Hospitals With Pricing Power Don't Necessarily Provide High-Quality Care

When private insurers negotiate prices for inpatient care with hospitals, the resulting fees vary considerably within and across private health plan markets.

Typically, the costliest hospital in a market charges 60% higher rates than the least expensive hospital. Previous research indicates certain hospitals use their market clout to bargain with insurers and improve payment rates, but few studies have been able to document the relationship between hospital characteristics and pricing power.

Using private insurance claims data, a study published in the February 2014 issue of Health Affairs has examined the factors that influence the costs to private payers. The authors examined 10 markets comprised of 110 hospitals with a combined 24,187 hospital stays and calculated a price index that captured cost differences while considering variations in service complexity across hospitals.

The researchers found high-price hospitals were larger than other hospitals in their areas, with more than twice the number of beds than nearby competitors. High-price hospitals also tended to have major teaching programs, belong to health systems with large market shares, and offer specialized services such as heart transplants, Level I trauma care, and neonatal intensive care. The costliest hospitals also had healthy financial margins and robust non-patient revenue streams that included state Medicaid disproportionate-share hospital funds.

Among hospitals with solid income streams, one might expect the quality of care to be high. Using annual U.S. News & World Report rankings, which are largely based on hospital reputation reported by physicians, the researchers found high-price hospitals were more likely to be identified as high-quality than low-price hospitals. However, objective measures like postsurgical mortality rates, excess readmissions, and patient-safety indicators showed high-price hospitals perform worse on care quality.

Nevertheless, the researchers acknowledged that high-price hospitals often treat patients who are sicker and more socioeconomically disadvantaged — and thus, more likely to have poor outcomes. The authors’ risk-adjustment algorithms may have inadequately accounted for that fact.

According to the authors, the reputation disparity alone creates a quandary for private insurers. The insurers may have data that supports the procurement of services from smaller or less costly hospitals, but their patients may resist changing hospitals, given the good reputations and specialized services of high-price facilities.