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Another Somewhat Boring Health Care Post, This Time on Hospital Prices

By August 21, 2023Commentary

Sorry, not everything I write can be an exhilarating rant against the decline of our society.  Sometimes I have to go back to the basics and so it is with this post on hospital prices.  Medicare sets prices in the fee-for-service Medicare world by administrative fiat–the agency running Medicare, CMS, just decides how much to pay hospitals, for example, within guidelines set by Congress.  There obviously is lobbying and political machinations going on in regard to the payment level, but it isn’t really negotiated.  In the other arm of Medicare, Medicare Advantage, the private health plans providing coverage do negotiate prices with hospitals and other providers, but they can always default to Medicare levels.  So this study took a look at how much the health plans paid hospitals for services to Medicare Advantage members compared to what they pay for services to a commercial member–someone covered by an employer health plan, for example.

In this way, they are able to see what kind of excessive pricing hospitals extract due to their market power.  Almost every urban hospital market is non-competitive due to extensive consolidation.  And hospitals have not been shy about using their market power to charge extremely high prices and make large profits, even though most of them are supposed to be non-profits.   Basically, hospitals were found to charge the same health plan on average about twice as much for the exact same service when it was delivered to a commercial member compared to a Medicare Advantage Member.  There was wide variation geographically and across types of services, with some commercial prices being close to Medicare Advantage ones, and others being as much as five times more.  There was some suggestion that where health plan markets were also concentrated, the price difference was lower, which might indicate some equalizing of bargaining power.   (HA Study)

It may be that Medicare underpays hospitals, so some of the difference could be commercial business subsidizing losses on Medicare patients.  But it can’t account for the amount of variation seen in this study.

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