Study: Indianapolis high-priced hospital market

Indianapolis-area hospitals have negotiated reimbursement rates with private health insurers that are two and three times higher than those paid by the federal Medicare program, suggesting the hospitals have the upper hand over insurers, according to a new study.

By contrast, private insurers pay Indianapolis-area physicians just 10-percent more than Medicare rates, according to the Nov. 18 analysis of eight hospital markets by the Center for Studying Health System Change, based in Washington, D.C.

The findings jibe with what local health care professionals have said for years: Health insurers do not feel they're in a position to let any of the four major Indianapolis-area hospital systems fall outside of their provider networks. That’s because employers demand wide choice for their workers, who can be scattered all over the city.

“Indianapolis is not highly concentrated overall but has a number of distinct markets within the metropolitan area where a particular hospital dominates,” center President Paul Ginsburg wrote to explain why Indianapolis was among four areas that “stood out as high-priced markets for private insurers.”

You can read Ginsburg's study here.

In the Indianapolis area, Ginsburg found, health insurers pay for inpatient care at an average of 198 percent of Medicare rates. The outpatient facilities run by Indianapolis hospitals do even better, pulling in payments that run 307 percent of Medicare rates.

Nationwide, health insurers pay hospitals an average of 139 percent of Medicare rates for all types of care, according to the Medicare Payment Advisory Commission.

Ginsburg’s study was based on data from four private health insurers—Aetna, Anthem Blue Cross and Blue Shield, Cigna and UnitedHealthcare—for eight metro markets.

Indianapolis ranked third-highest for inpatient rates and second-highest for outpatient rates. San Francisco was the most expensive, relative to Medicare rates, in both categories.

Medicare rates are set by a federal agency and adjusted for different costs of resources in various regions of the country. Ginsburg said it's reasonable to assume, therefore, that private insurance rates across different regions of the country should be fairly consistent when calculated as a percentage of Medicare rates.

Ginsburg’s study was immediately criticized by David Dranove, a Northwestern University professor of health industry management. In a blog post, Dranove said variation in prices is natural in competitive markets.

"So what did we learn from this study? That different hospitals get different prices? We also see price dispersion for authors, and for dry cleaning and electric pencil sharpeners, for crying out loud," he wrote. "This isn’t news and there are no policy implications to be drawn from the study."

Ginsburg does acknowledge that some hospitals might get higher prices from private insurers because they serve patients with more severe illnesses than Medicare recognizes. And Indianapolis might be higher than other markets because the Indiana Medicaid program reimburses at lower rates than the Medicaid program in many other states.

But Ginsburg insists that hospital market power is a significant factor in the payment disparity. And mergers by hospitals and doctors is a major reason for this market power, he wrote.

“There has been extensive provider consolidation over time, initially by the creation of hospital systems through mergers and acquisitions, and more recently through mergers of group medical practices and increasing hospital employment of physicians,” Ginsburg wrote.

The new health reform law’s push for doctor-hospital cooperation through “accountable care organizations” might only worsen the situation, he warned. Indeed, hospitals and doctor groups are lobbying the U.S. Federal Trade Commission to be liberal in applying antitrust laws to accountable care organizations.

“The formation of Medicare ACOs could increase provider leverage in rate negotiations with private insurers,” Ginsburg wrote, “especially if ACOs lead to mergers between hospitals and medical groups or to hospitals increasing employment of physicians.”