Analysis of Private Health Insurance Data Reveals Striking Variation in Cost of Care

Lauren / CC BY 2.0

A new study analyzing previously unavailable data from three of the country’s largest commercial health insurers finds that the cost of care for the privately insured varies wildly from town to town. Private insurers have to negotiate with hospitals individually, for example. And larger hospitals can typically command higher prices.

Atul Gawande, a surgeon, author and New Yorker magazine staff writer, writes at The New Yorker:

A fascinating study out this week […] manages to crack open the black box of private insurance. It analyzes payment data compiled, for the first time, from three of the country’s largest commercial insurers—Aetna, Humana, and UnitedHealthcare—which cover fourteen per cent of the U.S. population.

[…] The costs of care for the privately insured vary from town to town just as crazily as they do for the publicly insured. But the patterns are strikingly different. The most expensive places for Medicare are not the most expensive places for private insurers. In fact, there was essentially zero correlation between where a city ranks in Medicare spending and where it ranks in private-insurance spending—even when you only consider people undergoing the exact same procedure. […]

In Medicare, the prime driver of differences in costs between similar communities was differences in the number of tests and treatments given. In “The Cost Conundrum,” for instance, I compared health care in two Texas border towns: McAllen and El Paso. They had the same levels of poverty and poor health, but El Paso had half the per-capita Medicare costs despite the same or better results on quality measures. McAllen’s doctors were ordering more of almost everything—diagnostic testing, hospital admissions, pacemakers, coronary stents, surgical procedures—in many instances by twice as much or more. Spending on home health services alone in McAllen was five times that in El Paso. There appeared to be a huge amount of unnecessary care. That was the story of Medicare. And it made clear: more is not better in health care. It can sometimes be disturbingly worse. […]

Medicare can use its authority to set prices for hospitals. Private insurers can’t. They have to negotiate with individual hospitals. In general, they end up paying higher and far more variable prices than Medicare does. (There’s a big exception: Congress has prevented Medicare from setting drug prices—and as a result it often pays higher prices than other insurers do.) That, the new research finds, can lead to a completely different cost picture for the privately insured. […]

Differences in the number of tests and treatments given from place to place are still huge for the privately insured. But the cost of health care is like the cost of groceries—the total depends on the price of every item and on how many items you get. Both Medicare and private insurers have adopted policies and reforms that are reducing unnecessary tests and treatments and improving preventive care. In McAllen, as I wrote in May, such changes have saved Medicare an estimated half-billion dollars for that one community alone. But cutting costs for privately insured patients also requires addressing prices. And that’s a different matter entirely. […]

[…] The bigger the hospital, the more it can adopt systems that deliver better-organized, higher-quality, less-wasteful care. But the bigger the hospital, the more power it has to raise prices.

Continue reading here.

— Posted by Alexander Reed Kelly.