Pricier Hospitals Can Mean Higher Quality, With Big Caveat

by Leslie Small

With the cost of hospital-based services rising ever higher — and sometimes varying dramatically between different institutions — the concept of regulating prices has become a perennial political issue. However, a new study suggests that certain markets are much better suited for price regulation than others: namely, those where there is little hospital competition. 

Price does matter when it comes to quality 

• In those concentrated markets, higher hospital prices do not appear to lead to lower patient mortality, meaning cost isn’t correlated with quality, according to a new working paper published by the National Bureau of Economic Research (NBER).  
• But in hospitals in less concentrated markets, pricier hospitals are indeed associated with increased health care quality — and as a result, patients are 47% less likely to die than if they attended lower-priced facilities. 
• “Health economists have really realized over the past 10, 15 years that, to quote the famous health economist Uwe Reinhardt, ‘It’s the prices, stupid’ that cause health costs in the U.S. to eclipse that of other developed countries,” study co-author Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology (MIT), tells AIS. “But there’s a concern we have with price regulation that you might hamper quality, and so we wanted to try to evaluate that tradeoff and understand, do higher priced hospitals actually deliver better outcomes?” 
• In their NBER paper, Gruber and his coauthors noted that previous, complementary research suggests a potential reason for the correlation between hospital price and quality in less-concentrated markets. In such markets, high hospital prices “may reflect strategic investments by firms to increase quality and not patients’ lack of outside options,” they wrote. Often, such investments include actions taken to recruit top-tier doctors, such as installing cutting-edge technology, Gruber tells AIS Health. 

Some payers benefit from high prices 

• Health care providers have pushed back vehemently against any attempt at hospital price regulation. But private payers — despite their general stance of wanting to shell out less for claims — aren’t necessarily pro-price regulation, Gruber points out. 
• “Higher pricing, especially differential pricing, can allow them [insurers] to sort of use market power to get better deals,” he says. Ultimately, “the system is put in place to benefit the large, incumbent private payers, but it makes it hard for new, innovative private payers, and I think that’s a problem.” 
• To address the issue of high health care prices that don’t add any real value, Gruber says an “easy first step” is to simply stop approving hospital and health system mergers. And in markets that are already concentrated, he suggests policymakers consider “smart regulation” that takes into account (1) the level of competition in a market and (2) how “quality sensitive” different health care services are.

From Health Plan Weekly

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