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Cost Drivers in Massachusetts

By July 22, 2014Commentary

Massachusetts has been at the forefront of health care reform and also has one of the highest per capita health spending and spending growth rates.  The state also has a relatively consolidated provider and health plan market.  A number of state agencies have examined the state’s health market over the last few years and the Massachusetts Association of Health Plans has issued a report summarizing what has been learned about the sources of cost growth.   (MAHP Report)   The report lists ten common findings from the prior investigations of cost drivers, which are likely applicable to the United States as a whole.  These findings are:

1.  Provider price increases, not utilization, are the biggest contributor to spending growth.

2.  There is wide variation in prices across providers, both nominal prices and prices actually paid, and different payers often pay very different prices from the same provider.

3.  The largest proportion of health care services are delivered by higher-cost providers, which almost certainly reflects market power to demand high prices from payers.

4.  There is no clear correlation between high prices and higher quality of care; in other words, the higher prices aren’t buying a better-quality product.

5.  Providers which serve a higher percentage of poor patients tend to have lower commercial reimbursements.

6.  Academic medical centers have higher prices, which seems to be due to market power.

7.  Because of higher provider prices, commercial health plans are raising premiums and the consumer share of premiums and the cost of received services.

8.  Provider market share not only leads to higher prices, but has a feedback effect where the higher prices lead to more resources for marketing efforts to further increase market share.

9.  There are no signs that provider consolidation is leading to improved efficiency or lower costs of delivering care, on the contrary, it appears to lead to higher prices.

10.  Perhaps most discouraging, global payments do not appear to be lowering spending.

There is not a lot in the report that wasn’t known before.  It has been clear for some time that provider consolidation has almost exclusively pernicious effects, yet the regulators do almost nothing to stop it.  At this point, tinkering isn’t going to fix it.  Structural reform is needed and that means forcing the dismantling of these large provider systems–eliminate the ownership of more than one hospital in a market and force the sale of all physician practices and other providers.  The only other alternative is government regulation of pricing and that is always a disaster.

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