The American Journal of Managed Care November 2014
Variation in Hospital Inpatient Prices Across Small Geographic Areas
To examine whether market competition may influence the difference in the inpatient price per discharge between public (Medicare) and private payers across small geographic areas.
Retrospective multivariate analysis.
Data came from the 2006 Healthcare Cost and Utilization Project (HCUP) State Inpatient Databases (SIDs) in 162 counties from 6 states where an HCUP price-to-charge ratio (PCR) was available. The SIDs were linked with the Area Resource File, American Hospital Association Annual Survey Database, and US Census Bureau data files. Hospital inpatient prices were estimated by applying the HCUP PCR to total hospital charges. Payer-specific price comparisons were made for all discharges, an acute condition (acute myocardial infarction), and an elective condition (knee arthroplasty). Ordinary least squares models were used to examine the effect of market competition on the inpatient price per discharge by payer.
Greater geographic variation was found in the inpatient price per discharge among private than public payers for most hospital services. Hospitals in more concentrated markets were associated with a higher price per discharge among knee arthroplasty discharges for both payers.
Hospitals charged significantly higher prices to private than public payers. Because the payment policies from Medicare ultimately affect private payers, public policy efforts that take into consideration market-based approaches or payment reform may help to reduce price variations.
Am J Manag Care. 2014;20(11):907-916
- Greater geographic variation was found among private than public payers in the inpatient price per discharge for most hospital services.
- Hospitals charged significantly higher prices of private than public payers.
- Hospitals in more concentrated markets were associated with a higher price per discharge among knee arthroplasty discharges for both payers.
Several factors have been cited as possible reasons for the wide price variations. The consolidated hospital market has been leading to increased prices. A study of 6 California metropolitan areas showed that providers with strong leverage are able to use their increased market power to negotiate substantially higher payments.6 A study by Medicare Payment Advisory Commission (MedPAC) found that hospitals with strong negotiating power were able to let their cost structure rise because they receive higher reimbursement rates from private insurance; these payments offset negative Medicare margins.7 The substantial price variation across geographic areas might exist because certain providers have significant market clout to negotiate higher-than-competitive prices.
Differences in how hospitals set their prices between payers may also impact price variations. Because prices for Medicare are set administratively, hospitals do not develop any pricing strategies and are price takers.5 Conversely, hospitals negotiate prices with private payers for specific procedures and conditions. There is a minimum price threshold—below which a hospital will refuse to contract with a private insurer—and a maximum price threshold—above which a private insurer will not contract with a hospital.5 The agreed-upon price will depend, in part, on market factors such as the level of competition intensity and “must have” status in the provider network. Thus, hospitals are price makers with private payers.
The role of dynamic cost shifting has also been cited as a contributor to price variation between payers. Some have suggested that below-cost payments from public payers lead to price increases for private insurers.1,5 An implicit assumption of this perspective is that hospitals have unused bargaining power with private insurers. When payments from public payers decline, hospitals raise their prices to private payers to offset declining margins by leveraging their market power. More recent evidence suggests that the market structure—whether a hospital is located in a concentrated or competitive market—will determine if hospitals raise their prices to private payers, cut costs, or perform both in response to payment shortfalls from public payers.8,9
The changes in Medicare reimbursement expected under the Affordable Care Act (ACA) have led to some uncertainty regarding the implications of payment reductions by Medicare, the potential impact on private payers, and the confounding effect of market factors on hospital prices. Despite existing literature that has highlighted wide inpatient price variations, there is sparse evidence regarding the specific role that market competition might have in driving price variation between payers. Previous studies examined only select conditions that were restricted to a few hospitals or market areas and did not use adequate measures to adjust for differences in patient health status.
The purposes of the present study are: 1) to examine differences in inpatient price per discharge between public (Medicare) and private payers among various hospital services across small geographic areas, and 2) to investigate the relationship between hospital market competition and payer-specific prices for several common discharge types. We hypothesized that there would be greater variation in prices paid by private payers compared with Medicare because of differences in negotiated prices and discounting by private payers. We also hypothesized that market competition might drive between-payer price variations.
We used data from the 2006 Agency for Healthcare Research and Quality Healthcare Cost and Utilization Project (HCUP) State Inpatient Databases (SIDs) and 2006 US Census Bureau population estimates. The data came from 6 states (California, Florida, Massachusetts, New Jersey, Wisconsin, and 1 state that the HCUP Data Partner chose not to reveal) where an HCUP price-to-charge ratio (PCR) was available. These states included hospitals that were most consistent in terms of how they reported their financial data (according to a conversation with Katie Levit, BA, with Truven Health Analytics, July 6, 2012). The HCUP SIDs contain all-payer information for inpatient stays and currently account for 97% of dischargesinUScommunityhospitals.10
We used all nonmaternal discharges for patients 40 years and older. Patients aged 40 to 64 years with private insurance as the primary expected payer were classified as private insurance. Patients 65 years and older with a primary expected payer of Medicare were classified as Medicare. We made payer-specific price comparisons for all discharges, an acute condition (acute myocardial infarction [AMI]), and an elective condition (knee arthroplasty). We selected these conditions because they represent common and costly medical or surgical conditions that occur in the adult population.11 We identified these conditions using principal diagnosis or principal procedure from the HCUP Clinical Classification Software.12
We examined the effect of market competition on the price per discharge by primary payer across discharge types. We removed discharges with missing total charges, age, or primary expected payer. Hospitals with negative PCRs were also removed. We excluded counties where 50% or more of discharges were missing price information. We excluded hospitals with fewer than 11 discharges or small counties that did not have complete population characteristics. The final sample included 3,333,065 discharges across all discharges from 6 states.
Unit of Analysis
We aggregated discharges from the HCUP SID to the county level based on hospital zip code as our geographic unit of analysis. We examined a total of 162 counties in 6 states across all discharges. Previous studies analyzed variation in healthcare spending and utilization at the county level.13-15 A previous study also found that different measures of healthcare markets are highly correlated.16
We estimated payer-specific inpatient prices (net revenue) by applying the HCUP PCR to total hospital charges. The PCR calculates Medicare and private insurance inpatient net revenues—the payment a hospital receives— from gross inpatient revenue. The PCR is adjusted for contractual adjustments, discounts, bad debt, charity care, and other sources of inpatient revenue (eg, Medi- care disproportionate share hospitals [DSH], grants, and subsidies).17 The net revenue that a hospital receives is a more valid indicator of actual prices than billed charges, which are inflated.5
The payer-specific inpatient price per discharge was calculated by taking the sum of all hospital net inpatient revenues divided by total number of discharges at the county level. We calculated payer-specific rates by using number of patients in private insurance and Medicare payment groups. The Area Wage Index was used to adjust for differences in cost of living.
The Herfindahl-Hirschman Index (HHI), which represents market competition intensity, was derived from the HCUP Hospital Market Structure File.18 HHI represents sum of square of market shares for all hospitals within a county. A hospital’s market share is calculated as total number of discharges at a hospital divided by total number of discharges in the market. The HHI ranged from 0 to 100, where 0 represents a market with many competitors, each having no influence on price, and 100 represents a monopoly. HHI is a standard measure of market competition and has been previously validated.19 We used a continuous measure of HHI and included a dummy variable for markets with monopolies. As a check for a possible nonlinear relationship between market competition and prices, we substituted the continuous measure of HHI with a categorical variable based on quartiles of the HHI distribution.