Study casts doubt on conventional wisdom about healthcare spending

A new study reveals that previous assumptions about healthcare spending may be wrong, as areas of the country that spend less on Medicare do not necessarily have lower overall healthcare costs.

Several years ago, President Barack Obama praised Grand Junction, Colorado as a model of healthcare cost containment, as the $5,873 that it spent per Medicare patient in 2006 was about 30 percent below the national average. It achieved this by allowing doctors to charge a little less for privately insured patients and a bit more for Medicare-insured patients, and caring for many residents via a local, doctor-owned nonprofit health maintenance organization.

But the Healthcare Pricing Project study reveals that spending in one system doesn't necessarily predict spending in another. Some of the areas with the most cost-effective Medicare providers also have lower private insurance spending, but other places with relatively low Medicare costs have high private insurance spending. In fact, while Grand Junction did have the third-lowest spending per Medicare beneficiary among hospital-referral regions (HRRs) in 2011, it also had the ninth highest average inpatient prices and the 43rd highest spending per privately insured beneficiary among the country's 306 HRRs, according to the study.

The study cites provider and insurer market power as a key driver of price variation. With more than 1,200 hospital mergers and acquisitions in the U.S. since 1994, one to three large hospital systems dominate most large urban areas. As a consequence, hospitals, particularly those in highly concentrated markets, likely have substantial bargaining power relative to insurers.

The study concludes by calling for more transparency in the private insurance sphere, as accurate information is not as readily available to compare private insurance to Medicare. "Our work suggests that vigorous antitrust enforcement is important and that hospital prices could be made more transparent," the study says. "There is evidence that higher deductibles and cost sharing alone will not likely encourage shopping by patients."

To learn more:
- here is the report

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