participants and researchers have noted that different payers may reimburse hospitals different amounts for the same services.  The fact that Medicare and Medicaid, which together probably account for over half of most hospitals’ revenues, can essentially set their payments by fiat, has led to claims that these payers are shifting costs to the private sector.  At least one state, Maryland, has responded to these issues with an all-payer hospital rate regulation system, which appears to have generally worked fairly well.  Now Rhode Island has issued a report of variations in payment to different hospitals by different payers, which is a slight twist on the subject.  (RI Report) Rhode Island is a small state and as might be expected, two commercial insurers have most of the private market and there are two major hospital systems.

The study’s authors find that each of the two dominant health plans paid the same hospital on average within 5% of each other.  Commercial payers reimbursed at about 116% of what Medicare would have paid for the same patients.  This suggested a somewhat significant level of cost-shifting from Medicare to commercial payers.  If Medicaid were included the effect would likely be even more pronounced.  There was as a 90% difference in the reimbursement for the same patient at different hospitals, with the system-affiliated hospitals receiving the much higher payments.  The authors concluded that this difference was almost entirely due to negotiating leverage based on the size of the Rhode Island hospital systems.

A couple of observations are worth making.  A number of years ago, during the Reagan administration, the Justice Department and the FTC turned a completely blind eye to hospital mergers, a policy which has not really been reversed.  This has led to highly concentrated hospital markets where hospitals have significant pricing power.  The justification for many of the mergers was economies of scale which would benefit consumers by lower prices!  It would be absurd to suggest that this was the actual outcome.  Prices would obviously be significantly lower if most markets had no multi-hospital systems and one potential health reform worth considering is forcing the breakup of these hospital systems.  The second observation is that many people blame insurers for cost increases, but health insurers prices are largely driven by and move in lock-step with provider prices and it is apparent that hospitals at least, have the best end of that bargain and are in fact the primary driving force for higher health insurance premiums.  As hospitals employ more and more physicians and own more of the other sources of health care, we should be very concerned about the impact on unit prices and the costs of health coverage.

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