Hospital prices increasingly are coming under a microscope

May 20, 2022 10:50 pm
  • Newly issued reports and policy recommendations are examining hospital prices in the context of high healthcare costs.
  • Prices could become a bigger story if healthcare starts to catch up with the rest of the economy in terms of inflation.
  • Analysts have floated out-of-network payment caps as one way to address hospital prices.
  • There appears to be at least a small link between hospital prices and quality.

Recent weeks and months have brought renewed scrutiny on hospital prices as stakeholders and consumer advocates seek ways to improve the affordability of healthcare.

The latest talking point is a RAND report that found employers and private insurers paid 224% of Medicare prices for hospital services in 2020. There were significant disparities among states, with relative prices ranging from 175% below Medicare (Hawaii, Arkansas, Washington) to more than 300% above (Florida, West Virginia, South Carolina). For COVID-19 hospitalizations, commercial insurers paid 241% more than Medicare.

“Very little variation in prices is explained by each hospital’s share of patients covered by Medicare or Medicaid; a larger portion of price variation is explained by hospital market power,” the report states.

Specifically, the researchers calculated that 7% of the variation in Medicare-relative prices stems from market share, with a 10% increase in market share associated with a 0.5% increase in relative price.

Some of the findings echo a recent analysis by the Congressional Budget Office (CBO), which incorporated previous RAND pricing data and found that between 2013 and 2018, prices paid by commercial insurers rose by 2.7% per year, compared with 1.3% for Medicare fee-for-service. The CBO noted that the higher prices in certain areas of the country partially can be explained by “differences in the prices of inputs needed to deliver those services.”

A looming concern

Regardless of what’s driving them, prices could become a bigger issue politically if inflation in healthcare catches up with price trends in other industries. Prices for medical services rose by 3.5% in April, compared with 8.3% in the overall consumer price index.

“A lot of that [relatively slow increase] is temporary, and there’s even a possibility of some kind of bounce-back as a result of that because so much has been really based on projections, certainly in Medicare,” Paul Ginsburg, PhD, professor of health policy at the University of Southern California, said during an April webinar hosted by the Brookings Institution.

“The projections obviously were not accurate, and it could mean that the next projections err on the high side.”

Meanwhile, federal transparency regulations are shining more of a light on prices, including negotiated rates. New rules took effect for hospitals in 2021 and will be in place for health plans starting in July.

“As consumers are faced with increasing out-of-pocket financial responsibilities, they expect providers and their health plans to provide reasonable estimates for services,” said Rick Gundling, FHFMA, senior vice president of healthcare financial practices with HFMA. “This includes the application of the health plan’s network status and benefit design. Consumers deserve a reasonable estimate of their out-of-pocket payments.”

Differing stakeholder perspectives

The American Hospital Association took issue with RAND’s findings, noting that the report examined only 2.2% ($78.8 billion) of hospital spending. With such a small sample and so many differences from one organization to the next, it’s hard to surmise “what actually happens in hospitals and health systems in the real world,” AHA President and CEO Rick Pollack said in a written statement.

“Tellingly, when RAND added more claims as compared to previous versions of this report, the average price for hospital services declined,” Pollack added.

Even if the methodology is assumed to be sound, he said, “Medicare does not fully cover the cost of providing care to Medicare beneficiaries. Pinning commercial prices to inadequate Medicare rates would cause even more financial strain to hospitals already facing tremendous challenges as a result of the ongoing COVID-19 pandemic and rising inflation. The result could be reduced patient access to care.”

Predictably, insurers have a different viewpoint.

AHIP, formerly known as America’s Health Insurance Plans, recently wrote congressional leaders and the White House to announce a new policy roadmap and solutions “to improve healthcare affordability and access for every American.” Among the various recommendations was that the Federal Trade Commission start penalizing anti-steering clauses in contracts.

A recent issue brief from the Commonwealth Fund goes further, saying states should establish caps on out-of-network payments to providers.

“The U.S. has not had a functionally competitive, efficient private healthcare market for many decades,” wrote authors Robert Murray, MBA, president of Global Health Payment LLC, and Jack Keane of MidAtlantic Consulting.

High out-of-network rates allow systems to continually obtain sizable in-network rate increases because insurers don’t want to face the prospect of paying out-of-network charges, the authors said.

Out-of-network payment caps could address that issue, they said. The caps could be set at or slightly below median in-network negotiated prices.

By gradually reducing the caps over time, states would have an opportunity to “monitor any associated impacts on patient access, quality of care and provider financial condition.” And such caps are “the least intrusive” compared with other regulatory approaches such as price setting, since out-of-network care is a small segment of the market.

Justifications for hospital prices

Advocacy groups such as the AHA have pointed out that many hospitals and health systems are pillars of their communities, with nonprofit providers delivering community-benefit services and uncompensated care that amount to billions of dollars per year. Such activities could be hampered by price restrictions.

There’s also the question of whether price constraints could affect hospitals’ ability or incentive to compete on quality.

The RAND report sought to examine the association between price and quality by considering CMS star ratings. Lower-price hospitals were found to have poorer quality than high-price hospitals, but researchers found that the middle category (150% to 250% of Medicare prices) had the highest share of five-star hospitals.

“Thus, in at least some parts of the country, employers have options for high-value facilities that offer high quality at lower prices,” the report states.

The CBO’s analysis found a “small” association between higher prices and better quality while noting that a causal link could not be inferred.

“It is unclear whether hospitals with higher quality can command higher prices from commercial insurers or whether hospitals with more market power, and thus higher prices, can spend more to improve their quality,” the CBO wrote.


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