Addressing hospital costs: Reductions come with tradeoffs and uncertainty
Regulation of prices for payers (setting or capping prices) could reduce hospital spending by $61.9 billion to $236.6 billion per year.
Hospital spending—one of the biggest drivers of the rising health care costs in the U.S.—could be cut considerably lower by government regulation of prices than by competition or by more price transparency, a new RAND study said.
The study found that regulation of prices for payers (setting or capping prices) could reduce hospital spending by $61.9 billion to $236.6 billion per year. By comparison, increasing price transparency would cut hospital spending by $8.7 billion to $26.6 billion annually. Increasing competition among hospitals would cut spending by $6.2 billion to $68.9 billion.
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As usual with such projections, there are multiple devils in the details. The political and practical hurdles involved with all three options are considerable. And a lack of data on some of the options created relatively wide variations in the projected cost savings.
Hospital spending is No. 1 among health costs
The RAND study starts by noting that hospital spending is the top health care spending category in the U.S. It accounts for one-third of all U.S. health expenditures, totaling $1.2 trillion in 2018. The U.S. leads the world in hospital spending, according to data from the Organization for Economic Co-operation and Development (OECD).
Annually, the U.S. spends $3,041 per capita on hospital costs. The next-highest spending nation, Norway, spends $2,382 annually, according to the OECD. All other nations in that study spent under $2,000 per capita.
Private insurance covers a large percentage of these high costs, the RAND researchers noted. “Private insurers cover approximately 40 percent of this hospital spending,” the study said. “Compared with public payers, private insurers pay higher prices to hospitals and their prices have risen faster over time.”
Capping or setting prices
The study looked at two options of increasing regulatory control of prices: setting prices or capping prices for hospital services. “Capping prices has the potential for the largest impact on hospital spending: capping prices would reduce prices above the cap, while setting prices would reduce prices above the set price, and raise prices below the set price, which would offset the reductions,” the study said. “Our estimates for potential changes in hospital prices and spending under the capped price scenarios are conservative because they reflect a cap on average hospital prices rather than a cap on prices for individual services or payers.”
The study highlighted the differences in what private payers spend on hospital services compared to what government payers spend. In general, Medicare—a system that already caps payments—spends much less. If private payers were to pay at Medicare rates, the savings would be substantial. “We estimate that setting commercial hospital prices to Medicare prices would lead to a $236.6 billion reduction in health care spending, representing 19% of health spending by private health plans and 6.5% of national spending,” the researchers said.
But the report adds that such a reduction in payments would meet with resistance from providers and would be politically difficult to implement. The debate over Medicare rates has been going on for years, with many providers saying they could not financially survive if private payers switched to Medicare rates.
Other options: increased transparency and competition
Smaller, but still significant savings, were found with the other two options in the study: increasing price transparency and improving competition among hospitals.
The researchers said the effectiveness of price transparency efforts would depend on whether patients would use such tools. The researchers looked at both patient-driven scenarios and employer-driven scenarios of price transparency. With patient-driven scenarios, consumers would use payment information to shop for care; employer-driven scenarios would help employers design coverage plans to favor lower-cost providers.
The study noted there is relatively little data on how patient-driven transparency works as a cost-saving tool. Based on the researchers’ best estimates, patient-driven transparency efforts could result in savings of $8.7 billion to $11.1 billion; employer-driven transparency efforts would save $13.2 billion to $26.6 billion.
Another option is using anti-trust regulations to challenge mergers and acquisitions that are deemed to reduce competition. However, this approach has a significant level of uncertainty about how successful these efforts would in increasing competition and lowering prices. The researchers said savings could be in the $9.9 billion to $68.9 range.
The report concluded by noting there are substantial hurdles in making these changes. Regulating prices could face strong political opposition. Measures to address price transparency and market competition still face uncertainty about effectiveness.
“Regulating commercial hospital prices is a direct way to create significant reductions in spending, but doing so could potentially lead to hospital closures, erode quality, and face daunting political hurdles,” said study co-author Christopher Whaley, a RAND policy researcher. “As policymakers consider options for reducing hospital prices paid by private health plans, they will need to weigh the potential impact of different policies on hospital revenues and the quality of care, and they will also need to take into account the political and administrative feasibility of each option.”
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