Hospital Prices: The Inconvenient Truth

The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week's article. 

In the aftermath of the terrorist attack coverage in Paris and San Bernardino, and the day before the GOP Presidential debate in Las Vegas, this was the page one headline in last Tuesday’s New York Times: “The Experts Were Wrong About the Best Places for Better and Cheaper Health Care” (1). I found myself puzzled that the story made page one given the gravity of issues on the news landscape that day.

It was a story about a study by the National Bureau of Economic Research (NBER) based on an analysis of 88 million Humana, Aetna and United Health claims from 2007-2011, comparing utilization and costs for Medicare to employer-sponsored health insurance. They found:

“Health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the U.S. The correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14.

“Variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution.

“We document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of 12 across the nation and, on average, two-fold within HRRs.

“Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals” (2).

The 55-page study lays out what might be a surprise to some: indeed, the correlation between Medicare and commercial spending is low. It examined the intensity of services for seven conditions across 306 markets finding wide variability including low cost Medicare markets like Rochester, Grand Junction and La Crosse, where commercial costs are high and markets where the reverse is true.

The article ran three full pages. It was well done. Nonetheless, I found myself puzzled by its prominence on page one on that busy news day. I read the study and found its design, methodology, and analysis both valid and reliable, but found myself thinking “what’s new?” Each key conclusion above had been drawn by credible researchers in other settings…

For 20 years, Dartmouth researchers have demonstrated that how much is done drives Medicare costs, and they’ve chronicled the widely variable intensity of services Medicare enrollees receive (3). Every state insurance regulator and employer can attest that private insurance rates are higher than Medicare and vary widely based on what doctors and hospitals charge as well as how much they do. And numerous studies have shown costs go up, not down, in most markets when hospitals merge (4).

So why did this study make the front page on that day? I suspect it’s because the New York Times editorial board saw the opportunity to draw attention to the issue of hospital pricing and the implication of hospital consolidation.

Hospital costs are 31% of spending in U.S. healthcare. Along with drug costs, they represent the biggest drivers of health spending in our system. Together, they’re increasing faster than inflation and driving insurance premiums up in double digits annually.

Lowering operating costs is table stakes for most hospitals; being the low price option is not. After all, the majority of hospital revenues come from fee-for-service payments and rewards follow doing more, not less. Doing as much as you can, charging as much as you can, and collecting as much as you can from the insurer, government or individual is the game. And as cuts in reimbursement pile up, staying alive by cutting costs is key. But pricing is another matter. But that’s changing.

Payers led by Medicare are increasingly rewarding lower costs for hospital care that achieves a required threshold of quality. They’re forcing the alignment of lower costs and lower prices. The legitimacy of “high quality-low price” hospital care as a plausible policy pursuit is validated in studies like the NBER analysis. The fact is that differences in hospital supply and labor costs, compliance and risk management, facilities and technologies, payer mix and bad debt and the myriad of clinical, operational characteristics do not explain the wide variability in hospital pricing. And the direct correlation between hospital concentration and higher pricing is telling.

In some hospital boards and C-suites, attention to hospital pricing is intense: there’s pressure from payers and consumers to post prices for all to compare alongside quality measures. But in most, it’s a modest discussion at best. I’ve been in two hospital board strategic planning sessions in the past two weeks. Hospital pricing was not on the agenda or considered. Affiliations with other organizations and declining reimbursement were discussed at length, but pricing not at all.

I spent 51 hours in a hospital last summer for a new knee: I was charged $55,000 and the insurance company paid $37,000 based on its negotiated rate with the hospital. My bill covering 11 line item charges was submitted directly to the insurer without my review. I’ve studied healthcare for 40 years. I ran a hospital and plan early in my career. But I couldn’t figure out what the hospital did, calculate what it might have cost them to do it, and how it all ended up as the prices charged and payment negotiated. No wonder hospital prices are getting increased attention from regulators, payers and consumers.

The story in the Times is a wake-up call for hospital leaders: cost reduction efforts are essential. There’s no doubt declining reimbursement is problematic, but cost reduction and consolidation into bigger systems translate to competitive prices.

It’s also a wake-up call for other sectors: what we charge, and how we calculate our costs, are fair game. That’s true for how drug companies arrive at their costs and how these relate to their prices, how insurers arrive at their premiums and calculate what they consider “medical costs,” and so on. It’s the reality of price transparency for all, including hospitals, and the justification of our prices based on underlying costs that are verifiable and legitimate.

The New York Times article calls attention to an inconvenient truth about hospital prices: they’re hard to justify completely. And they’re fair game for scrutiny and are certain to be.

Paul

Sources:

  1. Kevin Quealy and Margot Sanger-Katz, “The Experts Were Wrong About the Best Places for Better and Cheaper Health Care,” New York Times, December 15, 2015
  2. Cooper et al, “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” National Bureau of Economic Research, May 2015
  3. Jonathan Skinner, PhD and Elliott S. Fisher, MD, MPH, “Reflections on Geographic Variations in U.S. Health Care,”; “Hospital Care Intensity,” The Dartmouth Atlas of Health Care, The Dartmouth Institute for Health Policy and Clinical Practice May 12, 2010
  4. The Impact of Hospital Consolidation-Update,” Robert Wood Johnson Foundation, June 2012

The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.

©2015 Navigant Consulting, Inc.