Standardized pricing. You can find it for various products and services, like your next long-distance telephone call, unlimited time on-line with an Internet service provider or the base sticker on that behemoth sport-utility vehicle purring on the showroom floor.
But don't look for it in healthcare.
Although many other industries also are notorious for their price volatility (just ask any half-dozen airline passengers how much they paid for their tickets), healthcare is often held up as an extreme example.
"If there are two hospitals across the street from one another, the prices will be different at each one," says Ed Kaplan, a principal with Segal Co., a New York benefits consulting firm.
But will healthcare consumers see more-uniform pricing in the near future? Is that even a reasonable expectation?
"I don't see it happening anytime soon, if at all," says Steve Richter, leader of the Los Angeles-based healthcare practice for consulting firm Watson Wyatt Worldwide. "There are simply too many differences: The use of procedures varies from city to city, and regional healthcare systems are structured differently, such as capitated medical groups on the West Coast that aren't as prevalent in the East."
He also notes that providers in urban areas practice differently than those in rural areas: "Patients in large cities are likely to be more insistent on receiving care with the most up-to-date technology," he says.
Reginald Ballantyne III, past chairman of the American Hospital Association and president and chief executive officer at PMH Health Resources, a Phoenix-based system, observes that large cost variations can appear "inexplicable." However, he did cite some factors behind them, such as the additional costs teaching hospitals incur and the large regional differences in managed-care penetration.
John Tiscornia, Seattle-based director of healthcare for the Pacific region of Arthur Andersen, cites regional differences in labor costs as a major factor. "It can cost a lot more to fill jobs in major cities than in rural areas," he says.
Sizable price differentials are ubiquitous in healthcare: It costs 20% more for HMO coverage in Shreveport, La., than in New Orleans, about 300 miles away. It costs 3% more to enroll a person in an HMO in Kansas City, Kan., than it does across the river in Kansas City, Mo. New York City is one of the most expensive places in the country for managed-care coverage, while upstate New York is one of the least expensive. And as recently as 1997, indemnity policies were cheaper in Chicago than HMO enrollment.
If you compare some selected cities nationwide, the variance between the lowest-cost markets and the most-expensive ones can be even more glaring (See chart).
Healthcare cost experts, purchasers and providers say there isn't one single cause for the stark differences. Instead they point to various reasons, ranging from the way physicians organize to local residents' health habits.
"People in other parts of the country joke about Californians eating bean sprouts in fern bars, and it may be particularly funny to someone in Chicago chowing down on a prime rib sandwich. But (lifestyle) does wind up affecting healthcare costs from one part of the country to another," says Blaine Bos, a principal in the Chicago office of benefits consulting firm William M. Mercer.
Of course lifestyle choices are just one variable in the complex equation determining healthcare costs. Providers, insurers and purchasers are engaged in a tug of war in which the factors determining who gains ground are continuously shifting. Prices are influenced by factors such as the availability of hospital beds, the concentration of health plans, the utilization of expensive technology, the number of doctors practicing in groups, the number of patients needing care and the size of employers in the market.
The influence of managed care. When it comes to managed care, California is consistently the nation's low-cost leader. The state's average premium per enrollee per month in 1998 was $108.20, compared with the national average of $164.17, according to the Milliman & Robertson HMO Intercompany Rate Survey.
"Quite simply, California is a much more advanced healthcare market than the rest of the country," says Dorothy Moller-Tiger, an associate partner in the healthcare practice of Andersen Consulting in San Francisco. "They're much more ahead in terms of care management and the elimination of excess capacity."
According to 1996-1997 data from SMG Marketing Group, a Chicago-based healthcare information firm, Los Angeles had 3.2 acute-care hospital beds per 1,000 residents, compared with 4.7 in New York.
Los Angeles hospitals admit 123 patients per 1,000 population vs. 186 in Chicago and 166 in New York, according to the 1996-1997 data from SMG. The lower the need to hospitalize, the lower the cost: The average annual managed-care premium was $1,275 in Los Angeles vs. $2,108 in New York, according to Milliman & Robertson.
But view the situation from another angle-high-end indemnity healthcare coverage-and the picture is radically different. In Los Angeles, an indemnity plan cost $6,474 per employee last year, compared with $4,393 in New York, $3,736 in Chicago and $2,904 in Dallas, according to the 1998 Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans.
"If a particular region has a preponderance of enrollees in one type of plan, cost differentials go out of whack," Bos says. Only 3% of Los Angeles employees are enrolled in indemnity plans, compared with 18% in New York.
Industry observers also say that doctors have far more say in the delivery of care in markets like New York because capitation is much less common.
And despite the negative publicity HMOs have endured in the media, Californians have far less trepidation about enrolling in them.
"Los Angeles has a much more transient population than New York," Bos says, so the restricted choice of providers common in managed-care plans might not be as much of an issue for many HMO enrollees in California. New York physicians are more resistant to banding together in large group practices, making them more difficult to control in a managed-care setting, he adds.
Laurel Pickering, executive director of the New York Business Group on Health, which purchases benefits for 50 area employers, says healthcare prices in her region are being driven primarily by the large number of academic medical centers and the much higher overall cost of living there.
"The need to support the academics-and the doctors-in such a high-price environment means everything costs more," she says.
What about collaboration? Experts agree that cooperation among providers, payers, patients and employers is necessary to control costs. And until that cooperation becomes more universal, deep price differentials are likely to persist, they say.
Stephen Cigich, an actuary with Milliman & Robertson who helped compile the firm's intercompany survey, observes that residents of East Coast cities generally are far more hostile toward managed care than residents of California, which was the first market in the country to be heavily penetrated by HMOs in the late 1970s and early 1980s. He notes that Connecticut residents, whose healthcare costs are among the highest in the country, led the backlash against the "drive-through mastectomy" controversy of the mid-1990s. By then, HMOs had already become lightning rods for negative publicity and were criticized for performing the procedure on an outpatient basis.
"As a result (of the general resistance to HMOs), penetration is unlikely to ever become as high as in California," Cigich says. And because of that, regional and national pricing dichotomies aren't likely to disappear soon.
In Buffalo, N.Y., for example, managed-care costs are among the lowest in the nation: Premiums average $111.92 per enrollee per month, according to Milliman & Robertson. That's a sharp contrast with prices in the Big Apple.
Buffalo is simply a different economic model than New York City. The latter is teeming with major employers, an array of health plans and large numbers of individual physicians, says Segal Co.'s Kaplan. Therefore it's difficult for one faction to gain leverage.
"Buffalo and Rochester (N.Y., 80 miles east of Buffalo) are odd animals. They almost function like a West Coast operation" because a handful of very large employers dominate those markets, Kaplan says. Those companies "steer employees to the lowest-cost plans, and higher costs can't be passed on as easily," he adds.
Help from Medicare. Experts agree that the sharp price differences have begun to level out in small increments in the past few years, mainly because of congressional efforts to equalize Medicare payments, according to Watson Wyatt's Richter. As the giant federal programs work to balance payment rates, providers will have a stronger incentive to bring costs in line.
And even though the spread of managed care should continue to ratchet down high-cost markets, the experts also insist that it's still likely to be a very long time before healthcare achieves anything resembling price uniformity.
PMH's Ballantyne foresees a fundamental shift in healthcare delivery if pricing doesn't become more uniform overall: "If there isn't fundamental rationalization of prices, it could eventually lead to the implementation of (government-mandated) universal healthcare coverage," he says.
But Andersen's Moller-Tiger simply sees price variation as part of the healthcare business landscape.
"There are alternative-care models being developed all the time, and as long as that occurs, there won't be a lot of uniformity for costs," she says.
