Commentary: Hospital pricing in Delaware can be regulated

Many people in need of medical services that can help them live higher quality and longer lives are forced to delay or even forego getting the medical care they need due to the high prices charged by some hospitals. These high prices exist despite numerous studies showing that places with higher prices do not necessarily have higher quality.

We recently presented evidence to the State Employee Benefits Committee showing that Delaware workers pay about twice as much as the Medicare program pays for certain hospital services. Using data on payments for services received by about 130,000 Delaware residents with private insurance received through their employer, we found that the mean payment for an inpatient stay for someone with private insurance was $23,721 in 2016, compared to $12,282 for a Medicare beneficiary. The mean private price of a hip replacement was $35,444 compared to $13,641 in Medicare. For a knee replacement, mean prices were $35,459 and $12,603 for private and Medicare enrollees, respectively.

One could argue that the Medicare program pays too little, however national data suggest that most efficient hospitals would not be unprofitable if hospitals were paid Medicare rates. Hospitals generally spend available resources; thus, when private insurers pay higher prices, hospital costs usually increase.

Our results point to a sizable gap between the prices paid by private insurers and those paid by Medicare beneficiaries. Rising prices in employee health plans raise concerns about the affordability of healthcare, may hold down wages and, in the case of state employees, may threaten the financial health of the state. 

Delaware has many options to close the price gap between private payers and Medicare over time. For example, the state could reduce rates paid for services used by state employees by 20 percent every year so that the gap between their prices and Medicare rates is closed over five years. Reducing rates for state employees would improve access to care for employees and reduce state spending on healthcare. Those savings could then be directed into higher wages or other priority areas for the state. 

Several states, including California and Montana, have enacted legislation tying rates paid for state employees’ healthcare directly to Medicare rates. For example, Montana pays 234 percent of Medicare rates for services provided to state employees. The state reports that this policy has been a success, saving the state $15.6 million this year without adverse effects on hospitals. California has taken a narrower approach, setting rates for state employees for a select set of procedures (and expanding this set over time). 

The state may also consider removing regulatory barriers such as “Certificate of Need” laws, which require healthcare facilities to appeal to a state board before expanding, building or acquiring a new service. Evidence has shown that these laws have not had the intended effects of controlling costs or improving quality. Instead, they have allowed existing hospitals to keep competitors out of the state, thereby reducing competition - and leading to higher prices. To date, 15 states have repealed their Certificate of Need laws, however Delaware’s remain in place. 

Understandably, there is concern about the effect that any decrease in prices paid by private insurers could have on hospitals in Delaware. A closer look at the state’s hospital industry suggests that most hospitals in Delaware have excellent financial viability and are more profitable than the U.S. average. Hospitals have the flexibility to respond to lower prices by lowering their costs.

As of 2017, 53 percent of Delawareans received health insurance through their employer. Delaware private plans currently pay approximately twice what Medicare pays for selected hospital services. In turn, these higher prices are passed on to employers and employees in the form of higher premiums and deductibles, and may lead to forgone employer profit and employee take-home pay. Opportunities exist for the state to address this issue and balance access, cost and quality of the Delaware hospital market. 

Aditi P. Sen, PhD, is a health economist and assistant professor at the Bloomberg School of Public Health at Johns Hopkins University. Ge Bai, PhD, CPA, is associate professor of accounting at the Carey Business School at Johns Hopkins University. They presented on hospital pricing at the December meeting of the State Employee Benefits Committee in Dover.