Understanding the Effect of Price Variation

Is our health spending too high?  May depend on your perspective.  If you are an employer, user of health services or taxpayer, you are likely feeling some pain.  If you are a provider or facility, not so much.  One person’s price is another’s income.  What is clear is that our spending is high mostly because our prices are high, not because of excessive utilization, although if our population took better care of its health, we would probably need to use a lot fewer services.  And our prices tend to be extremely variable outside of government programs like Medicare and Medicaid, which can set prices they will pay.  The variation exists both across and within geographic regions.  A report from the Health Care Cost Institute examines that variation in prices paid by commercial health plans and explores the effect of being able to equalize some of the variation.   (HCCI Report)   The researchers used 420 million claims from 963 markets for employer-sponsored health plans.  If the median price was applied to the half of claims with the highest price for every service in every market, spending by these plans would decline 20%.  If the median price was used for the half of claims with the lowest price for services, spending would increase 10.1%.  If you priced every service at the current median price, the total net effect would be a savings of 9%.  The combination of these analyses reflects the skewedness of prices–there are a few providers that have very high prices, but some of those also deliver a lot of services.  Applying that median price approach results in hundreds of billions of dollars in savings, but also hundreds in billions in lost revenue for providers.  This would be like implementing a nationwide fee schedule built off of the current median prices.  The best approach would probably not be a fixed fee schedule, but a cap–paying no more than the median.

One proposed solution is to create better price transparency and price comparison tools for consumers, and for clinicians who are referring patients.  The theory is that greater transparency will lead to more use of low-cost providers and will encourage providers to compete by lowering prices.  But the opposite can happen, when prices are clear to all, some providers may just raise their’s to a higher level.  Another approach, which I believe has real promise, is to use reference pricing, in which consumer cost-sharing is tied to use of low-price providers.  That seems to be a fairly effective tool.  And another possibility is that private payers are authorized to implement a fee schedule like the one described above.  An underlying issue is whether there is any real reason for some providers to charge a higher price–do some providers actually have higher costs that result in better quality?  All the research says no–the higher prices aren’t correlated with better care, and the higher prices are the result of being in a non-competitive geographic market.  And if providers have higher prices and more revenue they probably will have higher costs just because they have money to spend to pay people higher salaries and build fancier buildings.  If they got lower prices they would probably figure out how to be more cost-effective.