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Hospital Price Regulation Has Huge Cost-Saving Potential

Analysis  |  By Alexandra Wilson Pecci  
   February 18, 2021

That strategy could reduce hospital spending between $61.9 billion and $236.6 billion annually but would likely face major political and hospital pushback, finds a new study.

Regulating hospital prices would save more money than improving price transparency or increasing competition, finds a new RAND Corporation study.

It estimates that setting prices for all commercial healthcare payers could reduce hospital spending between $61.9 billion and $236.6 billion annually if the rates were set from 100% to 150% of the federal Medicare program.

That change would cut overall national health spending by 1.7% to 6.5%, according to the analysis.

The researchers sought to compare potential cost savings of three possible price-cutting strategies: Regulating hospital prices, improving price transparency, and increasing competition among hospitals. They used nationwide data from the federal Hospital Cost Report Information System.

They concluded that the other two strategies would also reduce costs, but not as dramatically as price regulation.

The RAND researchers estimate that improving health care price transparency could reduce U.S. spending by $8.7 billion to $26.6 billion per year.

They estimate that increasing competition by decreasing hospital market concentration could reduce hospital spending by $6.2 billion to $68.9 billion annually, depending on the size of the change and market price sensitivity.

"Improving markets through increased price transparency and competition could help reduce prices but would not reduce hospital spending to the extent that aggressively regulating prices could," Jodi Liu, the study's lead author and a policy researcher at RAND, said in a statement. "Direct price regulation could have the largest impact on hospital spending, but this approach faces the biggest political challenges."

Each scenario has its challenges and are heavily dependent on several factors:

  • Price transparency: Effectiveness would differ in patient-driven scenarios (patients using the information to find lower process) and employer-driven scenarios (employers creating health plans that steer patients toward lower-cost hospitals).
  • Rate-setting: Researchers modeled this by changing average commercial plan prices to an amount relative to Medicare prices for a given hospital. Prices were pegged to multiples of the Medicare price, as well as blended rates in between commercial and Medicare prices. Depsite the cost-saving potential, there are major barriers to price regulations. "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," study co-author and RAND policy researcher Christopher Whaley said in a statement.
  • Competition: Researchers modeled competition scenarios by reducing hospital market concentration in hospital referral regions, computing a price reduction with respect to the change in market concentration. However, since today's hospital markets are so concentrated, policymakers would need to "radically restructure hospital markets beyond what the study modeled for prices to approach competitive levels."

"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," Whaley said.

Alexandra Wilson Pecci is an editor for HealthLeaders.

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