Cost Control’s Growing Complexity

By Zack Buck

A paper entitled “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured” has a number of health policy experts talking this week. Authors Zack Cooper, Stuart Craig, Martin Gaynor, and John Van Reenen—as part of the Health Care Pricing Project—present new findings demonstrating that geographic areas with low Medicare costs and geographic areas with low private insurance costs are nearly completely unrelated. That is, locales with comparatively low Medicare costs are not necessarily areas with comparatively low costs for care paid for by private insurers. Though stunning, this lack of relation between the two metrics does make sense; the report notes that Medicare’s costs are largely driven by the amount of provided care and services, whereas care paid for by private insurance is largely affected by the price at which the care is set by each hospital. (Kevin Quealy and Margot Sanger-Katz of the New York Times have a number of interesting graphs and charts that reflect the study’s findings here.)

Indeed, before the study, and because of a dearth of private insurance pricing data, many simply believed that locales that were cheaper for Medicare were cheaper for private insurance—that is, areas that were great stewards of Medicare funds were likely efficient for private insurers as well. But this new paper demonstrates that this is not true. The two metrics are completely separate.

At the risk of overstating it, this finding could drastically change the paradigm for controlling health care costs going forward. The paper got the attention of Atul Gawande, who noted its importance in an article for The New Yorker. There, Gawande revisits the story of McAllen, Texas, which focused on exploding Medicare costs largely driven by large volume. (I even look at the McAllen story in a forthcoming article here because of its fascinating impact on cost control for Medicare.)

But, thanks to this illuminating study, it seems as though there will need to be a separate solution for care paid for by private insurance—something beyond a solution focused on limiting volume. Gawande notes that we have a “few ways out of the [cost] conundrum”—providing the potential solutions as increasing price regulation, pushing for more aggressive antitrust enforcement (to “break up big hospitals”), encouraging hospitals to increasingly become insurers themselves, or moving to a single payer system.

No matter the ultimate policy prescription, this new information demonstrates that what will work for Medicare cost control will definitely not—by itself—provide the type of cost savings in the larger health care industry to bend the cost curve in any meaningful way. And additionally, it seems to unmistakably highlight the importance of antitrust enforcement in the ongoing fight to control health care costs.

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