Differences in prices and spending under Medicare and private insurance

The Experts Were Wrong About the Best Places for Better and Cheaper Health Care

By Kevin Quealy and Margot Sanger-Katz
The New York Times, December 15, 2015

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.”


The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured

By Zack Cooper, Stuart Craig, Martin Gaynor, John Van Reenen
National Bureau of Economic Research, December 2015


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.



By Don McCanne, M.D.

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.