The Chaos of Health Care Costs

Medicine can be chaotic, and health care costs are certainly no exception. Prices for medical services are not universal and this study from the Federal Trade Commission (FTC) looked into the extent of this variability. 

The FTC analyzed the range of prices in Colorado for five common hospital-based procedures, which were C-sections, hip replacements, knee replacements, MRIs, and vaginal births. The results showed that there were strikingly different prices depending on the hospital, accounting for over 35% of the variation. However, these differences go even further as the study also found significant ranges in pricing within individual hospitals. Even MRIs, which should seemingly be the most homogeneous of the medical services studied, turned out to have the highest variation.

One of the more frustrating aspects of this trend is that there is no one clear reason as to why we have vastly different costs for the same medical services. Higher prices certainly do not always correlate with higher quality of care1. One theory to partially explain these differences is that certain insurance companies carry more leverage than others. For instance, powerful insurance plans with more members can demand lower prices since they can offer hospitals more patient volume compared to other insurance plans with fewer people.

So, two people receiving nearly identical services might pay vastly different amounts. How unfair, right? Well, perhaps not all variation is bad for everyone. Some hospitals up-charge the amount it actually takes to conduct medical procedures in order to provide services to uninsured populations who need care just as much as anyone else. Since the communities that hospitals serve are different, perhaps hospital prices should vary as well.

This Health Policy Journal Club review is written by Cyrus Daruwalla as part of our collaboration with the Health Policy Journal Club at Baylor College of Medicine where he is a medical student.

Abstract

Using commercial claims for 2012-2013 from the Colorado All Payer Claims Database, we examine how medical service prices vary for five hospital-based procedures and the complexity-adjusted inpatient price. We find that prices vary substantially in multiple dimensions. Our analysis indicates that there is significant price variation across payers for the same service in the same hospital. If prices converged to the lowest rate each hospital receives, commercial expenditures would fall by 10% to 20%. Differences across hospitals account for an even more substantial amount of the overall variation. For five out of six prices, we find that differences associated just with hospitals’ metropolitan areas account for over 35% of the total variation. We observe substantial residual variation (18%-32%) after accounting for factors specific to a given payer or provider.

PMID: 31216931

Parhans, M, et al. Med Care Res Rev. 2019 Jun 19: online first