Clout drives costs, study says

Teaching hospitals and other expensive, prestigious hospitals have long argued that providing medical education and the best equipment available drives their costs.

But a study by the Center for Studying Health System Change concludes that bargaining leverage 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.

The analysis 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 those of competitors for outpatient care.

The outpatient differences were particularly stark in 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. Thus, 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 primary-care doctors tend to work in smaller organizations that can't afford to walk away from the bargaining table with private insurers.

“In terms of negotiating leverage, primary-care practices fall at the bottom of the heap,” authors wrote in the research brief published online last week by the center. “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, according to the study. Many specialists were paid at least one-and-a-half times Medicare rates.

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.

The study authors cast aside the argument that the rate differential for expensive hospitals is due to treating sicker patients and having higher capital costs. 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 can'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.

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