New Study Casts Doubt on High-Price Hospitals' Value

A study in the February issue of Health Affairs examining characteristics of high-price hospitals adds strength to the argument that market clout and reputation allow some hospital systems to negotiate better rates from payors and drive up costs.

The issue of how big a factor market size and reputation are in setting hospital prices is a key one as hospital systems consolidate into ever larger entities and anti-trust challenges to mergers and accountable care organization models end up in court. For example, in a ruling that could impact other hospital purchases of physician organizations, a Federal judge ruled last month that St. Luke's Health System in Idaho violated antitrust laws when it acquired the independent physician's practice Saltzer Medical Group.

The Health Affairs study "Understanding Differences Between High- and Low-Priced Hospitals: Implications for Efforts to Rein in Costs" looked at 2011 claims data for active and retired non-elderly autoworkers and their dependents in 13 Midwestern markets and found that the highest paid hospitals on average earned 60 percent more for each inpatient stay than the lowest-price hospital in the same market. Characteristics that correlated with the high-price hospitals were good U.S. News & World Report rankings, which are largely based on peers’ rankings of the institutions (i.e., reputation) and large market share. The high-price hospitals also tended to be major teaching hospitals that provided specialized services, such as heart transplants and Level 1 trauma care.

What did not always correlate with higher price hospital care were better scores on more objective patient care measures, such as postsurgical mortality rates. Among the objective quality measures the researchers examined, the only one that the high-price hospitals performed better on than the low-price hospitals was 30-day mortality for heart failure patients.

The researchers were careful to note that they found evidence that the high-price hospitals may be delivering other valuable services not accounted for in a strict claims-based analysis, such as engaging in medical education, offering costly specialized services and serving more low-income patients with government health plans that reimburse poorly and force hospitals to engage in a certain amount of cost shifting. Poorer outcomes could also relate to these institutions seeing more complex patients.

However, the researchers stated that larger hospital systems with better reputations and high-level specialized services like Level 1 trauma care also clearly had an advantage in negotiations with payors. Any health plan without these hospitals “in-network” would face a backlash from enrollees and physicians.

If payors (health plans) do not “regain the upper hand” in negotiations with increasingly consolidated hospital systems, more “radical approaches” in controlling hospital costs may become popular, noted the study authors. These could include government rate setting or restrictions on contract arrangements between hospitals and health plans, the authors predicted.