What’s behind wide-scale hospital price variations?

A recent study,

” has challenged the premise that Medicare should set the pace for healthcare spending. With only 16% of the U.S. population covered by Medicare, extrapolation might need another look.

The report examines variation in total and inpatient health spending within and across geographic areas for the privately insured and why it exists, and analyzes how the prices of healthcare services affect spending levels. Besides finding major differences in spending in Medicare compared to private insurance, the study shows wide variations in the private sector within the same city, in the same state and across the country for the same procedures.

Cowritten by four academics-Zack Cooper at Yale University; Martin Gaynor, Carnegie Mellon University; Stuart Craig, Wharton School of the University of Pennsylvania; and John Van Reenen, London School of Economics-the report looks at 92 billion health insurance claims from 2007 to 2011 from 88 million people covered by Aetna, Humana and UnitedHealthcare in all 306 hospital referral regions (HRRs) in the country. That represents nearly 30% of people in the United States with employer-sponsored or private insurance.

Last year, a family of four would have spent an average of $17,545 for health insurance, which is the price of a Toyota Corolla. That means that every four-member family is expected to buy a new Toyota each year, says Cooper.

He says that access to data in the private insurance marketplace provided an opportunity to analyze why there are such high costs.

Next: The report's key findings

Eye-opening data

The report’s key findings are:

Healthcare spending per privately insured beneficiary varies by a factor of three across HRRs. The correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs was only 0.14 in 2011.

Provider transaction prices for the privately insured are a key driver of inpatient spending variation across HRRs, while variation in Medicare spending is driven by differences in the quantity of healthcare across regions.

There is a large disparity in overall inpatient hospital prices and in prices for seven relatively homogeneous procedures, including hip and knee replacements, lower limb MRIs and caesarian and vaginal deliveries-six surgical procedures and one imaging procedure.

For example, in 2011, hospital prices for lower-limb MRIs, which were relatively the same quality, varied by a factor of 12 across the nation-the Bronx being the most expensive and Baltimore the least-and, on average, two-fold within HRRs. Miami hospitals showed up to a nine-fold differentiation.

Hospital prices are positively associated with indicators of hospital market power. Being for-profit and having more technological capabilities and a lower share of Medicare patients are indicative of higher pricing. While controlling for these factors, the study shows that hospitals in less competitive markets have prices that are 15.3% higher than in areas with four or more hospitals.

For example, the cost of an average hospital stay in a market with a monopoly is nearly $1,900 higher than one with more competition. Since 1994, there have been more than 1,200 mergers in the industry, with more than a third since 2010. Los Angeles hospitals indicated a variance of $14,000 to $39,500 for knee replacement surgery. On average, hospitals in the Dakotas and Wyoming, areas with less competition, prove to have higher healthcare costs than Boston and Philadelphia.

Cooper says he is surprised to find that that in 2011, Grand Junction, Colorado, ranked the third lowest in Medicare spending per beneficiary in the 306 HRRs but had the ninth highest inpatient prices and the 43^rd highest spending per insured person in the private marketplace. Other cities, such as La Crosse, Wisconsin, and Rochester, Minnesota, also had low Medicare spending but high spending in the commercial marketplace.

“This disconnect is a real eye-opener for the government and for the healthcare industry,” Cooper says. “Hospital prices really matter; they shape the direction in which we think healthcare policy is going. We need to be aware of the pernicious impact this variation could have on what we pay for health insurance.”

Public policy should take a harder look at mergers and their impact on price and quality, Cooper adds. “If they don’t offer better quality and lower prices, perhaps mergers should not be allowed. We need stronger antitrust measures to keep mergers at bay and options to encourage competition.”

Next: Solutions to reduce variations

Transparency could reduce variation

Cooper says the study findings suggest that hospital prices should be more widely available. “If prices are made public, it would give patients and their physicians an opportunity to make more informed choices about treatment and hopefully put pressure on more expensive hospitals to lower their prices,” he says. “Becoming better consumers of healthcare and more price sensitive can save lots of money.”  

BinderLeah Binder, president and CEO of the Leapfrog Group, says it is imperative to have transparency in pricing and quality data to help consumers make the right choices. “Prices will only make sense if compared to quality,” she says. “Consumers need to understand all of the data-complication rates, for example-or they will blame plans for pricing and variations and wonder why certain treatments aren’t covered. We have more data then ever before and need to make a concerted effort to become more transparent.”

Binder says she is unfazed by the study’s results. She calls hospital pricing “nonsensical” and based on unintentional odd incentives. “At Leapfrog, we don’t believe that quality and safety necessarily correlate with pricing; the highest performers can have the lowest prices. There is no consistency.”

MouldsDonald Moulds, executive vice president, The Commonwealth Fund, says he is surprised to see so much variation in pricing within the private insurance sector and as compared to Medicare, as illustrated by the study.                                        

Moulds particularly applauds the study for using Health Care Cost Institute (HCCI) data, which he says, provides complete, accurate, unbiased information about healthcare utilization and costs, offering a better understanding of the U.S. healthcare system.

“The study makes a case for using this information, which helps insurers who struggle to address variation and costs,” he says. “It shows that consolidation, lack of competition and local factors can affect costs in private insurance and that there will be repercussions for the entire system.”

If there is a five-time variation in costs for the same treatment in a community, there must be overpayment somewhere so there’s room for improvement, he adds. “We need to pay more attention to markets with less competition.”

Next: One step closer

One step closer

Robin Gelburd, president, FAIR Health, understands all too well the value of data. FAIR health is a national, independent, not-for-profit corporation that makes the nation’s largest collection of private medical and dental claims available to all users.

Gelburd“Medicare follows government fee schedules that were created to address elderly, end-stage renal disease and the poor and does not purport to be an active determinant of market pricing,” she says. “The data don’t capture economic conditions that can affect pricing in the private market. Some hospital pricing could be high because of a challenging economic climate or investments in technology.”

Still, she says, the study results help to peel back the causes for variability and when one question is answered, it triggers another one, helping researchers better understand variability. “The goal should be transparency in pricing,” Gelburd says. “Having information for analysis will lead to an informed marketplace on a micro and macro level. It is a positive thing to have data sharing nationally, putting us closer to the ‘why’ behind variations.”

Mari Edlin is a frequent contributor to Managed Healthcare Executive. She is based in Sonoma, California.