- EDITOR'S NOTE: This article has been updated with a statement from the American Hospital Association.
Hospital prices increased much more quickly than physician prices for both inpatient and outpatient care from 2007 to 2014, according to a new study in Health Affairs.
For inpatient care, hospital prices grew 42 percent during the period, while physician prices increased by 18 percent. Similarly, hospital prices for hospital-based outpatient care rose 25 percent, while physician prices grew just six percent, researchers found using actual negotiated prices paid by insurers.
“Our work suggests that efforts to reduce healthcare spending should be primarily focused on addressing growth in hospital rather than physician prices,” wrote lead author and Associate Professor of Public Health and of Economics at Yale University Zack Cooper. “Policymakers should consider a range of options to address hospital price growth, including antitrust enforcement, administered pricing, the use of reference pricing, and incentivizing referring physicians to make more cost-efficient referrals.”
Prices are to blame for the accelerating growth in healthcare spending, several recent studies have shown. Just last month, authors of the landmark 2003 article “It’s the Prices, Stupid” found higher-than-average prices were still behind America’s higher rate of healthcare spending, which was 145 percent greater than the median of all Organization for Economic Cooperation and Development (OECD) countries analyzed and 25 percent higher than the country with the second highest healthcare spending (Switzerland).
But whether hospital or physician prices are behind the growth in healthcare spending remained unclear.
To answer the question, Cooper and his team of researchers from other prestigious universities analyzed data from the Health Care Cost Institute (HCCI) which included claims for individuals with employer-sponsored insurance from three of the largest insurers in the US.
Armed with actual negotiated prices paid by Aetna, Human, and UnitedHealth for inpatient and hospital-based outpatient services, the researchers found hospital prices accounted for a greater share of the total cost of services and grew more quickly over time compared to physician prices.
In fact, the growth in facility prices as a share of the growth in the combined cost of service (hospital and physician fees) ranged from 77 percent for a colonoscopy to 97 percent for a knee replacement.
“Our findings suggest that there may be significant differences in the bargaining leverage of hospitals and physicians,” the study stated. “More work needs to be done to quantify the differences between the two groups’ bargaining leverages and the extent to which there are differences in the price elasticities facing the two types of providers.”
Specifically, Cooper et al. called on policymakers to consider stricter antitrust enforcement. The researchers pointed to recent evidence that hospital mergers can significantly increase prices by boosting the negotiating power of hospitals.
Healthcare merger and acquisition (M&A) activity is significantly up. A recent PricewaterhouseCoopers (PwC) report showed healthcare M&A was up 14.4 percent in 2018.
And deals only got bigger among hospitals and health systems. Consulting firm Kaufman Hall found that the average size in revenue of sellers in a hospital M&A deal (the smaller of the two organizations) increased at a compound annual growth rate of 13.8 percent in the last decade. By 2018, the average size in revenue of sellers was $409 million.
These megamergers are creating large health systems that span several states. For example, Catholic Health Initiatives and Dignity Health recently finalized a merger deal that created the largest health system by revenue. The newly established CommonSpirit Health is a $29 billion system of 142 hospitals and over 700 care sites in 31 states.
Time will tell if recent hospital megamergers will actually increase prices because of the newfound negotiating power of the health systems. But in the meantime, researchers are urging policymakers to scrutinize proposed deals more vigorously to control the growth in hospital prices.
The team even advised policymakers to extend their antitrust enforcement to vertical healthcare mergers and acquisitions, in which hospitals and physician groups combine.
“[R]ecent work has suggested that referring physicians have substantial influence over where their patients receive care and that vertically integrated physicians often refer their patients to more expensive locations,” they wrote. “This suggests that payers should inform physicians about which hospitals deliver the most efficient care and incentivize physicians to refer their patients to those hospitals. Similarly, these findings suggest that antitrust regulators should consider the impact of vertical integration of hospitals and physician groups on the functioning of hospital markets.”
Cooper and his team also suggested that policymakers regulate hospital payments, especially in markets that are already highly concentrated, and private payers should implement reference pricing.
UPDATED 2/6/19: In response to the study, the American Hospital Association has issued the following statement on their website:
The authors of this Health Affairs study on hospital and physician prices use limited data to draw broad conclusions. To begin with, their analysis uses data from the Health Care Cost Institute (HCCI) that includes only Americans under the age of 65 who are insured through employer-sponsored insurance (ESI). The HCCI data is comprised of claims for three large insurance companies, Aetna, Humana and United, which represent only 27.6% of individuals with ESI coverage. The Kaiser Family Foundation estimates that 49% of Americans have ESI, so the HCCI sample represents just 13.5% of Americans with any sort of health coverage, including Medicare and Medicaid. The HCCI data also does not include any data from Blue Cross Blue Shield (BCBS) plans, which is significant given that BCBS plans often have the largest share of local markets.
The hospital group also pointed out that hospitals and health systems incur costs that do not apply to physicians. For example, hospitals must comply with additional regulatory requirements, which result in additional administrative expenses and staffing needs. The costs of hospital care also include the purchase of drugs and medical devices used to treat patients, which are costs physicians do not face with inpatient and hospital-based outpatient care.
“We recommend in the future that such studies take into account all these factors,” the AHA concluded.