News Release

Inpatient Hospital Prices Drive Spending Variation for Privately Insured Patients’ Knee/Hip Replacements and Other Episodes of Care

Findings Indicate Private Purchasers Can Focus on Hospitals’ Overall Inpatient Price Levels Rather than Pursue Bundled Payments for Episodes of Care with a Hospitalization

When including all care related to a hospitalization—for a knee or hip replacement, for example—the price of the initial inpatient stay explains almost all of the wide spending variation from hospital to hospital on so-called episodes of care, according to a study from the nonpartisan, nonprofit National Institute for Health Care Reform (NIHCR). Conducted for NIHCR by researchers at the former Center for Studying Health System Change (HSC), the study used 2011 claims data for 590,000 active and retired nonelderly autoworkers and their dependents to examine spending variation on episodes of care in nine U.S. metropolitan areas—Buffalo, N.Y.; Cleveland; Detroit; Flint, Mich.; Indianapolis; Kansas City; Lansing, Mich.; Louisville, Ky.; and Warren, Mich.

Previous HSC research has shown that private health plans pay inpatient hospital prices that vary widely, both within and across local health care markets. Breaking new ground, this study focuses on private health plans’ spending on entire episodes of care that begin with a hospitalization, including payments for the initial hospital stay, all physician services and rehabilitation during the stay and up to 30 days after discharge, and any readmission within 30 days of the initial discharge.

For example, average spending for uncomplicated inpatient knee and hip replacements across 36 hospitals in the nine markets ranged from less than $17,500 to $37,000 when including all services during the inpatient stay and all follow-up care within 30 days of discharge, the study found.

The pattern of spending variation for knee and hip replacements held true for other conditions, with hospital inpatient price differences accounting for the vast majority of spending variation rather than differences in spending on physician and other non-hospital services during and after discharge or spending on readmissions, according to the study. Moreover, hospitals’ case-mix-adjusted relative spending per episode for different service lines, such as orthopedics and cardiology, tended to track one another.

“The findings indicate that private purchasers can focus on overall hospital inpatient price levels rather than pursue bundled payments for episodes of care or service-line-specific purchasing strategies,” said Chapin White, Ph.D., a former HSC senior researcher now at RAND, and coauthor of the study with James D. Reschovsky, Ph.D., a former HSC senior fellow now at Mathematica Policy Research; and Amelia M. Bond, M.H.S., a former HSC analyst.

The study’s findings are detailed in a new NIHCR Research Brief—Inpatient Hospital Prices Drive Spending Variation for Episodes of Care for Privately Insured Patientsavailable here.

Other key findings include:

  • Spending per episode for uncomplicated knee and hip replacements varied more than twofold across the 36 hospitals in the nine markets. Among the lowest-spending hospitals, spending for knee and hip replacement episodes ranged from $17,000 to $20,000, dramatically lower than the highest hospitals, where spending was close to or more than $35,000. These spending variations appear even though the procedure and recuperative process are fairly standardized, the population is fairly uniform—nonelderly manufacturing workers and retirees—and payments are adjusted for local input prices.
  • Average spending per knee and hip replacement episode also varied among the nine markets studied. The market average spending per episode ranged from below $25,000 in Louisville to more than $30,000 in Buffalo. All but one of the markets had one or more low-spending hospitals—at or less than $25,000—and one or more high-spending hospitals—more than $25,000, suggesting that lower-spending hospitals are an option in most markets.
  • Related services, such as physician or rehabilitation care, accounted for 23 percent of the total spending on knee and hip replacement episodes, but they accounted for very little of the variation across hospitals—the price of the initial inpatient stay was by far the most important factor in a hospital’s spending per knee and hip replacement episode.
  • Initial hospital stays accounted for 68 percent of spending on hospitalization episodes, but differences in the prices of initial hospital stays accounted for an even larger share—more than 80 percent—of the variation in overall episode spending. Differences in spending on readmissions contributed to variation, but differences in the amounts paid per readmission were twice as important as the rate of readmissions in explaining variation in episode spending—6 percent vs. 3 percent.
  • Variation in the prices and quantities of physician and other services together accounted for less than one-tenth of the observed variation in episode spending.
  • Of the 43 hospitals that provided significant volumes of both cardiology and orthopedics episodes, most had either above-average spending for both service lines—14 hospitals—or below-average spending for both service lines—18 hospitals. A quarter of hospitals had higher-than-average spending for one service line and lower-than-average spending for the other.

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The National Institute for Health Care Reform (NIHCR) is a nonpartisan, nonprofit 501(c)(3) organization created by the International Union, UAW; Chrysler Group LLC; Ford Motor Company; and General Motors. Between 2009 and 2013, NIHCR contracted with the Center for Studying Health System Change (HSC) to conduct high-quality, objective research and policy analyses of the organization, financing and delivery of health care in the United States. HSC ceased operations on Dec. 31, 2013, after merging with Mathematica Policy Research, which assumed the HSC contract to complete NIHCR projects.