Limiting hospital price regulation to concentrated markets would miss the worst offenders

Hospital finance
More than a quarter of all high-price hospitals fall within unconcentrated markets, highlighting the need to divorce price regulation policies from market characteristics, researchers wrote in Health Affairs. (Getty/utah778)

Policymakers have introduced proposals to combat high and rising hospital prices, but focusing on high-concentration markets likely misses the mark.

The majority of high-price hospitals are active in markets that meet federal definitions of low or moderate concentration, according to a recently published commercial claims review.

As such, price regulation policy proposals that specifically target concentrated hospital markets would only impact a minority of hospitals charging the highest prices for their services, Harvard-affiliated researchers wrote in Health Affairs.

Policymakers would instead be more effective if they focused their interventions directly on limiting high provider prices without regard to a hospital’s surrounding market, researchers wrote.

“Policymakers could start with modest approaches, such as capping the highest prices, tracking outcomes and gradually pushing the caps downward, and monitoring trade-offs between savings and any unintended consequences for access or quality,” they wrote.

The researchers’ analysis used Health Care Cost Institute claims data for roughly a quarter of the U.S. commercially insured population during 2017 to build an inpatient and outpatient price index for individual general acute care hospitals.

To determine a hospital’s Herfindahl-Hirschman Index (HHI)—a measure of market density used by the Federal Trade Commission (FTC) and introduced legislation targeting high-concentration hospital markets—the group looked to admissions numbers reported through the 2017 American Hospital Association (AHA) Annual Survey. 

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The researchers found that more than a quarter of all hospitals they deemed to be charging high prices fell within unconcentrated markets, or those with an HHI below the FTC’s cutoff score of 1,500.

About 17% and 13% of high-price hospitals providing inpatient and outpatient services, respectively, were located in highly concentrated markets with HHIs exceeding 4,000—markets that they also noted contained about a third of the hospital referral regions included in the sample.

“To some degree, this result reflects the fact that more concentrated markets have fewer providers—just under 13% of hospitals in our sample were located in markets with HHI greater than 4,000—but it also reflects the reality that high-price providers were prevalent across the spectrum of market concentration,” they wrote.

Price regulation policies that are based on market concentration could become more effective by narrowing market definitions so that more regions are classified as noncompetitive and more hospitals qualify for regulation, they wrote. Still, the analysis suggests that a fair number of the hospital industry’s worst offenders would remain unaffected, strengthening the argument for approaches that directly address the outcome of interest.

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“Policies that address high prices regardless of the underlying market structure would be more consistent with a policy goal of constraining high prices,” the researchers wrote. “In some cases, these policies may entail promoting competition between hospitals in the same market, but if there are not enough hospitals in a market or if procompetitive policies are not successful at lowering the upper tail of the price distribution, regulation focusing on the most expensive providers may be needed.”

Rising hospital prices are a major concern for policymakers and have led to, among other efforts, increased scrutiny on provider consolidation as a source of the increases.

The FTC announced plans to study the impact of these deals back in January and received an extra nudge from President Joe Biden’s July executive order.

The latter action quickly drew responses from provider groups like the AHA and the Federation of American Hospitals, each of which characterized the order as misguided and a potential source of unnecessary bureaucratic red tape.