Wide variations in what providers charge for the same medical services are notorious. But providers are not acting alone. They’re aided and abetted—and some would say coerced—by health plans whose own negotiated payment rates for the same medical services are all across the board as well.
Health plan price variation is the subject of a new working paper published by the National Bureau of Economic Research. Researchers from the business schools at the University of Pennsylvania, Northwestern University and Boston University wrote the 41-page paper, which is based on data from the All-Payer Claims Database in Massachusetts.
They studied the prices that three health plans in Massachusetts paid to 68 hospitals from 2009 through 2011 for five different medical services provided to patients who were 18 to 64 years of age. The three health plans were Blue Cross Blue Shield of Massachusetts, Tufts Health Plan and Harvard Pilgrim Health Care. The five medical services were: knee replacements; hip replacements; vaginal deliveries; cesarean deliveries; and MRIs.
The researchers found that the three health plans paid the same hospital widely different rates for the same service. The variation in negotiated rates paid by the plans for the same care to the same hospital was about the same as the variation in prices that hospitals charged patients for the same service.
For example, the average payment by the three health plans for knee replacement surgery was $20,955. But what they reimbursed the same hospital for knee replacement surgery varied up or down by nearly $4,000 for most patients depending on what carrier they had. Meanwhile, the prices charged by the 68 hospitals for knee replacement surgery varied up or down by more than $4,000.
What those numbers told the researchers was that the prices that hospitals charged for the five services were driven primarily by individual negotiations between them and each of the three health plans. Each side’s negotiating power was an important factor—perhaps the most important factor—in determining the cost of care as well as how much employers paid and patients paid out of pocket for that care.
“Examining variation in prices between payers at the same provider largely eliminates quality differences as a potential explanation,” the researchers said (undoubtedly with a smirk when they wrote that line).
All things being equal, they said, comparison shopping among providers for the best price for a medical service after you have picked a health plan may be a waste of time. Better to pick the cheapest health plan early on to get the cheapest price because its providers will have the lowest prices by contract.
The findings are an important reminder that healthcare is a business like any other business. Prices for care are set by things like supply and demand, competition, market power and negotiating ability. They have little connection to cost or quality. So, if you want better prices or more value for your dollar, the way to attack the problem is supply and demand, competition, market power and negotiating ability.