A study showing that communities that spend less on Medicare don’t necessarily spend less on health care overall is throwing cold water on some long-cherished assumptions about how to reduce the cost of health care.
The New York Times today reported on the study, which found that the same factors that often drive lower Medicare spending – namely hospital consolidation and integration – often drive up prices in private markets because of lack of competition. It turns out that Grand Junction, Colo., which boasts low Medicare spending and has been upheld as a model of inexpensive, quality health care, has very high private insurance costs.
“Larger, integrated hospital systems – like those in Grand Junction – can often spend less money in Medicare, by avoiding duplicative treatments,” The Times reported. “But those systems also tend to set higher prices in private markets, because they face relatively little local competition.”
As it happens, Kansas City is one of the few places where spending on Medicare and private health insurance is very similar. In most other places, The Times reported, “there is some degree of mismatch.”
Among 306 communities, Kansas City ranked 142nd for lowest spending on Medicare and 82nd for lowest spending on private insurance. Wichita, Kansas, also aligned on spending for both. In fact, it achieved a perfect match: 107th lowest-spending for Medicare and 107th lowest-spending for private insurance.
By contrast, Topeka, Kansas, was 49th lowest-spending for Medicare but 126th lowest-spending for private insurance. And by way of further contrast, St. Louis had a different kind of mismatch, spending comparatively more on Medicare than on private insurance: It ranked as the 164th lowest Medicare spender but 26th lowest private insurance spender.
Robert F. St. Peter, president and CEO of the Kansas Health Institute in Topeka, says he’d be more concerned if the study showed that physicians were performing unnecessary or marginally beneficial services.
“That would bother me because it introduces the risk of harm and all those unnecessary things from unnecessary care,” he says. “The fact that this appears to be more on the price side speaks to a whole different set of issues that maybe we're just now beginning to focus on through a lot of the consolidation – partly as a result of the ACA (Affordable Care Act), but in part because of other market forces out there as well. And I think the need to look at prices and how those are determined and set, and how competitiveness in particular markets affects the price of health care, clearly is going to be much more important.”
Whereas Medicare prices are largely fixed, prices in the private market can vary wildly not only between different markets but even within the same market.
For example, prices for the simplest knee replacement surgery among 19 hospitals in the Kansas City area range from as little as about $8,900 to as much as about $31,500.
The same goes for other common medical procedures. The University of Kansas Hospital charged more than $115,000 for a joint replacement, but the same procedure at Olathe Medical Center cost just over $50,000, according to figures released last year by the Centers for Medicare & Medicaid Services. Similarly, the bill for renal failure added up to just over $14,000 at Truman Medical Center but $48,000 at Research Medical Center. (The figures don’t reflect actual reimbursements, which are significantly lower since Medicare and commercial insurers negotiate prices down.)
Kansas City is considered a moderately consolidated hospital market, which may account for why private health insurance spending here is comparatively low. The typical region in the United States has three to five consolidated health systems, but in Kansas City more than five organizations controlled about 70 percent of the market, according to a 2013 report by HealthLeaders InterStudy, a market research company.
HCA Midwest Health was the dominant player here, with eight hospitals, 1,206 beds and 22 percent market share, according to the report. HCA was followed by Saint Luke’s Health System, with 7 hospitals, 801 beds and 16 percent market share. And Saint Luke’s was followed by The University of Kansas Medical Center, with two hospitals, 595 beds and 10 percent market share.
While consolidation allows for greater coordination and integration of medical care, it also tends to create higher prices resulting from greater market power. Somewhat offsetting that power, at least in the Kansas City market, is the relatively low number of health insurers operating here.
“If you look at the different stakeholders in the Kansas City market, at least in terms of the power balance, the private insurers do have substantial market power in the sense there are only a few big players,” says Arif Ahmed, an associate professor of health administration at the Henry W. Bloch School of Management at the University of Missouri-Kansas City.
“So the price variation that you see, typically you'd see more of that in markets where certain providers dominate or certain providers have somewhat of a monopoly either on the entire market or on certain service lines.”
Martin Gaynor, a health economist at Carnegie Mellon University and one of the authors of the study on private insurance spending, told The Times that the new data “is strong evidence that the federal government needs to enforce antitrust laws vigorously to prevent health care markets from becoming monopolies.”
The data comes from a huge database drawn from private-insurance plans. The database includes nearly every claim made by employer health plans sold by UnitedHealthCare, Aetna and Humana and represent about 14 percent of all people in the U.S., according to The Times.
St. Peter, of the Kansas Health Institute, says that while variations by geographic area in Medicare spending are much more likely to reflect differences in how medicine is practiced at the local level, “when you see variations in the private sector, you have that whole additional variable of pricing.”
“And the differences in spending on the private side may reflect differences in the consolidation of the market and the ability of providers to negotiate better payment rates rather than underlying differences in how they actually practice medicine,” he says.
Editor’s note: KCUR is licensed to the University of Missouri-Kansas City. One of Heartland Health Monitor’s partners, KHI News Service, is affiliated with but editorially independent of the Kansas Health Institute.
Dan Margolies, editor of the Heartland Health Monitor team, is based at KCUR. You can reach him on Twitter @DanMargolies.
