Hospital/Payer Pricing

By November 6, 2018 Commentary

I firmly believe that hospital pricing tactics, particularly in regard to outpatient and other ancillary services, are to blame for much of the rise in private health plan costs and premiums.  A new paper from the National Bureau of Economic Research does nothing to discourage that belief.   (NBER Paper)   The authors use data from the Massachusetts all-payer claims database on adults aged 18 to 64 to explore differences in pricing between hospitals, but also focus on the different prices different payers are charged for the same services from the same hospital.  (A side-note, Massachusetts isn’t the best state to do this kind of study in, as it has an oligopoly both in payers and in providers and the state has all kinds of market-distorting regulations as well.)  Five common hospital services were examined, knee and hip replacements, vaginal and caesarean delivery, and MRIs, as well as a look at the overall level of prices for inpatient care.  While quality or cost structure might be a basis for differences in prices charged by hospitals, when there are differences in the prices to different payers from the same hospital, it is hard to imaging those factors have anything to do with it.  It probably is purely a matter of bargaining leverage–relative market shares.  The researchers found that between hospital variation was about 17% to 31% of the mean, while between payer price variation in the same hospital is a similar range, 16% to 28% of the mean.  The consequences for a higher price to a payer likely impacts both premiums, which employees often pay a share of, and out-of-pocket spending, as a higher prices usually means more in terms of payments under deductibles or co-insurance.

As noted above, Massachusetts is basically a provider and a payer oligopoly.  The Partners system, which claims to have such great quality, charges on average 27% more than other hospitals.  For the same payer different plan designs may even have different prices.  Typically HMO designs have lower provider prices, probably due to a belief that some greater ability to deliver patients to a specific provider is inherent in these designs.  BCBS Massachusetts has the largest market share but tends to pay higher prices that other large plans in the market.  This may reflect an oligopolistic tendency of back-scratching; BCBS charges its customers more and in turn passes on higher payments to providers. Some other interesting findings include that HMO-design payers tend to have prices about 3-5% lower than other payers and, disturbingly, that self-funded plans pay about 2% to 4% more.  This implies that the health plans, who almost always are contracting with providers for the self-insured employers, are not being as aggressive as they are when they are playing with their own money under a fully-insured plan.  Price level for a specific procedure was also not consistent across payers; the same hospital might charge one plan more for a knee replacement, but less for an MRI than it charged other plans.  What is generally clear is that the current market structure in a state like Massachusetts is not good for employers or consumers, who are ending up paying higher premiums and higher prices for medical care.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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