Healthcare Business News

Clout, not costs, drives higher charges from hospitals, study says

By Joe Carlson
Posted: September 5, 2013 - 12:01 am ET

Bargaining leverage, not the cost of providing complex care, is the main reason why some hospitals can demand prices twice as high as their competitors' and still get contracts to treat privately insured patients, according to a new study.

The analysis by the Center for Studying Health System Change of actual payments to hospitals and physicians by private insurers in 13 U.S. cities found that the most expensive hospitals got rates as much as 60% more than the lowest-priced competitor for inpatient care, and prices that were double the competition for outpatient care.

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The outpatient differences were particularly stark in three markets—Indianapolis, Kansas City, Mo., and Toledo, Ohio—where private insurers paid the most expensive hospitals more than four times what Medicare would have allowed for the same services.

The study drew comparisons between private insurance payments to hospitals and primary-care physicians to make its point. While the most expensive hospitals charged prices far exceeding their lower-priced competitors, study authors found that primary-care doctors don't command the same mark-up power. Some family practice doctors actually received lower rates from private insurers than they did from the famously stingy Medicare program, the study found.

Study authors said that was because they tend to work in smaller organizations that can't afford to walk away from the bargaining table with a private insurer.

“In terms of negotiating leverage, primary-care practices fall at the bottom of the heap,” authors wrote in a research brief published online today by CSHSC. “As a result, few, if any, primary-care practices can command prices that significantly exceed their competitors.”

In contrast, specialty physicians tend to have more negotiating clout because they have higher market concentration and work for larger group practices. Many specialists were paid at least one-and-a-half times Medicare rates. The highest-paid specialists in Cleveland and St. Louis garnered prices 50% more than even the median private rates in their areas, the study found.

The entities with the most bargaining power, and thus the highest mark-ups, are the “must-have” hospitals—that boast good reputations, large numbers of services and desirable locations, the authors found. “Even in metropolitan areas with many competing hospitals and hospital systems, these must-have hospitals can command unusually high prices,” they wrote.

Expensive hospitals have long argued that providing medical education and the best equipment available drives their costs. But the study authors cast doubt on that because their research was based on how much each hospital's rates exceeded Medicare payments for the same services. Since Medicare rates are adjusted to reflect patient case-mix complexity and the cost of capital equipment, those factors shouldn't explain why some hospitals get more than others relative to Medicare's rates.

The study examined private-insurance claims data from 2011 on 590,000 active and retired autoworkers and their dependents in 13 Midwest healthcare markets. All of the insured people were younger than 65. The studied prices paid to the providers included the combined payments from insurers and patients.

Study authors predicted that price growth could be slowed by innovations in “active purchasing” such as pegging maximum prices to specific multiples of Medicare prices. For example, limiting outpatient prices to 1.5 times Medicare rates would reduce spending in that category by 26%.

“But such a dramatic change might require governmental rate setting and force hospitals and specialist physician practices to cope with significantly constrained revenue,” the study says.

Follow Joe Carlson on Twitter: @MHJCarlson

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