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Hospital and Physician Pricing

By January 31, 2022Commentary

The Congressional Budget Office used to put out some good analysis.  God knows what wokeness and the current administration have done to it.  This report is on a topic that might get overlooked as a DEI target, the prices private health plans pay for hospital and physician services.  Medicare and Medicaid set prices by fiat–the agencies determine what they will pay, subject to legislative oversight.  Political pressure from providers is the only countervailing factor on those prices, and that pressure can be substantial.  (CBO Report)

Private health plans on the other hand, have to negotiate prices with providers.  That negotiation is obviously affected by the relative market share and power of each side.  Both markets have become highly concentrated–a few health systems, often as few as two or three even in major metropolitan areas, dominate delivery of health care and only a few major private insurers exist in most markets.  These dualing oligopolies don’t often have great incentives to keep provider prices low.  The losers are the ultimate payers for health care–employers and consumers.

The CBO study indicates that while private health plans control utilization slightly better than do the government programs, they pay twice the price per service, leading to much higher per person overall spending.  The higher unit prices are not related to provider costs; in other words, the providers are just making a lot more profit on private patients, a lot more.  The Report also finds limited evidence of cost-shifting, that is that low government prices lead to higher commercial prices.  The solution to high health care spending in the US is pretty obvious, we have to lower the high unit prices and profits of health care providers.

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  • James L. Edholm says:

    The reason there isn’t much more utilization management is simple – the Obama care says to insurers: “In order to be certain you don’t rip off the insureds, we will limit your rates to ones in which you can’t make more than 15% of premium as the source of corporate operations.”

    Sounds good on the surface, but here’s how insurers think about it: “If my operating funds are limited to 15% of premiums (they are), and if premiums are driven by claims (they are), then if I hold XYZ corporation to $10,000,000 in claims, I’ll generate $1,500,000 in revenues” (I’m oversimplifying – the real number on $10 M of claims would be $1,677,000 – but the idea is the same)

    “Ono the other hand, if I start doing all the utilization management I’m capable of doing, and if the claims then only become $9,000,000, I’ll be robbing myself and my company of $150,000 in operating margin I COULD HAVE HAD BY DOING NOTHING. To hell with it … I’m not going to incur the extra costs of controlling utilization for an effort that will only limit my potential profit.”

    That’s why any company that DOESN’T self-insure and create a partnership with someone that is paid on a per capita basis instead of a share of costs basis is making a HUGE mistake and robbing the employer of profits they could have kept and giving those profits, instead, to a bloated insurer.

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