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Huge variation in medical prices as hospital 'monopolies' charge more, report says

Health Care Cost Institute finds hospital transaction prices play a huge role in influencing healthcare spending for the privately insured.

Beth Jones Sanborn, Managing Editor

The prices hospitals negotiate with private insurers vary considerably across geographies, according to a new study by the Health Care Pricing Project, driving huge variations in health care spending for the privately insured.

The study, by researchers from Yale University, Carnegie Mellon University, University of Pennsylvania and The London School of Economics, called "The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured," analyzed 92 billion health insurance claims from 2007 through 2011 from 88 million people covered by Aetna, Humana, and UnitedHealth, three of the country's largest insurance companies. The data, which was provided by the Health Care Cost Institute, shows spending and utilization for almost 30 percent of people in the nation with employer-sponsored or private insurance.

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The study found striking variations existed both within geographic areas and nationwide for services. For example, they looked at Philadelphia for hospital-based MRIs of lower limb joints, a common procedure. In 2011, prices there varied significantly, with data showing the most expensive hospital was 6 times more expensive than the cheapest. Across the country, they also varied significantly. According to the study, prices were 12 times higher in the most expensive area, Bronx, New York, than in the least expensive area, Baltimore. In Miami, the most expensive hospital's prices were nine times more expensive than the least expensive hospital.

Not surprisingly, hospital transaction prices play a huge role in influencing healthcare spending for the privately insured. Across all hospital referral regions, spending per beneficiary varied by thousands of dollars. In 2011, $1,707.39 was spent per privately-insured beneficiary in the area that showed the lowest spending, Honolulu, Hawaii. On the other hand, in Napa, California spending per beneficiary topped out at $5,515.90 each.

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A number of factors influence high or low prices in a given market, but the study shows a big one is competition. It says hospitals that must contend with fewer competing facilities have significantly higher prices. More specifically, hospitals in "monopoly markets" show prices that surge more than 15 percent higher than hospitals doing business in markets where there are four or more competitors. Hospitals facing just one competitor had prices 6 percent higher, and hospitals with two rivals were almost 5 percent higher.

"These price differences between hospitals can be thousands of dollars," said Martin Gaynor, the E.J. Barone Professor of Economics and Health Policy at CMU's H. John Heinz III College. "For example, the price of an average inpatient stay at a monopoly hospital is almost $1,900 higher than where there are four or more competitors. We know that these higher prices end up getting translated into higher premiums that employers pass on to workers."

Other factors in hospital pricing included whether the facility is for-profit, the quality, scope and level of technologies the hospital boasts, and the size of the hospital's Medicare client population.  A lower share, along with these other factors, were all associated with higher prices, according to the study.

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Ultimately, the data should drive changes in how public health policy is shaped moving forward, the authors said. Just the nature of the data constitutes a huge departure, according to study co-author/Assistant Professor of Health Policy and Economics at Yale Zack Cooper. He said even though most people in the United States get their health insurance from private insurers, much of what is known about healthcare spending and what usually serves as the basis for public policy is based on analysis of Medicare data. "The rub is that Medicare only covers 16 percent of the population. The majority of individuals -- 60 percent of the U.S. population -- receive healthcare coverage from private insurers." said Cooper, "This new dataset really allows us to understand what influences health spending for the majority of Americans. This information is critical to creating better public policy." Moving forward, he said, policymakers should be more careful about making broad recommendations for health spending for privately insured Americans based on Medicare data.

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The study's authors said the boom in healthcare mergers and acquisitions can have a negative effect on prices, since their data points to the presence of healthy competition as a major force behind driving hospital prices down. "There have been over 1,200 mergers in the hospital industry since 1994, and 457 since 2010. There's a real need for continued vigorous antitrust enforcement and other policy options to encourage competition and combat market power," said Gaynor, who along with Cooper and their fellow co-authors insist antitrust enforcement will be pivotal to confronting hospital and providers' prices.

Moving forward, the collaborative group behind the Health Care Pricing Project will explore additional related topics, including healthcare spending growth over time, providers' price growth over time, changes in Medicare reimbursements and changes to hospitals' negotiated transaction prices.

Twitter: @BethJSanborn