A new Health Care Pricing Project study on employer-based health insurance and hospital pricing found that insurers are paying “substantially different prices for the same services.” Health spending on the privately insured varies by a factor of three across the country, with half of the variation caused by hospital pricing differences and half by quantity.
Competition also plays a role. “Monopoly hospitals” charge 12% higher prices than hospitals in markets with at least four other facilities, according to the report.
The study authors said inpatient spending for privately insured would drop nearly 20% if private insurers paid at 120% of Medicare rates rather than what they’re paying now.
The researchers used private insurance claims data from Aetna, Humana and UnitedHealthcare, which are three of the biggest private payers in the U.S., to explore payer-hospital contracts and find hospital pricing variations. The claims data accounted for 28% of Americans with employer-based coverage between 2007 and 2011.
The report found that a hospital’s location plays a huge role in prices. “Health spending per privately insured beneficiary differs by a factor of three across geographic areas and has a very low correlation with Medicare spending,” according to the report.
Not only do prices vary by region and across hospitals within regions. The report even found substantially pricing variations within hospitals. “For example, even for a near homogenous service, such as lower-limb MRIs, about a fifth of the total case-level price variation occurs within a hospital in the cross-section.”
One of the study authors, Zack Cooper, assistant professor at Yale University, wrote on Twitter about the importance of a payer’s bargaining power when setting hospital pricing. “Approximately 20% of the cross-sectional variation in hospital prices occurs within hospitals (even for procedures like MRIs). This shows how much insurer bargaining leverage matters," he wrote.
After 2 years of work, @stuartcraig, @MartinSGaynor, @johnvanreenen, and I finally finished the updates of our 'Price Ain't Right' paper. We now analyze within hospital price variation, the structure of insurer/hospital contracts, and hospital mergers. https://t.co/YE61jZmaLk— Zack Cooper (@zackcooperYale) May 8, 2018
The report found competition plays a vital role in hospital pricing because hospitals that are alone in their market have higher prices that load more risk on insurers. It’s very different in competitive markets. “In concentrated insurer markets the opposite occurs — hospitals have lower prices and bear more financial risk.”
The report said a lack of competition may also affect the move to value-based contracting. Providers with fewer potential competitors may be slower to take on more risk, and payers won’t have the leverage to push them in that direction if there are few competitors.
The researchers also dug into the numbers for 366 hospital mergers between 2007 and 2011. They found that prices increased more than 6% when the merger hospitals were within five miles of one another. That wasn't the case for hospitals that were farther away. These results show how M&A activity that removes local competition increases prices.
As more health systems seek M&A activity, market share and lack of competition could increasingly drive healthcare prices in the coming years. Healthcare executives trumpet M&A as a way to improve quality and lower costs, but that isn't always the case. Speakers at the National Health Policy Conference earlier this year said M&As can lead to less competition, higher costs and poorer patient outcomes.