The American Hospital Association (“AHA”) issued its second report in its series examining anti-trust issues in the pricing for hospital services. The first study rebutted claims made in two widely-cited publications that found links between higher hospital prices to insurers and market power. The second study examined hospital financial data to determine what factors best explained price differences across hospitals.

The study makes the following points:

• Hospital expenditures have held steady at approximately 30% of total healthcare expenditures in the U.S. during the period 2001 – 2009. Home health care expenditures have increased as a share of the total during the same period. The other categories that have grown faster than hospital care are prescription drugs, program administration and the net cost of private health insurance.

• Nationwide, Medicare and Medicaid admissions now account for more than 60% of total admissions. AHA estimates that the Medicare payment-to-cost ratios fell from 99.1% in 2000 to 90.1% in 2009; Medicaid payment-to-cost ratios fell from 94.5% in 2000 to 89% in 2009; and uncompensated care now represents approximately 6% of total hospital expenses.

• Total hospital admissions grew by 7% between 2000 and 2009, but have been relatively flat since 2004, due in part to the shift in services to outpatient environments. Outpatient visits increased 23% between 2000 and 2009.

Using Medicare cost report data from 2004 through 2008, the AHA researchers were able to develop a number of models that they believe explain the price differences across hospitals. The key explanatory variables are case mix, teaching intensity, share of Medicare and Medicaid discharges, regional costs (wage index), hospital investment in capital, resource utilization and characteristics of the patient population. One of the models was able to explain 72% of the price variation in commercial payors, and 83% in all payors.

The AHA study explains something we have observed in our practice; that academic medical centers are able to charge payors more for their services. In the AHA model, the explanation for the higher price difference is due not to the market power of the academic medical center, but the fact that it has a greater teaching intensity, higher wage costs, greater investment in capital and attracts a sicker patient demographic.

Although the researchers were not able to explain all of the price differences, they are able to explain a statistically significant amount. The AHA study takes issue with the conclusion of some researchers that any residual price variation not captured by the model is due to market power.