Private Health Plans Pay Hospitals Much Higher Prices in Indiana than in Michigan: Explanations and Implications

Premiums for employer-sponsored health insurance have been growing at a rate well above growth in wages or overall inflation. Excess premium growth, in turn, suppresses wage growth and creates financial hardship for the middle class while, at the same time, reducing government tax revenues and employment. Spending on hospital care represents the largest expenditure category for the privately insured, and the key driver of increasing hospital expenditures has been growth in unit prices.

RAND released a hospital price transparency study in 2019 that compared negotiated unit prices paid by private health plans with the administered prices in the Medicare program. That study revealed that private hospital prices in Indiana are roughly double the prices in Michigan.

The stark difference in hospital prices between Indiana and Michigan raises three main questions:

  • what are the differences, in market structure and institutions, that can explain the price gap?
  • how do hospitals in Michigan and Indiana differ in efficiency and quality of care? and
  • what lessons can be drawn for policy makers in other states and at the national level?

The key difference between Michigan and Indiana lies in the governance of the dominant insurer. The dominant insurer in Michigan is Blue Cross Blue Shield of Michigan (BCBSM), a state-based not-for-profit insurer governed by a board with heavy representation by unions and employers. BCBSM has historically been regulated as a quasi-public entity, with a state-imposed mission that included cost control and state oversight over hospital contracting and pricing. In Indiana, the dominant insurer is Anthem, a national for-profit insurer with relatively little oversight by the state or employers based in Indiana.

Hospitals in Michigan, compared to those in Indiana, operate more efficiently and, on the whole, appear to provide care of similar or better quality. Together, these findings suggest that reining in prices paid to hospitals by private health plans can spur efficiency gains without necessarily harming quality of care. The “Michigan pricing model” reflects a decades-long history, and a set of institutions, that is generally missing in other states.

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