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How to Counter Hospital Pricing Power

By May 28, 2012Commentary

It has been demonstrated in a number of research reports, including some from the government, that hospital pricing power is the biggest factor behind ongoing health spending growth.  Because of consolidation, both in hospitals and in ancillary services acquired by hospital systems, in most geographic areas a very small number of hospitals and hospital system exist and they have substantial bargaining leverage with payers, who are forced to agree to annual price increases well above general inflation or GDP growth.  A report from the National Institute for Health Care Reform, a unit of the Center for Studying Health System Change, looks at whether state rate regulation can help.  Some states, most notably Maryland and West Virginia, have always retained some control of hospital pricing, and have seen lower hospital cost growth than other states.   (NIHCR Report)

The authors note the history that led to hospital concentration and market power, including the managed care backlash, leading to broad network plans, and hospital consolidation.  They also note the significant growth in hospital margins on private payer reimbursement.  Given the pricing power of many systems, governmental intervention in the form of rate setting is considered necessary by some.  The authors suggest that if this path is to be followed, flaws in earlier rate-setting systems need to be fixed.  Even Maryland and West Virginia have not been that successful with their systems.  The rate setters must be completely politically insulated.  All payers, including government ones, should be subject to the system.  The payment rates should be flexible enough to accommodate other payment reforms, such as global or episode payments.   And the system should probably include outpatient services where there is evidence of excessive market power there.

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