Hospital rate study shows private insurers being pinched all the more

NATIONAL REPORTS-The Center for Studying Health System Change's (HSC) visits to 12 metropolitan communities found that hospitals are using their clout to command high payment rate increases from private insurers.

"Compared to our previous study, more consolidated hospital systems have been able to gain a lot of leverage over private insurers," says Ha T. Tu, an HSC senior health researcher who helped lead the study.

HSC's previous site visits took place in 2007.

According to an essay written by William B. Vogt, senior economist, RAND Corp., in the National Institute for Health Care Management's "Expert Voices" report, hospital prices for private payers rose by a total of 20% between 1994 and 2001, but increased by 42% between 2001 and 2008.

"It's a continuation of a trend, not a new phenomenon," Tu says of the current pricing increase pressures. "I think it's been exacerbated by the weak economy putting more pressure on employers, and also the compounding of rate increases. In some markets, rates were already high, and then they negotiated higher rate increases off of that."

She says rate increases vary widely across the 12 markets studied between March and October 2010, but they all exceed medical inflation.

The markets studied were:

The study also showed physicians face their own financial pressures, and many are choosing to align more tightly with hospitals and large physician groups, even in markets where physicians historically have been resistant to consolidation, Tu says.

The hospital industry is still fragmented, however. During a Web presentation, James Burgdorfer, associate at Juniper Advisory, said the largest hospital group, Hospital Corporation of America, only controls about 4% of the national market.

However, hospitals have enormous local market clout, and many enjoy a reputation as large employers and community supporters, according to Tu. Some hospitals also have built good reputations as leading medical centers that consumers know by name.

"Sometimes the prestige of a hospital system makes it a must-have in the insurance product," says Tu. "A prime example is in Boston-where the Partners HealthCare system consolidated Massachusetts General and Brigham and Women's Hospital-it's really the fact that they're so prestigious as Harvard teaching hospitals that consumers want them in their insurance network."

One option for payers is to take the case to the court of public opinion. This is a challenge, however, because insurers tend to be blamed for high premiums regardless of underlying medical costs.

During the recession, hospitals were among the only sectors to show growth. They argue that stemming the growth of hospital rates equals cuts in employment. Local regulators and politicians are reluctant to take up that banner.

Another option is to fight consolidation with consolidation. If insurance providers cover enough lives, they have leverage with which to negotiate payments with hospitals.

BENEFIT DESIGN OPTIONS

Tu says insurers can also try to introduce products that either exclude certain high-cost providers from the network or put them into more expensive tiers.

"If employers and consumers are willing to trade broad provider choice for better premiums, it could be a way to limit hospitals' clout in the community," Tu says. "So far, employers and consumers show limited willingness to give that up. In Boston, however, Blue Cross Blue Shield has started to succeed with tiered hospital products."

Hospitals now expect smaller Medicare rate increases plus new costs associated with accountable care organizations (ACOs), which might offset some of the gains they'll receive by serving more insured patients.

"I think that medical reform may be one minor factor in rate increases, but remember that hospital systems with market clout had been exercising leverage with insurers well before reform became a reality," Tu says. "For providers, base rates become baselines for ACOs, so providers see it in their own interest to set baseline rates high. The Medicare shared saving model going forward assumes those are a fair reflection of costs. I think there is some jockeying for position with healthcare reform, but healthcare reform doesn't explain all of it."