Hospital price growth driving healthcare spending

Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward, according to a new study.

For inpatient care, hospital prices grew 42% from 2007 to 2014 while physician prices rose 18%, according to researchers who studied the Health Care Cost Institute's claims data for people with employer-sponsored insurance from Aetna, Humana and UnitedHealthcare Group. Similarly, for hospital-based outpatient care, hospital prices increased 25% while physician prices grew 6%, the new Health Affairs study found.

Insurance costs a family of four about $19,000 a year. The reason costs vary so much across the country is because of the price of hospital care, which is the largest single component of healthcare costs in the U.S., said Zack Cooper, a study co-author and an associate professor of health policy at Yale University.

"What is most worrying to me is that there has been fairly profound consolidation among hospitals and when they gain market power they have the ability to raise prices," he said. "They have the ability to gain more favorable contractual terms, which allows them to raise prices and resist the new, more sensible payment reforms."

The U.S. healthcare economy is nearly as big as Germany's entire economy. U.S. healthcare spending grew 3.9% to $3.5 trillion in 2017, consuming nearly 18% of the country's gross domestic product, according to the CMS.

Higher healthcare spending limits economic growth. It stunts wages, produces higher out-of-pocket costs that dent disposable income and boosts federal subsidies for insurance bought through the Affordable Care Act exchanges.

About 33% of total healthcare spending is directed toward hospital care, translating to about 6% of total GDP, according to CMS data.

"If you look over the last 20 to 30 years, total employee compensation has gone up, but the amount each worker gets paid has been incredibly flat," Cooper said. "The gains they would've gotten in income have gone toward paying their insurance and the largest chunk of that goes toward paying their local hospital."

Healthcare inflation in the U.S. is projected to grow by an average of 5.5% annually from 2017 to 2026, ultimately reaching $5.7 trillion by 2026, the CMS estimates.

The common narrative is that growth in healthcare providers' prices plays a larger role in driving growth in health spending on the privately insured than any change in case-mix or utilization. But to the researchers' knowledge, this is the first analysis that systematically compared growth rates of hospital versus physician prices.

Researchers analyzed the pricing of four different hospital procedures—cesarean sections, vaginal deliveries, colonoscopies and knee replacements. The hospital component of the combined cost of care—physician plus hospital prices—ranged from 61% for vaginal deliveries to 84% for knee replacements.

Most of the growth in total price of care was driven by facility fees, which are higher rates meant to account for hospitals' overhead. The growth in facility fees as a share of the growth in the combined cost of a service ranged from 77% for a colonoscopy to 97% for a knee replacement.

There were no systematic differences in results between hospitals that employed physicians and those that did not, researchers noted.

"We need to seriously think about regulating hospital prices," Cooper said.

As an aside, researchers used negotiated prices from insurers aggregated through HCCI. Notably, the research institute recently announced that it will be losing UnitedHealth Group's data in a move that experts characterized as a major blow to data transparency.

More care is shifting from the hospital to outpatient facilities and the home, which holds tremendous savings potential, Cooper said. But hospitals can reap similar profits when they acquire outpatient providers and physician groups.

A proposal to level payments for hospital-owned outpatient departments and independent offices could slow health systems' acquisitions. But even with site-neutral payments, monopoly providers could still negotiate favorable contracts with payers, Cooper said.

Drug pricing has been the recent target of policymakers partially because out-of-pocket costs are typically higher. But hospital prices deserve a close look too, researchers outline.

A bill recently introduced in the California Legislature would allow state officials to cap hospital and physician prices. But broad-brush efforts could have unintended consequences, researchers warned. Policy solutions may need to be parceled out between the commercially insured and the Medicare fee-for-service beneficiaries, researchers argue in a related Health Affairs study.

Researchers recommended a range of options to rein in pricing, including antitrust enforcement, administered pricing and reference pricing as well as giving physicians incentives to make more cost-efficient referrals.

State and federal officials should scrutinize proposed mergers more vigorously, consider tougher remedies like divesting facilities when deals do go through, and block mergers that could raise prices. Massachusetts Attorney General Maura Healey's mandate to cap price growth as a condition of the Beth Israel Deaconess Medical Center and Lahey Health merger was a step in the right direction, Cooper said.

"Hospitals have become some of the largest employers, so we face some tension between short-term politics and job numbers and the long-term vibrancy of these economies," he said.

Regulating hospital payments, by tying them to Medicare rates for instance, could also help, researchers said. Private payers should consider reference pricing, which lets plan sponsors pay a fixed amount for a service, with members paying the difference in price for a higher-cost service.

Payers should give physicians incentives to refer their patients to hospitals that deliver the most efficient care. Vertical organizations like CVS Health and Aetna or UnitedHealth may direct more care outside of the hospital, Cooper said.

A new CMS requirement kicked in this year that forced hospitals to publish their lengthy list of retail charges for individual services and diagnosis-related groups. But that mandate was largely criticized by hospital executives and consumer advocates who argue that knowing the charges rather than the prices ultimately paid isn't helpful.

"(Our study) is a guide for where policymakers should focus their efforts," Cooper said.