Introduction to U.S. Hospitals and Prices

Ian McCarthy | Emory University

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:

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

Hospital prices in real life

We’ll get into the real data later in this module, but for now…a few 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