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When the Price Isn't Right: How Inaccurate Payments Drive Expensive Medical Care

Health Affairs Study Points to Growing Competition for Profitable Care as Key Cost Driver

News Release
Aug. 9, 2005

Alwyn Cassil (202) 264-3484 or

WASHINGTON, DC—Unintentionally inflated prices for certain medical services are spurring intense competition among physicians and hospitals to expand cardiac, orthopedic and high-end imaging services, potentially sparking a powerful new health care cost driver, according to a study by the Center for Studying Health System Change (HSC) published today as a Web-exclusive article in the journal Health Affairs.

"In many communities, hospitals and physicians are racing to expand profitable cardiac and orthopedic care, signaling that we’re inadvertently paying too much for these services," said Paul B. Ginsburg, Ph.D., lead author of the study funded by the California HealthCare Foundation. Ginsburg is an economist and president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

"This research provides further evidence that some aspects of the health care system have evolved in a direction that is both costly and inefficient," said Jill Yegian, director of the Health Insurance Program at the California HealthCare Foundation. "Intentional or unintentional, these perverse incentives make the already difficult job of reining in health care spending that much harder."

Current payment systems often rely on provider charges for services rather than the actual costs of providing care, leading to large differences in profitability when charges and costs diverge, the study finds.

Over time, changes in productivity and costs lead to inadvertent variation in profitability across different services, with many newer, more technologically advanced services likely becoming relatively more profitable. While variation in profitability probably isn’t a new phenomenon, growing financial pressures on physicians and hospitals are leading to increased competition for the more lucrative services.

Faced with stagnant payment rates for professional services, many physicians are growing more entrepreneurial, either by adding capacity for more profitable services in their practices or by investing in freestanding facilities. Advances in technology also have made it possible to offer more services in physician practices and physician-owned facilities.

Hospitals often cite the ability to cross-subsidize less profitable services as a motivation for expansion of profitable services, according to the study. And, in some cases, hospitals are responding to perceived competitive threats from physician-owned facilities.

Congress has focused attention on threats to general hospitals from the growth of physician-owned specialty hospitals, but the competition between physicians and hospitals for profitable services and the threat to hospitals is much broader, according to the study, which is based on findings from HSC’s site visits to 12 nationally representative communities and additional interviews with government officials, industry experts and private insurers. For example, such services as magnetic resonance imaging (MRI), radiation therapy and outpatient cancer care increasingly are being provided in physician practices, where physician self-referral restrictions don’t apply.

The study encourages policy makers to consider options to improve the accuracy of Medicare payment systems, such as subsidizing a sample of providers to provide systematic cost accounting data to the Medicare program or by assuming higher rates of capacity utilization for equipment in setting payment rates. The study cautions, however, that policy makers must be willing to spend money to save money.

"Although the amounts are likely to be minuscule in relation to the potential reduction in outlays for benefits, funds for administering Medicare have always been tight," the article states. "If experience prevails, resources will become available only when a major stakeholder decides this investment is important and effectively advocates for it."

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.

The California HealthCare Foundation, based in Oakland, is an independent philanthropy committed to improving California’s health care delivery and financing systems. Formed in 1996, its goal is to ensure that all Californians have access to affordable, quality health care. CHCF commissions research and analysis, publishes and disseminates information, convenes stakeholders, and funds development of programs and models aimed at improving the health care delivery and financing systems. For more information, visit



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The Center for Studying Health System Change Ceased operation on Dec. 31, 2013.