qotd: Differences in prices and spending under Medicare and private insurance

The New York Times
December 15, 2015
The Experts Were Wrong About the Best Places for Better and Cheaper
Health Care
By Kevin Quealy and Margot Sanger-Katz

GRAND JUNCTION, Colo. — As part of his push for the Affordable Care Act
in 2009, President Obama came to Central High School to laud this
community as a model of better, cheaper health care. "You're getting
better results while wasting less money," he told the crowd. His visit
had come amid similar praise from television broadcasts, a documentary
film and a much-read New Yorker article.

All of the attention stemmed from academic work showing that Grand
Junction spent far less money on Medicare treatments – with no apparent
detriment to people's health. The lesson seemed obvious: If the rest of
the country became more like Grand Junction, this nation's notoriously
high medical costs would fall.

But a new study casts doubt on that simple message.

The research looked not only at Medicare but also at a huge, new
database drawn from private-insurance plans – the sorts used by most
Americans for health care. And it shows that places that spend less on
Medicare do not necessarily spend less on health care over all. Grand
Junction, as it happens, is one of the most expensive health care
markets in the country for the privately insured – despite its unusually
low spending on Medicare.

Health care researchers who have seen the new findings say they are
likely to force a rethinking of some conventional wisdom about health
care. In particular, they cast doubt on the wisdom of encouraging
mergers among hospitals, as parts of the 2010 health care law did.

Larger, integrated hospital systems – like those in Grand Junction – can
often spend less money in Medicare, by avoiding duplicative treatments.
But those systems also tend to set higher prices in private markets,
because they face relatively little local competition.

"Price has been ignored in public policy," said Dr. Robert Berenson, a
fellow at the Urban Institute, who was unconnected with the research.
Dr. Berenson is a former vice chairman of the Medicare Payment Advisory
Commision, which recommends policies to Congress. "That has been
counterproductive."

Just as in Grand Junction, the researchers found high private spending
in Rochester, Minn., and La Crosse, Wis., two other places that spent
relatively little on Medicare. But the paper found that spending in one
system doesn't predict spending in another. Some of the areas with the
most cost-effective Medicare providers also have lower-cost private
health care – but just as many places with relatively low Medicare costs
have high private insurance spending.

The prices insurance companies pay for medical care are a major factor
in which markets are expensive for private insurance and which are more
moderate. Consider a knee replacement – a common procedure for Americans
over 50. Private health insurers negotiate separate prices for those
operations with every hospital in their network. That's different from
Medicare, which sets relatively standard rates for knee replacements
around the country, with only slight adjustments for local conditions.
The prices paid by private insurers vary widely. The least costly price
in the study for the simplest type of knee replacement was only about
$3,400. The most expensive one was about $55,800.

In Medicare, regional differences in spending are driven mostly by the
amount of health care patients receive, not price per service.
Researchers at Dartmouth Medical School have studied these differences
extensively, creating an influential online map of Medicare spending
known as the Dartmouth Atlas of Health Care.

"The reason why health insurance for the privately insured is expensive
is because the prices from hospitals with a lot of market power are
higher," said Zack Cooper, an assistant professor of economics and
health policy at Yale University, and the paper's lead author.

Several prominent researchers who read the paper said they had become
convinced that policy makers needed to do more to address the high
prices charged by some health care providers.

Many of the changes pioneered by the Affordable Care Act have been
devised to reduce wasteful medical care, but few have been directly
concerned about price.

Jonathan Skinner, a health economist who works on the Dartmouth Atlas,
said that there were still lessons to be learned from places like Grand
Junction, but he acknowledged that the new work showed the limitations
of studying Medicare in isolation. "This idea that if the entire country
turned into Grand Junction, that we'd suddenly save 20 percent on health
spending, maybe that's not totally true," he said. "Prices are a real
problem."

http://www.nytimes.com/interactive/2015/12/15/upshot/the-best-places-for-better-cheaper-health-care-arent-what-experts-thought.html?_r=0

***

National Bureau of Economic Research
December 2015
The Price Ain't Right? Hospital Prices and Health Spending on the
Privately Insured
By Zack Cooper, Stuart Craig, Martin Gaynor, John Van Reenen

Abstract

We use insurance claims data for 27.6 percent of individuals with
private employer-sponsored insurance in the US between 2007 and 2011 to
examine the variation in health spending and in hospitals' transaction
prices. We document the variation in hospital prices within and across
geographic areas, examine how hospital prices influence the variation in
health spending on the privately insured, and analyze the factors
associated with hospital price variation. Four key findings emerge.
First, health care spending per privately insured beneficiary varies by
a factor of three across the 306 Hospital Referral Regions (HRRs) in the
US. Moreover, the correlation between total spending per privately
insured beneficiary and total spending per Medicare beneficiary across
HRRs is only 0.14. Second, variation in providers' transaction prices
across HRRs is the primary driver of spending variation for the
privately insured, whereas variation in the quantity of care provided
across HRRs is the primary driver of Medicare spending variation.
Consequently, extrapolating lessons on health spending from Medicare to
the privately insured must be done with caution. Third, we document
large dispersion in overall inpatient hospital prices and in prices for
seven relatively homogenous procedures. For example, hospital prices for
lower-limb MRIs vary by a factor of twelve across the nation and, on
average, two-fold within HRRs. Finally, hospital prices are positively
associated with indicators of hospital market power. Even after
conditioning on many demand and cost factors, hospital prices in
monopoly markets are 15.3 percent higher than those in markets with four
or more hospitals.

http://www.healthcarepricingproject.org/sites/default/files/pricing_variation_manuscript_0.pdf

***


Comment by Don McCanne

Much of health policy today is based on the landmark Dartmouth studies
demonstrating the regional variation in spending in the Medicare
program, with the concept that controlling total health care spending
would be possible by making physicians and hospitals more accountable
for higher levels of spending. Thus we have accountable care
organizations and other models of paying for quality instead of
quantity. But are these variations in Medicare spending duplicated in
the private insurance markets where more people receive their care? The
quick answer is no.

This new NBER study shows us that there is very little correlation
between variation in Medicare spending on hospital services, which is
primarily due to variation in the volume of services, and variation in
private insurer spending which is primarily due to varying effectiveness
of insurer price negotiation that relates to the market power of
hospitals as determined by their degree of market concentration. With
increasing concentration of hospital market power, prices and thus
private insurance payments escalate, whereas Medicare prices remain stable.

This is really important. Current policies are designed to cut back on
use of health care services more than on prices. Narrow provider
networks and high deductibles reduce access but actually have little
impact on prices since only a minuscule fragment of patient contacts
with the health care system are amenable to price negotiation, even with
health savings accounts. These policies are detrimental because they do
reduce access to beneficial health care services and they do expose
patients to financial hardship in the event of medical need. Also, the
experimentation with accountable care organizations to date has not
shown any significant benefit though they have added to the
administrative burden of our health care system.

Mind you, these are policies that have been sold to us as being
important to control high use of services, as demonstrated by the
Dartmouth data. But what we needed were policies to control high prices.
This study demonstrates, once again, that the private insurers have been
ineffective in controlling prices. In contrast, Medicare has been very
effective in maintaining steady prices.

Regarding reducing wasteful services, we actually have a greater problem
with providing inadequate services, especially to patients with
financial barriers. Much of the reported variations demonstrating areas
with greater utilization of health care services actually represent
normal Bell curve variations in intensity of medical disorders plus
various socioeconomic contributors to population health. For those
actual outliers, we can identify both overutilization and
underutilization and make appropriate corrections.

Other studies have shown that high prices are unique to the United
States and are responsible for a very large portion of the differences
between our national health expenditures and the average expenditures of
the OECD nations.

Many say that we need to be careful when we use blunt instruments to
reduce access to health care services. No. We should be improving access
to health care. That means that we should eliminate policies that impair
access.

Instead, we should be introducing policies that control prices. The
market has certainly failed us. The recommended solution of higher
quality and lower prices through integration of health care services has
only led to market concentration of health care providers and higher
prices, and private insurers have proven that they cannot control health
care prices through the marketplace.

So how can we ensure access while controlling prices? Medicare is
already doing that. Medicare has some problems that can be easily fixed
as long as we have the political will to do so. With an improved
Medicare we would have better access to care that would be priced
appropriately for our publicly-funded universal risk pool. It's time to
get past lamenting over the dark-shaded areas in the Dartmouth Atlas.