Differences between high- and low-price hospitals demystified; radical changes coming?

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Intense and increasing pressure to control growth in private health insurance premiums may lead to radical approaches like state-based rate setting or restrictions on contracting arrangements between hospitals and health plans, according to a study published online Jan. 29 by Health Affairs.

The broad price variation that exists amongst hospitals is indicative of mounting tension between increasingly consolidated buyers--health plans-- and increasingly consolidated sellers--hospitals and hospital systems. Surges in hospital prices have largely contributed to the growth of private health plan costs and premiums in recent years. However, making sense of the elements that influence private hospital prices can be a challenge, according to lead author Chapin White, PhD, MPP, senior policy researcher at RAND in Arlington, Va., and colleagues.

White and colleagues chose to investigate some hospitals’ abilities to negotiate vastly higher prices than their nearby competitors. Utilizing private claims data from current and retired autoworkers and their dependents under the age of 65, the researchers identified low-, medium-, and high-price hospitals. They then used other data sources to make comparisons between characteristics of the different hospital groups. Included hospitals had to be short-stay, Medicare-certified, paid under the inpatient prospective payment system, provide a large portion of care to the autoworker demographic, and have a location in one of 10 metropolitan markets.

The researchers analyzed 110 hospitals, with hospital price calculations based on 24,187 inpatient stays. Thirty of the hospitals were defined as low-price, 50 as medium-price, and 30 as high-price. Results demonstrated that low-and high-price hospitals most starkly differentiated in their size and market share. With an average of 474 staffed beds, the high-price hospitals had more than double the average number of beds than low-price hospitals. Additionally, high-price hospitals had market shares three times larger than those of the low-price hospitals.

The types of services provided also differed between the high-and low-price hospitals. While almost half of the high-price hospitals were major teaching hospitals, only 17 percent of low-price hospitals were defined as such. Importantly, the high-price hospitals were much more likely to offer specialized facilities and services including Level I trauma centers, neonatal intensive care units, and heart transplants.

“This study provides mixed support for the notion that high-price hospitals face unique challenges or struggle to stay afloat,” wrote the authors. High-price hospitals treated a sicker and poorer patient population, had more transfer patients from other short-term hospitals, and offered more graduate medical education than low-price hospitals. However, high-price hospitals were different from lower-price institutions in terms of payer mix. According to White and colleagues, this difference was not necessarily worse.

The researchers examined two types of hospital margins: operating margin and total margin. Though the high-price hospitals seemed to be doing poorly, with a 2.8 percent loss of their operating margins (low-price hospitals had a positive operating margin of 1.5 percent), they had a healthy total average margin of 4.5 percent.

While nearly a quarter of the high-price hospitals were nationally ranked for at least one of the following areas: cancer, cardiology, gynecology, and orthopedic care, none of the low-price hospitals received U.S. News & World Report ranking. However, the high-price hospitals’ performance on outcome-based quality measures was mixed. They performed worse than their low-priced counterparts on measures of excess readmissions and on patient-safety indicators, which includes postsurgical deaths and complications. The sole quality measure on which the high-price hospitals performed better than the low-price was 30 day mortality for heart failure patients.

“These findings highlight the speed bumps on the way to ‘active purchasing,’ meaning attempts to steer patients away from higher-price providers and toward lower-price ones,” wrote White and colleagues. “Active purchasing can occur through the use of narrow networks that exclude high-price providers; tiers, so that patients face higher cost sharing if they use nonpreferred providers; or reference pricing, which makes patients liable for any amounts that are in excess of a benchmark price.” As the desire