Introduction to U.S. Hospitals and Prices
Outline for today:
- History of hospitals in the US
- Definition of hospital “price”
- Key facts about US hospital prices
Some History
Timeline of hospitcal care in the U.S.
Before 1900: Just don’t go to the hospital! (at least in the U.S.)
- mainly charity care
- hospitals were a learning experience for physicians
Early 1900s: big safety and technological improvements
Mid 1900s: huge growth, especially in wealthy and urban areas
- Medicare and Medicaid in 1965 (Social Security Act)
- Originally paid on a “cost-plus” basis
How does this play out now?
- Predominately not-for-profit
- Associations with universities, religious affiliations
- Concentration in urban areas, limited access in rural areas
- Opaque pricing and little or no cost management
Recent developments
- Major technology integration over past 30 years
- Move toward quality improvement programs, pay-for-performance, and mild versions of capitation
- Move toward increasing transparency in prices
- Significant reductions in competitiveness
- Increasing vertical integration (hospitals owning physician practices or insurers owning hospitals)
Why does any of this matter?
- As we know, we now spend a lot on health care in the U.S., and a big part of that is very high health care prices (and a big part of that is hospital prices)
- Must understand hospital markets and hospital pricing if we want to address healthcare spending
What is a hospital’s price?
In practice, it’s a negotiation with insurers
- Hospitals can’t set price on their own
- Bargaining problem where insurer and hospital split some total amount
- Agent/entity with higher bargaining position will get larger share
Defining characteristic of hospital prices and services: it’s complicated!
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
Different prices for different payors
Different notions of “price”
Fee-for-service
- price per procedure
- percentage of charges
- markup over Medicare rates
Capitation
- payment per patient
- pay-for-performance
- shared savings
Key Facts on Hospital Prices
We’ll get into the real data later in this module, but for now…a few facts:
Hospital services are expensive and vary across/within areas
Hospital markets are NOT competitive
Hospital prices are NOT transparent
Hospital prices in US
- Recall the high spending on healthcare in US relative to other countries. Health System Tracker
- This is largely driven by higher prices. Health System Tracker
Price variation
Discussion questions
- Why are hospital prices so high?
- Why do they vary so much?
- How do factors like market competition, price transparency, or hospital ownership (non-profit vs. for-profit) play a role.?
Role of competition
- Parkview Health in Fort Wayne, IN offers a good case study of high prices and lack of hospital competition
- See article from The Guardian
Role of price transparency
- How does the lack of price transparency impact patient behavior and healthcare costs?
- Would making hospital prices more transparent reduce healthcare spending, or would it lead to unintended consequences?
Role of price transparency
Price transparency can increase prices essentially by facilitating collusion. In markets where firms observe each other’s prices, they may adjust to match higher competitors’ prices rather than competing to lower them. This dynamic undermines competition, as firms coordinate tacitly by setting prices at similar, often higher, levels. Hospitals may follow similar patterns, especially in concentrated markets, choosing not to undercut one another to maintain higher profit margins.