Why Some Hospitals Make the Big Bucks (Hint: It's Not Excellence)

Last Updated Nov 22, 2010 12:44 PM EST

Some hospitals command top dollar from insurers because of their market power, not because they provide better care -- a major factor in pushing up healthcare costs. While this is generally known in the industry, a new study from the Center for Studying Health System Change shows just how much hospital rates vary, not only between markets, but also within local areas.

The HSC's report shows once again how little real competition there is in healthcare and the role that market failure plays in our health cost crisis.

Study author Paul Ginsburg, who's president of the research firm, compiled data from four large insurance companies -- Aetna, Anthem Blue Cross Blue Shield, CIGNA, and UnitedHealth Group -- in Cleveland, Indianapolis, Los Angeles, Miami, Milwaukee, Richmond, Va., San Francisco, and rural Wisconsin. What he found is that average hospital payment rates ranged from 147 percent of Medicare inpatient rates in Miami to 210 percent in San Francisco.

Making four times what Medicare pays
Price variations within markets were more extreme: In Los Angeles, for example, hospitals in the 25th percentile received 84 percent of the Medicare amount, vs. 184 percent for facilities in the 75th percentile. One L.A. hospital got more than four times the Medicare rate.

Ginsburg notes that the consolidation of hospitals into healthcare systems that dominate a market or sub-region explains some of the rate differences. But some single hospitals in rural areas have no competition, which is why their payments may be higher than average. Even in large metropolitan areas, certain well-known institutions -- usually teaching hospitals -- can get higher rates because no health plan can afford to exclude them from its network.

Hospitals admit that they try to get as much as they can from private insurers. They say they do that to make up for their relatively low Medicare and Medicaid revenues, which they say aren't enough to cover the cost of care. The question is, do some institutions go beyond what they need to make up their losses on public insurance? Judging by some of the outrageous inpatient and outpatient hospital rates exhibited in this report, the answer seems to be Yes.

How to restrain hospital profits
According to Ginsburg, there are two mechanisms for solving this problem: market-based and regulatory. Under the market-based approach, insurers could design benefits to encourage consumers to use low-cost hospitals and physicians. Aalternatively, the plans could create narrow networks of low-cost providers and sell them to employers at a discount.

These products haven't gained much traction: not many employers want to limit patient choice, and health plans have been forced to include some high-cost but desirable hospitals. The Federal Trade Commission could also enforce antitrust law against hospital mergers, which would maintain some market competition, but the FTC hasn't had much success in this regard.

The other regulatory option would be to bring back state "all-payer" laws that require hospitals to accept uniform rates. Most states that had such laws repealed them decades ago, because they believed that the federal prospective payment system and managed care would bring down rates. Today, only Maryland and West Virginia still have all-payer statutes.

The curious case of Maryland
Do these laws do any good? In Maryland, hospitals have kept their markup on private insurance rates lower than their counterparts in other states have. As a result, the average cost of Maryland hospitals has dropped from 25 percent above the national average to 4 percent below it over a 30-year period.

But Maryland has a deal with the federal government allowing to it set Medicare rates in the state. So Maryland hospitals get paid more for Medicare, and they're also reimbursed by the state for charity care, which means they have less costs to shift to commercial payers.

So a return to all-payer probably wouldn't work in other states because of the disparity between Medicare and private insurance rates. Even if the political climate wasn't so anti-regulation, granting waivers to states to set Medicare payments would cost the federal government too much.

Image supplied courtesy of Wikimedia Commons.
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  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.