Size matters: Big hospitals with largest market shares charge highest prices

February 3, 2014
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Health insurers are pushing harder now than they have in years to hold down prices charged by hospitals—especially the biggest, highest profile systems.

One obvious example is the narrow network created by Anthem Blue Cross and Blue Shield for its Obamacare products. It excluded the state’s three largest hospitals—Indiana University Health, St. Vincent Health and Franciscan Alliance.

Another example is UnitedHealthcare’s attempt to move IU Health to a higher tier in its health plan, which would require patients to pay more to visit IU Health’s doctors and hospitals. That would steer patients to lower-cost health systems.

But the key question is, will the insurers be successful?

Because in the recent past, they most certainly have not, according to a study published last week on the Health Affairs web site. The study examined hospital inpatient claims paid in 2011 by autoworkers and retirees in 10 metro areas, including Indianapolis.

It found that high-priced hospitals command, on average, a 30 percent higher payments than the average among all hospitals. Those high-priced hospitals have twice as many inpatient beds as low-priced hospitals. They also are part of hospital systems that have market shares twice as large as low-priced hospitals.

“Both their large size and their membership in even larger hospital systems made it difficult for health plans to negotiate lower prices with them,” wrote the study’s authors, Chapin White, James Reschovsky and Amelia Bond, about high-priced hospitals.

The researchers examined medical claims paid by the United Autoworkers health plans to 110 hospitals in these 10 markets:—Buffalo, Cleveland, Detroit, Indianapolis, Kansas City, St. Louis, Toledo, Flint, Mich., Troy, Mich., and Youngstown, Ohio.

Since the UAW negotiates nearly identical health benefits and has workers and retirees of roughly equivalent ages and health status, the data provide a rare comparable look across markets at the prices paid by private health insurers.

The researchers averaged the prices the UAW paid for inpatient services in each of the 10 markets, based on the severity of each patient's condition (measured by the common health care system of DRGs, or diagnosis-related groups).

They then categorized hospitals as either low-, medium- or high-priced, based on how close the prices paid at those hospitals were to the overall market average. There were 30 low-priced hospitals, 50 medium-priced hospitals and 30 high-priced hospitals.

Low-priced hospitals received payments that totaled 77 percent of the average price. Medium-priced hospitals received payments totaling about 97 percent of the average. And high-priced hospitals received 130 percent of the average.

High-priced hospitals averaged 474 beds each and were part of systems that claimed 28 percent of their markets.

But high-priced hospitals were also more likely to provide services that their low-priced peers did not. Half of high-priced hospitals had a neonatal intensive care unit, compared with fewer than 20 percent of low-priced hospitals. And nearly half of all high-priced hospitals were designated a Level 1 Trauma center, whereas no low-priced hospital were.

“The need to have these services ‘in-network’ makes it harder for health plans to omit such hospitals from provider networks,” wrote White, Reschovsky and Bond.

Indeed, UnitedHealthcare has been getting pushback from employers now that its tougher negotiating has led to IU Health being out of its network, at least temporarily.

And Anthem—by leaving IU Health and St. Vincent out of its Obamacare plans’ networks—omitted the state’s only two children’s hospitals and only two transplant centers. But it still makes those specific services available to its Obamacare plan members on a discounted basis, because they can’t be had anywhere else.

Higher priced hospitals also are more likely do high-cost things—such as educate medical students and residents and to care for more low-income patients than their lower-priced peers. However, high-priced hospitals also appear to have more privately-insured patients and to receive more Medicaid funding for treating indigent patients, giving them comparable operating margins to their low-priced peers.

Quality data from high-and low-priced hospitals showed few differences, although the study authors said there need to be better quality data before drawing any conclusions on that front.

The conclusion they do draw is that the rapid increase in at least the largest hospitals’ prices cannot continue. So either health insurers and employers will find ways to moderate them—or governments may step in to do so.

For example, a 2010 law passed in Massachusetts prohibits hospitals from demanding that they be placed in an insurer’s preferred tier as a condition of their participation in its network.

“It remains to be seen whether or not health plans will somehow regain the upper hand,” wrote White, Reschovsky and Bond. “If they do not, more radical approaches—such as state-based rate setting or restrictions on contracting arrangements between hospitals and health plans—may gain traction.”

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  1. to mention the rest of Molly's experience- she served as Communications Director for the Indianapolis Department of Public Works and also did communications for the state. She's incredibly qualified for this role and has a real love for Indianapolis and Indiana. Best of luck to her!

  2. Shall we not demand the same scrutiny for law schools, med schools, heaven forbid, business schools, etc.? How many law school grads are servers? How many business start ups fail and how many business grads get low paying jobs because there are so few high paying positions available? Why does our legislature continue to demean public schools and give taxpayer dollars to charters and private schools, ($171 million last year), rather than investing in our community schools? We are on a course of disaster regarding our public school attitudes unless we change our thinking in a short time.

  3. I agree with the other reader's comment about the chunky tomato soup. I found myself wanting a breadstick to dip into it. It tasted more like a marinara sauce; I couldn't eat it as a soup. In general, I liked the place... but doubt that I'll frequent it once the novelty wears off.

  4. The Indiana toll road used to have some of the cleanest bathrooms you could find on the road. After the lease they went downhill quickly. While not the grossest you'll see, they hover a bit below average. Am not sure if this is indicative of the entire deal or merely a portion of it. But the goals of anyone taking over the lease will always be at odds. The fewer repairs they make, the more money they earn since they have a virtual monopoly on travel from Cleveland to Chicago. So they only comply to satisfy the rules. It's hard to hand public works over to private enterprise. The incentives are misaligned. In true competition, you'd have multiple roads, each build by different companies motivated to make theirs more attractive. Working to attract customers is very different than working to maximize profit on people who have no choice but to choose your road. Of course, we all know two roads would be even more ridiculous.

  5. The State is in a perfect position. The consortium overpaid for leasing the toll road. Good for the State. The money they paid is being used across the State to upgrade roads and bridges and employ people at at time most of the country is scrambling to fund basic repairs. Good for the State. Indiana taxpayers are no longer subsidizing the toll roads to the tune of millions a year as we had for the last 20 years because the legislature did not have the guts to raise tolls. Good for the State. If the consortium fails, they either find another operator, acceptable to the State, to buy them out or the road gets turned back over to the State and we keep the Billions. Good for the State. Pat Bauer is no longer the Majority or Minority Leader of the House. Good for the State. Anyway you look at this, the State received billions of dollars for an assett the taxpayers were subsidizing, the State does not have to pay to maintain the road for 70 years. I am having trouble seeing the downside.

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