While some evidence suggests that rising physician prices drive growth in healthcare spending on the privately insured, a new study theorizes that increases in hospital prices, not physician prices, are causing healthcare costs to rise.
The study, published in the February, 2019 issue of Health Affairs, examines hospital and physician prices for inpatient and hospital-based outpatient services using actual negotiated prices paid by insurers.
“Prices for hospital-based services grew substantially over the time-period we studied with prices for inpatient services increasing by about 37 percent and prices for outpatient services growing by about 21 percent,” says one of the study’s authors, Stuart V. Craig, a PhD candidate at the University of Pennsylvania’s Wharton School.
Typically, he explains, hospitals and physicians bill insurers separately for the services they provide. For example, the surgeon who performs a hip replacement gets a payment directly from the insurer, and the hospital gets a separate payment.
“We looked at the differential growth rates of these two components of price, the total price paid, and found that the payments to facilities grew much faster than those to physicians,” Craig says. “This is especially important because facility payments are typically much larger than physician payments at baseline. Roughly 89% of total price growth came from increases in prices paid to hospitals rather than physicians.”
Therefore, Craig says, efforts to reduce healthcare costs should focus primarily on addressing rising hospital prices.
“The fact that hospital prices are larger than physician prices in the first place means that hospital price growth would be a bigger driver of spending growth, even if their growth rates were the same in percentage terms,” he says. “But we find that there is a large difference in relative growth rates as well.”
For example, the researchers found that physician services costs associated with Cesarean sections increased by 5.9% between 2007 and 2014, while facility services costs associated with Cesarean sections increased by 41.9% during that period.
The cost of physician services associated with Cesarean sections increased at a rate slower than Consumer Price Index (CPI) inflation, while the cost of facility services increased at a rate faster than the CPI.
After accounting for inflation, the physician services component of a Cesarean got smaller, while the facility services cost of a Cesarean increased. Therefore, all of the true increase in cost came from increases in facility services costs.
Adam C. Powell, PhD, president of Payer+Provider Syndicate, a management advisory and operational consulting firm for the managed care and healthcare delivery industries, says the findings suggest that costs for a number of physician services, although increasing, have largely just kept up with inflation.
“The 2007-2014 era was a time during which there was a strong emphasis on reducing costs and increasing value in healthcare,” he says. “Physicians likely had less leverage when negotiating with insurance companies than did hospitals, due to the far less concentrated market for physician services than for hospital services.”