Hospital Pricing and Pay for Performance

Ian McCarthy | Emory University

Outline for Today

1. Understanding Hospital Pricing
2. Recent Pay-for-Performance Programs
3. P4P and Prices

Hospital Prices

What is a hospital price?

Defining characteristic of hospital services: it’s complicated!

What is a hospital price?

Lots of different payers paying lots of different prices:

• Medicare fee-for-service prices
• Medicaid payments
• Private insurance negotiations (including Medicare Advantage)
• But what about the price to patients?

Price \(\neq\) charge \(\neq\) cost \(\neq\) patient out-of-pocket spending

What is a hospital price?

Source: Health Care Pricing Project

What is a hospital price?

Not clear what exactly is negotiated…

Fee-for-service

• price per procedure
• percentage of charges
• markup over Medicare rates

Capitation

• payment per patient
• pay-for-performance
• shared savings

What is a hospital price?

In most economic discussions, a hospital’s “price” refers to the allowed payment negotiated with insurers. That’s typically the definition I’ll use as well.

Hospital prices in real life

A few empirical facts:

1. Hospital services are expensive
2. Prices vary dramatically across different areas
3. Lack of competition is a major reason for high prices

Hospital prices in real life

Source: Health Care Pricing Project

Hospital Pay for Performance (P4P)

Basic Idea

• FFS payments create an incentive to overtreat
• Capitated payments create an incentive to undertreat
• Neither is necessarily a problem unless patient care is adversely affected

Current P4P Programs

There are three main hospital-based P4P programs in Medicare right now, details available here:

1. Hospital Readmissions Reduction Program
2. Hospital Value-based Purchasing Program
3. Hospital-Acquired Condition Reduction Program

Other programs exist for other care settings/services, such as the Quality Payment Program for physicians, which includes the Merit-based Incentive Payment System (MIPS) and Advanced Alternative Payment Models (APMs)

HRRP

• Reduces Medicare IPPS payments to hospitals with excess 30-day readmission rates for selected conditions (e.g., AMI, HF, pneumonia)
• Penalties are based on risk-adjusted excess readmission ratios relative to national benchmarks and are capped at 3% of base operating DRG payments
• Purely punitive (no bonuses, only penalties)
• Significant debate surrounding risk adjustment and potential unintended consequences
• HRRP Tracker

VBP Program

• Redistributes Medicare payments across hospitals based on a composite performance score covering clinical outcomes, patient experience (HCAHPS), safety, and efficiency
• Funding is budget-neutral: CMS withholds a fixed percentage of payments from all hospitals and redistributes it based on relative performance, creating both winners and losers
• VBP Tracker

HAC Reduction Program

• Penalizes hospitals in the worst-performing quartile on patient safety metrics (e.g., infection rates, PSI measures)
• Hospitals in the worst-performing quartile receive a flat 1% reduction in total IPPS payments; there are no bonuses
• Blunt, threshold-based incentive focused squarely on inpatient safety and has raised concerns about measurement noise and weak differentiation among hospitals
• HAC Tracker

P4P and Pricing

How?

There are several mechanisms by which P4P programs can influence a hospital’s negotiated price with insurers: - increasing costs - differentiation (e.g., quality improvement or changes in services) - service mix - bargaining

Costs

• P4P may increase real operating costs
  • care coordination
  • discharge planning
  • post-acute management
• If these investments raise costs across all patients, hospitals may seek higher prices from private insurers

Differentiation

• Efforts to reduce readmissions may reflect genuine quality improvements
• Hospitals may position themselves as:
  • lower readmission
  • better coordinated
  • higher value
• Insurers and employers may be willing to pay higher prices for perceived improvements in quality

Service mix

• Hospitals may adjust:
  • admissions policies
  • intensity of care
  • types of services emphasized
• These responses can change the average price observed even if per-service negotiations are unchanged

Bargaining

• Lowering Medicare margins may change hospitals’ incentives in negotiations:
  • greater urgency to secure favorable commercial contracts
  • less willingness to accept low-price agreements
• Effects depend on relative bargaining power and market structure
• This is a form of “cost-shifting” (although not a mechanical pass-through)

What is Cost-shifting?

• Some concern that when Medicare lowers payment rates, hospitals may respond with higher prices for private-insurance patients
• Is this possible?
  • No: If hospitals can unilaterally set prices, they would lower prices to get the marginaly lower WTP patients (not relevant in a bargaining context)
  • No: Hospitals must negotiate with insurance companies, and if they could have negotiated a higher rate, they would have done so earlier
  • Yes: If profits enter into a hospital’s objective function nonlinearly, then reductions in profit could provide upward pricing pressure
• Policy-makers and hospitals say yes (but for simpler reasons)
• Economists often say no under standard bargaining models, though this depends on assumptions about objectives, constraints, and market structure

Where we’re headed

• Empirical question: do P4P programs affect hospital prices?
• Why might we have an endogeneity problem here?
• What we need to answer this question:
  • Hospital prices
  • Penalty status
  • Some “exogenous” source of variation in penalty status…