The Prices That Commercial Health Insurers and Medicare Pay for Hospitals’ and Physicians’ Services

Average Annual Growth Rates of Spending, Utilization, and Prices for Hospitals’

and Physicians’ Services, 2013 to 2018

Percent

3.2

1.8

0.4

0.5

2.7

1.3

Spending per Person Utilization per Person Prices Paid to Providers

Inﬂation as

Measured by the

Gross Domestic

Product Price

Index (1.6)

Medicare Fee

for Service

Commercial

Insurers

JANUARY | 2022

The Prices That Commercial

Health Insurers and Medicare

Pay for Hospitals’ and

Physicians’ Services

At a Glance

Just over half of the total U.S. population receives health insurance through commercial plans that

are oered by employers or purchased by individuals. In recent years, commercial health insurers’

per-person spending on hospitals’ and physicians’ services has grown more quickly than analogous

spending by the Medicare fee-for-service (FFS) program, according to analysis by the Congressional

Budget Oce. e main reason for the growth of per-person spending by commercial insurers—and

for the dierence from the growth of per-person spending by Medicare FFS—has been rapid increases

in the prices that commercial insurers pay for hospitals’ and physicians’ services.

Prices paid by commercial insurers and Medicare FFS dier, and rise at dierent rates over time, in part

because of dierences in how the two sets of prices are determined. e prices that commercial insurers

pay for services from in-network health care providers result from negotiations between the insurers and

providers. Commercial insurers may try to obtain lower prices by excluding providers from their net-

works, but in many cases, their ability to do that is limited. e prices that Medicare FFS pays providers

are set administratively through laws and regulations, and providers can either take them or leave them.

CBO’s analysis and a review of the research literature found that commercial insurers pay much

higher prices for hospitals’ and physicians’ services than Medicare FFS does. In addition, the prices

that commercial insurers pay hospitals are much higher than hospitals’ costs. Paying higher prices

to providers can have several eects. First, it can increase insurers’ spending on claims, which may

lead to higher premiums, greater cost-sharing requirements for patients, reductions in the scope of

benets, or other adjustments to plans. Second, it can increase the federal government’s subsidies for

health care (that is, the government’s spending on health care plus forgone revenues from federal tax

preferences for health benets). And third, it can slow the growth of wages.

Compared with the prices paid by Medicare FFS, the prices paid by commercial insurers also vary

much more among and within geographic areas. Large variation in prices for similar services can be

evidence that markets are not operating eciently.

CBO examined potential explanations for why the prices paid by commercial insurers are higher

and more variable than those paid by Medicare FFS. CBO’s analysis and literature review suggest the

following conclusions:

•

Greater market power among providers consistently leads to prices for commercial insurers that

are higher than Medicare FFS’s prices and that vary more widely, both among and within areas.

Hospitals and physicians’ groups may have market power because they have a dominant share of

the market in an area or because an insurer sees them as essential to its network of providers.

•

Some of the variation in the prices that commercial insurers pay for hospitals’ and physicians’

services is explained by dierences in the prices of inputs needed to deliver those services.

•

Higher hospital quality is associated with higher prices paid by commercial insurers, although whether

there is a causal link between quality and prices, and the direction of any such link, is not clear.

•

e share of providers’ patients who are covered by Medicare and Medicaid is not related to higher

prices paid by commercial insurers. at nding suggests that providers do not raise the prices

they negotiate with commercial insurers to oset lower prices paid by government programs (a

concept known as cost shifting).

www.cbo.gov/publication/57422

Contents

Chapter 1: Levels of and Trends in Spending and Prices 1

Factors Driving the Growth of Per-Person HealthCareSpending 1

How Medicare’s Prices Are Determined 2

How Commercial Insurers’ Prices Are Determined 3

Sources of Upward and Downward Pressure on Prices 4

Average Prices for Hospitals’ Services 5

Average Prices for Physicians’ Services 6

How Payments to Hospitals Compare With Hospitals’ Costs 7

Chapter 2: The Implications of Price Increases 9

How Price Increases Aect People With Employment-Based Insurance 9

How Price Increases Aect Federal Subsidies for Commercial Health Insurance 10

Chapter 3: Variation in Prices Among and Within Geographic Areas 13

Prices for Hospitals’ Services: Variation Among States 13

Prices for Physicians’ Services: Variation Among States 14

Prices for Hospitals’ Services: Variation Within MetropolitanAreas 15

Prices for Physicians’ Services: Variation Within MetropolitanAreas 16

Chapter 4: Factors Aecting the Prices Paid by Commercial Insurers 17

Market Power and Commercial Insurers’ Prices 17

The Relationship Between Input Prices and Prices Paid toProviders 22

Quality of Care and Commercial Insurers’ Prices 24

Providers’ Administrative Spending and Commercial Insurers’Prices 25

Cost Shifting and Commercial Insurers’ Prices 26

Appendix A: Data Sources for Figures 29

Appendix B: Sources of Estimated Average Prices for Hospitals’ and Physicians’ Services 33

Appendix C: Studies Examining the Relationship Between Market Concentration for

Providers and Prices Paid by Commercial Insurers 39

About This Document 46

Notes

To produce this report, the Congressional Budget Oce adapted data and gures from a wide variety

of sources. Brief citations for the gures are included in the gures’ captions; full citations are listed in

Appendix A.

e Medicare data used in this report reect spending, utilization, and prices in the fee-for-service

(FFS) program. ey do not include data from the Medicare Advantage (MA) program, except

where noted. Although MA data are not as widely available as FFS data, published research suggests

that MA plans and the FFS program generally pay very similar prices for hospitals’ and physicians’

services. See Jared Lane K. Maeda and Lyle Nelson, “How Do the Hospital Prices Paid by Medicare

Advantage Plans and Commercial Plans Compare With Medicare Fee-for-Service Prices?” Inquiry,

vol. 55 (June 11, 2018), pp. 1–8, https://doi.org/10.1177/0046958018779654.

e prices paid by commercial insurers reect the actual amounts paid to providers, not providers’

billed charges (“list prices”). Depending on the data source, the prices paid by Medicare and com-

mercial insurers may or may not include cost-sharing amounts paid by patients. In most of the data

sources used in this report, spending and prices for physicians’ services also reect services provided

by other health care professionals, such as nurse practitioners and physician assistants.

Chapter 1: Levels of and Trends in

Spending and Prices

is chapter describes the growth of spending by commercial health insurers and Medicare’s fee-for-service (FFS)

program on hospitals’ and physicians’ services in recent years. It illustrates the role of price increases in fueling

thegrowth of spending by commercial insurers and describes how prices are determined for those insurers and

for Medicare. is chapter also discusses sources of upward and downward pressure on prices, compares prices for

Medicare and commercial insurers, and compares payments to hospitals with hospitals’ costs.

Factors Driving the Growth of Per-Person HealthCareSpending

From 2013 to 2018, commercial insurers’ spending per person on inpatient and out-

patient hospital care and physicians’ services grew by an average of 3.2 percent a year, the

Congressional Budget Oce estimates. at spending growth was driven by increases in the

prices that commercial insurers paid for such services. Prices rose by an average of 2.7percent

a year—about 1 percentage point faster than average ination during that period, as mea-

sured by the change in the gross domestic product (GDP) price index.

CBO estimated the

increase in the prices paid by commercial insurers per unit of service (visits, procedures, and

admissions) from the growth of per-person spending and the quantity of services. at quan-

tity—“utilization” in the gure—was measured as the number of services provided, adjusted

for their intensity (the amount of resources or physicians’ eort used to provide them).

Utilization grew by less than 0.5 percent per year, on average, during the 2013–2018 period.

Per-person spending grew more slowly for the Medicare FFS program than for commerical

insurers—by 1.8 percent a year, on average—from 2013 to 2018. at spending growth also

stemmed mostly from price increases. e FFS program’s prices for hospitals’ and physicians’

services, which are updated regularly by statute and regulation, rose by an average of 1.3per-

cent a year. e quantity and intensity of services provided per person (which CBO esti-

mated from the growth of per-person spending and from price updates) increased by an

average of 0.5 percent a year during the 2013–2018 period.

Average Annual Growth Rates of Spending, Utilization, and Prices for Hospitals’ and Physicians’

Services, 2013 to 2018

Percent

GDP Price Index (1.6)

Medicare Fee

for Service

Commercial

Insurers

3.2

1.8

0.4

0.5

2.7

1.3

Spending per Person Utilization per Person Prices Paid to Providers

Increases in the prices paid

by commercial insurers and

Medicare FFS were the major

reason for growth in their per-

person spending on hospitals’

and physicians’ services.

Price increases were larger

for commercial insurers,

exceeding the rate of inﬂation.

(Source: CBO’s analysis

of data from MedPAC, the

Medicare trustees, and the

Health Care Cost Institute.)

2 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

How Medicare’s Prices Are Determined

e prices that the Medicare FFS program pays providers are set administratively through

laws and regulations. e program uses various payment schedules for dierent kinds of

services. For hospitals’ services that are covered by the inpatient or outpatient prospective

payment systems, the amount that Medicare pays hospitals is predetermined. at amount

is based on a at base-payment rate, which Medicare adjusts to account for geographic

dierences in input costs, for the intensity of services, and for patients’ health (in the case of

inpatient services). Rates are also adjusted for patients who are transferred to another hospital

paid under the inpatient prospective payment system or who are discharged to a post-acute

care setting (for certain diagnoses).

In addition, Medicare makes hospital-specic adjustments for inpatient services at hospitals

that operate residency training programs or that treat a disproportionate share of low-

income patients. Medicare also makes “outlier payments”—additional payments for cases

that are extraordinarily costly—for inpatient or outpatient services. (Some hospitals, such as

certain small hospitals that Medicare considers “critical access hospitals,” are not paid under

Medicare’s prospective payment systems.)

For services covered by Medicare’s physician fee schedule, Medicare pays a xed amount per

service, with adjustments for the relative amount of resources (physicians’ eort, practice

expenses, and liability insurance) typically used to provide a given service and for geographic

dierences in the costs of delivering care. Payments are further adjusted if multiple similar

services are furnished by the same provider on the same day or for certain characteristics of

providers. For example, Medicare reduces prices if a service is provided by a nonphysician

professional, such as a nurse practitioner or social worker, or if a physician is serving as an

assistant during a surgery.

Stylized Illustration of How the Medicare FFS Program Determines Prices for Hospitals’ and

Physicians’ Services

  ’ 

  ’ 

Federal law

Final regulations

Base payment

(inpatient and

outpatient)

Intensity-

adjusted base

payment

Adjustment

for geographic

factors

Provider- or procedure-

speciﬁ c adjustments

Price

Adjustment

for geographic

factors

× × ×

××

Adjustment for intensity of

services, patients’ health

(inpatient), and patients’

transfers (inpatient)

Hospital-

speciﬁ c

adjustments

Price

Outlier

payment

The Medicare FFS

program’s prices for

inpatient, outpatient, and

physicians’ services are

set administratively by the

federal government. Base-

payment rates are adjusted

for speciﬁcs of the provider,

patient, orservice.

3CHAPTER 1 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

How Commercial Insurers’ Prices Are Determined

e prices that commercial health insurers pay in-network providers result from negotia-

tions between individual providers or provider groups and insurers. Providers agree to accept

lower in-network prices in exchange for having insurers steer patients to them and pay

claims promptly. In some instances, providers can negotiate higher prices by threatening to

stay out of an insurer’s network. at threat is more credible for providers that have a large

market share, provide high-quality services, or provide services that cannot be planned for in

advance. Such negotiations—and the contracts and prices that result from them—are often

considered trade secrets by both insurers and providers.

Insurers and providers also negotiate about the basis of payments. How hospitals are paid for

inpatient care can dier for each insurer and hospital. Methods include a at rate per stay

that varies by patients’ primary diagnosis and other health conditions (and may be set as a

percentage of the amount paid by Medicare for that service), a specied rate per day (known

as a per diem), or a specic discount from a hospital’s listed charges. Payments for hospitals’

outpatient care are frequently based on such discounts. Hospitals often prefer discounted

charges or per diems because a at rate can leave them at nancial risk for high-cost cases or

long stays. According to a recent study, hospitals with greater market power were more likely

to be paid on the basis of discounted charges.

Physicians are often paid by commercial insurers using the same structure as the Medicare

FFS program, but provider groups negotiate a multiplier that is applied to Medicare’s prices.

Some evidence suggests that physician groups with greater market power can negotiate

increases to that multiplier or have more ability to deviate from the Medicare FFS

paymentstructure.

Stylized Illustration of How Commercial Insurers Determine Payments for Hospitals’ and

Physicians’Services

 

Providers Health insurers

Commercial insurers’ prices

Negotiations

Network contracts

The prices paid by

commercial insurers

are determined through

conﬁdential negotiations

between individual insurers

and individual providers or

groups ofproviders.

4 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Sources of Upward and Downward Pressure on Prices

e prices that commercial insurers pay for hospitals’ and physicians’ services are much

higher, and have grown much more rapidly in recent years, than the Medicare FFS program’s

prices. ose outcomes are the net result of competing factors that put upward or downward

pressure on prices. For commercial insurers, the upward pressures on prices are stronger than

the downward pressures. For Medicare FFS, prices do not rise as fast as commercial insurers’

prices because of factors that restrain their increases.

Compared with Medicare, commercial insurers are subject to fewer constraints on the prices

they pay. Private health insurance is mostly provided through employers, and private insur-

ers negotiate prices on employers’ behalf. Employers and insurers mainly try to negotiate

lower prices by threatening to exclude providers from their networks. eir ability to do

that is often limited, however, for several reasons: Providers’ market power is much greater

than employers’ in many markets; enrollees in employment-based plans tend to value having

access to broad networks; certain providers may be essential to a network in a given area; and

large insurers or employers may have enrollees in many locations with diverse medical needs,

making narrow-network plans hard to implement.

Employers have been slow to adopt other

methods to restrain price increases, such as reference pricing or other changes to the design of

insurance benets, because such designs are complex and could put enrollees at nancial risk.

In addition, the incentives for any one insurer or employer to push for lower prices are lim-

ited because the benets of doing so may not accrue directly to them. For example, insurers

have less incentive to negotiate lower prices because they can pass providers’ price increases

on to employers. A dominant insurer may even limit the discounts that a provider can oer

to other insurers, which can raise the prices paid by those other insurers and their premiums.

Negotiating lower prices may also involve trade-os for employers. For instance, employers

may be reluctant to reduce prices by adopting a plan with a narrower network or by reducing

health care benets if they use those benets to compete for high-value employees.

Conversely, one factor putting downward pressure on the prices paid by commercial insurers

is that employers may have to nance higher provider prices by raising premiums, limiting

wage increases, or reducing their plans’ benets. e strength of that downward pressure is

dampened, however, because premium contributions are generally excluded from federal

taxes and because the link between higher provider prices and lower wages or narrower bene-

ts is indirect, so most employees do not see it.

For Medicare FFS, price increases have been limited in part because annual updates to prices

are set through statute and regulation and have been modest in recent years. Prices for hos-

pitals’ inpatient and outpatient services are updated using a measure of changes in the prices

of hospitals’ key inputs, minus the increase in economywide productivity.

Price updates

for physicians’ services are set by law; those prices have risen by less than 0.5 percent a year

since 2015. In addition, Medicare oers payment rates to providers on a take-it-or-leave-it

basis. Providers that do not want to accept those rates can decline to participate. But because

Medicare accounts for a large share of U.S. health care spending, providers may have limited

nancial ability to opt out of the program.

Another source of downward pressure on Medicare’s prices is that, because Medicare is a fed-

eral program, proposals that would raise its spending must be nanced through higher taxes

or premiums, increases in federal debt, or cuts in Medicare benets or other spending. e

strength of that downward pressure is partly reduced, however, by concerns about providers’

nancial stability and Medicare beneciaries’ access to care.

5CHAPTER 1 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Average Prices for Hospitals’ Services

CBO reviewed a range of studies published between 2010 and 2020 that compared com-

mercial insurers’ and the Medicare FFS program’s prices for hospitals’ services. On average,

the ve studies that looked at overall prices for hospitals’ services suggest that the prices paid

by commercial insurers were more than twice those paid by Medicare FFS.

(e combined

average price ratio for inpatient and outpatient services reported by those studies ranged from

167 percent of Medicare FFS’s prices to 250 percent.) ose studies also generally reported

substantial variation in prices for the same service in dierent areas, in dierent hospitals,

and within the same hospital.

e ratio of commercial insurers’ prices to Medicare FFS’s prices was generally much higher

for outpatient services than for inpatient services. Averaged across the 6 studies on outpa-

tient services and 11 studies on inpatient services that CBO reviewed, commercial insurers’

prices were 240 percent of Medicare FFS’s prices for outpatient services and 182 percent of

Medicare FFS’s prices for inpatient services. e reasons for the higher price ratio for out-

patient services are not fully understood. ose reasons could include contracting practices:

Contracts based on discounted charges are more common for hospitals’ outpatient services

than for inpatient services, and that type of contract may encourage higher prices.

In its literature review, CBO included studies that compared commercial insurers’ prices with

Medicare FFS’s prices or that reported payment-to-cost ratios both for private sources

(including uninsured people) and for Medicare. CBO then calculated a simple average of the

studies’ results. ose studies’ estimates may have diered because of dierences in the

locations, time periods, or types of data used in the studies. For instance, estimates can dier

depending on whether a data source includes patients’ total cost-sharing responsibilities or

the amounts that were actually collected from patients.

Studies’ Estimates of Commercial Insurers’ Prices for Hospitals’ Services as a Percentage of

MedicareFFS’s Prices

Hospitals’ Services Overall Outpatient Services Inpatient Services

Average (223%)

Average (182%)

Average (240%)

Bai and Anderson, 2018 (250%)

AHA, 2020 (167%)

Whaley and Others,

2020 (231%)

White and Whaley,

2019 (293%)

Selden, 2020 (155%)

Fronsdal and Others,

2020 (137%)

For hospitals’ services as a

whole, the prices paid by

commercial insurers were

more than double the prices

paid by Medicare FFS, on

average, in recent years.

(Source: CBO’s review of

published literature; see

Appendix B.)

6 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Average Prices for Physicians’ Services

For physicians’ services overall, commercial insurers paid 129 percent of Medicare FFS’s

prices, on average, according to studies published between 2010 and 2020. (CBO reviewed

seven studies that looked at physicians’ services as a whole; their average price ratio ranged

from 118 percent of Medicare FFS’s prices to 163 percent.) ose studies also generally

reported substantial variation in prices for the same service among geographic areas, physi-

cian practices, and physician specialties.

Relative to Medicare FFS’s prices, the prices paid by commercial insurers for primary care

services and oce visits were generally lower than the prices paid for specialty services.

Among the ve studies of primary care services or oce visits and ve studies of specialty

services that CBO reviewed, commercial insurers’ prices were 117 percent of Medicare FFS’s

prices for primary care services or oce visits, on average, and 144 percent of Medicare

FFS’sprices for specialty services.

Higher prices for specialty services could stem from three factors: Fewer doctors provide any

one of those services; many doctors who do are employed in larger, multispecialty practices;

and more of those practices are aliated with hospitals. (In this analysis, average prices for

specialty services do not include emergency services or physicians’ services provided only in

inpatient settings.) Some of the variation in estimates among studies comes from dierences

in the types of physicians’ services included.

In its literature review, CBO looked only at studies that compared prices paid by commercial

insurers and Medicare FFS. CBO then calculated a simple average of the studies’ results. For

studies that reported prices separately for specic services or markets (such as employer-

sponsored plans versus individually purchased plans), CBO averaged those prices, weighting

them by the frequency of services or by estimates of premiums for dierent segments of the

market from CBO’s baseline budget projections. e studies’ estimates of relative prices for

physicians’ services may dier because of dierences in data sources, time periods, settings

ofservice (such as hospitals’ outpatient departments versus physicians’ oces), or the specic

services or markets included in the studies.

Studies’ Estimates of Commercial Insurers’ Prices for Physicians’ Services as a Percentage of

Medicare FFS’s Prices

Physicians’ Services Overall Primary Care Services

or Oﬃce Visits

Specialty Services

Average (129%)

Average (117%)

Average (144%)

Chernew and Others,

2020 (163%)

MedPAC, 2020 (128%)

Trish and Others,

2017 (179%)

Biener and Selden,

2017 (117%)

Pelech, 2020 (106%)

Ginsburg, 2010; Biener

and Selden, 2017 (118%)

On average, the prices paid

by commercial insurers for

physicians’ services as a

whole were about one-

quarter higher than the

prices paid by Medicare FFS

in recent years. (Source:

CBO’s review of published

literature; see Appendix B.)

7CHAPTER 1 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

How Payments to Hospitals Compare With Hospitals’ Costs

According to data from the American Hospital Association (AHA), Medicare’s total pay-

ments for inpatient and outpatient services are lower than hospitals’ costs to provide those

services. Private payers’ payments, by contrast, are much higher than hospitals’ costs. Between

2000 and 2018, private payers’ payments rose from 116 percent to 145 percent of hospitals’

costs, whereas Medicare’s payments fell from 99 percent to 87 percent of hospitals’ costs. (In

the AHA data, Medicare includes both the FFS program and Medicare Advantage plans, and

private payers consist of all nongovernment payment sources.)

e payment-to-cost ratios in the AHA data reect hospitals’ total costs for delivering care,

including stas’ salaries and the costs of buildings and equipment. ose total costs vary

because of external factors, such as local wages and utilities, and internal factors related to

hospitals’ behavior, such as how eciently they can manage their resources. Although pay-

ments by Medicare are lower than hospitals’ costs, on average, research suggests that hospi-

tals have some control over their cost structure and can adjust their expenses on the basis of

the nancial resources they have available.

e Medicare Payment Advisory Commission

(MedPAC) has identied a subset of hospitals as “ecient,” meaning that they perform well

in the areas of cost and quality. Such hospitals had positive Medicare margins from 2010

until about 2015, although they have had slightly negative Medicare margins since 2016.

Payments for hospitals’ services in the AHA data reect all payments made for care, not just

the prices negotiated by a subset of payers. Private payments, in particular, reect a wide

variety of sources—from uninsured people, who typically pay less than commercial payers, to

automobile liability insurance and workers’ compensation, which tend to pay more. Private

payments also reect patients’ unpaid debts, which tends to reduce private payers’ prices in the

AHA data relative to the prices reported in other studies. (CBO does not know of any regu-

larly updated source of data about costs or payment-to-cost ratios for physicians’ services.)

Payment-to-Cost Ratios for Hospitals, 2000 to 2018

Percent

100

125

150

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

86.6

144.8

99.1

115.7

Private Payers

Medicare FFS

Total payments for

hospitals’ services, as a

percentage of hospitals’

costs to deliver those

services, have increased

for private payers and

decreased for Medicare

since 2000. (Source: CBO’s

analysis of national-level

data from the AHA.)

8 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

1. CBO analyzed changes in per-person spending because they are not aected by growth in the number

of people with health insurance. Rather, changes in per-person spending among people with insurance

result from changes in utilization (including the amount and intensity of services), in prices, or in patients’

characteristics, such as age or sex (though the eect of those types of demographic changes is thought

to be limited). For information about the eects of demographic changes on Medicare spending, see

Laura M. Keohane, Lucas Stewart, and Melinda B. Buntin, e Slowdown in Medicare Spending Growth

for Baby Boomers and Older Beneciaries: Changes in Medicare Spending Levels and Growth by Age Group,

2007–2015(Commonwealth Fund, December 27, 2019), https://doi.org/10.26099/sy0d-xs78; and Michael

Levine and Melinda Buntin, Why Has Growth in Spending for Fee-for-Service Medicare Slowed? Working Paper

2013-06 (Congressional Budget Oce, August 2013), www.cbo.gov/publication/44513. e data from the

Health Care Cost Institute that CBO analyzed were weighted to be representative of the population with

employment-based insurance plans; thus, the eects of age and sex on those plans’ per-person spending

should be minimal.

2. See Zack Cooper and others, “e Price Ain’t Right? Hospital Prices and Health Spending on the

Privately Insured,” Quarterly Journal of Economics, vol. 134, no. 1 (February 2019), pp. 51–107,

https://doi.org/10.1093/qje/qjy020.

3. See Jerey Clemens, Joshua D. Gottlieb, and Tímea Laura Molnár, e Anatomy of Physician Payments:

Contracting Subject to Complexity, Working Paper 21642 (National Bureau of Economic Research, October

2015), www.nber.org/papers/w21642.

4. For comparisons of employers’ and providers’ market power, see Matthew D. Eisenberg and others, “Large

Self-Insured Employers Lack Power to Eectively Negotiate Hospital Prices,” American Journal of Managed

Care, vol. 27, no. 7 (July 2021), pp. 290–296, https://doi.org/10.37765/ajmc.2021.88702.

5. Reference pricing sets a benchmark price for certain services, and enrollees are responsible for the dierence

between providers’ negotiated price and the reference price. See Anna D. Sinaiko, Shehnaz Alidina, and Ateev

Mehrotra, “Why Aren’t More Employers Implementing Reference-Based Pricing Benet Design?” American

Journal of Managed Care, vol. 25, no. 2 (February 2019), pp. 85–88, https://tinyurl.com/ps7t2w93.

6. ose limits on the prices paid by rival insurers are the result of “most-favored nation” clauses in contracts.

See David Cutler and Leemore Dafny, “Designing Transparency Systems for Medical Care Prices,” New

England Journal of Medicine, vol. 364, no. 10 (March 10, 2011), pp. 894–895, https://doi.org/10.1056/

NEJMp1100540.

7. e Medicare FFS program’s adjustment for productivity reects the change in economywide multifactor

productivity in the private, nonfarm business sector. (Multifactor productivity measures the amount of goods

and services produced relative to the amount of inputs used to produce those goods and services.)

8. e estimate based on data from the AHA compared commercial insurers’ prices for hospitals’ services

with the prices paid by both the Medicare FFS program and Medicare Advantage (MA) plans. In CBO’s

assessment, the AHA’s estimate would be nearly unchanged if it only included FFS prices because MA plans’

prices for hospitals’ services are roughly equal to those paid by the Medicare FFS program, on average,

according to published research.

9. See Chapin White and Vivian Yaling Wu, “How Do Hospitals Cope With Sustained Slow

Growth in Medicare Prices?” Health Services Research, vol. 49, no. 1 (February 2014), pp. 11–31,

https://doi.org/10.1111/1475-6773.12101.

10. Medicare margins were calculated as total Medicare revenues minus total Medicare-allowable costs, divided

by revenues. Of the 1,878 hospitals that met MedPAC’s screening criteria over the 2015–2017 period, about

14 percent were found to be relatively ecient. See Medicare Payment Advisory Commission, “Hospital

Inpatient and Outpatient Services,” Chapter 3 in Report to the Congress: Medicare Payment Policy (March

2020), p. 92, https://tinyurl.com/yckkxfuy.

Chapter 2: The Implications of

PriceIncreases

is chapter describes how the high and rising prices that commercial insurers pay for hospitals’ and physicians’

servicesaect people with private health insurance and the federal budget.

How Price Increases Aect People

WithEmployment-BasedInsurance

A rise in providers’ prices would increase health insurers’ spending on claims, all else being

equal. Insurers could respond to such spending increases by raising premiums, increasing

cost-sharing requirements for patients, reducing the scope of benets, or making other

adjustments. In general, insurers’ greater spending would be passed on to employers that

purchase coverage on behalf of their employees.

Employers’ spending on health insurance

represents a large part of their employees’ nonwage compensation, so employers generally

take actions to oset increases in health insurance spending in order to maintain their prots.

A recent study found that price increases for hospitals’ services were associated with a rise in

employees’ out-of-pocket costs, an increase in the use of high-deductible health plans, and

slower wage growth for employees.

In addition, the Congressional Budget Oce analyzed

data from the Kaiser Family Foundation’s Employer Health Benets Survey and information

from the Bureau of Labor Statistics and found that between 2010 and 2020, average total

premiums rose by 55 percent for a family plan (from $13,770 to $21,342) and by 48 percent

for an individual plan (from $5,049 to $7,470), whereas median wages grew by only 32per-

cent over that period.

Eects of Higher Prices on Health Insurance Premiums and Beneﬁts, Out-of-Pocket Costs, and Wages

When prices paid to

providers increase

Commercial health insurers’

spending on claims increases

Plans are adjusted in ways that have

one or more of the following results . . .

Employers’

premium payments

increase

Employees’ wages

grow more slowly

Firms’ proﬁ ts

decline

Employees’

premium payments

increase

Covered

beneﬁ ts are

narrowed

Patients’

out-of-pocket

costs increase

All else being equal,

increases in the prices

that commercial insurers

pay providers are

associated with increases

in premiums for employers

or employees, increases

in out-of-pocket costs

for enrollees, reductions

in covered beneﬁts,

slowdowns in wage growth

for employees, or declines

in ﬁrms’ proﬁts.

10 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

How Price Increases Aect Federal Subsidies for

CommercialHealthInsurance

e federal tax code contains various provisions that subsidize commercial health insur-

ance—both employment-based insurance and nongroup (individually purchased) plans.

For example, premiums for people with employment-based insurance are generally excluded

from federal income and payroll taxes. In addition, some out-of-pocket medical costs and

premium payments are subsidized through the tax deduction for itemized medical expenses.

efederal government also provides people who qualify with tax credits to reduce premiums

for nongroup health insurance purchased through the marketplaces established under the

Aordable Care Act. And the tax code allows some self-employed people who buy nongroup

insurance to deduct up to 100 percent of their premiums from their income. Because of

such provisions, increases in the prices that plans pay to providers aect federal subsidies for

commercial health insurance.

Insurers pass higher costs on to employers through premium increases or changes to plans’

benets. Since the tax code generally lets employers and employees contribute to the cost of

premiums with pretax dollars, higher premiums reduce taxable wages and increase federal

subsidies for employment-based insurance. Likewise, when premiums rise for the benchmark

plans oered in the federal or state health insurance marketplaces, tax credits for people who

buy insurance through those marketplaces rise as well.

Relationships Between Prices for Providers and Major Federal Subsidies for Commercial Health

Insurance in 2020

Federal subsidies for employment-based insurance

($288 Billion)

Marketplace

premium

subsidies

($53 Billion)

Subsidy for

self-employment

health insurance

($4 Billion)

Prices paid to providers

Health insurers’ costs

Employment-

Based Insurance

Nongroup

Plans

Premiums Premiums

Tax exclusion

for employment-

based insurance

Tax credit outlays and

revenue reductions

for nongroup plans

Tax deduction for

self-employment

health insurance

Major Federal Subsidies for

Commercial Health Insurance

Higher prices paid by

commercial insurers

to providers increase

federal subsidies for

health care because

of the tax preferences

for employment-based

insurance and premium

subsidies for nongroup

coverage. (Source: CBO.)

11CHAPTER 2 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

1. For people with nongroup insurance, increases in premiums or reductions in benets mainly aect the

covered individuals. e degree to which people with nongroup plans are aected by premium increases

depends on the size of the subsidies they receive from the federal government. ose who receive little or no

subsidy bear most of the cost of higher provider prices, whereas those who receive more subsidies are largely

shielded from price increases.

2. See Daniel Arnold and Christopher M. Whaley, Who Pays for Health Care Costs? e Eects of Health Care

Prices on Wages, Working Paper WR-A621-2 (RAND, July 2020), https://doi.org/10.7249/WRA621-2.

Chapter 3: Variation in Prices Among and

Within Geographic Areas

is chapter describes how prices for hospitals’ and physicians’ services vary among dierent areas, among hospitals

or provider groups in the same area, and within hospitals for the same or similar services. Prices can vary for many

reasons, but large variation in prices for similar services can be evidence of market ineciencies.

Prices for Hospitals’ Services: Variation Among States

e average prices that Medicare’s fee-for-service program and commercial employment-based

plans paid for hospitals’ inpatient services in 2018—relative to the national average price paid by

Medicare FFS—varied widely by state. e statewide average Medicare FFS price ranged from

24 percent lower than the program’s national average price in Arkansas to 55 percent higher

than the national average in Massachusetts. Prices for Medicare services diered among states

because of the location- and hospital-specic adjustments Medicare makes (see Chapter 1).

e degree of price variation was much greater for commercial insurers. e average state-level price

paid by commercial employment-based plans ranged from 54 percent higher than the national

average Medicare FFS price in Arkansas to 294 percent higher than that price in Massachusetts.

(e Congressional Budget Oce limited this analysis to employment-based plans because

price data are not as widely available for other types of commercial plans. Prices for inpatient

services are allowed amounts per stay, with stays adjusted to reect the intensity of the service.)

Average Prices for Hospitals’ Inpatient Services, by State, 2018

0 1x 2x 3x 4x

Price Relative to Medicare Fee-for-Service National Average

Commercial Insurers

Medicare FFS

Commercial insurers’ prices

for hospitals’ inpatient

services varied substantially

among states in 2018,

as did the gap between

commercial insurers’

and Medicare’s prices.

Commercial insurers’

prices were highest,

relative to Medicare’s, in

Massachusetts, New York,

and Tennessee. (Source:

CBO’s analysis of data from

Whaley and others,2020.)

14 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Prices for Physicians’ Services: Variation Among States

Relative to the national average Medicare FFS price for physicians’ services, the average price

paid by Medicare FFS and commercial insurers for a set of 500 common services in 2017

varied among states. (ose 500 services reect the service codes that appeared most often

in aggregate data drawn from employment-based plans in the claims database of the Health

Care Cost Institute, or HCCI. ey include services such as oce visits and knee replace-

ments.) e statewide average Medicare FFS price ranged from 9 percent lower than the

program’s national average price in Mississippi to 11 percent higher than the national average

in Washington, DC. In this analysis, average Medicare prices diered primarily because of

Medicare’s geographic adjustments for input prices.

e magnitude of the price variation was much larger for commercial insurers than for

Medicare FFS. e average state-level price paid by commercial insurers ranged from about

10 percent lower than the national average Medicare FFS price in Alabama to 78 percent

higher than that price in Wisconsin. Commercial insurers’ average price exceeded the average

state Medicare FFS price in every state except Alabama.

Average Prices for Physicians’ Services, by State, 2017

●

0.75x 1x 1.25x 1.5x 1.75x 2x

Price Relative to Medicare Fee−for−Service National Average

Commercial Insurers

Medicare FFS

Commercial insurers’ prices

for physicians’ services

varied substantially among

states in 2017. They

were highest, relative

to Medicare’s prices, in

Wisconsin, North Dakota,

and Oregon. (Source:

CBO’s analysis of data from

Johnson and others,2020.)

15CHAPTER 3 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Prices for Hospitals’ Services:

VariationWithinMetropolitanAreas

Commercial insurers’ prices for hospitals’ services vary widely not only by state but also

within a given metropolitan statistical area, or MSA (a geographic area that generally con-

sists of one or more cities and the surrounding population). For example, the median price

that commercial insurers paid for a vaginal delivery of a baby—a well-dened and fairly

standardized service—in San Francisco in 2016 was $13,363. But the range of prices around

that median in the San Francisco area was quite broad: e price at the 90th percentile of

the distribution of prices ($23,880) was more than twice as high as the price at the 10th

percentile ($11,098). In Tucson, Arizona, the median price for a vaginal delivery was much

lower, $5,920, and the range of prices was much narrower: e price at the 90th percentile

($6,735) was only 50 percent higher than the price at the 10th percentile ($4,490).

Price variation within an MSA reects price dierences among hospitals in that area as well

as price dierences within the same hospital. e latter largely reect dierences in the

amounts that dierent commercial insurers pay for the same service at a particular hospital.

Price variation within and among hospitals could also reect dierences in patients’ health or

in the intensity of a service. However, most studies that examine price variation either control

for patients’ health or focus on variation for a relatively standardized service, such as mag-

netic resonance imaging (MRI) scans.

Commercial Insurers’ Prices for Vaginal Deliveries at Hospitals in Selected MSAs, 2016

Dollars

Median

The price for vaginal

deliveries at the 90th

percentile was 2.2

times the price at the

10th percentile

3,823

4,490

3,991

5,638

11,098

8,862

6,735

10,376

15,945

23,880

Kansas City, MO−KS Tucson, AZ Miami, FL Los Angeles, CA San Francisco, CA

2.8

2.6

1.5

2.3

Commercial insurers’

prices for the same hospital

service, such as a vaginal

birth, varied substantially

in 2016 within the same

geographic area. The extent

of the range of prices varied

among areas. (Source:

CBO’s analysis of data

fromKennedy and others,

2019.)

16 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Prices for Physicians’ Services:

VariationWithinMetropolitanAreas

Recent analyses have found that commercial insurers’ prices for a given physicians’ service

varied widely among providers in the same metropolitan statistical area. For instance, CBO’s

analysis of data about a specic type of colonoscopy (Current Procedural Terminology code

45385) found a roughly twofold variation in commercial insurers’ prices for that service

within ve MSAs in 2014.

In the Chicago-Naperville-Elgin area of Illinois, for example, the

price for that procedure for the provider at the 90th percentile of the distribution of pro-

viders by price ($660) was twice as high as the price for the provider at the 10th percentile

($330).

CBO found similar variation in prices within MSAs for all 20 of the physicians’ services that

it examined—including fairly standardized and narrowly dened services, such as echocar-

diograms and MRIs. For instance, in more than 85 percent of the 218 MSAs included in

CBO’s analysis, the price for a cranial MRI for the provider at the 90th percentile was more

than 1.5 times the price for the provider at the 10th percentile.

Commercial Insurers’ Prices for Colonoscopies Performed by Providers in Selected MSAs, 2014

Dollars

The price of the 90th

percentile provider

was 2.8 times the

price of the 10th

percentile provider

2.1

2.3

1.7

2.0

330

302

361

219

265

660

524

830

460

740

Chicago−

Naperville−Elgin,

IL−IN−WI

Cincinnati,

OH−KY−IN

Dallas−

Fort Worth−

Arlington, TX

Miami−

Fort Lauderdale−

West Palm Beach, FL

New York−Newark−

Jersey City,

NY−NJ−PA

Commercial insurers’

prices for the same

physicians’ service, such

as a colonoscopy, varied

substantially among

dierent providers in the

same geographic area

in 2014. (Source: CBO’s

analysis of data from

Pelech, 2018.)

1. ose adjustments include changes to Medicare’s base-payment rates for such things as an area’s wages and

other input prices as well as certain hospitals’ spending on graduate medical education or their share of

patient days that are for low-income patients.

2. See Daria Pelech, An Analysis of Private-Sector Prices for Physicians’ Services, Working Paper 2018-01

(Congressional Budget Oce, January 2018), www.cbo.gov/publication/53441; and Zack Cooper and

others, “e Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” Quarterly

Journal of Economics, vol. 134, no. 1 (February 2019), pp. 51–107, https://doi.org/10.1093/qje/qjy020.

3. To ease interpretation, CBO converted the ratios of commercial insurers’ prices to Medicare FFS’s prices from

that analysis to prices in dollars by multiplying those ratios by the national median price for a given service.

Chapter 4: Factors Aecting the Prices

Paid by Commercial Insurers

is chapter describes possible reasons that commercial insurers’ prices for hospitals’ and physicians’ services are

higher and more variable than the prices paid by Medicare’s fee-for-service program. Potential explanations include

market concentration for hospitals and physicians, the prices of various inputs for care, the quality of care, providers’

administrative spending, and their possible cost shifting from public to private payers.

Market Power and Commercial Insurers’ Prices

Market power is the ability of rms to raise prices above the level that would exist in a per-

fectly competitive market. It occurs for many reasons. Hospitals and physicians’ groups may

have market power because they have a dominant share of a particular market or because

an insurer sees them as essential to its network of providers. Being seen as essential can give

providers substantial leverage in price negotiations with insurers. us, prices may vary among

areas because of dierences in the relative market power of providers and insurers in each area.

Dierences in market power can also contribute to price variation within a geographic area.

Prices may vary among providers because of dierences in providers’ and insurers’ relative bar-

gaining power, or they may vary within a hospital or physicians’ group because of dierences

in insurers’ bargaining power. One study found that, within the same provider group, nego-

tiated prices for physicians’ oce visits were 21 percent lower, on average, for insurers with a

market share of at least 15 percent than for insurers with a market share of 5 percent or less.

Market concentration (the extent to which only a few rms provide a large share of the goods

or services in a market) can confer market power to rms with larger market shares. Evidence

suggests that concentration in the markets for hospitals’ and physicians’ services has been

growing and that, in many areas, those markets are now moderately or highly concentrated.

e percentage of physicians’ practices that are owned by or aliated with hospitals has also

increased. Such vertical integration can increase concentration in the market for physicians’

services (by consolidating physicians into larger groups) and can increase hospitals’ mar-

ket power (by steering physicians’ referrals to the acquiring hospital). In addition, evidence

suggests that a growing number of health care providers have been acquired by private equity

rms, which may leverage providers’ market power to raise prices.

Most of the studies that the Congressional Budget Oce reviewed (see Appendix C) suggest

that consolidation increases prices in the markets for both hospitals and physicians, as does

vertical integration among hospitals and physicians’ groups. ere is also a well-documented

correlation, across many areas, between concentration in the provider market and prices,

suggesting that some of the dierence in prices in dierent areas is attributable to providers’

market power.

Most studies focus on market share as a measure of providers’ market power,

but there is growing evidence that providers can also derive market power from providing spe-

cialized services, high-quality services, or services that a patient cannot shop for in advance.

18 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Concentration in Hospital Markets and Commercial Insurers’ Prices

CBO analyzed data from the Health Care Cost Institute for hospital markets in 42 states

and found that the percentage of metropolitan statistical areas with hospital markets that

were considered highly or very highly concentrated rose between 2010 and 2017. In 2010,

63percent of the 124 MSAs in the HCCI data had highly or very highly concentrated hospi-

tal markets. By 2017, that share had risen to 70 percent. (e MSAs that HCCI included in

that sample were selected on the basis of population, insurance coverage, and number of hos-

pitals.) Over that period, the average Herndahl-Hirschman index (HHI) for the MSAs in

that sample rose from 3,032, already in the “highly concentrated” range, to 3,338. (e HHI

is a common measure of market concentration; it indicates the extent to which a market is

dominated by one or a few participants.)

Greater market concentration has been linked to less price competition. CBO reviewed

13studies published since 2010 on the relationship between hospital market concentration

and prices for hospitals’ services (see Table C-1 in Appendix C). Of the four studies that

tested for correlations, three found a positive association between market concentration and

hospitals’ prices. Mergers between hospitals have also increased concentration and typically

led to higher prices. Of the ve studies that examined hospital mergers within a market, three

concluded that prices rose for insurers. (e other two studies showed price increases for

some insurers and decreases for others.) ere is also some recent evidence that mergers of

hospitals in dierent markets may result in price increases.

CBO focused on the research literature since 2010 because high-quality data on prices have

become more readily available since then. But a review of older studies also found a positive

association between market concentration and prices for hospitals’ services.

It also found

some evidence that growth in those prices is related to market concentration and that hospi-

tal mergers in concentrated markets typically result in much higher prices.

CBO also reviewed studies on the relationship between mergers and eciency gains for

hospitals.

e evidence about the relationship between mergers and hospitals’ costs is

inconsistent; some studies found that acquired hospitals have lower costs after their merger.

But lower costs do not necessarily translate into lower prices for hospitals’ services if hospitals

do not pass those eciency gains on to consumers.

Hospital Market Concentration, 2010 and 2017

Percentage of MSAs

2010 2017

Very Highly Concentrated

(HHI greater than 5,000)

Highly Concentrated

(HHI 2,501–5,000)

Moderately Concentrated

(HHI 1,500–2,500)

Competitive

(HHI less than 1,500)

The percentage of

metropolitan areas with

hospital markets that

were highly or very highly

concentrated (as measured

by a Herﬁndahl-Hirschman

Index of more than 2,500)

increased from 2010

to 2017. (Source: CBO’s

analysis of data from HCCI.)

19CHAPTER 4 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Concentration in Physician Markets and Commercial Insurers’ Prices

Market concentration for physicians increased between 2010 and 2016, as measured by the

average of the Herndahl-Hirschman indexes for more than 370 metropolitan statistical

areas. During that period, the average HHI rose by nearly 29 percent for primary care phy-

sicians and by about 5 percent for four common types of specialist physicians (cardiologists,

oncologists or hematologists, radiologists, and orthopedists).

In addition, the percentage of

MSAs whose markets for primary care physicians were considered highly or very highly con-

centrated (an HHI of more than 2,500) increased from 20 percent in 2010 to 39 percent in

2016. Increases in market concentration were at least partly attributable to a rise in the share

of physicians employed by hospitals or hospital systems.

CBO reviewed eight studies on the relationship between market concentration for physicians

and prices for physicians’ services; all of the studies found that prices were related to market

structure in some way (see Table C-2 in Appendix C). Prices for most services were generally

higher in areas with more-concentrated physician markets, or increased more in areas with

higher initial levels of market concentration, or rose after mergers or acquisitions of physi-

cians’ practices. In addition, one of the studies found that an increase in the enforceability of

noncompete agreements for physicians (which make it harder for physicians to nd new

employment after leaving a practice) led to greater concentration among physicians’ groups

and higher prices.

Average Herﬁndahl-Hirschman Indexes for Primary Care and Specialist Physicians in Metropolitan

Statistical Areas, 2010 to 2016

Specialist Physicians

Primary Care Physicians

1,819

3,228

2,343

3,397

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013 2014 2015 2016

Concentration in the

markets for specialist and

primary care physicians

has grown since 2010. An

HHI of 1,500 to 2,500 is

considered moderately

concentrated, and an

HHI of 2,501 to 5,000

is considered highly

concentrated. (Source:

CBO based on Exhibit 1 in

Fulton,2017.)

20 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Employment of Physicians by Health Care Systems

Over the 2010–2016 period, the share of primary care physicians employed by a hospital

or health care system rose by 16 percentage points, from 28 percent to 44 percent.

At the

same time, the share of primary care physicians who were in a solo practice or were part of a

medical group declined. e trend of hospitals’ employing physicians may stem in part from

the fact that Medicare and many commercial insurers have tended to pay higher prices when

a service is billed in a hospital’s outpatient department rather than in a physician’s oce.

Physicians may also want to join larger, integrated practices to have more exible work

schedules, lower practice expenses per physician, access to expensive information technology

systems, or discounts on drugs they purchase for outpatient care.

Hospitals’ acquisitions of physicians’ practices have been found to result in greater use of

electronic health records and care management processes. Such acquisitions can also increase

hospitals’ market power in at least two ways. First, they increase the amount of care billed in

facilities owned by hospitals and reduce the amount billed in physicians’ oces. Second, they

lessen the ability of rival hospitals to refer patients to the acquired physicians’ practices and

increase the frequency of referrals within systems.

Such acquisitions can also increase market

concentration among physicians by consolidating them into larger groups.

CBO reviewed seven studies about whether vertical integration of providers relates to prices

for their services (see Table C-3 in Appendix C). Four of the studies looked at the relation-

ship between hospital-physician integration and prices for physicians’ services. All four

found that prices increased more in areas where vertical integration increased or that prices

rose after physicians’ practices were acquired by hospitals. (According to one of the studies,

almost half of those price increases were potentially attributable to the services’ being billed

as services provided in a facility and thus incurring a higher total fee.)

Another study looked

at integration between physicians of dierent specialties and found that prices for physicians’

services rose more in areas where that type of integration increased.

ree of the studies in CBO’s review examined the relationship between hospital-physician

integration and prices for hospitals’ services. Two found a signicant positive association

between increases in integration and hospitals’ prices. e other study’s ndings were incon-

clusive. (Although two of those studies used similar data sources, the three diered in their

time periods, measures of vertical integration, and methods.)

Share of Primary Care Physicians, by Ownership of Their Practice, 2010 to 2016

Percent

43.5

35.3

21.2

2010 2011 2012 2013 2014 2015 2016

Independent Solo Practice

Hospital or Health Care System

Medical Group

27.7

30.7

41.6

The percentage of primary

care physicians working

in a practice owned by

a hospital or health care

system rose during the

2010–2016 period. (Source:

CBO based on Exhibit 4 in

Fulton, 2017.)

21CHAPTER 4 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Acquisition of Health Care Providers by Private Equity Firms

In recent decades, some physicians’ practices and hospitals have been bought by private

equity rms (companies that purchase and take over other companies to generate short-term

prots for their investors). Several recent studies have documented the volume of such acqui-

sitions. According to one study, only about 2 percent of physicians’ practices were acquired

by private equity rms between 2013 and 2016, but such acquisitions more than doubled

in frequency during that period.

Anesthesiologists, emergency medicine specialists, family

practitioners, and dermatologists were the most common types of physicians in acquired

practices. Another study found that roughly 7 percent of short-term acute care hospitals,

responsible for 11 percent of total patient discharges, were acquired by private-equity-backed

ventures between 2003 and 2017.

More than half of those acquisitions (161) occurred

in 2006, when Bain Capital purchased Hospital Corporation of America. (HCA became

publiclytraded again in 2011.)

Evidence about the eects on prices when private equity rms acquire medical providers has

been mostly anecdotal, until recently. A recent study found that after private equity rms

acquired hospitals, the ratio of those hospitals’ charges to costs rose by 7 percent overall, and

by 16 percent in emergency rooms, relative to otherwise-similar hospitals not bought by pri-

vate equity rms.

(Hospitals’ charges dier from the negotiated prices paid by commercial

insurers. But they are often correlated with those prices because, in some contracts, negoti-

ated prices are dened as a percentage of a hospital’s charges.)

For physicians and other providers, another study found that after a private equity rm that

employed emergency physicians entered into contracts with hospitals, the percentage of

emergency care billed out of network at those hospitals rose by 83 percentage points, and the

prices paid to those emergency physicians rose by 114 percent.

A recent study of dermatol-

ogists found that among practices acquired by private equity rms, prices for a few common

services rose by 3 percent to 5 percent relative to prices at nonacquired practices, although

prices for other services were not signicantly aected.

In addition, a study found that air

ambulance companies owned by private equity rms charged 68percent more in 2017 than

other air ambulance companies did.

Number of Physicians’ Practices Acquired Each Year by Private Equity Firms, 2013 to 2016

136

516

1,882

500

1,000

1,500

2,000

2013 2014 2015 2016

Physicians

Practice Sites

Practices

216

843

Private equity ﬁrms’

acquisitions of physicians’

practices grew each year

between 2013 and 2016.

(Source: CBO based on data

from Zhu and others, 2020.)

22 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

The Relationship Between Input Prices and

PricesPaidtoProviders

Commercial insurers’ prices for hospitals’ and physicians’ services are correlated with various

measures of the prices of inputs needed to deliver those services (such as providers’ wages,

rent, and malpractice insurance premiums). e strength of those relationships, however, is

sensitive to the inclusion of a few areas with particularly high measures of input prices.

Hospitals’ Wages and Commercial Insurers’ Prices

Plotting an index of commercial insurers’ prices for hospitals’ inpatient services in a given

area against an index of hospitals’ wages in that area in 2017 shows a positive relation-

ship between wages and prices across 105 geographic areas. Of the variation in average

prices among those areas, 51 percent is explained by wages. at share falls to 33 percent

if the three outlier areas (Anchorage, Alaska; and San Francisco and San Jose, California)

areremoved.

In this analysis, the geographic areas are a subset of the nation’s core-based statistical areas

(CBSAs), which consist of metropolitan statistical areas and other areas with smaller popula-

tions, known as micropolitan statistical areas. Commercial insurers’ prices for inpatient

services are measured by a commercial price index, which represents the average price for a

basket of common services if people in each CBSA used services in the same proportions seen

at the national level. at index captures the percentage deviation from the national median

price paid by commercial insurers. Hospitals’ wages are measured by Medicare’s hospital wage

index. Medicare uses that index to adjust its prices for inpatient services to account for

geographic dierences in the wages that hospitals face in their local labor markets. Although

wages are a large part of hospitals’ input costs, Medicare adjusts its prices for other character-

istics of hospitals as well, such as whether they operate medical education programs or serve a

disproportionate share of low-income patients.

Relationship Between Hospitals’ Wages and Commercial Insurers’ Prices for Inpatient Services, 2017

-0.50

-0.25

0.25

0.50

0.75

1.00

0.50 0.75 1.00 1.25 1.50 1.75 2.00

Hospital Wage Index

Price

Index

Anchorage, AK

San Francisco, CA

San Jose, CA

Variation in the prices that

commercial insurers pay

for hospitals’ inpatient

services is associated

with variation in hospitals’

wages. (Source: CBO’s

analysis of aggregate

data from HCCI and the

Centers for Medicare &

MedicaidServices.)

23CHAPTER 4 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Physicians’ Input Prices and Commercial Insurers’ Prices

Plotting an index of commercial insurers’ average prices for physicians’ services in each of

42states in 2017 against an index of average input prices for physicians’ services in those

states shows a positive relationship between input prices and the prices that commercial

insurers pay for physicians’ services. Dierences in input prices explain 27 percent of the

variation in commercial insurers’ prices among those states (the states for which the price

index that CBO used was available). However, that relationship is sensitive to the inclusion

of Alaska, which has high input prices. With Alaska excluded, only 3 percent of the variation

in commercial insurers’ prices is explained by dierences in input prices.

In this analysis, commercial insurers’ prices for physicians’ services are measured as the

state-level average commercial price index for a basket of 500 common physicians’ services

in 2017. As in the earlier discussion of how prices for physicians’ services vary by state, the

500 services included in that index reect the service codes most often seen in aggregate data

from HCCI’s database of claims by employment-based plans.

To measure input prices for physicians’ services, CBO used Medicare’s geographic adjustment

factor (GAF) as a proxy index for a state’s average input price for such services. at adjust-

ment factor accounts for geographic dierences in the prices of three inputs necessary for

delivering medical services: physicians’ wages (based on geographic dierences in the wages

of other professionals, such as architects, pharmacists, and computer scientists), practice

expenses (such as wages for administrative and clinical sta and rent), and malpractice

insurance premiums. For states with multiple geographic adjustment factors, CBO created a

state-level GAF by calculating a population-weighted average of the state’s factors. In addi-

tion, the Centers for Medicare & Medicaid Services (CMS) makes a number of legislatively

determined adjustments to the parts of the GAF that deal with physicians’ wages and practice

expenses, which aect the relationship between that measure and relative input prices.

Relationship Between Physicians’ Input Prices and Commercial Insurers’ Prices for

Physicians’Services, 2017

-0.2

0.2

0.4

0.6

0.8

1.0

0.9 1.0 1.1 1.2 1.3

Input Price Index (Measured by the GAF)

Physician

Price Index

Alaska

Variation in the prices that

commercial insurers pay

for physicians’ services is

associated with variation

in physicians’ estimated

input prices. (Source: CBO’s

analysis of aggregate data

from Johnson and others,

2020, and CMS.)

24 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Quality of Care and Commercial Insurers’ Prices

Analyzing 2016–2018 pricing data from RAND and 2018 quality information from CMS

for more than 1,500 hospitals, CBO found a small positive correlation between the average

prices that commercial insurers paid for hospitals’ inpatient and outpatient services, relative

to Medicare FFS’s prices, and a summary measure of hospitals’ quality. In addition, when

hospitals were ranked by commercial insurers’ prices as a percentage of Medicare’s prices,

41percent of hospitals in the top third of that ranking (those with commercial prices greater

than 276 percent of Medicare FFS’s prices) received four or ve stars on CMS’s overall qual-

ity rating, compared with 32 percent of hospitals in the bottom third of the price ranking

(those with commercial prices less than 216 percent of Medicare FFS’s prices). Even among

hospitals in the bottom third, however, more than 60 percent received a quality rating of

three or more stars.

It is unclear whether hospitals with higher quality can command higher prices from commer-

cial insurers or whether hospitals with more market power, and thus higher prices, can spend

more to improve their quality. In addition, correlations between prices and quality scores

could both be associated with some other, unmeasured factor—such as a hospital’s size or the

health of its patients—that causes the observed correlations.

In the case of physicians’ services, commercial insurers’ prices were not found to be associated

with measures of quality for those services, according to a recent research study.

Quality Ratings for Hospitals, by Price Group, 2018

Percentage of Hospitals

Bottom Third

of Commercial Insurers' Prices

(<216% FFS)

Middle Third

(216−276% FFS)

Top Third

(>276% FFS)

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Hospital Quality Rating (Number of stars)

Hospitals in the top third

when ranked by commercial

insurers’ average prices for

inpatient and outpatient

services, relative to

Medicare FFS’s prices, were

twice as likely to receive

the highest (ﬁve-star)

quality rating from CMS

in 2018 as hospitals in

the bottom third. (Source:

CBO’s analysis of hospital-

level data from Whaley and

others, 2020.)

25CHAPTER 4 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Providers’ Administrative Spending and

CommercialInsurers’Prices

Many studies have documented the signicant costs of providers’ administrative activities,

which might contribute to higher prices for their services. Administrative spending can be

divided into spending on billing- and insurance-related (BIR) activities (such as processing

claims, updating patients’ medical records, and getting prior authorization from insurers) and

spending on non-BIR activities (such as general overhead, marketing, and eorts to monitor

and improve the quality of care).

In 2018, hospitals spent a total of $101 billion on BIR activities and $148 billion on

non-BIR activities, while physicians and clinics spent $94 billion on BIR activities and

$100billion on non-BIR activities. A study of BIR spending at a major academic medical

center found that providers’ administrative spending per encounter with a patient ranged

from $20 for a primary care visit to $215 for inpatient surgery.

Despite providers’ substantial administrative burden, the eect of that burden on prices for

providers’ services is unclear. Providers may pass the costs of their administrative activities on

to commercial insurers, but the relationship between administrative spending and prices has

not been documented by research studies.

Estimates of Providers’ Administrative Spending, 2018

Billions of Dollars

94 100

101 148

194

249

Physicians and Clinics

Hospitals

Billing- and Insurance-Related Not Billing- and Insurance-Related

Hospitals, physicians,

and clinics together spent

more than $440 billion on

administrative activities in

2018. But the eect of that

spending on prices paid

by commercial insurers

is unclear. (Source: CBO

based on Box Figure 1 from

Cutler, 2020.)

26 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Cost Shifting and Commercial Insurers’ Prices

Some observers assert that hospitals’ costs are inexible and that hospitals have to negotiate

higher prices with commercial insurers to oset smaller payments made by Medicare and

Medicaid—a concept known as cost shifting. ere is some evidence to support that asser-

tion in specic circumstances.

But the preponderance of the evidence suggests that hospi-

tals do not engage in cost shifting. Moreover, the idea of cost shifting is inconsistent with

economic theory: If hospitals could charge private payers more, it is unclear why they would

do so only after payment cuts from public payers.

If hospitals were able to cost shift, then hospitals with larger shares of Medicare and Medicaid

patients (for whom prices are relatively low) would be paid relatively high prices by commer-

cial insurers. However, CBO’s analysis of data for more than 1,500 hospitals indicates a weak

cross-sectional relationship between commercial insurers’ average prices for a hospital’s inpa-

tient and outpatient services during the 2016–2018 period and the percentage of Medicare

and Medicaid patients among the hospital’s discharges. (In this analysis, the average commer-

cial price reects the sum of commercial insurers’ allowed amounts for inpatient and outpa-

tient services relative to the simulated amount that Medicare would have paid for the same

services.) Each 1 percentage-point increase in a hospital’s share of Medicare and Medicaid

discharges is associated with only a 0.1 percent increase in commercial insurers’ prices rela-

tive to Medicare’s prices. A hospital’s share of discharges paid for by Medicare or Medicaid

explains just 0.4 percent of the variation among hospitals in commercial insurers’ prices.

CBO’s analysis is descriptive, however, and does not control for the many other factors that

aect hospitals’ costs. In addition, recent evidence suggests that hospitals with larger shares of

Medicare patients are more likely to close or be acquired over time, which could increase

concentration in their market and thus lead to higher prices for commercial insurers.

Relationship Between a Hospital’s Share of Medicare and Medicaid Patients and Commercial

Insurers’ Average Price for Its Services Over the 2016–2018 Period

Percent

100

200

400

600

900

0 25 50 75 100

Medicare and Medicaid Patients as a Share of a Hospital’s Discharges

Average Commercial Price for

a Hospital’s Services Relative

to Medicare FFS’s Price

(Natural log scale)

Predicted

Commercial

Price

The average price paid

by commercial insurers

for a hospital’s inpatient

and outpatient services

combined was weakly

associated with the

hospital’s share of

discharged patients

covered by Medicare or

Medicaid. (Source: CBO’s

analysis of hospital-

level data from Whaley

and others, 2020, and

White,2018.)

27CHAPTER 4 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

1. See Eric T. Roberts, Michael E. Chernew, and J. Michael McWilliams, “Market Share Matters: Evidence of

Insurer and Provider Bargaining Over Prices,” Health Aairs, vol. 36, no. 1 (January 2017), pp. 141–148,

https://doi.org/10.1377/hltha.2016.0479. Prices can also vary because of a patient’s health or the intensity

of services. However, most studies either adjust for variation in health status or focus on narrowly dened and

fairly standardized services, such as MRIs.

2. A study published in 2019 found that hospital market concentration was the strongest predictor of variation

in prices among hospitals, after controlling for patients’ health, measures of hospitals’ quality, the Medicare

base-payment rate (which reects some variation in hospitals’ input costs), and other characteristics of

hospitals, insurers, and counties. See Zack Cooper and others, “e Price Ain’t Right? Hospital Prices and

Health Spending on the Privately Insured,” Quarterly Journal of Economics, vol. 134, no. 1 (February 2019),

pp. 51–107, https://doi.org/10.1093/qje/qjy020.

3. For instance, hospitals with strong reputations have been shown to command high prices in competitive

markets, as do providers that insurers cannot credibly threaten to exclude from their networks, such as

anesthesiologists, emergency room physicians, and ambulance services.

4. See Martin Gaynor and Robert Town, e Impact of Hospital Consolidation—Update (Robert Wood Johnson

Foundation, June 2012), https://tinyurl.com/n8k8kft. at report updated an earlier study: William B. Vogt

and Robert Town, How Has Hospital Consolidation Aected the Price and Quality of Hospital Care? Research

Synthesis Report No. 9 (Robert Wood Johnson Foundation, February 2006), https://tinyurl.com/y4xjnuue.

5. For a review of that literature, see Hannah T. Neprash and J. Michael McWilliams, “Provider Consolidation

and Potential Eciency Gains: A Review of eory and Evidence,” Antitrust Law Journal, vol. 82, no. 2

(April 2019), pp. 551–578, https://tinyurl.com/dp4zs9jp.

6. See Brent D. Fulton, “Health Care Market Concentration Trends in the United States: Evidence and Policy

Responses,” Health Aairs, vol. 36, no. 9 (September 2017), pp. 1530–1538, https://doi.org/10.1377/

hltha.2017.0556.

7. Ibid.

8. See David Dranove and Christopher Ody, “Employed for Higher Pay? How Medicare Payment Rules

Aect Hospital Employment of Physicians,”American Economic Journal: Economic Policy,vol. 11, no. 4

(November2019), pp. 249–271, https://tinyurl.com/22j9r2y9; and Brady Post and others. “Hospital‐

Physician Integration and Medicare’s Site‐Based Outpatient Payments,” Health Services Research, vol. 56,

no.1 (February 2021), pp. 7–15, https://doi.org/10.1111/1475-6773.13613.

9. See Brent D. Fulton, “Health Care Market Concentration Trends in the United States: Evidence and Policy

Responses,” Health Aairs, vol. 36, no. 9 (September 2017), pp. 1530–1538, https://doi.org/10.1377/

hltha.2017.0556.

10. See Cory Capps, David Dranove, and Christopher Ody, “e Eect of Hospital Acquisitions of Physician

Practices on Prices and Spending,” Journal of Health Economics, vol. 59 (May 2018), pp. 139–152,

https://doi.org/10.1016/j.jhealeco.2018.04.001.

11. See Jane M. Zhu, Lynn M. Hua, and Daniel Polsky, “Private Equity Acquisitions of Physician Medical

Groups Across Specialties, 2013–2016,” JAMA, vol. 323, no. 7 (February 18, 2020), pp. 663–665,

https://doi.org/10.1001/jama.2019.21844.

12. See Anaeze C. Oodile II and others, “Private Equity Investments in Health Care: An Overview of Hospital

and Health System Leveraged Buyouts, 2003–17,” Health Aairs, vol. 40, no. 5 (May 2021), pp. 719–726,

https://doi.org/10.1377/hltha.2020.01535.

13. See Joseph D. Bruch, Suhas Gondi, and Zirui Song, “Changes in Hospital Income, Use, and Quality

Associated With Private Equity Acquisition,” JAMA Internal Medicine, vol. 180, no. 11 (August 2020),

pp.1428–1435, https://doi.org/10.1001/jamainternmed.2020.3552.

14. See Zack Cooper, Fiona Scott Morton, and Nathan Shekita, “Surprise! Out-of-Network Billing for

Emergency Care in the United States,” Journal of Political Economy, vol. 128, no. 9 (September 2020),

pp.3626–3677, https://doi.org/10.1086/708819.

28 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

15. See Robert Tyler Braun and others, “Private Equity in Dermatology: Eect on Price, Utilization,

and Spending,” Health Aairs, vol. 40, no. 5 (May 2021), pp. 727–735, https://doi.org/10.1377/

hltha.2020.02062.

16. See Loren Adler, Kathleen Hannick, and Sobin Lee, “High Air Ambulance Charges Concentrated in

Private Equity-Owned Carriers” (USC-Brookings Schaeer Initiative for Health Policy, October 13, 2020),

https://tinyurl.com/yhd6vuzu.

17. See Mark A. Unruh and others, “Physician Prices and the Cost and Quality of Care for Commercially

Insured Patients,” Health Aairs, vol. 39, no. 5 (May 2020), pp. 800–808, https://doi.org/10.1377/

hltha.2019.00237.

18. See Phillip Tseng and others, “Administrative Costs Associated With Physician Billing and Insurance-Related

Activities at an Academic Health Care System,” JAMA, vol. 319, no. 7 (February 20, 2018), pp. 691–697,

https://doi.org/10.1001/jama.2017.19148.

19. See Michael Darden, Ian McCarthy, and Eric Barrette, Who Pays in Pay for Performance? Evidence

From Hospital Pricing, Working Paper 24304 (National Bureau of Economic Research, August 2019),

www.nber.org/papers/w24304; and Austin Frakt, “Hospitals Don’t Shift Costs From Medicare or Medicaid to

Private Insurers,” JAMA Forum (January 4, 2017), https://tinyurl.com/me8b77f7.

20. See Michael E. Chernew and others, “Public Payment Rates for Hospitals and the Potential for

Consolidation-Induced Cost Shifting,” Health Aairs, vol. 40, no. 8 (August 2021), pp. 1277–1285,

https://doi.org/10.1377/hltha.2021.00201.

Appendix A: Data Sources for Figures

Chapter 1: Levels of and Trends in Spending and Prices

Average Annual Growth Rates of Spending, Utilization, and Prices for

Hospitals’ and Physicians’ Services, 2013 to 2018

Data sources: Growth rates for Medicare’s fee-for-service (FFS) program reect the

Congressional Budget Oce’s analysis of information from Medicare Payment Advisory

Commission, A Data Book: Health Care Spending and the Medicare Program (July 2020),

Section 1; Boards of Trustees of the Medicare Trust Funds, 2020 Annual Report of the Boards

of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust

Funds (April 2020), https://tinyurl.com/mb9666c8 (PDF, 2.7 MB); and other, miscellaneous

sources.

Growth rates for commercial insurers reect CBO’s analysis of aggregate data from Health

Care Cost Institute, 2017 Health Care Cost and Utilization Report (February 2019),

https://tinyurl.com/82jksnn3, and 2018 Health Care Cost and Utilization Report (February

2020), https://tinyurl.com/27v534jv.

CBO estimated total spending for Medicare FFS and for commercial insurers by summing

per-person spending on inpatient, outpatient, and physicians’ services but excluding spend-

ing on prescription drugs, home health care, and other types of care. In this analysis, com-

mercial insurers’ spending per patient reects the payments that insurers negotiated with

providers and excludes patients’ cost sharing.

Studies’ Estimates of Commercial Insurers’ Prices for Hospitals’ Services as a

Percentage of MedicareFFS’s Prices

Data sources: Sources are listed in Appendix B.

Studies’ Estimates of Commercial Insurers’ Prices for Physicians’ Services as a

Percentage of Medicare FFS’s Prices

Data sources: Sources are listed in Appendix B.

Payment-to-Cost Ratios for Hospitals, 2000 to 2018

Data source: CBO’s analysis of aggregate national-level data from American Hospital

Association, Trendwatch Chartbook 2020, Appendix 4, Table 4.4, https://tinyurl.com/

em4rjw9z (PDF, 3.6 MB).

Chapter 3: Variation in Prices Among and Within

GeographicAreas

Average Prices for Hospitals’ Inpatient Services, by State, 2018

Data source: CBO’s analysis of aggregate data from Christopher M. Whaley and

others, Nationwide Evaluation of Health Care Paid by Private Plans: Findings From

Round 3 of an Employer-Led Transparency Initiative, RR-4394-RWJ (RAND, 2020),

https://doi.org/10.7249/RR4394.

30 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Average Prices for Physicians’ Services, by State, 2017

Data source: CBO’s analysis of aggregate data from Bill Johnson and others, “Comparing

Commercial and Medicare Professional Service Prices: Public Use File” (Health Care Cost

Institute, August 13, 2020), https://tinyurl.com/3xux3hzj.

Commercial Insurers’ Prices for Vaginal Deliveries at Hospitals in Selected

MSAs, 2016

Data source: CBO’s analysis of aggregate data from Kevin Kennedy and others, “Past the

Price Index: Exploring Actual Prices Paid for Specic Services by Metro Area” (Health Care

Cost Institute, April 30, 2019), https://tinyurl.com/ap25xhr8.

Commercial Insurers’ Prices for Colonoscopies Performed by Providers in

Selected MSAs, 2014

Data source: CBO’s analysis of data from Daria Pelech, An Analysis of Private-Sector Prices for

Physicians’ Services, Working Paper 2018-01 (Congressional Budget Oce, January 2018),

www.cbo.gov/publication/53441.

Chapter 4: Factors Aecting the Prices Paid by

CommercialInsurers

Hospital Market Concentration, 2010 and 2017

Data source: CBO’s analysis of aggregate data from Health Care Cost Institute, “Healthy

Marketplace Index” (accessed December 2020), https://tinyurl.com/u86tw3x9.

Average Herﬁndahl-Hirschman Indexes for Primary Care and Specialist

Physicians in Metropolitan Statistical Areas, 2010 to 2016

Data source: CBO’s reproduction of Exhibit 1 in Brent D. Fulton, “Health Care Market

Concentration Trends in the United States: Evidence and Policy Responses,” Health

Aairs, vol. 36, no. 9 (September 2017), pp. 1530–1538, https://doi.org/10.1377/

hltha.2017.0556.

Share of Primary Care Physicians, by Ownership of Their Practice, 2010 to

2016

Data source: CBO’s reproduction of Exhibit 4 in Brent D. Fulton, “Health Care Market

Concentration Trends in the United States: Evidence and Policy Responses,” Health

Aairs, vol. 36, no. 9 (September 2017), pp. 1530–1538, https://doi.org/10.1377/

hltha.2017.0556.

Number of Physicians’ Practices Acquired Each Year by Private Equity Firms,

2013 to 2016

Data source: CBO, using data from Jane M. Zhu, Lynn M. Hua, and Daniel Polsky,

“Private Equity Acquisitions of Physician Medical Groups Across Specialties, 2013–2016,”

JAMA, vol. 323, no. 7 (February 18, 2020), pp. 663–665, https://doi.org/10.1001/

jama.2019.21844.

Relationship Between Hospitals’ Wages and Commercial Insurers’ Prices for

Inpatient Services, 2017

Data sources: CBO’s analysis of aggregate data from Health Care Cost Institute, “Healthy

Marketplace Index” (accessed December 2020), https://tinyurl.com/u86tw3x9; and Centers

for Medicare & Medicaid Services, “FY 2017 Proposed Rule Tables 2 and 3 (Wage Index

Tables) (ZIP),” Table 3 (accessed May 2021), https://tinyurl.com/cukuexa8.

31APPENDIX A THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Relationship Between Physicians’ Input Prices and Commercial Insurers’

Prices for Physicians’Services, 2017

Data sources: CBO’s analysis of aggregate data from Bill Johnson and others, “Comparing

Commercial and Medicare Professional Service Prices: Public Use File” (Health Care Cost

Institute, August 13, 2020), https://tinyurl.com/3xux3hzj; and Centers for Medicare &

Medicaid Services, “CY 2017 PFS Final Rule Addenda (ZIP),” Addendum D (accessed

December 2020), https://tinyurl.com/ywftbrad.

Quality Ratings for Hospitals, by Price Group, 2018

Data source: CBO’s analysis of aggregate data from Christopher M. Whaley and

others, Nationwide Evaluation of Health Care Paid by Private Plans: Findings From

Round 3 of an Employer-Led Transparency Initiative, RR-4394-RWJ (RAND, 2020),

https://doi.org/10.7249/RR4394.

Estimates of Providers’ Administrative Spending, 2018

Data source: CBO’s reproduction of Box Figure 1 in David M. Cutler, Reducing

Administrative Costs in U.S. Health Care, Policy Proposal 2020-09 (Hamilton Project,

Brookings Institution, March 2020), https://tinyurl.com/ap9mcczh.

Relationship Between a Hospital’s Share of Medicare and Medicaid Patients

and Commercial Insurers’ Average Price for Its Services Over the 2016–2018

Period

Data sources: CBO’s analysis of aggregate data from Christopher M. Whaley and

others, Nationwide Evaluation of Health Care Paid by Private Plans: Findings From

Round 3 of an Employer-Led Transparency Initiative, RR-4394-RWJ (RAND, 2020),

https://doi.org/10.7249/RR4394; and Chapin White, “RAND Hospital Data: Web-Based

Tool,” TL-303 (RAND, 2018), www.rand.org/pubs/tools/TL303.html.

Appendix B: Sources of Estimated

AveragePrices for Hospitals’ and

Physicians’Services

is appendix describes the sources that underlie the gures and discussion in Chapter 1 of average prices for hospitals’

and physicians’ services. For this analysis, the Congressional Budget Oce reviewed studies that compared commercial

insurers’ prices with the Medicare fee-for-service (FFS) program’s prices and studies that reported ratios of payments

to providers’ costs for private payers (including people without insurance) and for Medicare. (Studies that looked at

data before 2005 were not included because high-quality data on prices were not commonly available at that time.)

For each major type of service, CBO calculated a simple average of the studies’ estimates (see Table B-1). e estimates

of commercial insurers’ prices as a percentage of Medicare FFS’s prices may dier among the studies because of

dierences in the locations, data sources, and time periods they examined, as well as dierences in their methods for

adjusting for the health status of patients.

Table B-1 .

Studies Comparing Prices Paid by Commercial Insurers and the Medicare Fee-for-Service

Program for Various Hospitals’ and Physicians’ Services

Estimate of

Commercial

Insurers’ Prices

as a Percentage

of Medicare

FFS’s Prices Source Description of Data

Data

Period

Hospitals’ Services Overall

250% Ge Bai and Gerard F. Anderson, “Market Power: Price

Variation Among Commercial Insurers for Hospital Services,”

Health Aairs, vol. 37, no. 10 (October 2018), pp. 1615–1622,

https://doi.org/10.1377/hltha.2018.0567

Financial data for hospitals from the Florida Agency

for Health Care Administration

2016

247% Christopher M. Whaley and others, Nationwide Evaluation of

Health Care Prices Paid by Private Plans: Findings From Round

3 of an Employer-Led Transparency Initiative, RR-4394-RWJ

(RAND Corporation, 2020), www.rand.org/pubs/research_reports/

RR4394.html

Data from all states except Maryland. Sources

consist of self-insured employers and commercial

health plans, as well as all-payer claims databases

from Colorado, Connecticut, Delaware, Maine, New

Hampshire, and Rhode Island.

2018

241% Chapin White and Christopher M. Whaley, Prices Paid to

Hospitals by Private Health Plans Are High Relative to

Medicare and Vary Widely: Findings From an Employer-Led

Transparency Initiative, RR-3033-RWJ (RAND Corporation, 2019),

www.rand.org/pubs/research_reports/RR3033.html

Data from 25 states. Sources consist of self-insured

employers and commercial health plans, as well as

all-payer claims databases from Colorado and New

Hampshire.

2017

209% Richard Kronick and Sarah Hoda Neyaz, Private Insurance

Payments to California Hospitals Average More Than Double

Medicare Payments (West Health Policy Center, May 2019),

https://tinyurl.com/yb7kyxj6

Annual nancial disclosure reports led with the

California Oce of Statewide Health Planning and

Development

2015–

2016

167% American Hospital Association, Trendwatch Chartbook 2020

(accessed November 2020), Table 4.4, https://tinyurl.com/

em4rjw9z (PDF, 3.6MB)

Payment-to-cost ratios from all 50 states 2018

223% Simple Average for Hospitals’ Services Overall

Continued

34 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Estimate of

Commercial

Insurers’ Prices

as a Percentage

of Medicare

FFS’s Prices Source Description of Data

Data

Period

Hospitals’ Outpatient Services

293% Chapin White and Christopher M. Whaley, Prices Paid to

Hospitals by Private Health Plans Are High Relative to

Medicare and Vary Widely: Findings From an Employer-Led

Transparency Initiative, RR-3033-RWJ (RAND Corporation, 2019),

www.rand.org/pubs/research_reports/RR3033.html

Data from 25 states. Sources consist of self-insured

employers and commercial health plans, as well as

all-payer claims databases from Colorado and New

Hampshire.

2017

280% Paul B. Ginsburg, Wide Variation in Hospital and Physician

Payment Rates Evidence of Provider Market Power,

Research Brief 16 (Center for Studying Health System Change,

November 2010), www.hschange.org/CONTENT/1162

Data from Aetna, Anthem Blue Cross Blue Shield,

CIGNA, and UnitedHealth Group for 8 metropolitan

areas in 6 states

2005

267% Christopher M. Whaley and others, Nationwide Evaluation of

Health Care Prices Paid by Private Plans: Findings From Round 3

of an Employer-Led Transparency Initiative, RR-4394-RWJ (RAND

Corporation, 2020), www.rand.org/pubs/research_reports/

RR4394.html

Data from all states except Maryland. Sources

consist of self-insured employers and commercial

health plans, as well as all-payer claims databases

from Colorado, Connecticut, Delaware, Maine, New

Hampshire, and Rhode Island.

2018

227% Chapin White, Amelia M. Bond, and James D. Reschovsky, High

and Varying Prices for Privately Insured Patients Underscore

Hospital Market Power, Research Brief 27 (Center for Studying

Health System Change, September 2013), https://tinyurl.com/

yztwasr9

Claims data for auto workers from 13 markets in

6states

2011

216% Michael E. Chernew, Andrew L. Hicks, and Shivana A. Shah,

“Wide State-Level Variation in Commercial Health Care Prices

Suggests Uneven Impact of Price Regulation,” Health Aairs,

vol. 39, no. 5 (May 2020), pp. 791–799, https://doi.org/10.1377/

hltha.2019.01377

IBM MarketScan commercial claims data, which cover

all 50 states

2017

155% Thomas M. Selden, “Dierences Between Public and

Private Hospital Payment Rates Narrowed, 2012–2016,”

Health Aairs, vol. 39, no. 1 (January 2020), pp. 94–99,

https://doi.org/10.1377/hltha.2019.00415

Data from the Medical Expenditure Panel Survey, a

nationally representative survey. CBO’s estimate of

the price ratio for outpatient services from this study

is a weighted average of the study’s price ratios for

outpatient and emergency services.

2016

240% Simple Average for Hospitals’ Outpatient Services

Continued

Table B-1. Continued

Studies Comparing Prices Paid by Commercial Insurers and the Medicare Fee-for-Service

Program for Various Hospitals’ and Physicians’ Services

35APPENDIX B THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Estimate of

Commercial

Insurers’ Prices

as a Percentage

of Medicare

FFS’s Prices Source Description of Data

Data

Period

Hospitals’ Inpatient Services

231% Christopher M. Whaley and others, Nationwide Evaluation of

Health Care Prices Paid by Private Plans: Findings From Round

3 of an Employer-Led Transparency Initiative, RR-4394-RWJ

(RAND Corporation, 2020), www.rand.org/pubs/research_reports/

RR4394.html

Data from all states except Maryland. Sources

consist of self-insured employers and commercial

health plans, as well as all-payer claims databases

from Colorado, Connecticut, Delaware, Maine, New

Hampshire, and Rhode Island.

2018

220% Zack Cooper and others, “The Price Ain’t Right? Hospital Prices

and Health Spending on the Privately Insured,” Quarterly Journal

of Economics, vol. 134, no. 1 (February 2019), pp. 51–107,

https://doi.org/10.1093/qje/qjy020

The authors estimated risk-adjusted prices using

Health Care Cost Institute data, which include

Aetna, UnitedHealthcare, and Humana and cover all

50states.

2011

206% Michael E. Chernew, Andrew L. Hicks, and Shivana A. Shah, “Wide

State-Level Variation in Commercial Health Care Prices Suggests

Uneven Impact of Price Regulation,” Health Aairs, vol. 39, no. 5 (May

2020), pp. 791–799, https://doi.org/10.1377/hltha.2019.01377

IBM MarketScan commercial claims data, which cover

all 50 states

2017

204% Chapin White and Christopher M. Whaley, Prices Paid to Hospitals

by Private Health Plans Are High Relative to Medicare and Vary

Widely: Findings From an Employer-Led Transparency Initiative,

RR-3033-RWJ (RAND Corporation, 2019), www.rand.org/pubs/

research_reports/RR3033.html

Data from 25 states. Sources consist of self-insured

employers and commercial health plans, as well as

all-payer claims databases from Colorado and New

Hampshire.

2017

189% Jared Lane K. Maeda and Lyle Nelson, “How Do the

Hospital Prices Paid by Medicare Advantage Plans and

Commercial Plans Compare With Medicare Fee-for-

Service Prices?” Inquiry, vol. 55 (June 11, 2018), pp. 1–8,

https://doi.org/10.1177/0046958018779654

Health Care Cost Institute data, which include

Aetna, UnitedHealthcare, and Humana and cover all

50states

2013

178% Paul B. Ginsburg, Wide Variation in Hospital and Physician

Payment Rates Evidence of Provider Market Power, Research

Brief 16 (Center for Studying Health System Change,

November 2010), www.hschange.org/CONTENT/1162

Data from Aetna, Anthem Blue Cross Blue Shield,

CIGNA, and UnitedHealth Group for 8 metropolitan

areas in 6 states

2005

175% Thomas M. Selden and others, “The Growing Dierence Between

Public and Private Payment Rates for Inpatient Hospital Care,”

Health Aairs, vol. 34, no. 12 (December 2015), pp. 2147–2150,

http://dx.doi.org/10.1377/hltha.2015.0706

Data from the Medical Expenditure Panel Survey, a

nationally representative survey

2012

165% Laurence C. Baker and others, “Medicare Advantage

Plans Pay Hospitals Less Than Traditional Medicare Pays,”

Health Aairs, vol. 35, no. 8 (August 2016), pp. 1444–1451,

https://doi.org/10.1377/hltha.2015.1553

Health Care Cost Institute data, which include

Aetna, UnitedHealthcare, and Humana and cover all

50states

2012

151% Chapin White, Amelia M. Bond, and James D. Reschovsky, High and

Varying Prices for Privately Insured Patients Underscore Hospital

Market Power, Research Brief 27 (Center for Studying Health

System Change, September 2013), https://tinyurl.com/yztwasr9

Claims data for auto workers from 13 markets in

6states

2011

150% Thomas M. Selden, “Dierences Between Public and

Private Hospital Payment Rates Narrowed, 2012–2016,”

Health Aairs, vol. 39, no. 1 (January 2020), pp. 94–99,

https://doi.org/10.1377/hltha.2019.00415

Data from the Medical Expenditure Panel Survey, a

nationally representative survey

2016

137% Toren L. Fronsdal, Jay Bhattacharya, and Suzanne Tamang,

Variation in Health Care Prices Across Public and Private Payers,

Working Paper 27490 (National Bureau of Economic Research,

May 2020), www.nber.org/papers/w27490

Data from the American Hospital Utilization Database;

all-payer data from 474 hospitals in 38 states and

estimates of risk- and hospital-adjusted prices

2009–

2016

182% Simple Average for Hospitals’ Inpatient Services

Continued

Table B-1. Continued

Studies Comparing Prices Paid by Commercial Insurers and the Medicare Fee-for-Service

Program for Various Hospitals’ and Physicians’ Services

36 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Estimate of

Commercial

Insurers’ Prices

as a Percentage

of Medicare

FFS’s Prices Source Description of Data

Data

Period

Physicians’ Services Overall

163% Michael E. Chernew, Andrew L. Hicks, and Shivana A. Shah,

“Wide State-Level Variation in Commercial Health Care Prices

Suggests Uneven Impact of Price Regulation,” Health Aairs,

vol. 39, no. 5 (May 2020), pp. 791–799, https://doi.org/10.1377/

hltha.2019.01377

IBM MarketScan commercial claims data, which cover

all 50 states

2017

135% Medicare Payment Advisory Commission, “Physician and

Other Health Professional Services,” Chapter 4 in Report to

the Congress: Medicare Payment Policy (March 2020), p. 132,

https://tinyurl.com/yckkxfuy

Claims data from a large preferred provider

organization with national coverage

2018

128% Daria M. Pelech, “Prices for Physicians’ Services in Medicare

Advantage and Commercial Plans,” Medical Care Research

and Review, vol. 77, no. 3 (June 2020), pp. 236–248,

https://doi.org/10.1177/1077558718780604

Health Care Cost Institute data, which include

Aetna, UnitedHealthcare, and Humana and cover

all 50 states. To produce an overall estimate, CBO

calculated a weighted average of prices for various

services.

2014

122% Bill Johnson and others, “Comparing Commercial and Medicare

Professional Service Prices” (Health Care Cost Institute,

August 13, 2020), https://tinyurl.com/3xux3hzj

Average prices paid by commercial insurers (including

Aetna, UnitedHealthcare, and Humana) for the 500

most commonly provided physicians’ services in

metropolitan areas in 48 states and Washington, DC.

2017

121% Erin Trish and others, “Physician Reimbursement in Medicare

Advantage Compared With Traditional Medicare and Commercial

Health Insurance,” JAMA Internal Medicine, vol. 177, no. 9

(September 2017), pp. 1287–1295, https://doi.org/10.1001/

jamainternmed.2017.2679

Using data from a large national insurer, the authors

calculated average prices relative to Medicare for

each service in each year from 2007 to 2012 and

then averaged them across years. To produce an

overall estimate, CBO calculated a weighted average

of prices for professional services.

2007–

2012

118% Adam I. Biener and Thomas M. Selden, “Public and

Private Payments for Physician Oce Visits,” Health

Aairs, vol.36, no.12 (December 2017), pp. 2160–2164,

https://doi.org/10.1377/hltha.2017.0749

Data from the Medical Expenditure Panel Survey for

enrollees in employer-sponsored plans, nongroup

marketplace plans, and Medicare. To produce an

overall estimate, CBO calculated a weighted average

of prices paid by nongroup and employer-sponsored

plans (weighted by its 2020 baseline estimates of

premiums in those two segments of the market).

2014–

2015

118% Paul B. Ginsburg, Wide Variation in Hospital and Physician

Payment Rates Evidence of Provider Market Power, Research

Brief 16 (Center for Studying Health System Change,

November 2010), www.hschange.org/CONTENT/1162

Data from Aetna, Anthem Blue Cross Blue Shield,

CIGNA, and UnitedHealth Group for 8 metropolitan

areas in 6 states

2005

129% Simple Average for Physicians’ Services Overall

Continued

Table B-1. Continued

Studies Comparing Prices Paid by Commercial Insurers and the Medicare Fee-for-Service

Program for Various Hospitals’ and Physicians’ Services

37APPENDIX B THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Estimate of

Commercial

Insurers’ Prices

as a Percentage

of Medicare

FFS’s Prices Source Description of Data

Data

Period

Primary Care Services or Oce Visits

128% Medicare Payment Advisory Commission, “Physician and

Other Health Professional Services,” Chapter 4 in Report to

the Congress: Medicare Payment Policy (March 2020), p. 132,

https://tinyurl.com/yckkxfuy

Claims data from a large preferred provider

organization with national coverage

2018

126% Adam I. Biener and Thomas M. Selden, “Public and

Private Payments for Physician Oce Visits,” Health

Aairs, vol. 36, no. 12 (December 2017), pp. 2160–2164,

https://doi.org/10.1377/hltha.2017.0749

Data from the Medical Expenditure Panel Survey for

enrollees in employer-sponsored plans, nongroup

marketplace plans, and Medicare. CBO calculated

a weighted average of prices paid by nongroup

and employer-sponsored plans (weighted by its

2020 baseline estimates of premiums in those two

segments of the market).

2014–

2015

120% Bill Johnson and others, “Comparing Commercial and Medicare

Professional Service Prices” (Health Care Cost Institute,

August 13, 2020), https://tinyurl.com/3xux3hzj

The authors published commercial insurers’ prices for

primary care services in 320 metropolitan and state

areas and compared them with what Medicare would

have paid for the same services under the Medicare

fee schedule. CBO calculated a weighted average

of prices for those services (weighted by the volume

of commercial insurers’ claims in each core-based

statistical area).

2017

107% Erin Trish and others, “Physician Reimbursement in Medicare

Advantage Compared With Traditional Medicare and Commercial

Health Insurance,” JAMA Internal Medicine, vol. 177, no. 9

(September 2017), pp. 1287–1295, https://doi.org/10.1001/

jamainternmed.2017.2679

Using data from a large national insurer, the authors

calculated average prices relative to Medicare for

each service in each year from 2007 to 2012 and

then averaged them across years.

2007–

2012

106% Daria M. Pelech, “Prices for Physicians’ Services in Medicare

Advantage and Commercial Plans,” Medical Care Research

and Review, vol. 77, no. 3 (June 2020), pp. 236–248,

https://doi.org/10.1177/1077558718780604

Health Care Cost Institute data, which include

Aetna, UnitedHealthcare, and Humana and cover

all 50states. CBO calculated a weighted average of

prices for visits to physicians’ oces.

2014

117% Simple Average for Primary Care Services or Oce Visits

Continued

Table B-1. Continued

Studies Comparing Prices Paid by Commercial Insurers and the Medicare Fee-for-Service

Program for Various Hospitals’ and Physicians’ Services

38 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Estimate of

Commercial

Insurers’ Prices

as a Percentage

of Medicare

FFS’s Prices Source Description of Data

Data

Period

Specialty (Nonemergency) Physicians’ Services

179% Erin Trish and others, “Physician Reimbursement in Medicare

Advantage Compared With Traditional Medicare and Commercial

Health Insurance,” JAMA Internal Medicine, vol. 177, no. 9

(September 2017), pp. 1287–1295, https://doi.org/10.1001/

jamainternmed.2017.2679

Using data from a large national insurer, the authors

calculated average prices relative to Medicare for

each service in each year from 2007 to 2012 and

then averaged them across years.

2007–

2012

173% Daria M. Pelech, “Prices for Physicians’ Services in Medicare

Advantage and Commercial Plans,” Medical Care Research

and Review, vol. 77, no. 3 (June 2020), pp. 236–248,

https://doi.org/10.1177/1077558718780604

Health Care Cost Institute data, which include

Aetna, UnitedHealthcare, and Humana and cover

all 50states. CBO calculated a weighted average of

prices for various specialty services.

2014

132% Jacob Wallace and Zirui Song, “Traditional MedicareVersus

Private Insurance: How Spending, Volume, and Price Change

at Age Sixty-Five,” Health Aairs, vol. 35, no. 5 (May 2016),

pp.864–872, https://doi.org/10.1377/hltha.2015.1195

The authors used MarketScan data to estimate

prices for imaging and surgical procedures using

a regression-discontinuity exploiting the change in

spending that occurs for people aging into Medicare.

2007–

2013

120% Bill Johnson and others, “Comparing Commercial and Medicare

Professional Service Prices” (Health Care Cost Institute,

August 13, 2020), https://tinyurl.com/3xux3hzj

The authors published commercial insurers’ prices for

non-primary-care services in 320 metropolitan and

state areas and compared them with what Medicare

would have paid for the same services under the

Medicare fee schedule. CBO calculated a weighted

average of prices for those services (weighted by the

volume of commercial insurers’ claims in each core-

based statistical area).

2017

117% Adam I. Biener and Thomas M. Selden, “Public and

Private Payments for Physician Oce Visits,” Health

Aairs, vol. 36, no. 12 (December 2017), pp. 2160–2164,

https://doi.org/10.1377/hltha.2017.0749

Data from the Medical Expenditure Panel Survey for

enrollees in employer-sponsored plans, nongroup

marketplace plans, and Medicare. CBO calculated

a weighted average of prices paid by nongroup

and employer-sponsored plans (weighted by its

2020 baseline estimates of premiums in those two

segments of the market).

2014–

2015

144% Simple Average for Specialty (Nonemergency) Physicians’ Services

Table B-1. Continued

Studies Comparing Prices Paid by Commercial Insurers and the Medicare Fee-for-Service

Program for Various Hospitals’ and Physicians’ Services

Appendix C: Studies Examining

the Relationship Between Market

Concentrationfor Providers and

PricesPaidbyCommercial Insurers

is appendix describes the sources that underlie the discussion in Chapter 4 of how concentration in the markets for

hospitals’ services (see Table C-1) and physicians’ services (see Table C-2) aects prices for those providers’ services.

is appendix also describes studies that examine the relationship between prices and vertical integration of hospitals

and physicians—that is, when physicians’ practices are owned by or aliated with hospitals (see Table C-3).

40 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Table C-1 .

Studies of the Relationship Between Hospital Market Concentration and Prices

Source Data Period Experiment or Methods Findings

Eric Barrette, Gautam Gowrisankaran,

and Robert Town, “Countervailing

Market Power and Hospital

Competition,” Review of Economics

and Statistics (February 2021),

https://doi.org/10.1162/rest_a_01020

2011–2014 Estimated models of consumers’

willingness to pay (WTP) for

hospitals’ services in dierent

metropolitan areas. Using the mean

WTP of 1.26, and assuming that a

typical hospital merger increases

WTP by 14.4 percent, the authors

examined the expected price

change from hospital mergers in

areas with dierent concentrations

of insurers.

•

A typical hospital merger would increase prices

by 4.3 percent at the 25th percentile of insurer

concentration but by only 0.97 percent at the

75thpercentile of insurer concentration.

Daniel Arnold and Christopher M.

Whaley, Who Pays for Health Care

Costs? The Eects of Health Care

Prices on Wages, WR-A621-2 (RAND

Corporation, 2020), www.rand.org/

pubs/working_papers/WRA621-2.html

2010–2016 Estimated the eects on hospitals’

prices from nearly all U.S. hospital

mergers that occurred during the

2010–2016 period

•

Hospital mergers were associated with an

increase of $521 in the mean price of hospitals’

services, which is about equal to a 2.6 percent

relative increase in price.

Leemore Dafny, Kate Ho, and Robin

S. Lee, “The Price Eects of Cross-

Market Mergers: Theory and Evidence

From the Hospital Industry,” RAND

Journal of Economics, vol. 50, no.2

(Summer 2019), pp. 286–325,

https://doi.org/10.1111/

1756-2171.12270

1996–2012 Examined hospital mergers and

compared price changes for

three groups: hospitals that were

acquired by a new system in the

same state (but not in the same

market), hospitals that were

acquired by a new system in a

dierent state, and hospitals that

were neither acquired nor part of

an acquiring system

•

Hospital mergers across markets within a state

resulted in price increases of about 7 percent

to 10 percent.

•

Out-of-state hospital mergers did not result in

price increases.

Zack Cooper and others, “The Price

Ain’t Right? Hospital Prices and Health

Spending on the Privately Insured,”

Quarterly Journal of Economics,

vol. 134, no. 1 (February 2019),

pp.51–107, https://doi.org/10.1093/

qje/qjy020

2007–2011 Examined the cross-sectional

correlation between the structure

of hospital markets and prices for

hospitals’ services. Also estimated

the eects on hospitals’ prices from

nearly all U.S. hospital mergers that

occurred during the 2007–2011

period by comparing the price

changes at merged hospitals with

those at control hospitals.

•

Hospitals in monopoly markets had 12.5percent

higher prices than those in markets with at least

four hospitals.

•

Prices increased by more than 6 percent at

merged hospitals that were geographically close

(5 miles or less) but did not increase at merged

hospitals that were geographically distant (more

than 25 miles apart).

Laurence C. Baker, M. Kate

Bundorf, and Daniel P. Kessler,

“Competition in Outpatient

Procedure Markets,” Medical Care,

vol. 57, no. 1 (January 2019),

pp.36–41, https://doi.org/10.1097/

MLR.0000000000001003

2008–2012 Estimated the relationship between

prices and market concentration

for outpatient services provided by

hospitals’ outpatient departments

or ambulatory surgical centers

(ASCs)

•

Prices for outpatient services were 9.9 percent

higher in the least competitive inpatient markets

than in the most competitive markets.

•

Prices for ASC services were 7.7 percent higher

in the least competitive ASC markets than in the

most competitive markets. The number of ASCs

per capita in an area was also associated with

lower prices for hospitals’ outpatient services.

•

Competition in markets for hospitals’ outpatient

services had no statistically signicant eect

on prices for those services.

Seidu Dauda, “Hospital and Health

Insurance Markets Concentration

and Inpatient Hospital Transaction

Prices in the U.S. Health Care Market,”

Health Services Research, vol. 53,

no. 2 (April 2018), pp. 1203–1226,

https://doi.org/10.1111/

1475-6773.12706

2005–2008 Examined the eects on prices from

concentration in the markets for

hospitals and insurers

•

A 10 percent increase in hospital market

concentration resulted in a 1.4 percent to

5percent increase in prices.

•

A merger of two hospitals in a market with

ve equally sized hospitals would result in a

4.9percent to 18.4 percent increase in prices.

Continued

41APPENDIX C THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Source Data Period Experiment or Methods Findings

Matthew S. Lewis and Kevin E.

Pum, “Hospital Systems and

Bargaining Power: Evidence From

Out-of-Market Acquisitions,” RAND

Journal of Economics, vol. 48,

no. 3 (Fall 2017), pp. 579–610,

https://doi.org/10.1111/

1756-2171.12186

1998–2010 Examined price changes at

hospitals acquired by an out-of-

market health system (more than

45 miles away) relative to price

changes at control hospitals that

did not join a health system

•

Out-of-market mergers resulted in price

increases for merging hospitals as well as for

their local rivals.

•

When independent hospitals were acquired by

an out-of-market system, prices rose by about

17 percent.

Gautam Gowrisankaran, Aviv Nevo,

and Robert Town, “Mergers When

Prices Are Negotiated: Evidence From

the Hospital Industry,” American

Economic Review, vol. 105, no.1

(January 2015), pp. 172–203,

https://doi.org/10.1257/aer.20130223

2003–2006 Simulated the eects of the

proposed merger of Prince William

Hospital and Inova Health System in

northern Virginia using a bargaining

model of competition

•

If the Federal Trade Commission had permitted

it, the proposed merger would have increased

prices by about 3 percent, on average.

Glenn A. Melnick, Yu-Chu Shen, and

Vivian Yaling Wu, “The Increased

Concentration of Health Plan

Markets Can Benet Consumers

Through Lower Hospital Prices,”

Health Aairs, vol. 30, no. 9

(September 2011), pp.728–

1733, https://doi.org/10.1377/

hltha.2010.0406

2001 and 2004 Examined the association between

hospitals’ prices and market

concentration for health plans and

hospitals among all nonfederal,

general, acute care hospitals

located in metropolitan statistical

areas

•

A 1,000-point increase in the concentration of a

hospital market (as measured by the Herndahl-

Hirschman index) was associated with an

8.3percent increase in prices.

Deborah Haas-Wilson and Christopher

Garmon, “Hospital Mergers

and Competitive Eects: Two

Retrospective Analyses,” International

Journal of the Economics of Business,

vol. 18, no. 1 (February 2011), pp.17–

32, https://doi.org/10.1080/

13571516.2011.542952

Fiscal years

1999 and 2002

Examined price changes for

two hospital mergers in the

Chicago metropolitan area,

Evanston Northwestern–Highland

Park Hospital and Vista Health

(St.Therese–Victory Memorial

Hospital), relative to price changes

for control hospitals in that area

•

After the Evanston merger, price increases were

at least 10 percentage points larger at the

merged hospitals than at control hospitals for

four of the ve insurers included in the study.

•

After the Vista Health merger, three of the ve

insurers experienced smaller price increases at

the merged hospital than at the control hospitals.

Only one insurer experienced a larger price

increase at the merged hospital than at the

controls.

Steven Tenn, “The Price Eects of

Hospital Mergers: A Case Study of

the Sutter–Summit Transaction,”

International Journal of the

Economics of Business, vol. 18,

no. 1 (February 2011), pp. 65–82,

https://doi.org/10.1080/

13571516.2011.542956

1999 and 2001 Examined price changes for the

Sutter Alta Bates–Summit hospital

merger in California relative to

price changes for a set of control

hospitals in that state

•

After the merger, price increases at Summit

were 28 percent to 44 percent higher,

depending on the insurer, than the average price

increase at the control group, but prices at Alta

Bates did not change signicantly.

Aileen Thompson, “The Eect of

Hospital Mergers on Inpatient Prices:

A Case Study of the New Hanover–

Cape Fear Transaction,” International

Journal of the Economics of Business,

vol. 18, no. 1 (February 2011),

pp.91–101, https://doi.org/10.1080/

13571516.2011.542958

1997–1998 and

2001–2002

Examined price changes for the

New Hanover–Cape Fear hospital

merger in North Carolina relative to

price changes for a control group of

similar urban hospitals in that state

•

After the merger, prices increased for some

insurers and decreased for others. For two

insurers, prices increased by 56.5 percent and

65.3 percent, respectively, while for another

insurer, prices declined by 30 percent.

Asako S. Moriya, William B. Vogt,

and Martin Gaynor, “Hospital

Prices and Market Structure in the

Hospital and Insurance Industries,”

Health Economics, Policy, and

Law, vol. 5, no. 4 (October 2010),

pp.459–479, https://doi.org/10.1017/

S1744133110000083

2001–2003 Examined the association between

hospitals’ prices and changes in

market concentration for insurers

and hospitals across health service

areas

•

The relationship between increases in hospital

market concentration and prices was not

signicant.

Table C-1. Continued

Studies of the Relationship Between Hospital Market Concentration and Prices

42 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Table C-2 .

Studies of the Relationship Between Physician Market Concentration and Prices

Source Data Period Experiment or Methods Findings

Naomi Hausman and Kurt Lavetti,

“Physician Practice Organization

and Negotiated Prices: Evidence

From State Law Changes,” American

Economic Journal: Applied

Economics, vol. 13, no. 2 (April 2021),

pp.258–296, https://doi.org/10.1257/

app.20180078

1996–2007 Examined the relationship between

market concentration (as measured

by the Herndahl-Hirschman index,

or HHI) and prices, using changes in

judicial policies about noncompete

agreements as a source of

exogenous variation in the structure

of physician markets

•

A 100-point increase in the rm-based HHI

(which could mainly aect providers’ bargaining

power) increased prices by 1.7percent to

2.1percent.

•

A 100-point increase in the practice-location-

based HHI (which could mainly aect practices’

eciency) decreased prices by 1.4 percent to

1.9 percent.

•

A decrease of 10 percent in the enforceability

of noncompete agreements caused physicians’

prices to decline by 4.3 percent.

Thomas Koch and Shawn W. Ulrick,

“Price Eects of a Merger: Evidence

From a Physicians’ Market,” Economic

Inquiry, vol. 59, no. 2 (April 2021),

pp.790–802, https://doi.org/10.1111/

ecin.12954

2008–2013 Compared prices of services

provided by orthopedists before

and after a merger of six orthopedic

practices into one, relative to prices

in nearby areas

•

Prices increased by 10 percent to 20 percent,

relative to prices for the same services in nearby

areas, for two of the three payers in the study.

•

Prices did not increase for the third payer.

Caroline S. Carlin, Roger Feldman,

and Bryan Dowd, “The Impact

of Provider Consolidation on

Physician Prices,” Health Economics

(United Kingdom), vol. 26, no. 12

(December 2017), pp.789–1806,

https://doi.org/10.1002/hec.3502

2006–2011 Compared prices of physicians’

services before and after three

large, multispecialty clinics were

acquired by two hospital-owned

integrated delivery systems.

Compared prices at practices

controlled by the acquiring systems

with prices at practices controlled

by a competing system.

•

Four years after a merger, average prices had

increased by 32 percent to 47 percent at the

newly acquired systems and had increased by

14 percent to 20 percent at clinics that had

already been acquired.

•

Prices increased for physicians’ services

delivered in hospitals’ inpatient and outpatient

settings but did not increase for some services

provided in physicians’ oces.

Daniel R. Austin and Laurence C.

Baker, “Less Physician Practice

Competition Is Associated With Higher

Prices Paid for Common Procedures,”

Health Aairs, vol.34, no. 10

(October 2015), pp.1753–1760,

https://doi.org/10.1377/

hltha.2015.0412

2010 Examined the relationship between

prices for 15 common, high-priced

specialty services and market

concentration in the previous year

for specialists providing those

services

•

For 11 of the 15 services, prices were 8percent

to 26 percent higher in the counties with the

most market concentration than in the counties

with the least concentration.

•

For the other 4 services, prices were not

statistically related to market concentration.

Eric Sun and Laurence C. Baker,

“Concentration in Orthopedic Markets

Was Associated With a 7Percent

Increase in Physician Fees for

Total Knee Replacements,” Health

Aairs, vol. 34, no. 6 (June 2015),

pp.916–921, https://doi.org/10.1377/

hltha.2014.1325

2001–2010 Examined the relationship

between changes in physicians’

prices for knee replacements and

concentration in the market for

orthopedic surgery in 311 counties

throughout the United States

•

Prices for knee replacements were 7 percent

higher in the most concentrated markets than in

the least concentrated markets.

Samuel A. Kleiner, William D. White,

and Sean Lyons, “Market Power and

Provider Consolidation in Physician

Markets,” International Journal of

Health Economics and Management,

vol. 15, no. 1 (January 2015),

pp.99–126, https://doi.org/10.1007/

s10754-014-9160-y

2009 Used data on consumers’ demand

(willingness to pay) for cardiology

and ophthalmology services in

three metropolitan areas to model

the incremental value of including a

physician in a network. Compared

that incremental value with prices

and modeled hypothetical mergers.

•

Prices were positively correlated with higher

willingness to pay in the two most concentrated

markets.

•

A hypothetical merger between the two

largest practices in an area increased prices

by 5.7percent to 5.9 percent in the most

concentrated market.

•

In the other two markets, simulated mergers had

small or insignicant eects, increasing prices

by less than 1.5 percent.

Continued

43APPENDIX C THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Source Data Period Experiment or Methods Findings

Laurence C. Baker and others,

“Physician Practice Competition

and Prices Paid by Private Insurers

for Oce Visits,” JAMA, vol. 312,

no. 16 (October 2014), pp. 1653–

1662, https://doi.org/10.1001/

jama.2014.10921

2003 and 2010 Examined the relationship between

physicians’ prices for oce visits

in 2010 for 10 common specialties

and market concentration in the

previous year. Also examined the

relationship between changes

in concentration and changes in

prices between 2003 and 2010.

•

Prices were 8 percent to 16 percent higher in

the most concentrated markets than in the least

concentrated markets.

•

Prices increased more in places that had more

market concentration initially.

Abe Dunn and Adam Hale

Shapiro, “Do Physicians Possess

Market Power?” Journal of Law

and Economics, vol.57, no. 1

(February 2014), pp.159–193,

https://doi.org/10.1086/674407

2005–2008 Examined the relationship between

prices for cardiology and orthopedic

services and market concentration

in the previous year for specialists

providing those services. Also

examined the relationship between

changes in concentration and

changes in prices over time.

•

Prices were 14 percent to 30 percent higher in

the most concentrated markets than in the least

concentrated markets.

•

The eect of concentration on prices became

larger as markets became more concentrated.

Table C-2. Continued

Studies of the Relationship Between Physician Market Concentration and Prices

44 THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES JANUARY 2022

Table C-3 .

Studies of the Relationship Between Providers’ Vertical Integration and Prices

Source Data Period Experiment or Methods Findings

Haizhen Lin, Ian M. McCarthy, and

Michael Richards, “Hospital Pricing

Following Integration With Physician

Practices,” Journal of Health

Economics, vol. 77 (May 2021),

https://doi.org/10.1016/

j.jhealeco.2021.102444

2009–2015 Examined the relationship between

changes in prices for hospital

discharges and changes in whether

a hospital owned a physicians’

practice in the same hospital

referral region. Also examined the

relationship between price changes

and changes in the number of

physicians working in those

practices.

•

On average, hospitals’ prices increased by

about 3 percent after integration of a hospital

with a physicians’ practice.

•

Prices were about 4 percent higher at the

75thpercentile of the number of physicians

working in local practices owned by a given

hospital than at the 25th percentile.

Laurence C. Baker, M. Kate Bundorf,

and Daniel P. Kessler, “Does

Multispecialty Practice Enhance

Physician Market Power?” American

Journal of Health Economics, vol. 6,

no. 3 (Summer 2020), pp. 324–347,

https://doi.org/10.1086/708942

2008–2012 Examined the relationship over

time between changes in prices

for oce visits with general

practitioners or specialists

and prior-year changes in the

prevalence of integration between

those physicians

•

On average, prices were 2.7 percent higher for

general practitioner oce visits and 2.0 percent

higher for specialist oce visits in zip code areas

in the top one-quarter of generalist-specialist

physician integration than in areas in the bottom

one-quarter of such integration.

Richard M. Scheer, Daniel R.

Arnold, and Christopher M. Whaley,

“Consolidation Trends in California’s

Health Care System: Impacts on

ACA Premiums and Outpatient Visit

Prices,” Health Aairs, vol.37, no.9

(September 2018), pp.1409–1416,

https://doi.org/10.1377/hltha.2018.0472

2011–2016 Examined the association between

changes in prices for primary care

and specialist physicians’ oce

visits in California and prior-year

changes in the percentage of

primary care or specialist physicians

in practices owned by a hospital

•

On average, prices were 5.0 percent higher for

primary care oce visits and 9.1 percent higher

for specialty oce visits in counties where

all practices were owned by hospitals than in

counties that had the average level of vertical

integration (33 percent integrated for primary

care physicians and 35percent integrated for

specialty care physicians).

Cory Capps, David Dranove, and

Christopher Ody, “The Eect of

Hospital Acquisitions of Physician

Practices on Prices and Spending,”

Journal of Health Economics,

vol.59 (May 2018), pp. 139–152,

https://doi.org/10.1016/

j.jhealeco.2018.04.001

2007–2013 Compared changes in prices of

physicians’ services in several

states before and after physicians’

vertical integration with a hospital,

relative to price changes for

physicians’ services at practices

that never integrated

•

On average, prices for physicians’ services

increased by 14.1 percent after integration of a

physicians’ practice with a hospital.

Hannah T. Neprash and others,

“Association of Financial Integration

Between Physicians and Hospitals

With Commercial Health Care Prices,”

JAMA Internal Medicine, vol.75,

no.12 (December 2015), pp.1932–

1939, https://doi.org/10.1001/

jamainternmed.2015.4610

2008 and 2012 Examined the association between

changes in spending for and

use of inpatient and outpatient

hospitals’ and physicians’ services

in a metropolitan statistical

area (MSA) and changes in the

proportion of physicians in that area

billing exclusively with a hospital

outpatient department code

•

On average, spending increased by

3.1percent for outpatient services in MSAs

where the amount of integration increased by

about 5 percentage points (equivalent to the

75th percentile of changes that occurred in

MSAs). There was no statistically signicant

increase in the use of services, which suggests

that the spending increase was driven almost

entirely by price increases.

•

There was no statistically signicant change

in spending or utilization for inpatient services

associated with increases in vertical integration,

but those results were inconsistent when

alternative measures of physician-hospital

integration were used.

Continued

45APPENDIX C THE PRICES THAT COMMERCIAL HEALTH INSURERS AND MEDICARE PAY FOR HOSPITALS’ AND PHYSICIANS’ SERVICES

Source Data Period Experiment or Methods Findings

Laurence C. Baker, M. Kate Bundorf,

and Daniel P. Kessler, “Antitrust for

Accountable Care Organizations,”

Journal of Competition Law and

Economics, vol. 11, no. 2 (June 2015),

pp. 317–329, https://doi.org/10.1093/

joclec/nhv002

2001–2007 Examined the association between

changes in prices for outpatient

physicians’ services in 639 counties

and changes in the share of the

market served by hospitals in

one of four hospital-physician

integration categories

•

On average, prices increased by 1.7 percent

for outpatient physicians’ services in areas

where the type of organization with the most

vertical integration increased its market share

by 10percentage points and where there had

initially been low levels of integration.

Laurence C. Baker, M. Kate Bundorf,

and Daniel P. Kessler, “Vertical

Integration: Hospital Ownership of

Physician Practices Is Associated With

Higher Prices and Spending,” Health

Aairs, vol. 33, no. 5 (May 2014),

pp. 756–763, https://doi.org/10.1377/

hltha.2013.1279

2001–2007 Examined the association between

changes in prices for hospital

admissions in 639 counties and

changes in the share of the market

served by hospitals in one of four

hospital-physician integration