Medicare and Medicaid set their prices by fiat, so there isn’t a lot of variation. Private health plans have to negotiate with providers. So, surprise, surprise, there is a lot of variation in prices charged by different providers for the same service and by the same provider for the same service to different health plans. A report from the Health Care Cost Institute published in Health Affairs shows just how much variation there is. (HA Article) Now prices could vary because the underlying costs to produce the service or good vary; but frankly, there can’t be that much variation in those underlying costs. The researchers looked at prices (price was the actual paid amount from the plan and the patient) from 2012 and 2013 for 242 common medical services in 41 states and DC. In some cases, within the same state there were price variations of 2 to 3 times. Uhhh, don’t think production costs vary that much. The ratio of average state prices to the national average ranged from .79 in Florida to 2.64 in Alaska. Alaska is an unusual place so that is kind of explainable, but how about Wisconsin’s 1.91 ratio?
Lets look at a specific service; cataract removal. In Kansas the ratio of prices to the national average was .99, in Missouri 1.04, 1.29 in Illinois, 1.41 in Indiana and .85 in Ohio. Hmmm, must be a good explanation, I can’t think of it, oh wait, maybe more concentration among providers? My home state, has something to be proud of. 45% of the prices were at least 50% higher than the national average. I can testify to the level of concentration we have experienced throughout the state, which used to be relatively low-priced. And there is significant price variation across MSAs in the same state and within MSAs. Some of these variations are astounding. While the authors don’t suggest a reason, everyone knows that consolidation and concentration is the cause and other research supports this view. And I have opined before on what the remedy needs to be. We are suffering an epidemic on non-competitively set prices and it is the single largest cause of excessive health spending and spending growth. And it affects consumers in higher premiums and higher cost-sharing.