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Wide Variation in Private Insurer Payment Rates Evidence of Hospital Market Power

In Extreme Cases, Some Hospitals Command Almost Five Times What Medicare Pays for Inpatient Care

News Release
Nov. 18, 2010

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON , DC—Wide variation in private insurer payment rates to hospitals across and within local markets suggests that some hospitals have significant market power to negotiate higher-than-competitive prices, according to a study released today by the Center for Studying Health System Change (HSC) commissioned by Catalyst for Payment Reform.

Looking across eight health care markets—Cleveland; Indianapolis; Los Angeles; Miami; Milwaukee; Richmond, Va.; San Francisco; and rural Wisconsin—average inpatient hospital payment rates of four large national insurers ranged from 147 percent of Medicare in Miami to 210 percent in San Francisco, according to the study. In extreme cases, some hospitals command almost five times what Medicare pays for inpatient services and more than seven times what Medicare pays for outpatient care.

“The variation in hospital prices found in this study is inconsistent with highly competitive markets—at least for markets outside of health care,” said HSC President Paul B. Ginsburg, Ph.D., an economist and author of the study. “Indeed, observers of markets outside of health care would find the degree of price variation stunning.”

“The study confirms that many hospitals use their market power to get exorbitantly high private payment rates. Employers are very concerned about how this situation contributes to the unsustainable rise in health care costs and are looking into payment reforms that can improve the quality and cost-effectiveness of care,” said Suzanne Delbanco, executive director of Catalyst for Payment Reform (CPR), an independent, nonprofit group that works on behalf of large employers.

The study analyzed data on private insurer payment rates to hospitals and physician practices, focusing on variation across and within markets. Four major insurers—Aetna, Anthem Blue Cross Blue Shield, CIGNA and UnitedHealth Group—provided blinded hospital and physician payment rate data in the eight markets, reporting their contracted payment rates for commercial insurance as percentages of Medicare payment rates. The study’s findings are detailed in a new HSC Research Brief—Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Poweravailable here.

Price variation within markets was even more dramatic than variation across markets. For example, the hospital with prices at the 25th percentile of Los Angeles hospitals received 84 percent of Medicare rates for inpatient care, while the hospital with prices at the 75th percentile received 184 percent of Medicare rates. The highest-priced Los Angeles hospital with substantial inpatient claims volume received 418 percent of Medicare.

While not as pronounced, significant variation in physician payment rates also exists across and within markets and by specialty, the study found. Standard physician rates—those not subject to negotiation— across the eight markets were within 20 percent of Medicare rates in most of the geographic areas. Miami had the lowest standard physician rates at 82 percent of Medicare, while Milwaukee and rural Wisconsin stood out at the high end at 166 percent and 176 percent of Medicare, respectively.

Many factors likely play a role in the substantial variation of hospital payment rates, including the overall degree of hospital concentration in particular markets. But even in markets without high overall concentration, single hospital systems sometimes dominate geographic submarkets, according to the study. Hospital reputation also plays an important role. Some hospitals are so highly regarded that consumers perceive any health plan network as undesirable that excludes these so-called must-have hospitals. Some markets have such marquee hospitals, but others do not.

Within a hospital system, a highly regarded flagship hospital can lead to higher rates for the system’s other hospitals, since hospital systems often have the clout to negotiate rates as a single entity. Those who believe that cost shifting—the concept that health care providers do not fully exercise their market power to maximize profits so that they are in a position to raise rates to private payers in response to cuts in public payer rates—is important point to relatively low Medicaid payment rates in some areas leading to higher payment rates for private insurers. 

Hospitals often acknowledge that private insurance rates are rising more rapidly than their costs but attribute the spread to increasingly constrained Medicare and Medicaid payment rates—a cost-shifting argument. However, the Medicare Payment Advisory Commission (MedPAC) has found that hospitals with substantial negotiating leverage can allow unit costs to rise because they can obtain higher private insurance rates to offset negative Medicare margins that result from their high costs.

The study points out that purchasers and public policy makers can address provider market power and the role it plays in rapidly rising health care costs, through two distinct approaches—using market approaches to strengthen competitive forces or constraining payment rates through regulation.

“Neither market nor regulatory approaches to constraining provider market power and constraining health care spending growth will be politically popular,” the study concludes. “Hard choices and trade-offs will be needed. But the failure to act to constrain spending growth will result in declining access to high-quality care for many Americans over the longer run and undermine the nation’s fiscal health.”

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded in part by the Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research.

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On behalf of large employers, the independent, nonprofit Catalyst for Payment Reform (CPR) works to drive improvements to how we pay for health care to signal strong expectations for better and more cost-effective care. Working closely with payers, consumers, and providers, CPR aims to identify and coordinate workable reforms, track the nation’s progress, and promote alignment between the public and private sectors. For more information, go to www.catalyzepaymentreform.org.

 

 

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