What’s driving healthcare prices? Not doctors

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While some evidence suggests that rising physician prices drive growth in healthcare spending on the privately insured, a new study theorizes that increases in hospital prices, not physician prices, are causing healthcare costs to rise.

The study, published in the February, 2019 issue of Health Affairs, examines hospital and physician prices for inpatient and hospital-based outpatient services using actual negotiated prices paid by insurers. 

“Prices for hospital-based services grew substantially over the time-period we studied with prices for inpatient services increasing by about 37 percent and prices for outpatient services growing by about 21 percent,” says one of the study’s authors, Stuart V. Craig, a PhD candidate at the University of Pennsylvania’s Wharton School.

Typically, he explains, hospitals and physicians bill insurers separately for the services they provide. For example, the surgeon who performs a hip replacement gets a payment directly from the insurer, and the hospital gets a separate payment. 

“We looked at the differential growth rates of these two components of price, the total price paid, and found that the payments to facilities grew much faster than those to physicians,” Craig says. “This is especially important because facility payments are typically much larger than physician payments at baseline. Roughly 89% of total price growth came from increases in prices paid to hospitals rather than physicians.”

Therefore, Craig says, efforts to reduce healthcare costs should focus primarily on addressing rising hospital prices.

“The fact that hospital prices are larger than physician prices in the first place means that hospital price growth would be a bigger driver of spending growth, even if their growth rates were the same in percentage terms,” he says. “But we find that there is a large difference in relative growth rates as well.”

For example, the researchers found that physician services costs associated with Cesarean sections increased by 5.9% between 2007 and 2014, while facility services costs associated with Cesarean sections increased by 41.9% during that period. 

The cost of physician services associated with Cesarean sections increased at a rate slower than Consumer Price Index (CPI) inflation, while the cost of facility services increased at a rate faster than the CPI. 

After accounting for inflation, the physician services component of a Cesarean got smaller, while the facility services cost of a Cesarean increased. Therefore, all of the true increase in cost came from increases in facility services costs.

Adam C. Powell, PhD, president of Payer+Provider Syndicate, a management advisory and operational consulting firm for the managed care and healthcare delivery industries, says the findings suggest that costs for a number of physician services, although increasing, have largely just kept up with inflation. 

“The 2007-2014 era was a time during which there was a strong emphasis on reducing costs and increasing value in healthcare,” he says. “Physicians likely had less leverage when negotiating with insurance companies than did hospitals, due to the far less concentrated market for physician services than for hospital services.”

While physician prices are growing slower than those for hospitals, Craig says these prices are the result of negotiations between providers and insurers, and therefore reflect more than simply the underlying costs of providing care. In particular, the relative bargaining leverage between providers and insurers are an important determinant of prices. 

Reasons for price growth

Theresa Hush, MPA, CEO of Roji Health Intelligence, a Chicago-based healthcare strategy firm, says hospitals have been able to negotiate higher rates with insurance companies, impacting the numbers the study found.

“Increased hospital pricing reflects the greater negotiating power that consolidated hospital systems now have with insurance companies,” she says. “Several studies of healthcare consolidation show that larger systems, rather than creating economies of scale, have driven costs up. Consolidation has increased investments in electronic records and medical technology, the acquisition of physician practices, and higher administrative costs.”

And when consolidated systems have greater geographical breadth, insurers can’t easily walk away from negotiations because of demands for higher reimbursements. 

Powell says it’s not surprising that hospital prices grew faster than physician prices, as hospitals often have far more bargaining power. “There are many regions where hospitals are relatively scarce, and insurers must decide between contracting with them or limiting access to care,” he says. “Meanwhile, there are often multiple physicians providing services related to particular specialties in a given region.”

Additionally, physicians and physician groups may have affiliations with one or more hospitals. As a result, insurers may be able to provide an adequate network while being more selective in their physician contracting. Thus, hospitals have more bargaining power than physicians.

David Belk, MD, an internist in Alameda, Calif., notes that a major hospital might see several thousand outpatients and hospitalize a few hundred people each week, while contracting with at least a couple dozen insurance providers, each of whom pays a different rate for the thousands of separate outpatient and inpatient services that hospital provides. 

“Rather than trying to keep track of each individual payment, hospitals simply grossly inflate all bills and take what they can get from each insurance company,” Belk says. “Most doctor offices do exactly the same thing, just on a smaller scale. Since the payments to individual physicians are less chaotic than they are to hospitals, doctors aren’t pressured to over-bill by nearly as much.”

Christopher K. Lee, MPH, CPHQ, clinical solutions manager for Family Health Centers of San Diego, says a major reason physicians are impacting prices less is managed care penetration. 

“Under fee-for-service, physicians were paid for every service rendered. This incentivizes unnecessary, wasteful, and inappropriate care,” he says. “Under managed care arrangements, physicians are paid a capitation rate-that is, a per member per month fee-regardless of the number of patients seen or services provided in a given month. They are motivated, therefore, to only perform necessary services.”

Are sweeping changes needed?

Kyle Varner, MD, an internist in Toppenish, Wash., says hospital expenses are growing at an out-of-control rate because almost every U.S. hospital has a local monopoly. 

“In 35 states, it is essentially illegal to build new hospitals, and in the remainder of the states a mountain of regulation makes it nearly impossible even though it may technically be legal,” he says. “This means hospitals have all the power, and consumers have none.”