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The American Journal of Managed Care November 2014
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Variation in Hospital Inpatient Prices Across Small Geographic Areas
Jared Lane K. Maeda, PhD, MPH; Rachel Mosher Henke, PhD; William D. Marder, PhD; Zeynal Karaca, PhD; Bernard S. Friedman, PhD; and Herbert S. Wong, PhD
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Variation in Hospital Inpatient Prices Across Small Geographic Areas

Jared Lane K. Maeda, PhD, MPH; Rachel Mosher Henke, PhD; William D. Marder, PhD; Zeynal Karaca, PhD; Bernard S. Friedman, PhD; and Herbert S. Wong, PhD
Greater geographic variation was found among private than public payers in the inpatient price per discharge for most hospital services.
We adjusted for patient, population, and market-level characteristics in our models. We derived from the SID patient characteristics that included age, sex, comorbidities, and an all-patient refined diagnosis-related group (APR-DRG) disease severity measure. Patient characteristics were included to adjust for disease severity.5,8,20 From the US Census Bureau, we obtained population characteristics that included the Gini index, unemployment rate, and proportion of the population with a bachelor’s degree. We derived market characteristics from the American Hospital Association Annual Survey and Area Resource File that included proportion of teaching and specialty hospitals, number of primary care physicians per capita, and number of acute care beds per capita. The selected population and market characteristics were included to adjust for factors that have been previously described as influencing hospital price setting.5,8,17

We first examined the means and distributions of our sample and calculated the correlation in price per discharge among payers using Pearson’s correlation. Medicare and private insurance results were examined as scatter plots. Our empirical approach used an ordinary least squares regression (OLS) model with robust standard error—analyzed separately by payer—to estimate the relationship between market competition and inpatient price per discharge. In the multivariate analysis, we used the log of price per discharge to focus on percentage of payment as opposed to the specific dollar amount. We adjusted our models to account for areas with a small number of discharges by including the standard error of price per discharge in the regressions and weighted the county by the number of discharges by payer. State dummy variables were included to account for differences between states.

As a sensitivity analysis, we re-estimated our linear models using a robust regression with Huber weighting to assess the validity of our results. The robust regression uses iteratively reweighted least squares and assigns a weight to each observation with higher weights given to better behaved observations.21 We report results from both the OLS and robust regression models.

RESULTS

Descriptive Analyses


The average prices per discharge by payer are represented in 2012 dollars (Table 1). Results revealed that the average price per discharge for private insurance was nearly twice as high as for Medicare across each of the different types: all discharges ($7628 Medicare vs $13,713 private insurance; P <.0001), AMI discharges ($11,000 Medicare vs $23,485 private insurance; P <.0001), and knee arthroplasty discharges ($10,824 Medicare vs $21,098 private insurance, P <.0001). Among all discharges for Medicare, the price per discharge in the county with the highest rate was more than 4 times higher than the price in the county with the lowest rate ($13,776 vs $3300). For private insurance, the price per discharge among all discharges in the county with the highest rate was nearly 51⁄2 times higher than that of the county with the lowest rate ($30,071 vs
$5508) (data not shown). The coefficient of variation, which is a measure of dispersion, was also higher for private payers than for Medicare across all conditions, except knee arthroplasty.


Table 2 contains the descriptive results of the patient characteristics. Medicare patients tended to have more severe loss of function and a greater number of comorbidities as a function of age compared with those with private insurance. Table 3 presents the descriptive statistics of the population and market characteristics. On average, counties were highly concentrated (HHI greater than 18). About one-fourth of the population had a bachelor’s degree or more education and approximately one-fourth were families with income below the poverty level.

Scatter plots (eAppendix A available at www.ajmc.com) of the variables revealed weak correlations between Medicare and private payer price per discharge across all discharges, AMI discharges, and knee arthroplasty discharges.

Multivariate Analyses

From the unadjusted regression results, an increase in market concentration (less competition) was associated with a lower price per discharge for all discharges and AMI discharges for Medicare (Table 4). An increase in market concentration, however, was associated with a 0.2% to 0.3% higher price per discharge for knee arthroplasty among Medicare and private insurance, respectively.

After adjusting for model covariates, market concentration was significantly associated with an increase in the price per discharge for knee arthroplasty for private but not public payers (Table 5). A 1-unit increase in market concentration was associated with a 0.3% increase in the price per discharge among knee arthroplasty for private insurance (P = .017), but was only marginally significant for Medicare (P = .054). There was no difference found between market competition and the price per discharge for all discharges or AMI discharges. In the robust regression model, an increase in market concentration was found to have a similar effect on the price per discharge for knee arthroplasty among both private and public payers (eAppendix B). A 1-unit increase in market concentration was associated with a 0.3% increase in the price per discharge.

When we replaced the continuous measure of HHI with quartiles, the positive association between market concentration and price per discharge for knee arthroplasty for private insurance was particularly strong for the second- and third-most concentrated quartiles. Quartile 4, however, was associated with a lower price per discharge for all discharges for private payers (results available upon request).

DISCUSSION

There were significant differences in the payer-specific price per discharge among certain hospital services. Hospitals charged significantly higher prices to private payers than to Medicare for all discharge types examined. As in previous studies,22 we found a weak correlation in the price per discharge between payers. We also observed greater geographic variation in the price per discharge for private payers than for Medicare. The larger price variation among private payers may have been caused by: differences in negotiated prices and market power, or by price restraints of public payers.


Consistent with economic theory, market competition was found to be modestly associated with inpatient prices for an elective condition. This effect was found to be similar for both categories of payers.

The level of hospital competition has been previously cited as contributing to price variations.1 Concentrated markets tend to have higher prices for private payers because hospitals wield their market power to obtain higher payments.1,6 Hospitals in concentrated markets are also able to command higher prices because they are at a lower risk of being excluded from an insurer’s network.20 We find evidence that hospitals in more concentrated markets may be exerting their leverage to obtain higher prices for elective procedures such as knee arthroplasty. Counterintuitively, we found hospitals in concentrated markets were associated with higher Medicare payments for knee arthroplasty. A possible reason for this finding is that because the PCR takes into account adjustments made after the claim was paid, hospitals in concentrated markets may receive additional revenue through Medicare DSH or other subsidies (ie, sole community hospitals, critical access hospitals). A recent report by the Government Accountability Office found that although the Inpatient Prospective Payment System (IPPS) was designed to maximize “cost-control, efficiency, and access,” 91% of hospitals paid by Medicare received some add-on to the standard IPPS payment rates.23

A previous study that used the HCUP Nationwide Inpatient Sample found that critical access hospitals had costs that were 9.9% to 30.1% higher than non–critical access hospitals for select surgical procedures, including knee replacement.24 This finding remained consistent even after restricting the sample to Medicare beneficiaries. The differences in inpatient cost were attributed to the more generous Medicare payment policies for critical access hospitals. The authors suggested that elective procedures likely represent an important revenue stream for critical access hospitals.24

The findings from our study have implications for the changes that are expected to take place under the ACA. The payment reductions in the Medicare program are expected to result in higher payments made to hospitals by private insurers. There is a growing concern that the disparity between the prices paid by public and private payers will continue to increase.1,5

 
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