Healthcare isn't immune to supply and demand

Original post:  Dec 16, 2015

For years, hospitals have claimed that the wide variation in costs could be attributed to factors such as quality or patient mix. A recent analysis of the underlying billing data revealed that is not the case.

Here is an excerpt from Becker's that explains what happened:

Researchers analyzed the real prices hospitals negotiate with private insurers and found places that spend less on Medicare do not necessarily spend less on healthcare overall.

The new "Big Data" project from researchers at Carnegie Mellon University, Yale University, University of Pennsylvania and the London School of Economics shows that the prices hospitals negotiate with private health insurers vary significantly within and across geographic regions in the U.S.

For the study, the researchers analyzed 92 billion health insurance claims from 88 million people covered by three of the nation's largest health insurance companies: Aetna, Humana and UnitedHealthcare. The data was provided by the Health Care Cost Institute and represents spending and utilization for about 30 percent of individuals in the U.S. with employer-sponsored health coverage.

The study shows spending patterns for the privately insured aren't the same as those for Medicare, which may cause policy makers to reexamine some of the markets that have been lauded for their healthcare models.

Time Magazine went on to add further analysis:

Shopping for health care services is incredibly difficult. Prices for the same service can vary widely, for little discernible reason. A MRI might cost you $511, or it might cost $2,815, depending on where you go.

A new study sheds some light on why some people see much higher prices than others. For the first time, researchers analyzed some 2.92 billion actual insurance claims for 88.7 million people across the country. They found that a person on one end of the country “routinely” might have to pay eight times more than they would somewhere else in the country — for the same procedure. Within the same city, hospitals would routinely charge three times more than other hospitals nearby.

Market power inevitably led to higher prices. This is exactly what economic theory says should happen in a rational market.

One of the most important factors influencing the crazy differences in price? The number of hospitals in any given region. The researchers found that even after controlling for other factors, areas with just one hospital had prices that were 15.3% higher than areas with four or more hospitals. Areas with two hospitals had prices that were 6.4% higher, and areas with three hospitals had prices that were 4.8% higher.

“We have this large body of evidence covering many, many years that consistently shows if you happen to live in an area with only one hospital you are going to pay a lot more,” study co-author Martin Gaynor told Marketplace.

Intuitively, this makes sense. When you have health insurance, you pay monthly premiums to get access to the health care providers in your insurer’s network. Your insurer negotiates with local hospitals to get lower prices for its pool of customers. In areas where there’s more than one hospital, the hospitals may be more inclined to compete for each insurers’ customers — and therefore more inclined to cut better deals with insurers. But in areas where there’s just one hospital, that hospital has little incentive to lower prices: If you get sick, you’re going there no matter what.

With the trend leaning towards increasing consolidation in the healthcare market, this trend bears watching.

One of the most important counterweights to this type of market power is exactly the analysis conducted. By sharing their actual billing data, major payers can compare rates and help to negotiate more competitive pricing for their members.

Here are the links to the articles:
Becker's:  New data shows experts were wrong about where healthcare costs less
Time:     Health Care Costs More in Cities with Fewer Hospitals