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Two patients lie asleep on operating room tables, each with an inflamed appendix demanding to be relocated to a specimen jar. Two operations take place, each one lasting close to fifty minutes, each one performed by an experienced surgeon at a state-of-the-art U.S. hospital. One operation was priced at $1200 dollars. But the other one cost more than $4,000.
Why such different prices for such similar procedures?
A recent study by Robert Berenson of the Urban Institute highlights some of the nitty gritty details of hardball hospital/insurance company negotiations that contribute to pricing disparities across regions, and even neighborhoods, in the United States. Berenson reports in the May 2012 issue of Health Affairs on findings from the most recent wave of the Community Tracking Study, a biannual survey of hospital leaders working in large metropolitan areas. These hospital leaders, able to speak anonymously about the goings on in their local markets, painted a picture of powerful hospital organizations using their market leverage to negotiate payment terms with local insurance companies. They even explained that hospital power has grown substantially in recent years. What is the source of that power?
Most powerful were those hospital systems that controlled “must have” resources. A hospital that’s the only tertiary care pediatric hospital in town, for example, can expect to be in a strong negotiating position with the local insurance company. That company won’t be able to convince many working parents to enroll in any of their insurance plans if they don’t include that children’s hospital as a preferred provider, meaning that the hospital system—including the adult hospitals and rehab centers that are affiliated with that children’s hospital—can take a hard position in negotiations knowing that if they walk away from the negotiating table, the insurance company will be in deep trouble.
Almost as strong in their negotiating leverage are those hospitals that routinely fill their beds to capacity. When a hospital negotiates with, say, Aetna over the costs of its surgical procedures, that hospital negotiator can much more easily walk away from a deal if she is confident that her hospital has a long waitlist for elective surgical procedures, meaning that the other insurance companies in town will bring them plenty of business to remain at capacity.
Prestigious hospitals also have correspondingly strong negotiating positions. What insurance provider in Northern Ohio is going to exclude the Cleveland Clinic from its list of providers?
What all this means is that the cost of medical care is subject to market forces that diverge strongly from the prices patients would pay in a free market. As hospitals bond together in ever larger networks, their negotiating leverage rises much more quickly than their quality of care. In other parts of the economy, efficiencies of scale usually lead to lower prices. In medical care, any efficiencies of scale that come from hospitals working together are overwhelmed by the ability of those same hospitals to raise their prices. In medicine, efficiency leads to expensive appendectomies.
At the extreme, too much market power creates antitrust problems for hospital systems. But in medical care, many hospitals achieve strong negotiating positions long before reaching near monopoly status.
In the case of hospitals with must have services, they’re negotiating power enables them not only to raise the price of those services, but also to negotiate higher fees for other services.
These market peculiarities would only be of concern to hospitals and insurance companies except for the rising role that co-pays and deductibles play in how Americans pay for their health care. Most of the cost of those expensive appendectomies are borne by insurance companies. But patients paying twenty percent co-pays on hospital services are going to be hit hard by the inability of their insurance companies to negotiate lower appendectomy fees. Even aside from co-pays, the large variation in the cost of medical care inevitably leads to variations in the cost of health insurance, a cost that ultimately comes out of people’s wages and disposable income.
The relative bargaining power of health providers and insurance companies waxes and wanes over time, and varies across parts of the U.S. for a slew of reasons. But if the American public hopes to fork less of its money over to health-care providers, then it might need to hope for a stronger health insurance industry, one with enough bargaining power to slow the rise of medical bills.
Insurance companies—whether they’re non-profit or for profit—are not the cause of high medical costs. But they could be a big part of the solution.
