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Commercial Plan Hospital Price Trends

By August 15, 2019Commentary

UnitedHealth Group releases a report on one of my favorite punching bags, hospital prices for commercial health plans.   (UHC Report)   About $200 billion was spent on inpatient hospital care in 2019 and this is projected to grow to $350 billion by 2029.  Hospital spending is a combination of the number of units of service used and the unit price of those services.  For hospital inpatient care, there is generally a charge for both the use of the hospital itself and physician charges for services rendered during the stay by doctors.  From 2013 to 2017, UHC says the hospital portion of inpatient spending experienced a 19% price increase, or 4.5% per year.  For the physician component of inpatient care, prices rose 10% over the full period or about 2.5% per year.   Over the study period, utilization declined 5%, putting downward pressure on hospital inpatient spending.  Here were hospital prices rises for some common services, annualized.  For a stay related to hypertension, up 6.5%; for a normal vaginal childbirth, up 6%, for a coronary bypass, up 6% and for an appendectomy, up 7.5%.   The authors point out that reducing the price rise in the hospital component to the same level as the physician increases, 2.5% per year, would save $250 billion in the next decade.

In some ways the data isn’t as bad as I expected, but maybe that is because UnitedHealth is the nation’s largest private health insurer so it probably has more leverage than most plans do over hospital rates, so I wonder if their experience is typical.  A hospital has a fixed capacity and a fixed cost related to that capacity, and the decreases in utilization reduce the use of that capacity, putting pressure on hospitals.  In a normal market, that actually might mean more price competition between hospitals to fill more of their capacity; but health care isn’t a normal market.  Instead, in health care hospitals raise prices to try to compensate for the lower capacity utilization.  And that is possible because of the extensive consolidation among health systems, which has left most urban areas with an oligopoly at best.  And that is the real problem in health care; we have allowed both provider and private insurance markets to become too concentrated and that has muted price competition.  The obvious solution is to attempt to restore some semblance of a competitive market.

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