Hospitals with leverage get more from insurers

A new study shows that payment rates vary widely from private insurers to hospitals. The president of the Center for Studying Health System Change talks to ACP Hospitalist about possible causes and solutions.

Unlike advertising in most other industries, commercials for hospitals don't usually mention how their prices compare to competitors.

But maybe they should. A new study has found wide variation in the payment rates from private insurers to hospitals, with some hospitals able to command payment rates five times higher than competing facilities. Some of the difference was geographic; San Francisco, Indianapolis, Milwaukee, rural Wisconsin and Richmond, Va. were high-priced areas, and average rates were lower in Miami, Cleveland and Los Angeles.

Even within metropolitan areas, however, hospitals commanded significantly different rates. For example, one hospital in Los Angeles received 84% of Medicare rates for inpatient care, while the highest-priced hospital received payments that were 418% of Medicare rates.

Such wide variation in payments is not consistent with a competitive market and is likely contributing to increasing insurance premiums, the study concluded. The research was conducted and published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization focused on the U.S. health care system. (The report is available online. )

Paul B. Ginsburg, PhD, HSC president and the author of the report, recently spoke to ACP Hospitalist about the possible causes of and solutions to these payment variations.

Q: What causes this variation in payments to hospitals?

A: The reasons why some areas might have higher prices would be factors such as how consolidated the provider market is, and also the degree to which there are certain institutions that have “must-have” status—basically institutions that are sufficiently prominent that consumers and their employers are insisting that they be included in the network.

Q: This particular study was just a snapshot of the current situation, but have you determined whether the variation is a new or increasing issue?

A: I published a study in Health Affairs on California [2010;29:699-705]. That study was very focused on the trend over the last 10 or 15 years and it was showing that for California this was definitely a real development of increasing provider leverage.

Q: What's the impact of this variation on hospitalists?

A: If they're employed by the hospital, the hospital will be negotiating payment rates for them. For those that are employed by the hospital, presumably hospitals that have the greatest leverage will be able to negotiate higher payment rates for their hospitalists, although that doesn't necessarily mean that hospitalists will get paid more as a result of that.

Q: Your paper lists two potential approaches to reducing payment variation, a market approach, and a regulatory one. How would the market approach work? Would some health plans have to take the “must-have” hospitals off their lists?

A: There have been a few instances of that actually happening, where a version of a plan lacking a particularly expensive hospital system is offered. That's one way of doing it. For example, in California, the CalPERS [California Public Employees Retirement System], which is for state employees and some local government employees, came up with a product that excludes the Sutter system, because the Sutter system is widely known for having very high payment rates.

The other way of doing it is just asking the enrollees to pay more if they go to hospitals or physician groups that are very expensive. This means that if a hospital system has very high prices it is probably going to lose some market share, because it will have to convince consumers to pay more to use it.

Q: The regulatory approach would involve the government mandating one payment method [such as diagnostic-related groups] and capping the rates that hospitals could charge private insurers. How likely is that to happen on the state or federal level?

A: I actually think we're going to start seeing it in a few states, particularly in the Northeast. In Massachusetts, people are waiting to see what the governor says; some are speculating that he might propose something like that. We definitely won't see it at the federal level for some time, but we could see it in a few states.

Q: What's your overall prediction of what will happen to hospital payment variation?

A: I think implementation of health reform is likely to have some profound effects on that, because it's going to be creating plans and exchanges where the enrollees are going to be very sensitive to the premiums. Many of them will be getting tax credits, but tax credits won't pay the whole thing. If they get a plan that costs an extra $10 a month, they will be paying the full $10 a month out of pocket. So I think that we just need to wait to see the nature of the popular plans offered through exchanges. That might lead to a significant step toward what I call the market approach.