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Why Do Teaching Hospitals Command Higher Payments?

Why Do Teaching Hospitals Command Higher Payments?

In the current era of consolidation among healthcare providers, regulators have paid increased attention to the risk of large organizations using their combined geographic presence and market power to negotiate higher rates from insurers and raise prices. But there’s also another metric some hospitals have leveraged to get higher-than-average reimbursements: reputation. Brand power and patient preference can drive patient volume, even if those preferences aren’t based on a provider’s superior quality.

The most prominent example of this effect lies in Massachusetts, where hospitals, state officials, and activists have participated in an ongoing debate over higher prices at academic and teaching hospitals despite equivalent care quality. Public focus on the issue grew in 2008 when The Boston Globe published an investigative report finding that academic medical centers and teaching hospitals received higher insurance reimbursements than community hospitals for the same service and with the same patient outcomes. Subsequent state and regulatory investigations reached similar conclusions, and most recently in March 2016, the Massachusetts legislature passed a bill that would financially reward hospitals that effectively restrict price growth.

While organizations like Partners Healthcare, which was often singled out for the higher prices of its hospitals, and the Massachusetts Hospital Foundation did not dispute the entirety of the findings, they tended to downplay their significance, pointing to outdated quality data and other factors that were more significant drivers of cost.

So how big are the cost differences, and can they be explained by quality differences?

A review of hospital Diagnosis Related Group (DRG) codes, reimbursement estimates, and quality scores based on Definitive Healthcare data suggests that the differences are indeed significant. For each of the top 10 most common DRGs excluding rehab and mental health-related codes, the estimated median payment at academic and teaching hospitals was significantly higher than at other facilities – usually 30 to 40 percent higher. Among academic and teaching hospitals, Boston Medical Center (BMC) had the highest estimated payment per claim, coming in roughly 20 percent higher than the median for other teaching hospitals and academic medical centers and anywhere from 36 to 44 percent higher than the median for other regular hospitals. However, BMC also received the highest Medicare reimbursements for each procedure, suggesting that the hospital’s prices could be attributable to the organization’s unique costs.

Median estimated insurer payments to Massachusetts hospitals for top 10 most common acute care DRGs

DRG Teaching & Academic Hospitals Other Hospitals Difference
Septicemia/Severe Sepsis With Major CC $17,304 $13,022 32.9%
Lower Joint Replacement W/O Major CC $20,355 $15,800 28.8%
Heart Failure With Major CC $14,514 $11,040 31.5%
Heart Failure With CC $9,623 $7,154 34.5%
Esophagitis/Digestive Disorders W/O MCC $6,534 $5,331 22.6%
Septicemia/Severe Sepsis W/O Major CC $9,808 $7,439 31.8%
Renal Failure With CC $8,905 $6,311 41.1%
Pneumonia With CC $8,471 $6,485 30.6%
Kidney & Urinary Tract Infect W/O Major CC $6,487 $4,510 43.8%
Pulmonary Edema $12,009 $9,531 26.0%


Yet at the same time, across most quality measures, the average scores and rates for academic and teaching hospitals were comparable to those for all other hospitals. Regular hospitals had slightly higher average mortality rates for pneumonia and heart failure, but actually had better scores than teaching hospitals for stroke readmission and mortality rates. However, it is important to note the possibility that patient health may affect quality scores. Teaching hospitals are known to treat larger numbers of very ill patients, as is reflected in their higher case mix (an average of 1.68 for MA academic and teaching hospitals, compared to 1.27 for other MA hospitals), and CMS is still working to adjust its methodology for quality scores.

Select quality metric averages for Massachusetts hospitals

Quality Metric Teaching & Academic Hospitals Other Hospitals
Hip/Knee Complication Rate 3.0% 3.1%
Hip/Knee Readmission Rate 4.7% 4.7%
Stroke Mortality Rate 14.1% 13.8%
Stroke Readmission Rate 13.4% 12.7%
Pneumonia Mortality Rate 14.0% 14.9%
Pneumonia Readmission Rate 17.4% 17.1%
Heart Failure Mortality Rate 10.2% 11.3%
Heart Failure Readmission Rate 22.3% 22.4%
All Cause Hospital-Wide Readmission Rate 16.7% 15.9%


While some healthcare observers and activists in Massachusetts have long argued about the ability of prestigious, market-dominating health organizations and teaching hospitals to drive higher reimbursements from insurers, the state’s inpatient care industry has only just recently acknowledged it is a problem, judging by a new report from the Massachusetts Health and Hospitals Association. In it, the Association writes “unwarranted variation among providers should be addressed,” and it even floats the idea of short-term limits on price increases at certain hospitals. The report suggests Massachusetts hospitals have a new willingness to approach the issue, and their strategies should be watched closely to see how well they might fare if adopted elsewhere in the nation.

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