Data shows power of hospital monopolies

Hospitals with no competition negotiate higher payments from health plans

By Markian Hawryluk, The Bulletin, @markianhawryluk

For decades the prices hospitals negotiated with private insurance plans were treated as tightly guarded industry secrets. But the emergence of state-run databases on hospital payments is now shining light on the wide variation in prices and what factors might influence those amounts.

Pricing data released by the Oregon Health Authority earlier this month suggest hospitals that enjoy greater market power or a natural monopoly in their area may be able to negotiate higher prices with insurance companies than hospitals that face more direct competition.

The database includes the prices paid to Oregon hospitals by commercial insurance companies but not public health plans such as Medicare or Medicaid. In July, OHA officials released both the median price and the range of prices paid to hospitals in 2014 for up to 58 common inpatient or outpatient services.

Hospitals in Oregon’s urban areas such as Portland or Salem tended to have a higher percentage of their prices at or below the statewide median price for that service. Hospitals that were geographically isolated, along the Oregon Coast or in Central or Eastern Oregon, had more of their prices above the statewide median.

“Being a monopoly or being a very large part of a market, that clearly leads to higher prices,' said Paul Ginsburg, a professor of health policy at the University of Southern California’s Schaeffer Center for Health Policy and Economics and the Brookings Institute in Washington, D.C. “The economics of the market are working.'

The Oregon data mirrors the findings from a large national study conducted by researchers at Yale University and Carnegie Mellon University last year. That study analyzed data from three large insurance companies that covered more than a quarter of all individuals with employer-sponsored plans in the U.S. The researchers concluded that hospital monopolies drastically drive up prices. In markets with just a single hospital, they found, prices were 15 percent higher than in markets with four or more hospitals.

“The price of an average inpatient stay where there’s a monopoly hospital is almost $1,900 higher than where there are four or more competitors,' said Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University and a co-author of the study. “We know that these higher prices end up getting translated into higher premiums that employers pass on to workers.'

Costs of doing care

Negotiating prices is a complex process that factors in a hospital’s costs, expected volume of patients and a host of other factors. Each hospital must negotiate prices with each insurance company from whom it will accept reimbursement for a procedure.

Hospitals that treat a larger volume of patients may be able to spread their fixed costs over a greater number of claims and can therefore accept lower prices per procedure. And hospitals that have a higher percentage of patients on Medicare and Medicaid, which generally pay lower rates than commercial insurers, may look to charge private payers to make up the difference. Prices will also differ from plan to plan depending on how much the patient must contribute through deductibles and cost-sharing.

In areas with numerous hospitals, market power can shift to the insurance plans, which can threaten to exclude a hospital from its network and send its members to a competing hospital down the street. In areas with a hospital monopoly, on the other hand, the insurance plan may have no choice but to meet the prices a hospital demands.

“The problem is it’s hard to be precise about what the impact of competition is relative to some of these other factors,' said Jesse O’Brien, policy director with the Oregon State Public Interest Research Group, a Portland-based consumer advocacy group. “It’s just hard to disentangle all these issues.'

St. Charles Bend, for example, negotiated prices above the statewide median for 43 of the 51 services, one of the highest percentages in the state. St. Charles CFO Jennifer Welander said the hospital system tries to negotiate fair but competitive prices.

“In doing that, we don’t have line of sight to what insurers contract for with other organizations,' Welander said. “That is not something that is shared, so you do much of this work in a vacuum.'

Smaller systems like St. Charles, she said, have less negotiating power with their suppliers than some of the larger hospital chains that operate in Portland, and so end up paying higher per unit costs for everything from bandages to defibrillators. The higher cost of living in Central Oregon compared with other parts of the state can make it more difficult to attract staff. Meanwhile, 75 percent of St. Charles’ business comes from Medicare and Medicaid, which sets its own prices for hospital services. That leaves hospital administrators trying to lower costs without affecting the quality of care, and to negotiate commercial payment rates high enough to remain financially viable.

“It’s an artful balance,' Welander said.

Two insurance carriers left

The Oregon pricing data may also shed light on why insurance companies are no longer offering individual insurance plans in certain markets. Counties that have a large number of competing hospitals and lower prices also tended to have more insurance companies offering plans.

Deschutes County went from having six insurance carriers offering individual plans two years ago to only two companies offering them in 2017.

Officials from the health plans that exited the market declined to comment on their rationale, and responded to questions about hospital market share by pointing to an industry study showing that hospital monopolies raised prices.

But many health policy experts have drawn a straight line from high provider pricing to plan departures.

“It’s very hard for me to believe that the high price points for health care services in the Bend area aren’t a significant factor in insurance companies choosing to pull out of the area,' O’Brien said. “It’s hard to say how much, compared to some other factors, but it has to be part of the story.'

Welander stressed that hospital services account for only about 30 percent of a health plan’s costs, and that the companies choosing not to offer individuals plans in the county are still contracting with St. Charles for other types of insurance plans. Welander said none of the plans asked St. Charles to lower its prices before deciding to exit the market.

“We’re very much at the table, wanting to have those conversations right now,' she said. “It’s not to our benefit to have the market be this unstable or disrupted.'

At times, the threat to leave the market altogether can be the only negotiating tactic left for either side when they lack market power. Hospitals and physicians groups will threaten to leave insurance networks if they don’t get the prices they need, while health plans vow to exclude providers denying them a supply of patients if they don’t lower their demands.

“If these insurers are making good on their threats to pull out entirely, that can’t be good for the hospital,' Gaynor said. “They may have to lower their rates in response.'

Welander said having data from other hospitals for comparison is now likely to influence future negotiations with health plans. Hospitals have had access to data on list prices, and in 2015, St. Charles launched a project to bring its charges down to the median level. But few patients actually pay those list prices, and until now, the hospital hasn’t had access to the rates negotiated between other hospitals and insurance companies.

Increasingly, hospitals and health plans are adopting value-based contracting, which rewards hospitals for providing better care, rather than their market power.

“Many of our contracts that we are moving into now pay us a fixed rate for a certain procedure or an outcome, so that we’re incentivized to deliver really quality outcomes,' Welander said. “That’s where health care is going.'

In the meantime, more price transparency could create public pressure on high-cost hospitals to lower their prices.

“Most of the hospitals are not-for-profit and are at least supposed to have a mission benefiting the community,' Gaynor said. “Presumably the members of their boards would not feel too good seeing very high rates made available to the public. Sometimes sunshine is the best disinfectant.'

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