Hospital Price Variation

It is well established that there is wide geographic variation in hospital charges for the same services and that even within the same geography different hospitals may have substantial price differences.  In addition, hospitals charge different payers different prices.  In the case of Medicare and Medicaid, hospitals generally must accept what those programs are willing to pay for a service.  But in the case of commercial health insurers, prices are negotiated and a body of research has suggested that hospitals generally have significant market power and charge private health plans much more than government programs pay.  A study carried in the American Journal of Managed Care explores further the relationship between market power and hospital pricing.  (AJMC Article)  The study is based on 2006 data and compares what Medicare pays and private payers are charged for all inpatient admissions and for some common diagnoses and also looks at the relationship between market concentration and pricing.  The two diagnoses examined were heart attacks and knee replacement, which is elective.

The average price paid by private insurance across all hospital regions examined for all discharges was almost twice what Medicare pays.  Since it is unlikely that it is more intensive to care for private patients, this is either a result of cost-shifting from unprofitable Medicare business or hospitals are using market leverage to charge plans as much as they can.  There was weak correlation between Medicare prices and private payer prices in a specific region.  In an unadjusted analysis, an increase in market concentration was associated with lower prices for Medicare on all discharges and on heart attack specifically, but with a higher price for knee replacement for both Medicare and private insurance.  When adjustments were made, commercial plans paid more for knee replacement in less competitive markets, but not for heart attack admissions.  The results suggest that the relationship between the level of theoretical competition in a geographic area and prices is complex.