Commentary: 'The Price Ain't Right' ain't right

It's not every day that an unpublished academic study rates a front-page story in the New York Times, let alone an additional continuation page replete with graphics, but that was the treatment accorded to the study titled “The Price Ain't Right? Hospital Prices and Spending on the Privately Insured” on Dec. 15. Even more remarkably, the study itself, while well-written and full of interesting information, contained no substantive findings that should have been at all surprising to anyone who has followed the health policy or health economics literature in recent years.

Apart from the authors' skillful promotional efforts, including the clever title, “The Price Ain't Right” appears to have garnered so much attention for two reasons. The first, as reflected in the Times headline, is that “Doubt is cast about a gauge of health care costs.”

For two decades, policymakers, including the executive branch architects of the Affordable Care Act, had been led to believe that regional variations in unadjusted Medicare costs demonstrated the extent to which unjustified overutilization of services was the source of excessive healthcare costs. That belief has since been thoroughly debunked by the Institute of Medicine and others, but the average Times reader might not have known that. In fact, as the authors demonstrate again, there is almost no correlation between geographical regions with high Medicare costs and those with high private insurance costs.

Second, however, “The Price Ain't Right” has been taken as further evidence that consolidation in the hospital industry, driven by mergers and acquisitions, is a major cause of increased healthcare costs. In media interviews, the paper's authors were quoted as saying just that, even though their paper itself says that its estimates of the relation between hospital market structure and healthcare prices “should be interpreted as an association, not causal effects.”

This is not the place for a discussion of how the study's data limitations and misspecified variables made it impossible for the authors to draw a causal conclusion about the relationship between hospital market structure and commercial insurance prices—that discussion is already occurring in more technical forums. But it is worth considering how blithely people have come to accept as part of the conventional wisdom the assertion that healthcare costs are so high because an increasingly concentrated hospital industry can raise its prices with impunity, even though the empirical evidence for that alleged wisdom is surprisingly thin. The erroneous belief that high healthcare costs are the result of hospital pricing policies appears to have supplanted, without a hitch, the previous erroneous belief that high healthcare costs resulted from excessive utilization of health services caused by the incentives of fee-for-service.

In fact, what the burgeoning literature on the relationship between hospital concentration and healthcare prices does show is how complicated those relationships are, how many other variables are at play—including community demographics, the structure of local, private insurance markets, the market shares of government payers, and local medical cultures—including how the relationship may differ from one payer to the next. Such a complicated reality, of course, makes it much harder for politicians or academics to provide simple solutions, or newspaper reporters to write stories of an appropriate length.

Every American healthcare executive knows how hard it is to control the costs of delivering health services. It's easier in other countries, with government-administered prices or public sector monopolies, or both. The U.S., however, remains committed to pluralism, decentralization, private-sector competition and individual entrepreneurialism. In healthcare, those are expensive choices.

That's not to say that Americans can't control healthcare costs; a growing number of successful examples, along with the aggregate data from the first half of this decade, demonstrate otherwise. But we can't let academic theory get too far out in front of the facts. In theory, the fewer sellers of hospital services there are in a given market, the higher prices will be. In reality, it's a lot more complicated than that.



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