An unprecedented look at medical costs nationwide

Dan Gorenstein Dec 15, 2015

An unprecedented look at medical costs nationwide

Dan Gorenstein Dec 15, 2015

Over his career, Carnegie Mellon economist Martin Gaynor has been published 69 times – papers like “Equilibrium Misperceptions,” “Efficient Efficiencies Analysis,” and “Productivity Consequences of Alternative Land Division Methods in China’s Decollectivization.”

“Most of one’s work is read by other academics, and my mother. But not by many other people,” he said.

Gaynor thinks his latest – a paper out Tuesday called “The Price Ain’t Right”– will be different.

“It’s really unusual to write an academic research paper that has the potential to make a difference,” he said.

Three of the nation’s largest insurance companies – Aetna, Humana and UnitedHealth – have let researchers have a look at the negotiated prices they pay for services and procedures like C-sections, MRIs and hospital stays.

All told, we’re talking about claims data for 88 million customers, some $682 billion of healthcare bills.

No one has ever had such exhaustive access to real price data before.

And for a long time, people like Gaynor have believed the more hospitals merge, the more their monopoly power helps them drive prices up.

Until now though, the evidence has been limited to single states or hospitals that have merged. And it often relied on the sticker price listed by hospitals.

But this analysis is different because it comes from hospitals coast to coast and uses the actual amount insurers paid.

“We have this large body of evidence covering many, many years that consistently shows if you happen to live in an area with only one hospital you are going to pay a lot more,” Gaynor said.

That helps explain why a C-Section in one Oregon market costs more than $15,000 and can run for as little as $3,000 in St. Louis, where there’s lots of competition.

For years, hospital executives have defended these prices saying it’s about quality, or that they see sicker patients, or lots of folks on Medicare.

“That’s just not true,” said co-author Yale economist Zack Cooper.

Cooper said the team, including John Van Reenen from the London School of Economics and the University of Pennsylvania’s Stuart Craig, controlled for all those factors. And Cooper said market power matters more than the rest.

The report found after decades of mergers, nearly a third of U.S. markets have monopolies, or are close to having monopolies.

This study could be persuasive enough that the bar on any future deals is raised.

Cooper also hopes graphs he’s posted this morning showing prices in 118 cities light a fire under employers and insurers.

“What I’d really love to see happen is these large employers to say, ‘Wait a second, this is absurd. Why do MRI prices vary by a factor of nine within my city?’” he said.

“Why are these hospitals getting away with charging such incredibly high prices? Why is this ok? And how do we change that?”

Change starts, says Cooper, when people who buy the MRIs and the C-sections can simply see real prices. And change may happen when those same people negotiate next year’s deals knowing what they know now. 

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