Hospitals' market clout equals pricing power, conflict with insurers

Hospitals with a grip on market power in a region can charge prices that are as much as 60 percent higher than the area’s lowest-priced hospital for inpatient services, according to a report released today by the Center for Studying Health System Change.

Average hospital prices for privately-insured patients are about one-and-a-half times the Medicare rate for inpatient care and vary widely across and within the 13 selected metropolitan areas.

[See also: Market consolidation results in clout]

The differences were even more extreme for hospital outpatient services, for which the highest-priced hospital generally is paid nearly double the lowest-priced hospital, and twice what Medicare pays. In Cleveland, the spread was three times as high as the least expensive hospital.

By contrast, primary care physician prices are typically priced close to or even below Medicare rates, and there is little variation within and across markets, the report said. 

“The dramatic variation in prices from one hospital to another points to the significant market power of certain hospitals to command high prices, even in markets with a dominant insurer,” said Chapin White, senior researcher at the Center for Studying Health System Change and co-author of the study, in a news release.

Researchers analyzed claims data for 590,225 active and retired non-elderly autoworkers and their dependents for the study conducted by the HSC for the National Institute for Health Care Reform. The center examined areas including St. Louis, Indianapolis and Lansing, Mich.  

Providers claim that their higher prices are due to having to care for the sickest and most expensive patients.

[See also: Hospital consolidation rising]

However, the higher prices are more likely driven by hospitals’ increased negotiating leverage with private insurers, giving them the “ability to walk away if an agreement cannot be reached,” the report said. “Private insurers understand that employers will not continue to offer their products if must-have hospitals are excluded from the provider network.”   

Payer strategies designed to encourage patients to use high-value providers can offer potential savings, the report said. For example, with reference pricing, the payer sets a maximum allow amount for a specific procedure in a specific market. And benefit design encourages those enrolling in plans to choose high-value providers when accompanied by information about differences in what they will have to pay with different providers. 

As long as provider consolidation continues, amassing market power in a number of systems, “health plans may face only stiffening resistance to attempts to rein in high prices,” the report said. 

Even capping prices at the median of the market only represents 5.5 percent of physician and hospital spending in the plans, less than a year’s worth of the average 7 percent to 8 percent of annual growth in per capita spending for employer-sponsored health insurance.

“However, even small percentage gains can make a significant difference given the enormous amount many large employers spend on health care,” the report said. And value purchasing may begin to give large employers a more direct role in healthcare payment and delivery decisions.

[See also: AHIP report highlights rising hospital prices]