N.C. hospitals charge more for chemo because they can, experts say

In ‘provider favorable’ market, hospitals set their own prices

jneff@newsobserver.comSeptember 22, 2012 

Hospitals have a big advantage over independent physician practices when it comes to billing commercial insurance companies.

Many private insurance companies pay doctors a percentage of the average sales price for a particular drug. Hospitals, on the other hand, set their own charges, and insurers often pay a percentage of those charges. That system gives hospitals far more control over what they are paid and allows them to increase revenue from cancer drugs.

For hospitals, it’s an arrangement that Mark Warner, a vice president for Blue Cross and Blue Shield of North Carolina, calls “provider favorable.” Warner says Blue Cross would rather have fixed pricing for drugs, but he has faced resistance from hospitals.

Experts point to a fundamental reason why hospitals charge more: They can get away with it.

The size of hospitals – particularly large hospital chains – gives them power to negotiate favorable reimbursement rates from insurers. While insurers might be willing to exclude a small clinic from their networks, they are loath to lose the hospitals in a large system such as Duke University Health System.

“If (hospitals) aggregate to one system and that’s the only system within 100 miles, you need a contract,” said Dr. Ira Klein, assistant to the chief medical officer at Aetna insurance company.

“They know that. They raise the rates. ... Even if they settle at a 10 percent increase, I don’t see 10 percent more value.”

Size also gives hospitals another advantage. It allows them to get discounts when they buy chemotherapy drugs in bulk.

And more than 40 North Carolina hospitals – including Duke University Medical Center and UNC Hospitals – obtain discounts under the federal 340B program, which requires drug manufacturers to cut prices for hospitals that treat a significant percentage of needy patients. The 340B plan applies only to outpatient drugs, so these hospitals pay more for inpatient drugs.

UNC Hospitals pays 20 to 25 percent less for outpatient drugs, said Rowell Daniels, UNC Hospitals’ director of pharmacy.

Although Congress set up the program to offset the cost of treating Medicaid patients, the hospitals use the program to purchase discounted drugs for all outpatients, including those with private insurance. Hospitals buy most of their oncology drugs through the 340B program at steep discounts unavailable to independent practices, said Dr. John Peterson, who practiced as an independent oncologist in Sanford for 18 years before moving to Dartmouth College last year.

“There is no requirement to pass the savings on to patients, and they don’t,” Peterson said. “These hospitals are driving out the private practices, and they’re becoming the Wal-Mart of health care, squashing the competition but without the low prices.”

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