Hospital Price Dispersion

A study by the Center for Studying Health System Change that will be released today shows that hospitals receive different prices for treating the same diseases. Center President Paul Ginsburg says this about the findings:

“The variation in hospital prices found in this study are (sic) inconsistent with highly competitive markets—at least for markets outside of health care,” said HSC President Paul B. Ginsburg, Ph.D.,

Hospital markets may not be highly competitive, but this argument is silly. One might as well say “The variation in automobile prices is (not “are”) inconsistent with highly competitive markets.” But one would be wrong in either case.

Vertical quality differentiation (i.e., some sellers are better than others) generates price dispersion in competitive markets. It is only in the most basic treatment of competition — in the first week of an intro economics course — that vertical differentiation is ignored. Observed price dispersion is not incompatible with competition.

Moreover, there is severity dispersion within diagnoses (e.g., some hospitals get the sickest patients within DRGs). Medicare ignores this when setting payment rates. But private insurers need not ignore this and can calibrate pricing accordingly. Hospitals getting sicker patients can get higher prices. Again, this is not incompatible with competition.

So what did we learn from this study? That different hospitals get different prices? We also see price dispersion for autors, and for dry cleaning and electric pencil sharpeners, for crying out loud. This isn’t news and there are no policy implications to be drawn from the study. But this is health care, so I predict this study will be front page in the New York Times, even if it fails to tell us anything we didn’t already know.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red”. He has a Ph.D. in Economics from Stanford University.

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6 replies »

  1. First off I would like to say fantastic blog! I had a quick question in which I’d like to ask if you don’t
    mind. I was curious to find out how you center yourself and clear your thoughts before writing.
    I have had difficulty clearing my thoughts in getting my thoughts
    out. I truly do enjoy writing however it just seems
    like the first 10 to 15 minutes are generally lost simply just trying to figure out how to begin.
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  2. David is right, There are no policy implications of the McAllen, Tx example either, as that “research” was also totally flawed. Care delivered in the last 2 weeks or months of life is just different and subject to so many variables unrelated to where the patient expired. And when they do expire, there is a huge variation in the ways in which families pay their respects. What does that tell us, other than where the sick people were before they died?

  3. “For crying out loud” where does McAllen TX come in the “there are no policy implications” assessment?

  4. But you’re intenionally ignoring the determining factor in price variation: market domination (coupled with “reputation”). It’s been shown over and over that the hospitals that are paid the most DO NOT offer better care and DO NOT care for sicker patients. The more light shed on this rip-off the better.

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