Do large hospital systems increase healthcare costs?

In Rhode Island, hospitals that are part of hospital systems were paid more for the same services than independent hospitals.

The price differences could not be explained by quality of care or severity of illness.  The results suggested that market power determines the price of hospital services, and that increasing concentration of power in hospital networks is likely to further increase costs, without improving quality of care.

Recently, a similar report out of the neighboring state of Massachusetts was announced.  As reported by Liz Kowalczyk in the Boston Globe:

Massachusetts insurance companies pay some hospitals and doctors twice as much money as others for essentially the same patient care, according to a preliminary report by Attorney General Martha Coakley. It points to the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs.

The yearlong investigation, set to be released today, found no evidence that the higher pay was a reward for better quality work or for treating sicker patients. In fact, eight of the 10 best-paid hospitals in one insurer’s network were community hospitals, which tend to have less complicated cases than teaching hospitals and do not bear the extra cost of training future physicians.

Coakley’s staff found that payments were most closely tied to market leverage, with the largest hospitals and physician groups, those with brand-name recognition, and those that are geographically isolated able to demand the most money.

While market power predicted pricing, quality of care and severity of illness did not.

The report shows that a small group of about 10 hospitals statewide command significantly higher payments than the other 55, ranging from 10 to 100 percent more than their competitors for similar work.

While academic medical centers are widely thought to be the most costly, the report noted that one major teaching hospital that treats some of the state’s sickest patients was paid less than dozens of others with healthier patients.

The investigation also discovered that hospitals that treat large numbers of poor patients, who can be more expensive to care for, are as a group paid 10 percent to 25 percent less than average by commercial insurers.

Finally, the report showed that increasing prices per unit of service, not increasing amounts of service, accounted for most of the rising costs of hospital care.

Coakley’s investigators found that Massachusetts health care costs, which are growing by 7.5 percent annually, are mostly the result of rising prices, not patients getting more imaging tests, surgery, and other procedures. For one major insurer, provider price increases accounted for 80 percent of the total growth in medical expenses between 2006 and 2009.

We have tried to encapsulate the concerns that motivated starting Health Care Renewal as “concentration and abuse of power” in health care. Here is a stark of example of that.

Lots of hospital insiders have tried to sell increasing concentration of power among hospitals as a way to decrease costs, improve quality, and improve access. The American experience going back to the 19th century, however, has been that market concentration increases costs regardless of quality or access.

The two reports from Rhode Island and Massachusetts suggest that as hospitals combine in hospital systems, and these systems become more oligopolistic, costs, but not quality or access increase.  Of course, the insiders within the system are likely to keep selling the idea, because their pay doubtless goes up as the system gets bigger.

Real health care reform will require reversing the trend towards concentrated power, maybe most directly by breaking up oligopolies such as large hospital systems, and changing health care organizations’ leadership and governance to reduce the incentives to expand regardless of how expansion affects patient care.

Roy Poses is an internal medicine physician who blogs at Health Care Renewal.

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  • GlassHospital

    This is really important. Sorry to have missed it over at HCR.

    Since the trends in health care business are all moving toward consolidation (health care reform will only accelerate this–my opinion), oligopolies will continue to be able to negotiate hard.

    Many will claim that it’s about their superior services (really brands and market leverage).

    My employer (I also call it GlassHospital) negotiated higher fees from Blue Cross by playing hardball (threatening to not sign a contract to be an in network provider), claiming that our innovative research leads to clinical care that is worth a ‘premium’ price. Blue Cross balked.

    Depends which side of the issue you sit on, but the health care market in this regard is a lot like other sectors.

  • Scott

    Which is why you want large, INTEGRATED hospital systems, where the hospitals own the insurance company as well. That way they have accountability for increasing the prices of their services, and the incentive is to deliver care efficiently, and you also see the efficiencies of a large company. See Kaiser Permanente, the VA, Geisenger, etc.

  • ninguem

    And as demonstrated, you pay more for that efficiency.

  • Scott

    This has not demonstrated that you pay more for having large, integrated systems. This has only demonstrated that large hospital systems in general are not cheaper. It is pretty clear that integrated systems save money, even though they are big hospital systems. The data need to be separated from non-integrated large hospital systems, and integrated large hospital systems (which are small fraction of large hospital systems).

    • joe

      I worked at Kaiser and it was anything but efficient.

      The CRUCIAL step the country must take is to force providers to publish their costs.

      Just tell us what these services actually cost, and let us shop around for the best price.

      It works with plastic survey, shoes, pizzas, cars, houses, massage therapy… you get the point?

      Show me one example of a business that hid its costs from its customers and then turned around charged their customers less for the services they provide.


  • Vernon Rowe

    This is a great article. In our area, oligopolistic hospital practices are reflected in hospital systems buying up general practices and forcing referral desks to keep all patient testing and treatment within the system.

    It’s bad enough when this practice results in 2-4 times the cost of such testing and treatment. But this practice often results in delay in patient care. Such a delay can produce worsening of a patient’s medical status, and could potentially produce medical liability for this behavior.

    The difference between large systems and small hospitals and practices seems to be solely due to lobbyists in the halls of congress.

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