May 11, 2018

A tale of two MRIs: Why one insurer may pay 65% extra for the same procedure—at the same hospital

Daily Briefing

    Hospitals in monopoly markets have higher prices for health care services than those in more competitive markets—but even within a single hospital, prices may vary significantly for the same procedures, according to an updated paper released Monday.

    Research details

    The revised paper is part of the Health Care Pricing Project, which focuses on analyzing the growth and variation in U.S. health care spending for the nation's privately insured population. Researchers in December 2015 released an initial version of their research.

    For the updated paper, economists examined the Health Care Cost Institute's database containing insurance claims for three of the largest private health insurers in the United States, representing 28% of U.S. residents with employer-sponsored health insurance between 2007 and 2011.

    According to the paper, the claims data included "hospitals' charges (for 2010 and 2011), hospitals' negotiated transaction prices (broken down by facility and physician fees), and payments to hospitals made by patients in the form of co-insurance payments, co-payments, and payments made before deductibles were met." As such, the researchers wrote they were able to determine "the amounts paid to hospitals for all health care encounters recorded in our data."

    The researchers used the data to:

    • Analyze price variation across U.S. hospitals;
    • Evaluate variation in health spending for the privately insured; and
    • Examine insurer-hospital contracts.

    Findings

    Overall, the researchers found a strong association between hospital market structures and both the price of health care services and the type of insurer contract they negotiate. For example, the researchers found hospitals in monopoly markets have prices 12.5% higher for health care services than hospitals in markets with at least four competitors. The researchers said prices increased by more than 6% when hospitals within 5 miles or fewer merged. However, the researchers said they did not find prices increased when hospitals more than 25 miles apart merged. The researchers found hospitals in concentrated markets were more likely than those in competitive markets to have contracts that shift greater financial risks to the insurer.

    According to the paper, hospital prices for health care services vary significantly across U.S. regions, within U.S. regions—and even within hospitals "for plausibly undifferentiated services."

    For instance, the researchers found a significant variation in the prices for lower limb MRIs within hospitals: At one hospital, the price for an MRI for one insurer was 65% higher than the price for another insurer—even though, as Vox notes, "Hospitals presumably use the same MRI scanner for different patients. They don't typically have, for example, one scanner for Humana patients and another for their Aetna customers."

    The researchers estimated that inter-hospital variation accounts for one-fifth of all price variation in the United States. They wrote that the findings suggest prices are "not simply a function of differences in hospital quality or patient severity across providers," and "that the relative bargaining power of insurers with hospitals can strongly influence price levels." They wrote that their study "provides the first national evidence that insurers pay substantially different prices for the same services at the same hospitals."

    While the updated paper show quantity variation and price variation across U.S. regions each drive 50% of the spending variation for the privately insured, the researchers suggest that the within-hospital price variation is a major driver to price variation in the United States, accounting for about one-fifth of all price variation.

    Comments

    Martin Gaynor, one of the paper's authors and an economics and health policy professor at Carnegie Mellon University, said the variation in prices within a hospital could be linked to exclusivity provisions and other clauses in contracts between insurers and hospitals. He added that payment reform cannot occur in the private sector if there is no market competition, because monopoly hospitals will refuse to agree to payment models they do not like. Gaynor said. "It's all about the relative negotiating position."

    Zack Cooper, another one of the paper's authors and assistant professor of health policy and economics at Yale University, said, "When we talk about consolidation of mergers there is a lot of focus on price levels, but it is also important to think of the long-term impact of negotiating payment terms, which could have more impact than negotiating higher prices." Cooper said regulators have to understand the anticompetitive effects of proposed hospital mergers. Cooper added that it is difficult to address problems related with consolidated markets after mergers have already taken place. Cooper said, "Figuring out what to do in those areas is going to be one of the biggest challenges going forward (Kliff, Vox, 5/9; Kacik, Modern Healthcare, 5/9; Gooch, Becker's Hospital CFO Report, 5/9; Baker, "Vitals," Axios, 5/9; Cancryn, "Pulse," Politico, 5/9; Cooper et al., Healthcare Pricing Project paper, 5/7).

    Patients are shopping for prices—are you making it easy for them?

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