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Studies Say Hospital Clout Is Key Factor in Driving Premium Hikes

By John Reichard, CQ HealthBeat Editor

May 8, 2012 -- The market power of hospitals is a key factor driving increases in health insurance premiums, according to new research from the nonpartisan Center for Studying Health System Change. Policymakers may want to consider rate-setting as a tool to shrink some of those increases, the center says.

Based on site visits to 12 markets, researchers said that large insurers are reluctant to use their own market muscle to keep hospital rates down. Insurers worry they'll lose popular hospital systems from their provider networks. That in turn could be a turnoff for the employees of companies that are the insurer's customers, the researchers said.

Insurers are willing to accept relatively high hospital charges, possibly because they can pass along the higher costs to employers and their workers, according to the study.

Robert Berenson, along with other researchers affiliated with the center, said in the study that "although dominant health plans might be able to restrain prices and achieve other contracting advantages, they also must be sensitive to their employer customers' preferences for stable provider networks. Therefore, they are willing to tolerate large price increases from providers—as long as these insurers' competitors, other health plans, pay higher rates." Berenson also is a fellow at the Urban Institute and vice chairman of the Medicare Payment Advisory Commission (MedPAC).

The study was funded by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform and appears in the May issue of the health policy journal Health Affairs.

"While hospital consolidation is often cited as the reason for growing provider clout, another important factor is employer reluctance to limit workers' choice of providers by excluding them from plan networks," said a center summary of the study. "According to study respondents, without a credible threat of excluding a provider, insurers lack a critical bargaining chip."

Market-oriented approaches to slow rising premiums are generally based on benefit designs that make consumers aware of costs, giving them an incentive to pick low-cost options, the study noted. "Alternatively, in the face of rising premiums, employers unwilling to adopt more restrictive benefit designs might support more direct regulation of provider rates," they added.

In a second study , researchers from the center noted that in the 1970s and 1980s, "many states considered multi-payer hospital rate setting, and eight eventually enacted laws authorizing public agencies to regulate hospital rates." Maryland and West Virginia continue to regulate hospital rates, researchers said.

"Studies indicate that rate setting slowed aggregate total hospital spending in New Jersey, New York, Massachusetts, Maryland, New Jersey and Washington. One exception was Connecticut, which reportedly lacked authority to enforce payer and hospital compliance with approved rates," the center said.

The study led by Anna Sommers of the center said that in 2000, hospital prices paid by private insurers on average exceeded hospitals' costs by 16 percent. By 2009, that gap had grown to 34 percent, the analysis said.

Hospitals say they are underpaid by Medicare and Medicaid. MedPAC data indicate that at least in Medicare, their payments do not fall short of their costs to the same degree that private insurer payments exceed them.

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