Service Price Variation

Most analyses clearly show that higher health spending in the United States is largely driven by higher prices.  In addition to high prices, for commercial health plans there is a substantial amount of variation in prices charged by different providers for the same service.  A study from UnitedHealth Care provides further evidence on this point.   (UHC Study)   As a large national health plan, UnitedHealth has access to extensive databases about what services actually cost.  It used those databases to analyze what it paid for some common tests.  In 2017 across all seven test types included in the study, the firm spent $37.4 billion on 12.5 million tests.  This included $9.7 billion for MRIs, $7.4 billion for ultrasound, $5.5 billion for CT scans, $4.5 billion for pathology tests and $3.5 billion for mammograms.  Looking at the range of prices, using prices just from the 10th percentile to the 90th percentile to avoid outliers, the variation was three times to twenty times for the price at the 90th percentile to the one at the 10th.   Looking at echocardiagrams, a type of ultrasound, for example, prices ranged from $210 to $1830.  The potential savings from controlling pricing are enormous.  If all these tests had a maximum price at 40% of the range, $18.5 billion would have been saved.

The researchers found that geography was not a factor in the price variation and that price was not related to either provider quality or patient outcomes.  Instead the driving factor appears to be market power and the sheer ability to charge whatever price the provider desired.  The higher prices have a definite impact on patients–they also pay more in deductibles, copays and coinsurance.  And the increased spending raises health insurance premiums.  So is there any justification for the higher prices.  I don’t think so.  Undoubtedly providers vary in their ability to be efficient and to manage their own costs of providing a service.  But that cost variation can’t be anything like the price variation.  The machines that do many of these tests and the labor costs for the people involved doesn’t change much across providers.  So the providers with the higher prices are really just gouging and getting an enormous margin.  And many of these institutions are supposedly not-for-profit.  Meanwhile, we often see exorbitant salaries among the management of health systems and we see other signs of excessive spending, which is driven by the high prices and profits.  I keep saying that we either have to reverse the health system consolidation or providers will get what they deserve–extensive regulation of the prices they charge.

the podcast of this post can be found at https://anchor.fm/dashboard/episode/e45src