Affordability of healthcare is not enhanced when providers form health systems, studies find

The efficiencies gained when providers operate as a health system don’t always translate to care that is more cost-effective, according to two recently published JAMA studies on pricing.

In one study, researchers with Harvard Medical School and the National Bureau of Economic Research (NBER) examined 2018 data from various sources, including CMS administrative data, IRS filings, and Medicare and commercial claims. They used the data to identify 580 health systems, defined as commonly owned or managed entities consisting of at least one general acute care hospital, 10 primary care physicians and 50 total physicians within a single hospital referral region.

“Integrated systems of care have the potential to improve quality and efficiency through care coordination and use of information technology, but also have greater market power to negotiate higher prices,” the researchers wrote.

Paid prices were 31% higher if a hospital was part of a system, the researchers found, while payments to system physicians ranged between 12% and 26% higher. The gap especially was pronounced for smaller practices.

Performance on measures of preventive care, clinical quality and patient experience was “modestly higher” for system-based providers. The differences appear to stem largely from relative deficiencies in clinical performance among smaller independent practices.

“Small quality differentials combined with large price differentials suggests that health systems have not, on average, realized their potential for better care at equal or lower cost,” the researchers wrote.

They noted their study is among the first to examine the correlation between healthcare integration and commercial prices, as opposed to only Medicare payment.

Surgical prices affected by system status

In another study, researchers with the University of Michigan compared prices for 16 surgical procedures at independent hospitals with prices at system hospitals. They reviewed commercially negotiated prices as compiled by Turquoise Health through September 2022 using data available in accordance with hospital price transparency requirements.

The researchers reported that for 15 of the 16 procedures, the median negotiated price was “significantly higher” at system facilities. The difference was most pronounced for shoulder arthroscopy with cartilage removal (1.68 times higher), knee cartilage removal (1.38), inguinal hernia repair (1.26) and tonsil removal (1.24).

The researchers mentioned a couple of key caveats. In addition to limited availability of data stemming from inconsistent compliance with price transparency, they pointed out that “there may be appropriate reasons why prices of these procedures vary across hospitals that could not be identified with raw price data.” They noted that the Medicare area wage index was incorporated in the analysis to try to control for cost variation across markets.

Nonetheless, as more hospitals comply with the price transparency regulations, “It will be important to better understand the mechanisms behind these significant variations in negotiated prices for surgical care to identify areas of unwarranted variation that may be mitigated.”

Researchers dig into the issue

The recent analyses are merely the latest attempts by healthcare researchers and policymakers to provide perspective on hospital pricing. In 2020, the Medicare Payment Advisory Commission’s annual report to Congress included a chapter on consolidation that stated, “The primary incentives for mergers are to achieve higher prices from commercial payers and possibly to gain efficiencies.”

The report added that over time, “Higher prices from commercial payers could loosen hospitals’ budget constraints and lead to higher cost growth, thus offsetting any efficiency gains.” It remains to be seen whether the price transparency rules, which were not in effect when the report was published, will have a mitigating effect on payment rates.

An NBER paper published in February 2022 took an in-depth look at hospital pricing and reported that higher prices were associated with better outcomes in one crucial respect. Specifically, when comparing two hospitals, if one hospital had inpatient prices that were two standard deviations higher, a 37% reduction in in-hospital mortality was seen.

However, the researchers added, “The relationship between hospital prices and in-hospital mortality is only present for hospitals located in relatively unconcentrated markets.” They noted that one differentiating factor for high-priced hospitals in such markets is “a markedly higher share of physicians who received their training from Top 25 medical schools.”

Although “competition in unconcentrated markets appears to generate prices that are correlated with quality, we do not observe a correlation between hospital prices and quality in concentrated markets. Going forward, policymakers must consider what to do in these markets.”

They cited price regulation as one possible approach, although such a strategy should focus on “concentrated provider markets where competition is geographically infeasible.”