Hospital Surgical Procedure Markup And Hospital Market Competition

The relationship between interhospital competition and the costs passed on to patients and their families is a complex one. Research has shown that as hospital systems have become more consolidated, prices for routine medical care have increased.

Yet, there are three types of players and thus three types of relationships to contend with – those between hospitals and patients, between patients and insurers, and between hospitals and insurers.  Hospitals with greater market share – as well as hospitals in more concentrated markets with less competition – may be able to negotiate higher payments from private third-party payers. On the other hand, hospitals that are subject to more competition may be less able to negotiate higher payments or charge higher prices.

This question sits at the crux of the debate regarding implicit price controls. As we discuss, proponents for hospital market consolidation (which effectively reduces hospital market competition), tout the gains in efficiency and quality of patient care – if primary care doctors are in the same system as surgeons, then referrals and care planning ought to be smoother. On the other hand, while this increase in overall efficiency may lead to overall lower costs, hospitals may nevertheless apply a substantial markup.

The aim of our study was to characterize how hospital markup for surgical procedures is related to hospital market competition. Indeed, the factors that affect procedural markup across different types of hospitals (e.g. not-for-profit versus private-for-profit hospitals, teaching versus non-teaching hospitals, and hospitals that care for a disproportionate share of publicly-insured patients) have not been well defined.

Methods

Using data from the Nationwide Inpatient Sample, we estimated the average markup (i.e. percent difference between the total hospital charges and average estimated costs) across a range of gastrointestinal or cardiothoracic operations. Our models were adjusted for patient and hospital factors. Then, we compared the average markup between not-for-profit and private, for-profit hospitals, across a range of hospital markets (i.e. from very competitive [unconcentrated] to noncompetitive [highly concentrated]).

Findings

Hospital markup is not uniformly sensitive to hospital market concentration, though clinical practices may be sensitive to interhospital competition. As we report in the conclusions of our paper, overall, private for-profit hospitals employed a 72% greater adjusted markup compared with not-for-profit hospitals, though the association between market concentration and markup was different between the two groups.

In highly concentrated markets, private for-profit hospitals employed an 81% higher adjusted markup versus not-for-profit hospitals, while in unconcentrated markets, private for-profit status was associated with a 62% higher markup.

These findings suggest that costs for surgical care in private, for-profit hospitals may be less constrained in more concentrated (i.e. less competitive) markets.

Conversely, lower markups employed by not-for-profit hospitals in more concentrated markets may indicate that the cost of surgical care was not solely associated with market pressures.

These findings are described in the article entitled Variation in markup of general surgical procedures by hospital market concentration, recently published in the American Journal of Surgery.  This work was conducted by Marcelo Cerullo from Johns Hopkins University School of Medicine and Duke University Medical Center, Sophia Y. Chen and Joseph K. Canner from Johns Hopkins University School of Medicine, and Mary Dillhoff, Carl R. Schmidt, and Timothy M. Pawlik from Wexner Medical Center at Ohio State University.