HSChange

Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power

Originally published by the Center for Studying Health System Change

Published: November 2010

Updated: April 6, 2026

HSC Research Brief No. 16

November 2010

Paul B. Ginsburg

Substantial differences in what private insurers pay hospitals and physicians — both across and within local markets — point to considerable provider market power in negotiating rates above competitive levels, according to research from the Center for Studying Health System Change (HSC). Examining eight health care markets — Cleveland; Indianapolis; Los Angeles; Miami; Milwaukee; Richmond, Va.; San Francisco; and rural Wisconsin — the study found that average inpatient hospital payment rates from four major national insurers ranged from 147 percent of Medicare in Miami to 210 percent in San Francisco. In the most extreme instances, certain hospitals received nearly five times what Medicare pays for inpatient services and more than seven times what Medicare reimburses for outpatient care. The variation within individual markets proved equally dramatic. In Los Angeles, for example, the hospital at the 25th percentile received 84 percent of Medicare rates for inpatient care, while the hospital at the 75th percentile was paid 184 percent of Medicare rates. The highest-priced Los Angeles hospital with significant inpatient claims volume commanded 418 percent of Medicare. Although less pronounced, meaningful variation in physician payment rates also exists across and within markets and among specialties. The degree of variation in hospital and physician payment rates documented in this study would not be expected in a truly competitive market. Purchasers and public policy makers can tackle provider market power — the capacity to negotiate prices above competitive levels — through two distinct strategies. One approach seeks to strengthen competitive market forces, while the other involves constraining payment rates through regulatory mechanisms.

Many Providers Have Upper Hand in Payment Negotiations

As concerns about health care affordability grow more acute, the question of provider market power over private insurers — specifically, the ability to secure payment rates above competitive levels — is increasingly attracting policy attention.[1] Under national health reform, the combination of coverage expansions and reductions in Medicare and Medicaid hospital payments may push private insurer payment rates even higher.

During HSC's recently completed 2010 site visits to 12 nationally representative metropolitan communities, health plan executives consistently identified rising provider payment rates — needed to secure hospital and physician group participation in plan networks — as a primary driver of premium increases.[2] Hospital leaders often conceded that private insurance payment rates were climbing faster than their underlying costs but attributed the growing gap to increasingly constrained Medicare and Medicaid reimbursement levels.

The Medicare Payment Advisory Commission (MedPAC) has determined that hospitals with considerable negotiating leverage can tolerate rising unit costs because they are able to secure higher private insurance rates to compensate for negative Medicare margins resulting from those elevated costs.[3] Earlier HSC research examining six California metropolitan areas revealed substantial growth in provider leverage over time, producing striking disparities in payment rates between providers with strong bargaining positions and those with little leverage.[4] Following enactment of the Patient Protection and Affordable Care Act (PPACA), some observers worry that the opportunity for hospitals, physicians, and other providers to establish so-called accountable care organizations (ACOs) for Medicare contracting will further enhance their bargaining power vis-a-vis private health plans.

This study examined private insurer payment rates to hospitals and physician practices, with a focus on variation both across and within markets. Four major insurers supplied payment rate data for eight market areas, reporting their private payment rates as percentages of Medicare payment rates (see Data Source). The findings reveal substantial differences in payment rates across the eight markets and even greater disparities within individual markets. To gain deeper insights, interviews were also conducted with representatives from the four insurers and provider trade and professional associations.

Inpatient Hospital Payment Variation Across Markets

Average inpatient payment rates across the eight market areas exhibited considerable variation, spanning from 147 percent of Medicare rates in Miami to 210 percent in San Francisco (see Table 1). Indianapolis, Milwaukee, rural Wisconsin, and Richmond emerged as particularly high-priced markets for private insurers relative to Medicare benchmarks. Cleveland and Los Angeles represented more moderate pricing environments.

The payment-rate patterns reported by individual insurers showed broad similarities but also notable differences across the eight markets. For instance, while San Francisco registered the highest average rate when all four insurers' data were combined, it was the top-priced market for only two of the four insurers. This likely reflects factors such as varying market shares held by different health plans across these communities.

Explaining the pattern of relative rates across markets is challenging because numerous factors are likely at play, including the overall level of hospital concentration in particular markets. However, some metropolitan areas contain hospital markets that are smaller than the metropolitan area itself, meaning that even without high overall metropolitan-level concentration, individual hospital systems can dominate specific submarkets. Hospital reputation also plays a significant role. In certain markets, particular hospitals are so widely esteemed that consumers view any health plan network excluding these "must-have" hospitals as unacceptable. Some markets contain such marquee institutions, while others do not.

Within a hospital system, a prestigious flagship hospital can drive higher payment rates for the system's more ordinary facilities, since hospital systems frequently possess the bargaining power to negotiate rates as a single entity. Those who consider cost shifting an important dynamic point to relatively low Medicaid payment rates in certain areas as a factor pushing private insurer rates higher. In economic terms, cost shifting implies that health care providers do not fully exercise their market power to maximize profits, leaving room to raise rates for private payers when public payer reimbursement is reduced.

Examining the eight communities, informed speculation about why hospitals in certain areas command higher rates is possible. San Francisco exhibits a high degree of hospital concentration and the presence of must-have hospitals, combined with low Medicaid rates. Richmond, typical of many smaller metropolitan areas, has a highly concentrated hospital market — two systems and an academic medical center. Milwaukee's elevated rates, which have been documented in other studies,[6] likely stem from a combination of hospital concentration and dominance in submarkets.

Similarly, Indianapolis is not highly concentrated overall but contains a number of distinct markets within the metropolitan area where a particular hospital system holds a dominant position. Rural Wisconsin, like most rural areas, consists of hospitals with no local competitors and heavy reliance on Medicare and Medicaid patients. Cleveland has a highly concentrated hospital market yet maintains noticeably lower rates than other highly concentrated markets. A history of a major insurer excluding the downtown hospitals of one of the market's two major systems from its network — along with the broad geographic reach of each system — may restrain the systems' ability to raise rates. Los Angeles has a relatively fragmented hospital market with many small hospitals that lack must-have status for insurer network inclusion, but also a small number of marquee institutions. Miami features a relatively low degree of concentration, though certain hospital systems are viewed as powerful within submarkets.

The overall average inpatient rates appear broadly consistent with MedPAC data, although the eight markets are not nationally representative. Calculations from the most recent published MedPAC data suggest that private insurer payment rates averaged 139 percent of Medicare rates nationally in 2008.[7]

Payment Variation Within Markets More Striking

Variation within each market proved even more striking than variation across the eight markets. Insurers were asked to arrange hospital payment rates — with the hospital as the unit of observation — within markets in ascending order and report by quartile. Rates at the 50th percentile (median) showed a pattern generally similar to the market averages, but distinctive results emerged at other points in the distribution.

In Los Angeles, the rate at the 25th percentile of hospitals was 84 percent of Medicare rates, while the highest payment rate to a single Los Angeles hospital reached 418 percent of Medicare. Notably, all four insurers reported a very high rate for their top hospital in Los Angeles — potentially the same institution. Prior research has highlighted sharp contrasts in payment rates between Los Angeles' so-called have and have-not hospitals.[8] While Cedars Sinai and UCLA enjoy strong reputations, many Los Angeles hospitals are indistinguishable from others just a few miles away.

Within communities, hospitals commanding higher payment rates tended to be the larger institutions. For instance, a disproportionate share of spending occurred at hospitals at or above the 75th percentile (findings not shown) — an expected result given that larger hospitals are likely to wield more leverage with health plans.

Insurers compensate hospitals for inpatient care through three distinct methods — diagnosis related groups (DRGs), per diems, or discounted charges. The variation by market in payment methods is considerable (see Table 2). For example, DRGs or other case rate payment accounted for 47 percent in Indianapolis but only 6 percent in Los Angeles. Responses from individual insurers indicated that within some markets, different insurers employed different payment methods. In interviews, insurers expressed a preference for DRGs over alternative payment methods because broader payment units provide greater control over total payments.

One might expect hospitals to prefer DRGs as well — in addition to Medicare, nearly all Medicaid programs use DRGs — because consistent payment methods across payers would align the incentives hospitals face from different payers. Whether through inertia or active resistance, distinct norms have taken root in different parts of the country. Beyond insurers with larger market shares having more standing to engage hospitals in discussions about payment method choices, there was little indication that payment methods were determined by the relative market power of hospitals and insurers. After all, it would be much more straightforward for a hospital to simply pursue higher rates rather than negotiate a change in the payment mechanism. To the extent that a particular payment method, such as DRGs, is considered advantageous from a societal perspective, policy makers should not assume that current market forces will bring it about.

Outpatient Hospital Payment Rates

Payment rates for hospital outpatient services were generally higher — relative to Medicare rates — than those for inpatient services. This is somewhat surprising, given that hospitals face a degree of competition for outpatient services from freestanding facilities, including ambulatory surgical centers, imaging centers, and physician offices. Medicare hospital outpatient margins were lower than inpatient margins in 2008 by approximately 8 percentage points, -12.9 percent vs. -4.7 percent.[9] However, the extent to which private insurer outpatient payment rates in relation to Medicare in the eight communities exceeded inpatient rates was greater than the difference in Medicare margins. Since a hospital's full range of services is typically covered under a single network agreement, whether inpatient or outpatient services hold greater must-have status for consumers is unlikely to produce such large rate differences relative to Medicare.

The pattern of substantially higher private rates for outpatient care could be an artifact from the period when Medicare paid for inpatient care prospectively through DRGs while outpatient payment was cost based. During that era, hospitals had an incentive to allocate overhead to outpatient services — which is no longer the case — and this legacy may continue to influence pricing for private insurers. Put differently, a different allocation of overhead between inpatient and outpatient services could produce what would appear to be a more uniform difference from Medicare rates.

Regardless of the underlying cause, the pattern of higher outpatient rates relative to Medicare suggests that hospitals perceive limited price competition from freestanding facilities. This may reflect the fact that, except for high-deductible health plans, most insurance benefit designs do not financially reward patients for choosing freestanding outpatient facilities over hospital outpatient departments. Alternatively, it could reflect the rapidly growing alignment between hospitals and physicians, which might give hospitals greater confidence that patients will be referred to their outpatient facilities. Another possibility is increasing hospital ownership of freestanding facilities through joint ventures with physicians. And, in certain states, hospitals have been able to leverage the certificate-of-need process to block entry by physician-owned facilities.

The pattern of variation in hospital outpatient payment rates across and within markets mirrors the pattern observed for inpatient services. Since inpatient and outpatient rates are negotiated together in a single agreement between a hospital and an insurer, this is unsurprising. Conversations with insurers about payment methods for hospital outpatient services indicated the same desire — as with inpatient care — to use broader payment units. Interviews suggested that adoption of the Medicare ambulatory payment classification (APC) system as a basis for private insurance payment is growing but remains far from universal. Insurers identified discounted charges as the most common payment method for hospital outpatient services.

Physician Payment

Physician payment rates are comparatively straightforward to communicate because of the nearly universal use by private insurers of the Medicare physician fee schedule. Most insurers construct fee schedules based on the Medicare fee schedule relative value scale but apply their own conversion factors, which reflect their goals for physician network participation and local physician supply. For most small physician practices, insurers present their fee schedule, and the practice either accepts and participates in the network or declines and bills patients as an out-of-network provider. Larger practices negotiate higher rates with insurers based on the perceived importance of their presence in plans' networks. Standard — not negotiated — rates tend to be based on a common fee schedule for most specialties, though there are important exceptions, such as hospital-based specialties, particularly anesthesiology.

Average standard physician rates across the eight markets fell within 20 percent of Medicare rates in most geographic areas (see Table 3). Miami had the lowest rates, while Milwaukee and rural Wisconsin stood out at the upper end.

Standard rates generally do not apply to hospital-based specialists. Although reporting of rates for anesthesiologists in this study was limited, their rates were substantially higher than for other specialties. Radiologists also received elevated rates, but not as high as anesthesiologists.

Insurance executives explained that high rates for anesthesiologists result from patients' inability to select their own anesthesiologist. Because hospitals typically contract with one or more anesthesiology groups to provide all such services, insurers believe it would be inappropriate to penalize enrollees using an in-network hospital for utilizing an out-of-network anesthesiologist. This leads insurers to seek a much higher percentage of anesthesiologists in their networks than for other specialties. Using the terminology from the earlier hospital rate discussion, most anesthesiology groups are must-have providers for insurance networks, although in this case the status derives not from reputation but from patients' inability to choose.

It is noteworthy that insurers apparently cannot make anesthesiologist participation in an insurer's network a condition for hospital participation in the network, and that hospitals apparently cannot require anesthesiologists to participate in the same networks as the hospital as a prerequisite for receiving hospital privileges.

While negotiated payment rates at the 75th percentile for certain physician specialties in each community were substantially higher than the standard rates, they were generally not as elevated — in relation to Medicare — as hospital rates. Community rankings varied by specialty, likely because of local market factors such as the degree to which specialty physicians practice in large groups. At the 75th percentile, rates for primary care physicians tended to be substantially lower than for other specialties, likely reflecting the stronger negotiating leverage of single-specialty groups.

Formation of larger practices has been far more prevalent among specialists than among primary care physicians. Consequently, insurers can follow the Medicare fee schedule and maintain uniform standard rates across specialties, yet at the conclusion of the negotiating process, many specialists end up being paid substantially more than primary care physicians.[10]

Consistent with hospital rates, physician rates in Milwaukee and rural Wisconsin were generally higher than in other communities. A likely contributing factor in Milwaukee is that most physicians are employed by hospitals, and their rates are negotiated by the hospitals themselves. This enables hospitals to extend their leverage from inpatient and outpatient facility services to professional payment for physician services. Rates in rural Wisconsin may be elevated because insurers need a higher proportion of physicians included in their networks in rural areas compared to urban areas.

Rates at the 75th percentile for most specialties in Los Angeles and San Francisco could not be included in the table because too few insurers reported them, but both markets had relatively high rates. Both communities have large, highly regarded medical groups considered essential for inclusion in insurers' networks. Additionally, California has extensive regulation of health maintenance organization (HMO) networks requiring adequate physician access, which may also afford physicians a degree of leverage.

Policy Implications

Few observers would characterize the variation in hospital and physician payment rates documented in this study as consistent with what one would expect in a highly competitive market — at least for markets outside of health care. Indeed, analysts of markets in other sectors would be astonished by the magnitude of price variation. A truly competitive market would exhibit variation in payment rates across communities and across providers within a community that reflects only those cost differences outside providers' control, such as labor cost differences across locales and quality differences. Medicare payment methods are designed to capture cost differences outside provider control through case-mix adjustments, medical education adjustments, and input-price indexes. Since payment rates are expressed as a percentage of Medicare rates, these factors have, in theory, already been accounted for.

In a competitive market, much of the price variation associated with quality differences would reflect the costs of producing higher quality. Although health care quality measurement remains in its early stages, it is unlikely that costs associated with quality differences across the eight areas studied would be as large as the observed differences in payment rates. Differences in patient severity not captured by Medicare adjustments could be a factor but are likely more relevant to differences in rates across individual providers than across areas. Some of the payment rate variation might be explained by other factors, such as Medicaid rates being much lower in some states than in others or differences in hospitals' uncompensated care burdens. But the magnitude of the differences suggests that variation in market power is a significant contributing factor.

A number of factors likely contribute to the weakness of competition. There has been extensive provider consolidation over time, initially through the creation of hospital systems via mergers and acquisitions, and more recently through mergers of group medical practices and increasing hospital employment of physicians. The nature of insurance benefit structures also plays a role. A lasting legacy of the shift toward managed care in the 1980s and 1990s is that privately insured individuals still typically pay only a small fraction of their care costs out of pocket. Though patient cost sharing has increased steadily since the early part of the decade, benefit designs have not focused on encouraging patients to choose lower-cost providers. Indeed, a remaining effect of the managed care backlash is that insurers continue to face pressure from purchasers to maintain networks offering a broad choice of providers, contributing to the must-have status of some providers. The absence of meaningful information on provider quality also makes consumers reluctant to select providers based on price for services other than those that are simple and standardized.

The price variation identified across the eight areas suggests that provider market power is a more serious problem in some markets than others. And, price variation within a market indicates some providers have far more leverage than others. Purchasers and policy makers can address weak competitive forces through two distinct approaches. One is to pursue market-based strategies to strengthen competitive forces, while the other is to constrain prices through regulation.

A Market Approach

The core of the market approach involves redesigning insurance benefit structures so that a greater number of patients have strong incentives to select providers with lower overall costs. The ability to do this effectively has been improving, with tools such as episode groupers that allow insurers to make more precise assessments of the relative costliness of different providers. Rather than being limited to comparing hospital room charges or payment for a single hospital day, episode groupers enable comparison of total payment for all services across all care settings involved in an episode of care. Groupers also permit calculation of certain quality elements that are closely tied to costs, such as rates of potentially avoidable complications. Although physicians have criticized the proprietary episode groupers currently in use for their lack of transparency, the PPACA requires the Centers for Medicare and Medicaid Services to develop a public domain episode grouper with provider input.

Better data on the quality of care patients receive would also enhance the effectiveness of incentives encouraging them to consider price when choosing providers. For the most part, such data are not yet widely available, although methods for measuring and publicly reporting quality data are improving.

Benefit designs that encourage patients to compare providers on the basis of price are not common today but are evolving. Narrow-network insurance products, which exclude selected high-cost providers from a network, are attracting some interest, particularly among small employers. Still affected by the backlash against tightly managed care in the mid-1990s, many employers have resisted efforts to restrict provider networks, instead relying on increased patient cost sharing to slow premium growth. But persistent affordability pressures are leading some employers to reconsider that strategy and explore narrow-network plans.

Another benefit design, known as tiered networks, emphasizes consumer incentives to select lower-cost providers. Consumers are familiar with the concept because of its widespread use in prescription drug benefits, where they typically pay the least for generic drugs, a larger amount for preferred brand-name drugs, and the most for non-preferred brand-name drugs. When this approach is applied to hospital and physician services, aspects of patient cost sharing — such as the deductible, the coinsurance rate, or copayments — vary by provider tier. More sophisticated versions of this approach would place hospitals — or even physicians — into tiers by category of services. Similar to narrow-network products, improved measurement of cost and quality would increase the effectiveness of tiered networks and, potentially, lead to greater consumer and provider acceptance.

A critical factor hindering the spread of benefit designs that incentivize consumers to choose less expensive providers is the tax treatment of employer-sponsored health insurance. The fact that employer contributions and most employee contributions to health insurance come from pre-tax earnings diminishes the motivation to obtain health insurance with lower premiums. Under PPACA, however, starting in 2018, employer and pre-tax employee contributions exceeding $10,200 for single coverage or $27,500 for family coverage will be subject to a 40 percent excise tax. Since the threshold will not increase as quickly as premiums are likely to, over time an increasing percentage of people will have employer coverage subject to the tax and become more sensitive to the level of health insurance premiums.

Other policy changes that would bolster a market approach lie in the antitrust arena. Following a wave of hospital mergers in the 1990s, hospital markets in many communities are highly concentrated. The Federal Trade Commission (FTC) attempted to block a number of mergers during the 1990s without success. Antitrust enforcement may prove more effective going forward since research now offers stronger evidence that nonprofit hospital mergers increase prices.[11] Nevertheless, it is difficult to envision any large-scale breakup of hospital systems that were formed a decade or longer ago.

A new antitrust issue on the horizon involves the formation of ACOs authorized by the health reform law. Under the law, Medicare can contract for care for a population of beneficiaries with "groups of providers of services and suppliers which have established a mechanism for shared governance."[12] Eligible groups include "ACO professionals in group practice arrangements, networks of individual practices of ACO professionals, partnerships or joint venture arrangements between hospitals and ACO professionals, hospitals employing ACO professionals, [and] such other groups of providers of services and suppliers as the Secretary determines appropriate."[13] The formation of Medicare ACOs could increase provider leverage in rate negotiations with private insurers, especially if ACOs lead to mergers between hospitals and medical groups or to hospitals expanding physician employment.

Currently, antitrust rules permit organizations that assume financial risk for patients' care to negotiate private insurer payment rates on behalf of participating providers. Even provider groups that do not assume risk but can demonstrate a certain degree of clinical integration can negotiate as a group. Provider leverage could increase if the FTC — based on a presumption that all ACOs are clinically integrated — grants ACOs permission to negotiate with private insurers on behalf of all associated providers, even for contracts that do not involve risk. On the other hand, if the FTC does not grant such permission, the ACO would be unable to negotiate rates for non-risk contracts; each provider in the ACO would then have to negotiate individually with insurers. The ability to contract separately with providers would help preserve private insurers' leverage with providers. The FTC may need to reconsider policies allowing clinically integrated organizations to negotiate contracts that do not involve risk.

Two factors raise questions about whether market approaches could be sufficiently robust to substantially lower payment rates by reducing provider leverage. The first is the degree to which a significant proportion of markets are so highly concentrated that effective competition is not feasible. For example, many smaller communities, including some metropolitan areas, have only one hospital system. The trend of hospital employment of physicians further amplifies the market power of these hospitals.

The second is whether the public would support an approach that would require patients to consider price when choosing their physicians and hospitals. Most privately insured Americans are enrolled in preferred provider organizations (PPOs) with fairly comprehensive benefits and do not need to incorporate price into their provider selection decisions. Many political leaders have long resisted market approaches in health care — believing that market forces should not govern the allocation of health care, which should be determined by medical need.

On the other hand, few political leaders have advocated higher patient cost sharing — such as large deductibles — as a solution to rising health care costs. But, over the past decade, substantial increases in patient cost sharing in private insurance were used to moderate rising premiums, with little apparent public backlash. Although PPACA limits the overall degree of patient cost sharing, what is permitted is far more extensive than prevailing norms in private insurance. With increasing affordability pressures on employers and with the federal government soon to be subsidizing private coverage for those with incomes below 400 percent of poverty, political attitudes toward market approaches might shift.

A Regulatory Approach

A regulatory approach to controlling provider market power would involve government imposing ceilings on what providers can charge private insurers and individuals, while establishing a common payment method across public and private payers. A number of states adopted this approach, known as all-payer rate setting, during the 1970s and 1980s to limit hospital rates. Most states eventually abandoned their rate-setting programs in response to two developments. The first was a belief that Medicare inpatient prospective payment, enacted in 1983, would lead hospitals to contain costs and that additional state-level regulation was unnecessary. The second was the expansion of tightly managed care and credible insurer threats to exclude providers from plan networks if provider payment rate demands were excessive. A broader shift in the political climate toward deregulation also played a role.

Only Maryland and West Virginia have retained rate-setting systems. Maryland is expanding its system to include physician services delivered in hospitals. The Maryland system has generally enjoyed stronger hospital support than programs in other states, possibly because of a governance structure based on an independent commission insulated from political interference.[14]

Concerned about growing provider market power, some policy makers are reconsidering all-payer rate setting, especially at the state level. The landscape for rate setting differs from the 1970s in three key ways. First, differences in payment rates among private and public payers have grown so large over time that equalizing payment rates across payers is unlikely to be feasible given the potential fiscal impact on Medicare and Medicaid — freezing existing differences is more plausible.

Second, there is the potential for these initiatives to lay the groundwork for broader provider payment reform. For example, a Massachusetts commission charged with addressing cost containment has recommended that the state design a global payment system, an approach resembling ACOs in some respects, which all payers would use. A common payment method across payers would create consistent incentives for providers and likely accelerate the pace of provider payment reform. Although the proposal did not include regulation of the global rates, some Massachusetts providers expect this will ultimately occur.[15] The third difference is the potential to incorporate physician payment as well as hospital payment.

However, specifying a method of provider payment, while an advantage in the short run as a mechanism to accelerate payment reform, carries the downside of potentially locking in a system that turns out to be suboptimal. In contrast to the situation in the early 1980s, when Medicare adoption of DRG payment was seen as a clear improvement over the earlier cost-reimbursement or charge-based systems, there is no consensus today about how to reform provider payment. Although ACOs are encouraged under PPACA, the legislation also supports Medicare pilots of other methods, such as bundled payment, and requires the use of value-based purchasing by Medicare.

As with all regulatory approaches, there is concern that politics will play too prominent a role in the rate-setting process. This has been seen in certificate-of-need regulation, where politically powerful local hospital systems have often circumvented the process and where research suggests limited accomplishment in terms of cost containment.[16]

Given the lack of familiarity with the concept of all-payer rate setting today, a general political environment growing increasingly unreceptive to regulation, and the fact that approaches to provider payment reform are just getting underway, this may not be an auspicious time to pursue this option at the national level. However, some states, especially in the Northeast, with stronger preferences for regulatory approaches over market approaches, might decide to pursue rate setting now, seeking a Medicare waiver so that the approach would apply to all payers. Nationally, it might be more productive to devote the next few years to piloting different approaches to provider payment reform in the Medicare and Medicaid programs and in private insurance.

At the same time, efforts to deploy market approaches more effectively than has been done to date could be explored. Perhaps the weak economy will push employers to more seriously consider benefit designs that limit provider choice or emphasize price when selecting a provider, much as the recession in the early 1990s pushed employers toward managed care. Government could support private-sector approaches by making Medicare provider data accessible to private insurers and rethinking antitrust policy. The latter would need to balance fostering needed clinical integration among providers against the increased provider market power that comes from greater alignment of providers.

Neither market nor regulatory approaches to constraining provider market power and slowing health care spending growth will be politically popular. Hard choices and trade-offs will be required. 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.

Sources and Further Reading

Notes

1. Examination of Health Care Cost Trends and Cost Drivers, Report for Annual Public Hearing, Office of Attorney General Martha Coakley, Boston, Mass. (March 16, 2010).

2. HSC recently completed the seventh round of the Community Tracking Study site visits to 12 nationally representative metropolitan communities: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. HSC has been tracking change in these markets since 1996. In each site, researchers interview representatives of major hospital systems, physician groups and private insurers.

3. Medicare Payment Advisory Commission (MedPAC), Report to the Congress: Medicare Payment Policy, Washington, D.C. (March 2009).

4. Berenson, Robert A., Paul B. Ginsburg and Nicole Kemper, "Unchecked Provider Clout in California Foreshadows Challenges to Health Reform," Health Affairs, Vol. 29, No. 4 (April 2010).

5. U.S. Government Accountability Office (GAO), Report to the Honorable Paul Ryan: House of Representatives: Federal Employees Health Benefits Program — Competition and Other Factors Linked to Wide Variation in Health Care Prices, Washington, D.C. (August 2005).

6. GAO (August 2005).

7. MedPAC reports that private insurer rates were 132 percent of hospital costs in 2007. See MedPAC, Report to the Congress: Medicare Payment Policy, Washington, D.C. (March 2010). MedPAC reports inpatient hospital Medicare margins of negative 4.7 percent in 2008. Combining these data implies private insurer rates averaging 139 percent of Medicare rates.

8. Katz, Aaron B., et al., Los Angeles: Haves and Have-Nots Lead to a System Divided, California Health Care Almanac: Regional Markets Executive Summary, California HealthCare Foundation (July 2009).

9. MedPAC (March 2009).

10. A 2003 study showed higher rates for specialists relative to Medicare in commercial coverage. See Dyckman and Associates, Survey of Health Plans Concerning Physician Fees and Payment Methodology, MedPAC, Washington, D.C. (August 2003).

11. William B. Vogt and Robert Town, How Has Hospital Consolidation Affected the Price and Quality of Hospital Care, The Synthesis Project, Research Synthesis Report No. 9, Robert Wood Johnson Foundation (February 2006).

12. Patient Protection and Affordable Care Act (Public Law No. 111-148), Section 3022.

13. Ibid.

14. Murray, Robert, "Setting Hospital Rates to Control Costs and Boost Quality: The Maryland Experience," Health Affairs, Vol. 29, No. 5 (September/October 2009).

15. Tu, Ha T., et al., State Reform Dominates Boston Health Care Market Dynamics, Community Report No. 1, Center for Studying Health System Change, Washington, D.C. (September 2010).

16. Rivers, Patrick A., Myron D. Fottler and Mustafa Zeedan Younis, "Does Certificate of Need Really Contain Hospital Costs in the United States?" Health Education Journal, Vol. 66, No. 3 (September 2007).

Data Source

This Research Brief is based on data obtained from four national insurers — Aetna, Anthem Blue Cross Blue Shield, CIGNA, and UnitedHealth Group — on current provider payment rates for eight geographic areas. The eight areas were purposively selected because it was believed they have a wide range of payment rates, with estimates based on a 2005 U.S. Government Accountability Office study of prices paid in the Federal Employees Health Benefits Program.[5]

All payment rates were reported as a percentage of Medicare rates, regardless of the payment unit actually used. For inpatient and outpatient hospital care, this meant that each insurer had to convert rates into an equivalent if Medicare methods had been used. Methods to convert negotiated rates into Medicare equivalents might have varied among the participating insurers, but this is unlikely to affect patterns of variation in rates across markets and within markets. Generally, insurers reported payment rates for large numbers of hospitals in each market. For example, one insurer reported the number of contracted hospitals ranged from 18 in Richmond to 85 in Los Angeles. Insurers were asked to limit their responses to rates negotiated for their own networks and not to report rates from any so-called rental networks they use.

Data on both average payment rates for the entire market and distributions of rates within a market were obtained. For physicians, insurers provided data for selected specialties, including primary care, medical specialists, surgical specialists, and hospital-based specialists. For both hospitals and physicians, the instructions for reporting the "highest rate" included reporting only those contracts with substantial claims volume. To protect sensitive information, a commitment was made not to publish any payment rate information based on data from less than three insurers. To increase the understanding of and gain richer insights into the quantitative data, interviews were conducted with insurer network contracting executives as well as individuals from professional and trade associations of providers to reflect provider perspectives on these issues at the national level.

The insurers are not representative of all private insurers, with the most apparent difference related to Blue Cross Blue Shield plans in certain markets (in many areas, Anthem's market share is much larger than the 25 percent weighting it gets for seven areas in this analysis and the zero weight it gets for Miami, where it does not operate). But with the focus of the study on variation in prices across markets and across providers within a market, the limitation of this convenience sample is likely to be small. The study is vulnerable to instances in which the insurers used different methods to get the specific information requested from their databases. Although this does not contribute bias, it does detract from the precision of the specific numbers reported. Table 3 (physician payment) could not include the highest rates because of inadequate rates of information submission. A very small number of insurer reports of rates at the 75th percentile appeared to be outliers (all high values). Rather than eliminate these suspected outliers, they were weighted at 50 percent.

Funding Acknowledgement

This research was commissioned by Catalyst for Payment Reform (CPR). On behalf of large employers, the independent, nonprofit 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, visit www.catalyzepaymentreform.org.