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Hospital Pricing

By September 9, 2013Commentary

We have long been of the view that allowing the degree of provider, and in particular hospital, consolidation that has occurred in the United States would be a significant cause of health care spending growth, a view which has been supported by ongoing research.  The latest evidence comes from a Center for Studying Health System Change Report.   (CSHSC Report)   Examining 13 metropolitan areas largely in the midwest, the report finds that commercial health plans usually pay much higher prices than either Medicare or Medicaid and that hospital prices vary widely within and between markets.  Using data from autoworker plans on the total (payer and patient) amounts actually paid to hospitals for services, as well as for other categories of service.   On average, the highest-priced hospital received 60% more for the same inpatient service than did the lowest-price hospital in the same market.  For hospital outpatient care, the highest-price hospital was paid twice as much as the lowest-price one.  In every market the average payments by commercial insurers to hospitals for inpatient services were well-above Medicare rates.  Prices for primary care services were closer to Medicare reimbursements and less variable but specialty physician services had both more variability and tended to be higher about the Medicare payments.  These differences in price are not likely explained by labor costs, which tend to be the roughly the same across facilities and markets, differences in service complexity or differences in benefits.  The authors conclude that negotiating leverage is the primary cause of both the variation and the higher than Medicare prices.  Primary care tends to be the most competitive, with fewer competing specialists and many hospital markets are very concentrated.  Health plan concentration levels may also affect provider prices.  You would think that dominant health plans could drive better prices with hospitals but in many cases it seems that such plans decide to “share the wealth”; i.e. both providers and the health plan just charge higher prices which flow through to the ultimate payers–employers and patients.  Employers, consumers and health plans that wish to do something about high provider prices need to aggressively move volume to lower-priced alternatives, regardless of reputation and size.

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