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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