Insurers vs. Hospitals: Who Has the Upper Hand?

For years, hospitals have complained of getting the short end of the stick on reimbursements. Come to find out, they were just blowing smoke.

According to a study by the Center for Studying Health System Change (HSC), hospitals are successfully negotiating higher-than-competitive prices with insurers. So much so, the study claims, that the prices are an anomaly compared with other industries in competitive markets.

The report's conclusion was that rates varied significantly from region to region and sometimes even within the same market—the result of hospital concentration in certain area, authors said. The Both National Public Radio and the Wall Street Journal found this story interesting enough to thoroughly cover, noting that even a hospital's prestige in certain markets appeared to carry additional negotiating weight.

Hogwash, hospitals say. "The newly released publication on variation in private insurer payment rates is too deeply flawed to be a usable policy tool," said Rich Umbdenstock, president and CEO of the American Hospital Association (AHA) in a statement. "The publication reaches faulty conclusions based on unverified data from a handful of powerful insurance companies."

The hospital and physician payment rate data he is referring to was provided by four major insurers—Aetna, Anthem Blue Cross Blue Shield, Cigna and UnitedHealth Group—in eight different markets. Researchers analyzed contracted payment rates for commercial insurance as a percentage of Medicare payments. The average inpatient hospital payment rates of four ranged from 147 percent of Medicare in Miami to 210 percent in San Francisco, according to the study.

"In extreme cases, some hospitals command almost five times what Medicare pays for inpatient services and more than seven times what Medicare pays for outpatient care," according to the Center, which noted that in the Los Angeles market, hospitals with prices at the 25th percentile received 84 percent of Medicare rates for inpatient care, while the hospital with prices at the 75th percentile received 184 percent of Medicare rates. One Los Angeles hospital with substantial inpatient claims volume even commanded rates at 418 percent of Medicare.

AHA claims that each insurer used its own methods to determine price comparisons and that no effort was made to verify, validate, or correlate the information provided, Umbdenstock said. He noted that using Medicare as a benchmark was inherently flawed given that it covers less than the cost of caring for a patient and that these costs are passed on.

It appears that the blame game for high healthcare costs is heating up just as healthcare reform is getting some traction.

Insurers, I suspect, will leverage studies like this one from HSC to make a case for regulation-driven fairness amid new healthcare delivery models being bantered about such as the accountable care organization (ACO). Insurers have been vocal about their fear of collusion among ACO hospitals that will drive rates up.

But considering that the report comes amid some impressive financial results from insurers during the third quarter, I'm led to believe that even though they may take it on the chin in certain regions, they're weathering this anomaly quite well.

I'm sure there's validity in the report that some hospitals are sticking it to insurers, which is probably not unlike when I drive through a relatively poor neighborhood and find gas costs a good 30 or 40 cents more than in my middle-class suburb. The thought behind pricing like this, I suspect, is "what other option do you have?"

With the noted exceptions, I'm apt to believe that most healthcare organizations are struggling under record high bad-debt levels and lower Medicare reimbursements, which keeps me from feeling too sorry for insurers. But reform could always change that …