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Hospital Pricing Variation

By February 23, 2016Commentary

For health insurers (and some of the rest of us) that awful thing hiding at night under your bed or in your closet and just waiting to devour you is the pricing power of hospitals and their associated health systems.  Several reports, many by independent researchers, have found that hospital prices play an outsize role in rising health insurance costs.  Because Medicare and Medicaid set prices by fiat, subject to political pressures, the impact of hospital system bargaining power is largely felt by commercial health plans.  A report sponsored by trade association America’s Health Insurance Plans (surely a disinterested group on this topic) finds that not only do commercial plans pay more for hospital services than Medicare does, but the gap is rising.   (AHIP Report)

Using Medicare fee-for-service claims data and a large commercial claims database, AHIP reports that in 2012, average payments for commercial stays were higher than Medicare payments for 96% of DRGs analyzed.  In fact, 80 percent had a ratio of commercial to Medicare payments of over 1.25 and over 20% had one over 1.75.  Between 2008 and 2012, the average payment difference increased 14%.  Some very common DRGs had some of the biggest payment ratios and largest gap increases.  This despite the fact that commercial stays were usually shorter, suggesting that hospital costs for the admissions were probably lower.

While you may suspect AHIP of potential bias in the report, there is actually little reason to doubt the conclusions.  Hard to manipulate the data, the statistics are straightforward, and the results are supported by other research.  Personally, it seems to me beyond dispute that hospitals’ market power, and their assertion of that market power through pricing negotiations with health plans, is the single largest source of increasing health spending.  So if you want to do something about those increases, finding ways to limit hospital prices would be a good place to start.

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