Hospitals with a grip on market power in a region can charge prices that are as much as 60 percent higher than the area's lowest-priced hospital for inpatient services, according to a report released Thursday by the Center for Studying Health System Change.
Insurers with their own concentration of market power can dampen some of the clout of dominant providers, but playing against each other's leverage in negotiations is not a surefire solution.
Average hospital prices for privately-insured patients are about one-and-a-half times the Medicare rate for inpatient care and vary widely across and within the 13 selected metropolitan areas.
The differences were even more extreme for hospital outpatient services, for which the highest-priced hospital generally is paid nearly double the lowest-priced hospital, and twice what Medicare pays. In Cleveland, the spread was three times as high as the least expensive hospital.
By contrast, primary care physician prices are typically priced close to or even below Medicare rates, and there is little variation within and across markets, the report said.
"The dramatic variation in prices from one hospital to another points to the significant market power of certain hospitals to command high prices, even in markets with a dominant insurer," said Chapin White, senior researcher at the Center for Studying Health System Change and co-author of the study, in a news release.
Researchers analyzed claims data for 590,225 active and retired non-elderly autoworkers and their dependents for the study conducted by the HSC for the National Institute for Health Care Reform. The center examined areas including St. Louis, Indianapolis and Lansing, Mich.
Providers claim that their higher prices are due to having to care for the sickest and most expensive patients.
However, the higher prices are more likely driven by hospitals' increased negotiating leverage with private insurers, giving them the "ability to walk away if an agreement cannot be reached," the report said. "Private insurers understand that employers will not continue to offer their products if must-have hospitals are excluded from the provider network."
Insurers' leverage is based on their share of the insurance market and their willingness and ability to steer patients to providers in their networks. For example, Blue Cross Blue Shield of Michigan (BCBSM) is dominant in the state. Prices vary less among providers in Michigan compared with other markets in the study. And hospital prices tend to be lower on average in Michigan markets.
"But BCBSM does not appear have used its market power to force physician prices down to levels seen in other markets," the study said, perhaps choosing to instead incentivize them to increase their capabilities to offer more patient-centered care that will reduce costs over time. The insurer also may not want to risk distancing providers using its clout as a club.
Dominant payers don't need to push prices down aggressively, just "do better than the competition," the report said.
Payer strategies designed to encourage patients to use high-value providers can offer potential savings, the report said. For example, with reference pricing, the payer sets a maximum allow amount for a specific procedure in a specific market. And benefit design encourages those enrolling in plans to choose high-value providers when accompanied by information about differences in what they will have to pay with different providers.
As long as provider consolidation continues, amassing market power in a number of systems, "health plans may face only stiffening resistance to attempts to rein in high prices," the report said.
Even capping prices at the median of the market only represents 5.5 percent of physician and hospital spending in the plans, less than a year's worth of the average 7 percent to 8 percent of annual growth in per capita spending for employer-sponsored health insurance.
"However, even small percentage gains can make a significant difference given the enormous amount many large employers spend on health care," the report said. And value purchasing may begin to give large employers a more direct role in healthcare payment and delivery decisions.