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Do hospital mergers disincentivize facilities to lower costs?

Written by Alyssa Rege | November 21, 2016 | 

The Medicare Payment Advisory Commission met in November to discuss potential Medicare policy responses to increasing consolidation and whether integration actually motivates facilities to lower their costs.

Here are six things to know about hospital consolidation and Medicare rates.

1. MedPac advisors suggest commercial insurers’ rates are directly linked to a hospital’s market power ─ the more market power a health system retains, the better rates it receives. In recent years, healthcare facilities have tried to increase their market power through consolidation.

2. Data compiled by the organization revealed Medicare’s hospital payment rates are nearly 50 percent higher than payment rates in other countries that belong to the Organization for Economic Co-operation and Development, adjusting for the cost of living.

3. Medicare rates are higher in the U.S. because U.S. hospitals have 50 percent higher input costs compared to other OECD countries.

4. MedPac found that when hospitals are reimbursed higher commercial rates, they are more likely to maintain higher costs per patient and can cut costs when they are under financial pressures. By receiving higher payments, the financial pressure the hospital faces is lower, which makes facilities less inclined to keep costs low.

5. For-profit hospitals also have more incentive to keep costs lower than nonprofit hospitals. For-profit hospitals are expected to maximize profit for their investors, while nonprofit hospitals incorporate excess profit into their cost structure, raising costs and reducing their Medicaid margins, according to the article.

6. Some policy suggestions the organization proposed included: reference pricing, where the insurer sets a price limit for planned procedures and the consumer must pay the cost above that level; encouraging hospitals and physician groups to form ACOs; utilizing high-deductible plans; and capping out-of-network prices charged in emergency situations at the standard Medicare rate.

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