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More on Hospital Pricing Power

By November 20, 2010Commentary

The Center for Studying Health System Change has issued a research brief which examines the issue of hospital pricing power.  The Center obtained data from four major health insurers regarding eight geographically diverse markets and also interviewed representatives from those payers and from provider organizations.  The authors compared the private insurer payments with those by Medicare for the same services and found wide variation in payment across and within geographic regions.  (HSC Brief) On average, the insurers paid 147% of Medicare reimbursement for inpatient services in Miami, but 210% in San Francisco.

Understanding the factors causing this variation is not simple, but as with other researchers, these authors suggest it is a combination of concentration and reputation.  The reputational factor is illustrated in the variation that exists within particular markets.  In Los Angeles, for example, some hospitals were actually getting less than Medicare reimbursement, while others got as much as 4 times it.  Generally, there was a correlation between hospital size and payment.  Somewhat surprisingly, payments for hospital outpatient services were even higher as compared to Medicare reimbursement than were payments for inpatient services.  Although there would seem to be more sources for those outpatient services, the hospitals must not fear competition, perhaps because they now own or control so many physicians that they control referrals.  Physician services were not compensated at as much of a multiple of Medicare payments, although specialists generally commanded more of a premium than did primary care doctors.

Hospitals blame inadequate government reimbursement for cost-shifting to private insurers but that has generally been shown to be an inadequate explanation.  Hospitals with market power raise their costs to be commensurate with what they can charge, not vice versa.  Anyone who has been in a prominent local hospital can see the marble and fancy wood, and the million dollar salaries paid to administrators.  The authors suggest that placing more power in the hands of consumers through information or benefit design might be a market solution to the problem.  Another approach could be all-payer rate setting, but that will only slow spending increases if it is done by an independent body that holds annual changes to the rate of general inflation or less.  It has become very clear that until hospital pricing is tamed, there will be no decline in the rate of health spending growth.

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