The striking variation of commercial healthcare prices

Price and utilization are the two essential elements of the nation's health spending tab, and seemingly wild differences in prices for common medical procedures appear to be driving that bill up a lot.

One of the most comprehensive, independent studies of commercial healthcare prices shows that employers and insurers that provide private health coverage can pay a lot more for services depending on the state where people live. Those price differences even exist for routine procedures, like MRIs and ultrasounds, which should not be much different in theory.

“As we think about policy responses to try and rein in increases to healthcare prices, the responses are going to have to be nuanced,” said David Newman, executive director of the Health Care Cost Institute, who led the study.

Parts of the Affordable Care Act were conceived to control health spending through value-based arrangements between payers and providers. The goal is to reward hospitals and doctors who have both low costs and great outcomes for their patients. The ACA has implemented some of these reforms through Medicare, but the commercial market has relied on providers and insurers to reform on their own.

The Health Care Cost Institute's study analyzed 3 billion medical claims from Aetna, Humana and UnitedHealthcare during 2012 and 2013, constituting about 25% of the commercially insured market. The data also represent prices actually paid to hospitals and doctors—which generally are more important than the prices that are charged—but are difficult or sometimes impossible to obtain due to gag clauses in contracts.

Researchers found the national average price for 242 common services—everything from lab tests and X-rays to more extensive procedures like hip replacements and angioplasties—varied extensively across states as well as within metropolitan areas. For example, the average price for a knee replacement in South Carolina paid by one of the three large for-profit insurers was almost $47,000; yet the average price of the same bundled procedure in New Jersey totaled only half as much—$24,000.

In Cleveland, the average price paid for a pregnancy ultrasound was $522. But just 60 miles away in Canton, Ohio, the average price was $183, according to the study.

States with the highest average prices, compared with a national benchmark, included Alaska, Minnesota, New Hampshire, North Dakota and Wisconsin while Arizona, Florida, Maryland and Tennessee had medical services that were priced much lower than the national average.

The study essentially aims to answer this burning question in the industry: “Why do prices for the same service differ markedly across distances of only a few miles, and what amount of that difference is justifiable?” Although researchers did not analyze the root causes behind the price variation, they said geographic costs certainly play a role.

“Everything in Alaska, other than snow, is more expensive than elsewhere in the country,” Newman said. Variation in housing, rent and salaries also may justify differing healthcare prices.

However, “the remaining variation is most likely due to differences in underlying market dynamics, such as varying market power, a lack of transparency or the availability of alternative treatments,” Newman and other authors wrote in their study for Health Affairs. Indeed, other researchers who used Health Care Cost Institute claims data theorized late last year that hospital consolidation often drove up prices unjustifiably.

At the very least, Newman said, employers, payers and consumers could save money if they knew just how different the prices were. He joked that employers or insurers could drive a knee-replacement patient from Palm Bay, Fla., down to Miami, give him or her a couple thousand dollars in casino chips and then drive that person back home—and still save money. The average knee replacement price in Palm Bay was $44,237, compared with $27,115 for the same bundled procedure in Miami.

“There's lots of savings to be had,” Newman said.

The Blue Cross and Blue Shield Association has released similar findings on price with data from its member plans, and Castlight Health found its employer clients also pay wildly different prices for the same procedures depending on where people live.

However, the Health Care Cost Institute also has found that patients who shop for services based on price won't completely slow down health spending. Individual people still have little to no market power to negotiate prices with much larger provider systems, indicating that true consumer shopping in healthcare will only have “modest” effects.