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The Roger C. Lipitz Center for Integrated Health Care

Post date:  11 June 2013 
 

"IT'S THE PRICES, STUPID!":
LOWERING HEALTH CARE PRICES IN THE U.S.


Gerard Anderson


“It’s the Prices, Stupid!” As the tag line of a paper I co-authored with colleagues in Health Affairs in 2005, we argued that one of the main reasons for the higher level of health care spending in the US compared to other industrialized countries is that the US pays higher prices for similar services.1  The paper found that despite the perception that other countries ration care, the US has fewer hospital days and physician visits per capita than most other industrialized countries. It’s not the quantity of services that makes US costs twice that of other industrialized countries, it’s the price per unit of service.

Recently, a number of papers have used this finding as a starting point to examine various aspects of health spending, including physician fees, drug prices, and hospital services. In 2011, a study compared the fees paid to physicians in the US to the fees paid to physicians in other countries and demonstrated that the physician fees were significantly higher in the US.2  A study published in 2013 showed that the prices the US was paying for brand name drugs was double the prices in other industrialized countries.3  Finally, another study found that the prices at a US hospital were much higher than the prices at a Japanese hospital although the hospitals provided a similar bundle of hospital services.4  These studies all concluded that high health care spending in the US was not due to quantity of services used, but because prices paid in the US were higher.

Figure 1 shows the cost per day in the US compared to other industrialized countries. The cost of a hospital day in many industrialized countries is one-tenth to one-fifth of the cost per day in the US. In fact, the cost per day in the most expensive US hospitals are 15 times the cost per day in France and 17 times the cost per day in the Netherlands.

As policy makers recognize the relationship between high health care spending and high prices in the US compared to other countries, the main question becomes how can the US obtain more competitive prices comparable to other industrialized countries? Recent analysis suggests that the problem lies in how the payment rates in the US are determined, especially in the private sector.

Payment rates are established in one of two ways in other industrialized countries – either  the government sets the rates through regulation or negotiation occurs between all insurers and all providers simultaneously. For example, in Japan and the UK, the government determines how much  providers will receive, while in Germany, all of the health insurers (sickness funds) jointly negotiate with hospitals and physicians.5 

In contrast, the US has a “free-for-all” with each private insurer negotiating separately with each provider. The final rate that a private insurer pays to any particular provider is dependent on the bargaining power of each entity. Given the concentration of both payers and providers, the result is a pricing system where the bargaining power of health care providers and insurers determine the rates, resulting in rates that vary substantially from one geographic region to another. In almost all cases, the prices exceed competitive levels and those least able to negotiate pay much higher prices, particularly the uninsured.  Recent studies have shown how illogical and opaque the hospital pricing has become in the US.6  In May 2013, CMS released information on hospital charges by specific hospitals in the US.7  Charges varied from hospital to hospital, but on average hospitals were charging four to six times what it actually costs to provide the services and three to five times what most public and private insurers actually pay. While it is true that most health insurers do not pay the actual charges in full, some people and entities actually pay the charges or at least are billed at the charge master file rate. Self-pay patients include the nearly 50 million Americans without health insurance coverage and persons with health insurance whose insurer does not have a contract with the health care provider. Providers and insurers affected by this also include physicians and hospitals that are out-of-network providers, and indemnity and workers’ compensation insurers that have small numbers of beneficiaries entering any specific hospital and who by law cannot steer patients to a specific hospital. While many hospitals do not expect the uninsured to pay the majority of their charges, hospitals do collect a significant amount from other self-pay patients and people with certain types of health insurance.7  Medical debt is a one of the major causes of bankruptcy.8 

Studies conducted by the Medicare Payment Advisory Commission (MedPAC) have shown that the private sector pays 30 percent more than what Medicare pays for similar services.9  Similarly, other studies have shown that there are communities where the hospitals receive two to five times what Medicare pays.10  These are market areas where the hospital has much more negotiating power than the insurers and the hospital uses its market power to get much higher rates.

Analysis of production functions for health care providers does not support these large price variations.  The cost of taking care of a patient does not vary substantially by type of insurer or the volume of cases the insurer can supply. Instead, cost per patient is based on how many nursing hours are involved in treating the patient, how long the person was in the operating room, or what procedures were performed. As a result, it makes little sense that one person (or insurer) should pay several multiples of what another entity  is paying for essentially the same service.

As a response to rising hospital costs, Maryland started operating an all-payer rate setting system in 1974.11  All insurers essentially pay the same rate (Medicaid gets a slight discount) and the markup of charges over costs is in the 18-22 percent range; in 2007, the markup was 21.5 percent in Maryland compared to the national average of 180 percent.12  Despite higher than average increases in hospital admissions, Maryland hospitals have been able to constrain hospital costs successfully as well as attain high quality of care ratings and good access to capital and medical technology.

In 2004 and again in 2006, I testified in the Congress that the maximum that anyone should have to pay for hospital services is what Medicare pays plus a fixed percentage.13  At that time, I proposed a fixed percentage of 25 percent based on data showing that the private sector was paying 14 percent above what Medicare was paying, private insurers were entitled to a discount of 1 percent for prompt payment and because not all private insurers pay the same rate (an additional 10 percent was added to allow for the health insurers who paid more or had less bargaining power). Since MedPAC was showing that economically and efficiently run hospitals could earn a small profit on Medicare, this method would enable these hospitals to earn a 25 percent profit. Now in 2013, the situation has changed slightly – the private sector is paying 30 percent more than Medicare. This suggests that Medicare plus 41 percent is the maximum reasonable rate that should be paid for hospital care.

Over the past 10 years, the concept that “It’s the Prices, Stupid” has become even more relevant as the difference between what the US pays and what other industrialized countries pay for medical services has increased. Strong measures must be taken to simplify the payment system so that the US may achieve more competitive prices and control rising health care costs.
 

Figure 1. International Comparison of Cost per Hospital Day


 

2012 Hospital Prices by Country

 

Source: "2012 Comparative Price Report: Variation in Medical and Hospital Prices by Country," International Federation of Health Plans
 
References

  1 GF Anderson, UE Reinhardt, PS Hussey, and V. Petrosyan, "It's the prices, stupid: why the United States is so different from other countries," Health Affairs 2003 22(3):89-105.

  2 MJ Laugesen and SA Glied, "Higher fees paid to US physicians drive higher spending for physician services compared to other countries," Health Affairs 2011 30(9):1647-5166.

  3 P. Kanavos P, Ferrario A, Vandoros S, Anderson GF, "Higher US branded drug prices and spending compared to other countries may stem partly from quick uptake of new drugs," Health Affairs 2013 32(4):753-761.

  4 Inokuchi T, Ikegami N, Gupta V, Rao S, Anderson GF, "Comparison of price, volume and composition of services provided to inpatients for two procedures between a U.S. and a Japanese academic hospital," Health 2013;5(4):703-711.

  5 M. Stabile, S. Thomson, S. Allin, S. Boyle, R. Busse, K. Chevreul, G. Marchildon, E. Mossialos, "Health care cost containment strategies used in four other high-income countries hold lessons for the United States," Health Affairs 2013 32(4):643-652.

  6 UE Reinhardt, "The pricing of U.S. hospital services: chaos behind a veil of secrecy," Health Affairs 2006 25(1):57-69; GF Anderson, "From 'soak the rich' to 'soak the poor': recent trends in hospital pricing," Health Affairs 2007;26(3):780-789.

   7 Medicare Provider Charge Data. Centers for Medicare & Medicaid Services. Access June 2013 from http://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/medicare-provider-charge-data/index.html

  8 DU Himmelstein, D. Thorne, E. Warren, and S. Woolhandler, "Medical bankruptcy in the United States, 2007: results of a national study," The American Journal of Medicine 2009 122(8):741-746.

  9 Medicare Payment Advisory Commission 2011. Report to the Congress: Medicare payment policy. Washington, DC: MedPAC.

  10 PB Ginsburg, "Wide variation in hospital and physician payment rates evidence of provider market power," Res Brief. Nov. 2010 (16):1-11.

  11 Health Services Cost Review Commission. Accessed June 2013 from http://www.hscrc.state.md.us

  12 R. Murray R. "Setting hospital rates to control costs and boost quality: the Maryland experience," Health Affairs 2009 28(5):1395-1405.

  13 GF Anderson, "A Review of Hospital Billing and Collection Practices. Testimony before the House Committee on Energy and Commerce." 108th Cong. 2d sess. 24 June 2004, and GF Anderson, "What’s the Cost?: Proposals to Provide Consumers with Better Information about Healthcare Service Costs: Hearing Before the Subcommittee on Health of the House Committee on Energy and Commerce." 109th Cong. 103. 15 March 2006.