The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured

98 Pages Posted: 8 Oct 2016

See all articles by Zack Cooper

Zack Cooper

London School of Economics & Political Science (LSE)

Stuart Craig

University of Pennsylvania - The Wharton School

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

John Reenan

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Date Written: January 1, 2016

Abstract

We use insurance claims data for 27.6 percent of individuals with private employer-sponsored insurance in the US between 2007 and 2011 to examine the variation in health spending and in hospitals’ transaction prices. We document the variation in hospital prices within and across geographic areas, examine how hospital prices influence the variation in health spending on the privately insured, and analyze the factors associated with hospital price variation. Four key findings emerge. First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.4 percent higher than those in markets with four or more hospitals.

Keywords: healthcare, health spending, hospitals, prices, price dispersion, competition, market structure

JEL Classification: I11, L10, L11

Suggested Citation

Cooper, Zachary and Craig, Stuart and Gaynor, Martin and Reenan, John, The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured (January 1, 2016). Available at SSRN: https://ssrn.com/abstract=2848417 or http://dx.doi.org/10.2139/ssrn.2848417

Zachary Cooper

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Stuart Craig

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
412-268-7933 (Phone)
412-268-5338 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leverhulme Centre for Market and Public Organisation

12 Priory Road
Bristol BS8 1TN
United Kingdom

John Reenan

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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