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Albany Times-Union: N.Y. hospital prices tied to market power, not quality

By Claire Hughes. 12/17/16

If a knee joint replacement costs $20,000 at Hospital A and $35,000 at Hospital B, what does that whopping 75 percent difference tell you about the likely results of surgery at each place?

Unfortunately, nothing.

Certainly not that Hospital B does a better job at knee replacements. Nor that hospital B has patients with more complex problems, provides more advanced care or is making up low government payments by upcharging your insurance company.

All the price difference tells you — if you can actually get hospital prices you can compare — is that Hospital B had less competition in its market, giving it more negotiating clout with health insurers, according to a report scheduled for release on Monday.

“There’s not an association between prices and quality,” said David Sandman, chief executive of the New York State Health Foundation, noting that would come as little surprise. “But there is a strong one between market power and price.”

In other words, a hospital has the power to demand higher prices if an insurance company needs a hospital in its network because it’s the only acute care facility in town, or because it’s part of a larger health system that it must contract with. That means, for instance, that in the northeastern New York region including Albany, hospitals considered rural, which operate as virtual monopolies with no nearby competition, are pricier than urban ones.

The health foundation, a nonprofit whose goal is improving health care for New Yorkers, commissioned the report, “Why Are Hospital Prices Different? An Examination of New York Hospital Reimbursement,” as rising insurance premiums and growth in high-deductible policies drive up consumers’ out-of-pocket health costs. Reducing prices for hospital services, among the costliest of medical care, is also a primary goal of state and federal health reforms after decades of health care spending increases.

In addition to finding that market leverage was the biggest determinant of price, the report came to another unsurprising conclusion: hospital pricing is complicated. But here’s what’s not so obvious: It’s really, really complicated. Not just for average New Yorkers but for experts, too. So complicated that you need something akin to a team of actuaries or economists to analyze pricing.

“Contracts are unbelievably complex,” Sandman said, “to the point that it’s not always certain that the payers themselves” — the health insurers — “always understand what they are paying.”

Yes, there is information readily available on a state website on what hospitals charge. But those charges do not reflect prices actually paid, which are the result of negotiations between government and private insurance companies and the hospitals or their parent companies.

Researchers further found that certain contract provisions demanded by hospitals hinder competition, the ability to compare prices and efforts to contain costs. These include gag clauses that prohibit insurers from posting hospitals’ prices on members-only websites and termination clauses that allow a hospital to get out of a contract if an insurance company attempts to steer members to lower-priced facilities.

Consumer advocates and health insurers, groups often at odds with each other, were both pleased to learn the foundation’s findings would soon be released.

“This report is a call for a close review by state legislators and government regulators to see if they can help make our hospital pricing system more rational,” said Elisabeth Benjamin, vice president of health initiatives at the Community Service Society of New York, an advocate for low-income New Yorkers.

Health insurers “support providing more information on prices and costs as important and necessary tools to helping consumers make better decisions about their health care coverage,” said Leslie Moran, a spokeswoman for the New York Health Plan Association, an insurance industry group.

Bea Grause, president of the Healthcare Association of New York State, a hospital trade group, acknowledged that hospital pricing is complex.

“It is not like typical products and services,” she said.

HANYS has published a 22-page consumer guide to help patients compare prices and manage out-of-pocket costs. Among reasons the guide gives for price variations are hospital size, the populations served and the services provided.

But according to the health foundation’s report, none of these correlate with higher price.

The hospital pricing report does not provide comparisons of the charges for individual procedures from one hospital to another. Nor did it consider the more than 300 hospitals in the state.

Rather, it sought to get a representative sample of hospital types and locations by looking at 107 hospitals in three diverse markets — downstate, Albany and Buffalo — to shed light on price variations and obstacles to market competition.

Researchers led by Bela Gorman of Massachusetts-based Gorman Actuarial Inc. looked at claims data from nine insurance companies in 2014. Hospitals were not classified as higher- or lower-priced based on individual procedures, but on a method that involved blending the inpatient and outpatient prices at each hospital and then comparing the average price to others in its region.

Compared to downstate and Buffalo, researchers found less hospital price variation in the Albany market, which included a dozen hospitals extending north to Plattsburgh and west to Gloversville.

What they did find in Albany, however, was a significant difference between the average prices of urban hospitals and rural ones, as defined by the federal Medicare program, which considers the county served rather than whether a hospital is in a city or country setting. Average prices at rural hospitals were 130 percent of the average prices of their urban counterparts.

The 300-bed Champlain Valley Physicians’ Hospital in Plattsburgh and 74-bed Nathan Littauer Hospital in Gloversville, both considered rural, were among the priciest of the dozen studied.

A trend seen downstate and in Buffalo, but not in Albany, was that hospitals that were part of a larger system with greater market share had higher prices, regardless of their own size or market share. (Gorman said continuing affiliations in the Albany area may have changed that by now; the analyzed insurance claims were from 2014.) In some regions of the state, academic medical centers with no competition were able to command the highest price, regardless of market share.

The study’s examination of downstate markets turned one widely held belief about pricing on its head. Researchers found that hospitals with a large concentration of Medicare and Medicaid patients were not able to make up low reimbursements from the government by negotiating higher prices with private insurance companies. In fact, these hospitals had lower prices from private payers.

That finding did not surprise Richard Gottfried, chair of the state Assembly Health Committee. He recalled the 2010 closure of St. Vincent’s Hospital Manhattan. It served a large percentage of Medicare and Medicaid patients, but couldn’t bargain for good fees from private insurers because it didn’t have the leverage of hospitals with more market share, like Mount Sinai and NYU Langone Medical Center.

“For hospitals that serve low-income neighborhoods, they would love to make up for the Medicaid losses by charging insurance companies more, but insurance companies won’t pay it,” Gottfried said. “They have to settle for what they can get.”

The ability of hospitals with more market power to command higher prices was something a few people predicted 20 years ago, Gottfried said, when New York ended its practice of setting hospital rates. Perhaps ironically, the argument toward eliminating state rate setting was to reduce costs by nurturing competition.

Benjamin, of the Community Service Society, called it a cautionary tale.

“We now have a true understanding of what happens when you go to a full, unfettered, deregulated, no-price-setting system,” Benjamin said. “Certain hospitals with market share will prevail. That’s problematic.”

The health foundation does not advocate a return to state rate setting, Sandman said. The report’s suggestions include simplifying hospital payment methods, barring certain contract language and looking east to Massachusetts as a model for reform.

A study by the Massachusetts attorney general on health care price variations led to the creation of two state agencies charged with understanding and reducing costs.

The state’s Health Policy Commission monitors how hospital affiliations and other proposals will affect competition and pricing, whether or not that effect rises to the level of an antitrust violation.

Price transparency is a primary goal. Consumers in Massachusetts can now look up a hospitals’ relative pricing, compared to others, based on the hospitals’ contracts with their insurers.