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Why are Prices so High in Health Care?

Jay-Want-for-print-(1).jpgFor many years we have been assuming that if Medicare costs were low in a particular region, like Grand Junction on our Western Slope, then commercial insurance (insurance like the kind many of us get through our employer) costs were also likely to be relatively low.  A recent report in the New York Times tells us that assumption is unfounded in the data.  Instead, what researchers at Yale discovered was that there is no correlation between commercial and Medicare cost in a given region.  If Medicare costs were relatively low, then commercial costs could be…low, high, or something in between.  One did not predict the other.

In a recent Health Affairs blog by Elliott Fisher and others, however, the authors pointed out that there actually is a fair correlation between Medicare volumes and commercial volumes. What this means is that if a region tends to use fewer services than average in Medicare patients, they tend to do the same with commercial patients. 

If there is a correlation in volumes, but no correlation in overall costs, what explains the difference? The answer comes from the basic economic equation:

Total cost = price X volume

What this implies, and what studies have shown, is the difference is because prices vary widely in the commercial market. CIVHC just published a Spot Analysis that shows that Coloradans pay very different prices for similar services, depending on whether you have Medicare or commercial insurance. 

On average, when you have commercial insurance, your company pays 1.5 to 3 times as much for a hip or knee replacement as if you were insured by Medicare, depending on where in the state you have it done. So what, you might think? Insurance covers the vast majority of the cost in either case, so what do I care? But since we all pay insurance premiums, we all are paying those higher prices indirectly, so much so that premiums are getting unaffordable for the average consumer. We can escape the impact of those higher prices for only a short time, until it’s time to pay our insurance premiums again.

Note that the studies don’t say why prices are higher for commercially insured patients. The mechanistic answer is that Medicare dictates prices for providers, and commercial insurance companies have to negotiate prices for the same procedures.  But that’s only a partial answer. Many providers will say that they lose money on Medicare, so they have to make it up in commercial pricing. Some simply have the ability to charge higher prices because they are a provider of a particularly rare service in their region, so it’s hard to shop around for another provider of the same service. Some have higher costs because their own costs to produce the service are higher, like real estate or employees. Knowing that prices are higher doesn’t tell you if those higher prices reflect higher costs, higher profits, both or neither.

What articles like the ones in the New York Times, Health Affairs, and other publications do tell us is that there is a substantial range of prices, between different insurances, providers, and regions of our country and state. The harder investigation and discussion is the one that comes after that: why are the prices different for the same service, and are there ways for us to control prices to make the services affordable for average Coloradans? CIVHC is privileged to be the steward of the Colorado All Payer Claims Database (CO APCD), the most powerful data collection yet assembled to help us have that conversation well, and potentially answer the questions posed by disparate pricing. 

Why are health care prices so high?  There is no consensus on the answer to that question, even among those who have spent decades studying the question. CIVHC hopes to shed some light on the question, and fuel an intelligent conversation that leads to answers for all Coloradans.

About the Author: Dr. Jay Want is CIVHC's Chief Medical Officer. Contact him at jwant@civhc.org.

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