Some hospitals are paid as much as four times other hospitals in the same city for the same procedure

Across the clinical pathology laboratory testing industry, the use of deeply-discounted prices for medical laboratory tests has always been a flash point. But few consumers see the real price of the clinical laboratory test, and even many healthcare policy experts pay little attention to how clinical laboratories and pathology groups will set prices for laboratory tests.

That is not true of the prices hospitals charge. Because of sustained efforts by Medicare, private health insurers, and employers to make prices more transparent for patients, more information on the pricing policies of different hospitals is becoming available.

For example, a hospital’s reputation can enable it to negotiate higher-than-competitive prices in its regional market. That’s the conclusion drawn by researchers at the Center for Studying Health System Change (HSC).

The Washington D.C.-based nonpartisan research center compared blinded hospital and physician’s practice rate data provided by Aetna (NYSE:AET), Anthem Blue Cross Blue Shield (NYSE:WLP), Cigna (NYSE:CI) and UnitedHealth Group (NYSE:UNH) from eight regional hospital markets using Medicare rates as a baseline.

The striking results highlighted a huge difference in the private insurer payment amounts, even among hospitals in the same geographical region. One conclusion offered by researchers was that the public’s impression of the quality of healthcare provided by some healthcare providers can often give those hospitals clout during contract and price negotiations with payers.

(Sourced from “Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power” on the HSC website. Author: Paul B. Ginsburg.)

(Sourced from “Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power” on the HSC website. Author: Paul B. Ginsburg.)

Study Results Suggestive or Definitive?

One dramatic example is in Los Angeles, where one hospital received 418% of Medicare while another hospital across town received only 84% of Medicare for inpatient care. Researchers determined that, in other cities, hospital pricing typically fell within that range. Some of the healthcare markets studied were Los Angeles; Cleveland; Indianapolis; Milwaukee; Richmond, Va.; San Francisco; Miami; and rural Wisconsin.

The results of the study are compelling and, as expected, sparked some controversy. Discussion centers around the reasons for these extreme differences. Health policymakers are using these findings to debate the role of government in curbing the rising cost of healthcare.

Paul Ginsburg, Ph.D., President of HSC and author of “Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power,” stated in a press release that, when compared to non-healthcare markets and industries, the results of the variation in hospital pricing indicate that healthcare is no longer a competitive marketplace.

“The variation in hospital prices found in this study is inconsistent with highly competitive markets—at least for markets outside of healthcare,” he said. “Indeed, observers of markets outside of healthcare would find the degree of price variation stunning.”

Suzanne Delbanco is the Executive Director of Catalyst of Payment Reform (CPR), a non-profit group that advocates for payment reform. In the same press release, she stated that the study “confirms” that hospitals use their power to negotiate higher payments from insurers, and suggests that reform is needed to correct the situation.

“Employers are very concerned about how this situation contributes to the unsustainable rise in healthcare costs and are looking into payment reforms that can improve the quality and cost-effectiveness of care,” concluded Delbanco.

All analysts, however, are not as certain of the study’s results. Not surprisingly, from the American Hospital Association (AHA), CEO Richard Umbdenstock said in a written statement that the study was “deeply flawed.”

And, in a Modern Healthcare article, William Vogt, Ph.D., Associate Professor in the Department of Economics at the University of Georgia, who also was formerly a Senior Economist with the Rand Corporation, said that the variation in hospital prices could reflect “significant differences in hospital quality or costs,” but that he felt the results of the study are “suggestive, but not definitive.”

Given the data collected as part of this study, there is no question that selected hospitals are able to get paid higher prices because of how they leverage some combination of the quality of their care, consumer perceptions, and market clout in their community.

What many pathologists and clinical laboratory administrators will be watching is whether the efforts of Medicare and private payers to post hospital prices on public websites will help greater numbers of consumers to shop hospitals based on price and quality. As this happens, the big question is whether these informed consumers will be the type of market force that can help drive down the highest prices charged by hospitals.

—Michael McBride

Related Information:

Data Battle: Modern Healthcare

Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power: Research Brief No. 16

Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market Power: News Release

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