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How fast are hospital prices really rising?
D Dranove1, M Shanley, W D White
1Kellogg School of Management, Northwestern University, Evanston, IL 60201.
Insights
The Consumer Price Index (CPI) for hospital services may overestimate actual healthcare inflation. Discounts negotiated by health plans create a gap between list prices and actual costs, potentially doubling inflation rates.
Area of Science:
- Health Economics
- Healthcare Management
- Price Index Analysis
Background:
- The Consumer Price Index (CPI) hospital services component measures list prices, not actual transaction costs.
- Increasing enrollment in managed care organizations (HMOs, PPOs) leads to negotiated discounts.
- The gap between list price inflation and actual price inflation may be widening.
Purpose of the Study:
- To investigate the existence and magnitude of a gap between hospital list price inflation and actual price inflation.
- To compute parallel indices for list and actual hospital prices.
- To assess the implications for inflation measurement and cost containment strategies.
Main Methods:
- Analysis of hospital price data from California hospitals for fiscal years 1983-1988.
- Computation of parallel Consumer Price Index (CPI) and actual price indices.
- Comparison of inflation rates derived from list prices versus discounted prices.
Main Results:
- Hospital list price inflation significantly exceeded actual price inflation between 1983 and 1988.
- The disparity between list and actual price inflation was substantial, potentially doubling in recent years studied.
- A notable gap exists, indicating that CPI hospital services data may not accurately reflect real healthcare cost inflation.
Conclusions:
- The CPI hospital services component is an inappropriate measure of overall hospital price inflation due to negotiated discounts.
- Managed care discounts create a significant divergence between list and actual healthcare prices.
- Findings impact the evaluation of healthcare inflation and the effectiveness of cost containment strategies.
Abstract:
The hospital services component of the Consumer Price Index (CPI) measures the cost of hospital services to private patients paying list prices. It is, however, widely used as an estimate of the overall rate of inflation in hospital prices in spite of the fact that there are strong reasons to believe that it is inappropriate to use the CPI for this purpose. This is because: 1) A growing number of patients are enrolled in health maintenance organizations (HMOs) and preferred provider organizations (PPOs), which negotiate discounts from list prices; and 2) the size of the discounts may have been increasing. The potential result is a gap between the rate of inflation of list prices and the rate of inflation of actual prices paid in transactions. This study explores whether such a gap exists and determines its possible magnitude. In addition, parallel indices for list and actual prices are computed on the basis of data from California hospitals for fiscal years 1983-1988. The analysis suggests that list price inflation has greatly exceeded actual inflation--by a factor of two for recent years. These findings have broad implications for evaluating not only inflation but also the impact of cost containment strategies.