Think about the last time you purchased a cell phone. You probably had a lot of choices including multiple versions of the iPhone and Android phones, all with unique bells and whistles which impacted the price you would have to pay. Regardless of what you chose, you likely knew that selecting the latest iPhone model with new features would cost you more than last year’s model. As a consumer, it makes sense to have to pay more to get more.
Health care is similar in that prices are different depending on where you go (or what “brand” or “model” you choose). But when you pay more for health care services, you don’t always get more. In fact, sometimes the opposite is the case, and you actually may be paying more and receiving worse care, not better.

In our last Plaintalk Blog, we talked about how data from the Colorado All Payer Claims Database (CO APCD) is starting to help us understand how much care costs and why. The CO APCD Cost of Care interactive report has information on how much is spent on health care services, and depending on where you live, your annual costs could be $3,000 more or less per year regardless of the type of health insurance you have. So what’s driving these drastic differences in cost?

There are many theories out there on why costs may be higher in one area than another, but the CO APCD data casts doubt upon many of these theories as a source of objective information single source of truth:

1. Urban Economies of Scale:
Theory: Compared to their urban counterparts, rural areas will naturally have higher costs of care because providers do not have as many people accessing services. Therefore, rural areas have to charge higher prices in order to cover fixed costs to realize revenues sufficient to sustain operations.
Fact: We do not see consistently higher costs in rural Colorado. On the contrary, if you look at the map above, there are many rural counties in Colorado that have much lower costs (green) compared to the rest of the state and even some urban areas like Mesa County that are higher.

2. Lack of Competition:
Theory: In areas where there is only one practice or hospital in town, they can charge higher rates because there are no competitors.
Fact: In some rural areas, this may be the case, but similar to the economies of scale theory above, there are some areas without competition that appear to have lower costs.

3. Cost of Living:
Theory: Prices have to be higher in areas of the state like mountain resort towns where the cost of living is higher and you pay more for just about everything.
Fact: Costs in some mountain resort areas are higher than others, however, cost of living doesn’t seem to be the only driver as some eastern plains areas have high healthcare costs but relatively low cost of living.

4. Sicker Population:
Theory: If you live in an area with a higher percentage of people who are sick and are dealing with things like chronic conditions, costs will be higher.
Fact: While it is true that healthier people don’t visit the doctor as much and sicker people tend to need more costly care, analyses of the data that account for population health status still show wide variation in costs.

5. Utilization of Services:
Theory: If you live in an area where people go to the doctor a lot, use a lot of medications, or visit the hospital or ER more, costs will be higher.
Fact: Utilization of services is not solely responsible for higher costs. Analyses have shown that some areas have higher rates of utilization but actually show lower costs than other areas with lower utilization rates. Total spending is determined by both the volume of services and the prices of those services. One or both of price and utilization contribute to higher spending and total cost of care.

6. Cost of Services:
Theory: Payments being made to providers, hospitals, pharmacies, etc. based on negotiated rates are what drives health care costs in an area.
Fact: Like utilization of services, negotiated rates paid to providers do impact the overall costs, but may not be the sole driver of higher costs overall. Utilization matters too as described above.

So what’s the answer? Unfortunately there is no one magic bullet or single solution. All of the factors above contribute to costs in some way, and the biggest drivers of cost need to be evaluated one community at a time to find solutions.

The good news is that while policy makers, legislators, and communities are looking at macro ways to bring down costs, patients can play a part by making smart choices on where to go for care. In the coming months, will have facility cost and quality information available for patients to shop in Colorado. Many health plans also have cost calculator tools that allow members to determine what will be covered by their insurance and what they will pay out of pocket. Additionally, providers and employers have begun working to help patients make health care choices to ensure they are remaining healthy and getting high quality care at lower costs.