THCB

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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fenixgastroSteven FindlayBob HertzPeterkauveryhospital Recent comment authors
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fenixgastro
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fenixgastro

Thanks for discussing this.Usually, there is a lot of hope built on the finding that is going to arise from such a test drive laparoscopy but as you say the chances are just 5% and as according to me it is not worth it.

Bob Hertz
Member
Bob Hertz

Perter, thanks for your comment on the need for rate-setting in the hospital sector. I do not agree that we need a single payer system to do this. Germany and Switzerland (among other nations) have many insurers, but they all pay the same rates for hospital care. In other words there is a national fee schedule. I do agree that ‘leaving it to the states’ is a recipe for no action at all. This is a complex problem. If America ended at the Mason-Dixon line, this would be less an issue. Northern states could probably agree on federal price controls,… Read more »

Peter
Member
Peter

“In other words there is a national fee schedule.”

OK Bob, I’ll start there. But don’t forget there’s also a national doctor wage schedule, and premiums are deducted as taxes. I’ll take Germany’s system, and have insurance companies no more than paper pushers.

Of note, Switzerland’s is the most expensive of the European systems as it is more closely aligned with a freer market.

Steven Findlay
Member
Steven Findlay

Great dialogue, with some real-life examples of the pricing conundrum. Thanks.
BTW, Atul Gawande weighed in on the study @ The New Yorker. Here’s the link:
http://www.newyorker.com/news/news-desk/health-cares-cost-conundrum-squared?mbid=rss

Bob Hertz
Member
Bob Hertz

Thanks for the detail, Peter. To me, all the hospital charges are appalling. The surgeon is perhaps the most important person in the whole operation, and he is charging $5000. What is the hospital doing for its huge charges? Providing an operating room? Providing a bed for recovery? Of course what is going on is that the hospital needs to cover its costs from a small and (in many cases) diminishing number of paying non -Medicare patients. The huge charge is mainly overhead. On the one hand, this industry cries out for a massive shakeout of overbuilt hospitals with overpaid… Read more »

Bob Hertz
Member
Bob Hertz

Note to Peter: thanks for your comments on pricing hip surgery. All three of the costs you were quoted are bloated prices, in my view. Note the following from a Blue Cross survey: Though the average cost for a total knee replacement procedure (without complication) was $31,124 in 64 markets where claims data was reviewed, costs for the same procedure dipped as low as $11,317 in Montgomery, Alabama, and rose as high as $69,654 in New York City. Stark cost variations also exist within the same market in some cases, like in Dallas, where the cost for a total knee… Read more »

Peter
Member
Peter

Bob the three prices were in the same city – Columbia, so it can’t be explained away as a higher rent/wage district. I actually had my surgery paid for through Medicare, so not sure what the hospital got paid. My Medicare account does show the “charge” and “reimbursement” but I’ve been told that it’s a false number and lower than actual??? Those hospital costs do not include the surgeon, he’s not in Medicare and charges a flat $5000, which helps to pay his surgery assistant and his part of a group joint replacement clinic with a lot of overhead. I… Read more »

Peter
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Peter

“As a second choice, I am looking at Medical tourism, both within the USA and abroad.”

Bob I went to India for my first hip. You need to do a lot of investigation going abroad though, and suing for errors is probably not possible. Fortunately for me there was a hip web site dedicated to my type of surgery. Lots of reviews of docs and outcomes. My total OOP including return airfare, hotel, recovery resort, hospital, doctor was $10,000.

kauveryhospital
Member

need to negotiate with the insurance companies to get the better compensation…. http://www.kauveryhospital.com

Allan
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Allan

You guys get things wrong all the time because of preconceived notions as to which variable is the cause of problems. You then study all the variables you know of, but that list is incomplete. Finally, instead of recognizing those variables left out you assume the problem must be caused by that preconceived notion.

@RogueRad
Member

When there are no price signals, when the laws of supply and demand do not follow the usual laws of economics, when negotiated prices are not disclosed because of expedient interpretation of anti-trust laws, prices will be arbitrary.

What’s shocking is that this finding is shocking.

An enormous amount of methodological discipline is needed to reveal the obvious in healthcare. But if you want to understand how prices work, I suggest visiting a flea market in an emerging economy.

Peter
Member
Peter

“But if you want to understand how prices work, I suggest visiting a flea market in an emerging economy.”

People don’t die from lack of access or go broke participating in a flea market, emerging market or not.

Getting to the real cost and negotiated prices of corporate health care in a private, contractually protected industry is not possible. And if we knew those things how would it help us, especially with the market concentration of buy outs and amalgamations?

There is no freedom of information law for private business.

@RogueRad
Member

Peter, when prices are secretive & depend on ability to negotiate, they will not just be arbitrary but vary wildly.

Many seem unable to come to terms with this truism.

Peter
Member
Peter

Rogue, I’m not disagreeing on the secrecy of prices be wildly arbitrary, but how will you get private companies to divulge contract terms? Just posting the prices will not be a panacea for lower prices, maybe price leveling. The insurance companies already know what the prices are, what we don’t know are the costs that justify those prices. I can find out the cash price right now by using the phone. Recent hip surgery alerted me to three hospitals in SC. One charged $43,000, one $54,000 and one $60,000. The reason I went to the $43,000 one was my surgeon… Read more »

@RogueRad
Member

The flea market was to explain how healthcare pricing works. That is the healthcare pricing is the same as that in a flea market – worse than, in fact.

We now have a classic dilemma. To make patients care so much about the prices that they force the providers to care, who force the hospitals to care, they need pay more upfront. Clearly that’s a problem.

The only solution is that the state sets a rate – now the question is: why is this not happening in Democrat-run states? (I know the answer you’ll give me for Republican-run states).

Peter
Member
Peter

“To make patients care so much about the prices that they force the providers to care, who force the hospitals to care, they need pay more upfront. Clearly that’s a problem.” I’m don’t think everyone caring about prices is a problem, but if you’re saying that patient co-pays and deductibles are a problem, then I agree. Those methods don’t lower prices they shift risk. “The only solution is that the state sets a rate – now the question is: why is this not happening in Democrat-run states? (I know the answer you’ll give me for Republican-run states).” Your first mistake… Read more »