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Study: Hospitals Differ On Response To Medicare Cuts

A new study in Health Affairs provides more reason for concern that the trend of hospital consolidation, which may have been accelerated by the health care law, will lead to higher prices for the privately insured in places where hospitals have lots of market power.

The study found that as Medicare payments drop, hospitals that dominate their local markets tend to raise prices on private insurers, while hospitals with plenty of competitors respond by cutting their costs.

The analysis gives another reason for concern about provisions in the Affordable Care Act that encourage doctors and hospitals to partner in caring for patients and share in the financial savings and risks. Congress hoped those collaborations would lead doctors to focus more on preventing illnesses before they require hospitalization and reduce the lack of communication among specialists. But there have been growing worries that these new partnerships, called accountable care organizations, or ACOs, may give doctors and hospitals more leverage to obtain higher prices from private insurers.

In the study, James Robinson, a professor of health economics at the University of California, Berkeley, compared the profit margins of 61 hospitals on seven types of common operations, including knee replacements, spine fusions and hip replacements. Robinson then broke the results down for hospitals in concentrated markets and those facing more competition.

He found that for all seven procedures, hospitals with market power made more profits from private insurers than did hospitals surrounded by competitors. For a knee replacement, for instance, the hospitals in concentrated markets made an average of $13,731 while those in more competitive markets made an average of $7,529. Robinson wrote the difference was “indicative of the stronger bargaining power obtained in contexts where private insurers cannot credibly threaten the hospitals with network exclusion.”

But for Medicare, the profit situation was reversed:  Hospitals with strong market power made lower margins than did those with weak market power for most procedures. For a knee replacement, those hospitals in concentrated markets lost $190 on average while those in competitive markets earned $1,700. Robinson said that finding supports the perspective of the Medicare Payment Advisory Commission, whose executive director, Mark Miller, has argued that when Medicare payments are cuts, those hospitals that can’t shift their costs to private insurers will cut their costs so their finances can stay in the black.

The implication: as hospital markets become more consolidated — something Robinson says is inevitable — those providers will be more likely to respond to lower Medicare payments by shifting the costs onto private payers, unless policy makers are able to find ways to stop it.