Health care spending for the privately insured rose 20% overall from 2007 to 2014, and rising provider prices are a primary driver of this growth. A new study found that hospital prices paid by private insurers for inpatient and outpatient care grew much more quickly than the prices paid to the physicians who provide care in these settings. For all inpatient care, hospital prices grew by 42 percent compared to 18 percent for physician prices. The same pattern was observed for four specific high-volume hospital-based procedures. This Research Insights summarizes the findings of this study, conducted by NIHCM grantee Zack Cooper and colleagues, and outlines proposed policy solutions.

The majority of the 2007-2014 growth in private insurer payments for hospital-based care was driven by a rapid increase in the negotiated payments for hospitals rather than escalating prices paid to physicians, suggesting significant differences in the bargaining leverage of hospitals and physicians vis-à-vis insurers. Government interventions recommended by the authors include much more active anti-trust enforcement and regulating hospital prices, particularly in markets where hospitals already hold considerable market power. They also encourage private payers to use reference pricing and incentivize physicians to make more cost-efficient referrals.

Per-enrollee spending varies dramatically across geographic markets for people with private health insurance coverage, and variation in prices accounts for about half of the observed spending variation. But what is driving this variation in private insurers’ prices? This Research Insights summarizes newly published findings from NIHCM grantee, Zack Cooper and colleagues, who took a comprehensive look at this question. Above all, their work points to the importance of provider market power and relative negotiating strength vis-à-vis insurers. Not only do market-dominating hospitals command much higher prices from private payers and obtain insurance contracts that expose them to less financial risk, when two hospitals in close proximity join forces through a merger their negotiated prices rise significantly.

This comprehensive analysis of claims data from three national insurers documents the extensive variation in the prices that hospitals receive for the same procedure. Payment rates vary not only across and within hospital markets but also within individual hospitals, suggesting that the relative bargaining power of hospitals and insurers plays a role in price determination. The work also establishes that monopoly hospitals are paid higher prices and are more likely to obtain contracts that place them at lower financial risk, whereas hospital prices are lower and contracts are more likely to be based on prospectively determined rates when the insurer market is more concentrated. Finally, analysis of hospital mergers over a five-year period demonstrates post-merger hospital price increases, with the largest impact observed when merging facilities are in closer proximity to one another.  

This cover story in The New York Times, written by Kevin Quealy and Margot Sanger-Katz, features a groundbreaking study on prices and spending in private insurance. This study, led by Yale University's Zack Cooper, was supported by grants from NIHCM Foundation and The Commonwealth Fund.