Hospital Market Power and Pricing

If you have private insurance and you pay attention to health trends and research, you know that hospital consolidation and hospital acquisitions of other provider types are the major causes of health spending growth in the United States.  A recent paper from the Healthcare Pricing Project further validates this thesis.   (HCPP Paper)   Medicare and Medicaid theoretically dictate prices they pay for hospital services; it is largely a political process. Private insurers, which cover 61% of the American population, must negotiate their contracts with hospitals and the prices embodied in those contracts reflect relative market power.  The researchers used a large commercial claim database from 2007 to 2011 to analyze the effect of market share on prices and spending.  There is wide per capita health spending variation across the country for non-Medicare eligible adults, with the hospital referral region at the 90th percentile of spending having a per capita rate 47% higher than the HRR at the 10th percentile.  Unlike Medicare, where quantity of services drives 95% of the geographic variation in spending, for private insurance, price differences represent half the variation.  Hospital prices vary significantly both within and between geographic markets, with some hospitals being paid twice as much as others for the same service.  And the same hospital will charge very different prices to different private insurers, almost certainly reflecting the insurers’ own market shares.

The headline numbers show the damage done by unchecked hospital consolidation.  Markets with one hospital, compared to those with four or more, have 12.5% higher prices; have 10% more cases paid as a percent of charges and have 11% fewer cases where they are at risk by prospective payments.  Markets with high insurer concentration are able to partially offset these higher prices, dropping the excess price to 7%.  Mergers between hospitals that were five miles or less apart increased prices by over 6%.  Mergers by hospitals more than 25 miles apart had no apparent impact on prices.  To give you a sense of the magnitude of the problem, if private insurers paid hospitals at 120% of Medicare rates, they would still have 20% lower inpatient spending than they currently do.  That is a tremendous amount of savings.  The paper does a good job of describing not only the impact of hospital market structure on prices but on examining other aspects of hospital price contracting, such as the nature of the payment in relation to risk-sharing and to Medicare payment structures.  In addition to raising prices for core inpatient hospital services, large dominant health systems often own much of the physician and other care segment market, allowing them to force use of those services as well, at high prices.  The solution is obvious–force divestiture of hospitals and of related care businesses.  A market structure with more hospital participants and independent physician practices, nursing facilities, labs, imaging centers, etc., will be more competitive, have lower prices, and likely better quality.  The only other alternative is to engage in large-scale price-setting by governments.