The authors analyze the spending impact of policy options to reduce hospital prices paid by private health plans, with various design choices and effectiveness levels for each approach. They estimate that price regulation could have the largest impact on hospital prices and spending but would likely face political challenges, while improving price transparency and competition could help reduce prices—but to a lesser extent than price regulation.

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Impact of Policy Options for Reducing Hospital Prices Paid by Private Health Plans

by Jodi L. Liu, Zachary M. Levinson, Nabeel Qureshi, Christopher M. Whaley

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Research Questions

  1. What is the potential impact on hospital prices and spending of regulating hospital prices paid by private health plans?
  2. What is the potential impact on hospital prices and spending of improving price transparency?
  3. What is the potential impact on hospital prices and spending of increasing competition among hospitals?

Hospital spending—the largest health spending category in the United States—accounts for one-third of national health expenditures; in 2018, U.S. hospital spending totaled $1.2 trillion. In response to high health care spending and concerns about affordability, policymakers have proposed a variety of reforms to increase health insurance coverage and modify how providers are paid. In this report, the authors analyze the spending impacts of policy options to reduce hospital prices paid by private health plans. The authors estimate the potential impact on hospital prices and spending for a range of policy designs and assumptions for each option.

The authors consider three policy options—regulating hospital prices, improving price transparency, and increasing competition among hospitals—with various design choices and effectiveness levels for each approach. They estimate that price regulation could have the largest impact on hospital prices and spending but would likely face political challenges, while improving price transparency and competition could help reduce prices—but to a lesser extent than price regulation.

Key Findings

Regulating prices for all private plans, by either setting or capping prices, has the potential for a significant impact on hospital spending

  • Setting prices for all commercial payers could reduce hospital spending by $61.9 billion to $236.6 billion when the rates are 100 to 150 percent of Medicare rates; this change would lead to a 1.7- to 6.5-percent reduction in national health spending.
  • Setting prices for a public option or for highly concentrated hospitals would reduce the impact on spending, while capping prices could increase the impact on hospital spending.

Increasing hospital price transparency could help reduce prices but is unlikely to reduce spending as much as regulating hospital prices could

  • Increased price transparency potentially reduces hospital spending by $8.7 billion to $26.6 billion.
  • The uncertainty in how patients and employers would respond to price transparency initiatives necessitated the modeling of patient-driven scenarios, in which patients use price information to seek lower prices, and employer-driven scenarios, in which employers use price information to seek plans that steer patients toward lower-cost hospitals.

An increase in hospital market competition, even one that is large by historical standards, could also reduce prices but is unlikely to save as much as regulating hospital prices for all private plans

  • Decreasing hospital market concentration would reduce hospital spending by $6.2 billion to $68.9 billion.
  • Given how concentrated today's hospital markets are, policymakers would need to radically restructure hospital markets for prices to approach competitive levels.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Options to Reduce Hospital Prices

  • Chapter Three

    Rate Regulation

  • Chapter Four

    Price Transparency

  • Chapter Five

    Increasing Competition

  • Chapter Six

    Other Effects of Reducing Hospital Prices

  • Chapter Seven

    Conclusion

  • Appendix A

    Technical Specifications

  • Appendix B

    Detailed Results

Research conducted by

This research was funded by a grant from Arnold Ventures and carried out within the Payment, Cost, and Coverage Program in RAND Health Care.

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