RAND: Cap on hospital rates saves more than price transparency

stethoscope, coins and calculator
Setting healthcare prices could save the U.S. healthcare system more than $200 billion a year, a new study from RAND estimates. (Getty/mckare)

A cap on hospital prices would save between $61 billion and $236 billion a year, much more than the savings produced by price transparency or increased competition, a new study finds.

The study, released Thursday from RAND Corporation, acknowledges the major political obstacles to installing price regulations and setting rates, which have faced fierce opposition from providers.

“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,” said study co-author and RAND policy researcher Christopher Whaley in a statement.

The study looked at the annual savings produced by setting prices for all commercial healthcare payers as high as 150% and as low as 100% above Medicare rates. The change could reduce healthcare spending by between $61.9 billion and $236.6 billion a year.

Those figures are far above the savings that could be generated from price transparency and more competition. RAND estimated improving price transparency could reduce healthcare spending by between $8.7 billion and $26.6 billion a year.

Researchers modeled several scenarios to predict the spending decline, including if patients use price information or if employers use it to create health plans that steer their workers to lower-cost hospitals.

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Increasing competition by cracking down on hospital mergers and market concentration could also reduce spending by between $6.2 billion to $68.9 billion a year, “depending on the magnitude of the change and how sensitive hospital prices are to market concentration,” the study said.

While researchers looked at several scenarios, they concluded that—given how concentrated today’s hospital markets—policymakers would “need to radically restructure hospital markets beyond what the study modeled for prices to approach competitive levels,” RAND said in a release.

RAND noted that hospital spending is the largest healthcare spending category in the U.S., making up one-third of national health expenses, according to a release.

“Private insurers such as employers and insurance companies cover about 40% of hospital spending,” RAND said. “Compared with public payers, private insurers pay higher prices to hospitals and those costs have risen faster over time.”

The federal government has taken steps to address both price transparency and market competition.

Starting this year, a new rule required hospitals to post payer-negotiated rates for certain shoppable services in a bid to give consumers the power to comparison shop among facilities.

The Federal Trade Commission (FTC) also announced a probe in 2019 on hospital consolidation and the impact on price, quality and wages.

A lawsuit from the FTC caused Tenet and Methodist Le Bonheur to call off a deal for Methodist to buy two of Tenet’s Memphis, Tennessee area hospitals. The FTC sued to block the deal in fear it would raise prices and lower quality if it went through.

The hospital industry said that the report doesn't present the full picture of what is behind rising healthcare costs in the U.S.

RAND dismisses "rising costs and market concentration in the commercial health insurance industry, which is earning record profits during the public health emergency while spending less on actual care," according to a statement from Rick Pollack, CEO of the American Hospital Association. 

He added that RAND regurgitated older and flawed studies.

"Despite claims otherwise, it is widely acknowledged that Medicare and Medicaid — the two largest public programs — pay below the cost of deliver care," Pollack said. "Price-setting would only enrich commercial health insurers at the expense of innovations in care that truly benefit patients."