It’s Still the Prices, Stupid!

Steve FindlayOh, for heaven’s sake! Just when we thought we knew one important path to retraining healthcare costs—by mimicking what communities with lower Medicare costs do — along comes a study that blows that idea out of the water.

The landmark new research, unveiled this week in The New York Times, found that communities with lower Medicare hospital spending don’t necessarily have lower hospital spending for privately insured people.

That matters because for the last 10 years or so we have assumed that where Medicare costs were high (or low), privately insured costs would be high (or low), — in short, that there was a correlation. It just made sense.

President Obama trumpeted this relationship in the run-up to passage of the Affordable Care Act, sometimes citing Atul Gawande’s now-famous June 2009 New Yorker article on McAllen, Texas. Obama advised health leaders nationwide to study communities with lower Medicare costs and learn from their cost-cutting ways.

Would that things were so straightforward. Instead, the new research, published as a 50-page paper under the auspices of the National Bureau for Economic Research, shows a more complex picture. Indeed, there are a few communities (e.g. Honolulu and Dubuque, Iowa) where costs are below the national average for both Medicare and private insurance spending. But there are many more communities, of the 306 “hospital referral regions”studied, where Medicare and private insurance prices and spending for hospital care are at variance, sometimes by a lot.

You can read all about that in the Time’s article and, in rich (and mathematically oriented) detail, the study itself. The points I’d emphasize are these:

The study is the latest (and arguably among the best and most important) to show the obscene price variability that plagues our health system. The author’s document, for example, a 12-fold variance in the price for lower-limb MRIs.

In another example: Medicare reimbursed Stanford Hospital, in Palo Alto, California $12,699.13 in 2011 for a stroke with complications and reimbursed the Medical Center Enterprise in Enterprise, Alabama, $5,365.09 for the same episode. Overall, average spending per privately insured person varied by a factor of three across the 306 hospital regions.

Aseconomists Gerry Anderson and Uwe Reinhardt pointed out years ago: It’s the Prices, Stupid.”  The new study found that, in general, places with lower use of medical services for Medicare patients also had lower use for privately insured patients, too. That’s very good news for reducing wasteful spending by targeting inappropriate and unnecessary care. But the problem is: the high prices charged to private insurers often negate the savings from wasteful care.

Hospitals in areas with a single or dominate hospital or health system charged higher-than-average prices to private insurers, underscoring persistent worries about the affects of hospital (as well as physician practice) consolidation on health spending. Even after factoring in demand and local cost factors, the researchers found that hospital prices in monopoly markets were 15.3% higher than those in markets with four or more hospitals.

Antitrust regulators, take note: 15% is not small potatoes.  States: how about looking to Maryland where a government board sets standardized prices for hospital services.

This was a “big data” study, drawing on a database set up by the Health Care Cost Institute. The database includes insurance claims for almost 28% of Americans with private employer-sponsored insurance, courtesy of UnitedHealthCare, Aetna and Humana. Kudos to these companies for transparency. The researchers used claims data for the years 2007 to 2011.

Thus, this is another win for big data analytics. And the findings quite likely signal that we’ll learn a lot more in coming years about how healthcare actually works that won’t conform to conventional wisdom.

Steven Findlay is an independent journalist and editor who covers medicine and healthcare policy and technology.

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