Variation in Hospital Pricing

Hospitals and the larger health systems they have created are responsible for a substantial portion of all health spending.  The prices these hospitals charge for their services and the payments they actually receive are a long-standing mystery.  A brief report from the Minnesota Department of Health shows just how much variation there is between and among hospitals in prices received for the same service.   (MDH Report)   The report used Minnesota’s all-payer database to reveal how much was actually paid for the service.  Four services were studied–major bowel surgery, appendectomy, removal of uterine fibroids and spinal fusion.  The prices paid included the physician and facility charges.  Statewide averages were determined and variation across and within a hospital were examined.   It is a little complicated, but fascinating to look at the results.  For major bowel surgery the statewide average across all procedures at all hospitals for all payers was $34,489, ranging from a low of $14,541 to a high of $68,765, almost a five-fold variation.  The single hospital with the highest average price received an average reimbursement of $47,276, with a low $14,541 (I am guessing this is Medicaid) to a high of $68,765.  The single hospital with the lowest average price got $23,913, with a range of $14,541 to $65,128.  It is interesting to see the within hospital variation even in relatively low-average reimbursement hospitals.  The other procedures showed similar results, although there was less general variation for removal of uterine fibroids.

So what accounts for the variation?  Some might be patient characteristics, but even within an individual hospital only 64% of the variation in what the hospital got paid for the same service by different payers was explained by a pretty long list of factors such as patient demographics, severity of illness, length of hospital stay and insurance characteristics.  It could be that there are differences in hospitals’ cost structure that are out of their control, but within a single state this is unlikely to account for much of the variation.  More likely is market power; hospitals with bigger market share or a bigger “brand” can charge more, at least to private payers.  Multiple studies have identified this as a primary cause of higher prices.  By law, this report couldn’t identify the individual hospitals, but that barrier should be removed and payers and patients should be able to see who is charging what for the same services.  This data is critical to allow price shopping and to help payers insist on fairer prices.