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Hospital price-setting would have the most impact in reducing healthcare spending

Although RAND said price regulation is the most effective way to reduce spending, the researchers said this method has the most opposition.

Mallory Hackett, Associate Editor

Regulating hospital prices by setting what private health plans pay would have the most impact as a policy option for reducing annual hospital spending, according to new research from RAND Corporation.

The study compared three policy options – regulating hospital prices, improving price transparency and increasing competition among hospitals – to find which action would have the most impact.

If the prices that commercial payers paid to hospitals were set as high as 150% and as low as 100% of what Medicare pays, hospital spending could be reduced annually by $61.9 billion to $236.6 billion, respectively, according to the report.

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That change would create a 1.7% to 6.5% reduction in national health spending, RAND said in the study.

Improving healthcare price transparency could reduce U.S. spending by $8.7 billion to $26.6 billion per year while increasing competition could reduce spending by $6.2 billion to $68.9 billion annually, the report said.

Researchers attribute the lesser impact of improving price transparency to the uncertainty in how patients and employers would actually use price transparency tools. For instance, many services aren't shoppable, and when patients seek emergency care, they usually don't compare prices.

As for increasing competition, the price reductions depend on the magnitude of the change and how sensitive hospital prices are to market concentration.

"Given how concentrated today's hospital markets are, policymakers would need to radically restructure hospital markets – and more so than modeled here – for prices to approach competitive levels," the researchers said in the report.

WHY THIS MATTERS

In 2019, U.S. healthcare spending reached $3.8 trillion, according to the Centers for Medicare and Medicaid Services. Hospital spending made up the largest portion of spending (31%) and climbed to $1.2 trillion that year.

Although the report called price regulation the most effective action to reduce hospital spending, the researchers noted that this approach faces the biggest political challenges.

The American Hospital Association disagrees with the RAND report's recommendation and said that price-setting would only make commercial payers richer at the expense of creating change that would actually benefit patients.

The AHA pointed to the fact that hospitals expect to lose hundreds of billions of dollars in revenue as a result of the pandemic, yet still provide care, all while health plans posted profits due to spending less on care.

The provider advocacy group also referred to the $660 billion worth of uncompensated care hospitals have provided since 2000 as evidence that hospitals are doing their part to contain costs.

In addition to receiving political pushback, the RAND researchers also said that price-setting could lead to hospital closures and reductions in quality of care.

"As policymakers consider options for reducing hospital prices paid by private health plans, they will need to weigh the potential impact of different policies on hospital revenues and the quality of care, and they will also need to take into account the political and administrative feasibility of each option," said Christopher Whaley, a RAND policy researcher and study coauthor.

THE LARGER TREND

The U.S. consistently pays more on healthcare than other financially-similar countries, yet has worse health outcomes, according to the Commonwealth Fund.

Stakeholders from across the industry have long been looking for a solution to this disconnect in spending, which CMS anticipates is only going to increase moving forward. By 2027, it predicts national health spending will reach nearly $6.0 trillion.

Those at Deloitte suggest that by putting more power in the hands of patients, $3.5 trillion could be shaved off CMS's long-term cost projections.

Others want to use technology to cut administrative workflow costs, which amount to $372 billion annually, according to the Council for Affordable Quality Healthcare's 2020 Index. The council estimates that an additional $16.3 billion could be saved through automation on top of the $122 billion the industry already saves with electronically-powered transactions.

As for action at the federal level, beginning in 2023, CMS will require most private health plans to disclose pricing and cost-sharing information. It hopes that the price transparency will benefit employers, providers and patients to help drive down healthcare costs. 

ON THE RECORD

"Improving markets through increased price transparency and competition could help reduce prices, but would not reduce hospital spending to the extent that aggressively regulating prices could," said Jodi Liu, the study's lead author and a policy researcher at RAND.

"Direct price regulation could have the largest impact on hospital spending, but this approach faces the biggest political challenges."

"Unfortunately, RAND ignores the unique role of hospitals and health systems, and dismisses rising costs and market concentration in the commercial health insurance industry, which is earning record profits during the public health emergency while spending less on actual care," said Rick Pollack, the president and CEO of the AHA.

"RAND continues to regurgitate older and flawed 'studies,' which may be why they land on a poorly-reasoned proposal to have the government regulate prices. Despite claims otherwise, it is widely acknowledged that Medicare and Medicaid – the two largest public programs – pay below the cost of delivering care. Price-setting would only enrich commercial health insurers at the expense of innovations in care that truly benefit patients."

Twitter: @HackettMallory
Email the writer: mhackett@himss.org