Care costs, rather than market power, influence hospital prices, AHA finds

Hospital prices are directly related to the prices of care incurred by specific hospitals in specific areas--and not through "market power," says a new study sponsored by the American Hospital Association (AHA) and sent this week to the Federal Trade Commission and the Justice Department's Antitrust Division. 

As more attention is being focused on the creation of accountable care organizations (ACOs) and medical homes--and the role that hospitals will play in them--questions have arisen about how prices are determined.

According to the report, the second one undertaken at the AHA’s request by economists Margaret Guerin-Calvert and Guillermo Israilevich with Compass Lexecon, hospital revenues closely tracked cost increases from 2000 through 2009, meaning that hospital margins showed little increase. Both revenues and expenses per adjusted admission increased about five percent per year, the report said. 

When viewed in a larger context, hospital care accounted for "a steady proportion of national health care expenditures" over the past decade of slightly more than 30 percent--a level expected to be maintained during the next decade. Half of these costs were related to labor, which has been growing at the rate of five percent to eight percent annually from 2002 to 2009, it added. Other costs included capital investment and the specialization of services. 

In an accompanying letter sent with the report, AHA said the research casts "serious doubt on claims of market power based simply on differences in prices." In this regard, it agrees with recent work by the FTC's Bureau of Economics  that reported different price levels in hospital markets are "neither necessary, nor sufficient, to demonstrate the exercise of market power." 

For more details:
- review the AHA’s report
- see an earlier report prepared for AHA

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