Dominant hospitals dictate price and contract terms

Different insurers pay widely varying prices for the same procedures at the same hospitals, indicating that insurers' bargaining leverage influences healthcare prices, according to an updated healthcare economics paper.

That was one of the new takeaways from a Commonwealth Fund-backed paper that used actual claims data from three national insurers to explain how hospitals get paid. Spending on U.S. hospital care represents about 6% of the entire economy and providers continue to consolidate throughout the country, which underlines the importance of understanding healthcare pricing dynamics. The variation of prices within hospitals could be related to closely guarded exclusivity provisions and other contract clauses, said Martin Gaynor, co-author of the paper and an economics and health policy professor at Carnegie Mellon University. Hospitals with significant market power can dictate how much they will get paid—about 12.5% higher prices for monopoly hospitals than those in markets with four or more competitors—and the form of their contracts with insurers. Providers in concentrated hospital markets can obtain contracts that shift more risk to insurers, which would slow the industry's already gradual transition to new payment models that are expected to rein in prices, according to the researchers. "When we talk about consolidation of mergers there is a lot of focus on price levels," said Zack Cooper, a co-author and assistant professor of health policy and economics at Yale University. "But it is also important to think of the long-term impact of negotiating payment terms, which could have more impact than negotiating higher prices." The two main types of contracts use prospectively set prices that pay a fixed dollar amount based on the DRG classification code, or a model that sets payments as a percentage of hospital charges. Hospitals are likely to prefer the latter because they get paid for every service they provide, and thus bear less risk. This drives prices up and also places less pressure on the hospital to reduce costs. The economists found that about 23% of hospitals' inpatient cases have prices set as a share of hospitals' charges, and dominant hospitals likely use their power to demand these terms. No more than 57% of cases are based on contracts where prices are prospectively set as a percentage of Medicare payment rates. Payment reform on the private side can't happen without competition because dominant hospitals will refuse payment types they don't like, Gaynor said. The findings tie in with insurers like Anthem, which are clamping down on what they will pay for in the hospital setting. Anthem and hospitals are pitted in a legal battle over who ultimately has the power to determine where care should be delivered.

Average hospital charges, negotiated prices and medicare reimbursements

"These payers are having their medical expenses go up and up, and a lot of that is about prices," Gaynor said. "It's all about the relative negotiating position." Researchers also found that prices increased by more than 6% when merging hospitals were less than 5 miles apart. They didn't find significant price impact when the hospitals were separated by at least 25 miles. Antitrust enforcement needs to take a look at proposed hospital mergers and understand that they may have anticompetitive effects, Cooper said. But dealing with already consolidated markets is a much more difficult proposition, he said. "I don't really have an answer there," Cooper said, adding that it's hard to unwind mergers. "Figuring out what to do in those areas is going to be one of the biggest challenges going forward."