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Massachusetts Provider Price Variation

By June 8, 2011Commentary

The Massachusetts Division of Health Care Finance and Policy is required to conduct an annual study of health care cost trends in the state.  The latest report examines prices paid by commercial carriers for hospital inpatient and outpatient care and physician and other professional services.   (Mass. Report) The data came from five insurers covering about 60% of the privately-insured state residents.  The sample included services representing 40% of all hospital discharges and 28% of physician and professional services.  The report contains so much useful and interesting information that it is hard to summarize it all here.  A picture is painted of tremendous variation that almost appears chaotic.

A few quick examples.  For every service type, there was very substantial variation, at least a three-fold difference for every service analyzed and 6 or seven-fold difference for most.  That means that if a low-priced hospital, for example, received $1000 for a service, a high-priced one was getting $7000.  For inpatient services, volume was concentrated in higher-priced hospitals.  Tertiary care hospitals tend to be very expensive.  Variation is basically unrelated to performance on quality metrics.  Medicaid and Medicare pay lower than private insurers but interestingly, Medicare payments have significant variation.  There was no correlation between high numbers of Medicaid patients and prices to commercial insurers.

Massachusetts has a public policy goal that any differences in payments for the same services should reflect differences in cost and quality value.  The report suggests that this is not happening.  Just narrowing physician and hospital inpatient payments to between 20% and 80% of the current range of prices would save about $270 million a year.  We can assume that the Massachusetts experience is replicated elsewhere.  Many analysts say our health care problem is related to inappropriate utilization, but it is apparent that it is really much more a unit price issue and one way or another, we are going to have force a rationalization of those unit prices if we are going to get spending under control.

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