Study Finds Hospital Prices Vary Greatly Under Medicare

High costs are one of the most vexing problems in US health care. As policymakers seek to understand cost drivers, they have begun to untangle the complex economic, regulatory, political and clinical factors that determine prices for care. One interesting piece of the puzzle is price variation: for example, different hospitals in the same city charge vastly different prices, for the same service. They also charge different prices to different payers (for example, more to private insurers, and less to Medicaid).

Variation in prices paid in the private insurance sector have been widely studied.  But what about prices for Medicare, the public program paying for 40% of hospital stays every year? In a recent study, NYU Wagner faculty member Jan Blustein and colleagues ran the numbers: They found vast variations in hospital prices within cities, with the highest priced hospitals receiving nearly twice the rates of their lower-priced neighbors, for the same services.

These large price variations are hard to justify, according to Blustein, who said, “Arcane rules determine the prices every hospital can charge Medicare. But those rules have evolved over time through administrative and political processes that do not necessarily ensure efficiency or equity.“

For policymakers, the study underscores the need to consider changing the rules – a hard task, since hospitals that are “winners” are likely to oppose change. Regardless, we need to understand how variations in prices under Medicare correspond to the widely-noted variations in the private insurance market, and how overall price variations affect hospitals’ ability to provide good service to all, in an increasingly competitive marketplace.

The article, “Variation in Payment Rates under Medicare’s Inpatient Prospective Payment System,” appears in Health Services Research journal and is co-written with Sam Krinsky, MA, 1199SEIU, Andrew M. Ryan, PhD, of University of  Michigan School of Public Health, and Tod Mijanovich, PhD, of NYU Steinhardt.