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Pointing the Finger at Health Plans for Providers’ Price Variations

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Economics | 
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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.

Author

David Burda is a columnist for 4sight Health and news editor of 4sight Friday, our weekly newsletter. Follow Burda on Twitter @DavidRBurda and on LinkedIn. Read his bio here.

About the 4sight Health Author
David W. Johnson
David Johnson CEO 4sightHealth

David Johnson is the CEO of 4sight Health, a boutique healthcare advisory and investment firm. Dave wakes up every morning trying to fix America’s broken healthcare system. He is a frequent writer and speaker on market-driven healthcare reform. His expertise encompasses health policy, academic medicine, economics, statistics, behavioral finance, disruptive innovation, organizational change and complexity theory. Dave’s book, Market vs. Medicine: America’s Epic Fight for Better, Affordable Healthcare, is available on www.4sighthealth.com