Hospital prices grew faster than physician prices in hospital-based care

By Zack Cooper, Stuart Craig, Martin Gaynor, Nir J. Harish, Harlan M. Krumholz, and John Van Reenen
Health Affairs, February 2019

Abstract

Evidence suggests that growth in providers’ prices drives growth in health care spending on the privately insured. However, existing work has not systematically differentiated between the growth rate of hospital prices and that of physician prices. We analyzed growth in both types of prices for inpatient and hospital-based outpatient services using actual negotiated prices paid by insurers. We found that in the period 2007–14 hospital prices grew substantially faster than physician prices. For inpatient care, hospital prices grew 42 percent, while physician prices grew 18 percent. Similarly, for hospital-based outpatient care, hospital prices grew 25 percent, while physician prices grew 6 percent. A majority of the growth in payments for inpatient and hospital-based outpatient care was driven by growth in hospital prices, not physician prices. Our work suggests that efforts to reduce health care spending should be primarily focused on addressing growth in hospital rather than physician prices. Policy makers should consider a range of options to address hospital price growth, including antitrust enforcement, administered pricing, the use of reference pricing, and incentivizing referring physicians to make more cost-efficient referrals.

From the Discussion

Our findings suggest that there may be significant differences in the bargaining leverage of hospitals and physicians. More work needs to be done to quantify the differences between the two groups’ bargaining leverages and the extent to which there are differences in the price elasticities facing the two types of providers.

Our results also have direct implications for strategies to address growth in health spending for the privately insured. For example, a bill recently introduced in the California legislature would allow state officials to regulate hospital and physician prices. Broad-brush efforts that do not discriminate by setting could miss the mark. Our work suggests that instead of focusing on growth of physician prices (which have grown roughly at the pace of inflation), in the short run policy makers should devote more of their efforts to addressing growth of hospital prices.

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Comment:

By Don McCanne, M.D.

Under our current fragmented system of financing health care, it is no surprise that hospital prices have been growing faster than physician prices for both inpatient and outpatient services. Merger and acquisition activities, including hospital acquisition of medical groups have long been suspected as contributors to health care inflation. So what do we do about it?

It is well established that markets do not work well in setting prices for health care, whereas publicly financed and publicly administered programs are more effective in determining appropriate value. A well designed single payer Medicare for All program would go a long way toward improving pricing in health care.

Central planning and budgeting of capital improvements does a better job in controlling capacity of the system, thus ensuring the right number of beds. Operations of the facility should be funded through global budgets, just as the fire department is. That would both slow excessive growth in prices while ensuring adequate funding to fulfill the community’s needs.

Physicians would be reimbursed at negotiated rates whether through fee-for-service or capitation, depending on the practice model. Our government Medicare program has been more effective than private insurers at keeping price increases at sustainable rates.

At any rate, according to this study, “efforts to reduce health care spending should be primarily focused on addressing growth in hospital rather than physician prices.”

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