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If commercial insurers paid hospitals Medicare rates, spending would drop 31 percent

Written by Diane Archer

There continues to be irrational variation in hospital prices in the United States, both within a given area and across markets. Hospital market-power forces commercial insurers to pay excessive rates. In most markets, commercial insurers do not have the leverage to rein in hospital prices, but Medicare does. If commercial insurers paid hospitals Medicare rates, health care spending would drop 31 percent, and premiums and out-of-pocket costs would also come down considerably.

Shockingly, we have very little hospital-specific price data and very little data on health care spending by people with commercial insurance, let alone quality information. Hospitals and insurers are allowed to claim their data is proprietary. Without data, there is no effective competition.

Prices should be transparent. Moreover, there’s a strong case for an all-payer system. An all-payer system would help rationalize the prices.

A paper by Zach Cooper, Stuart Craig, Martin Gaynor and John van Reenen, which analyzes health insurance claims data from three commercial insurers for 27.6 percent of people with employer coverage, between 2007 and 2011, reveals that prices are all over the map.

Overall, hospitals with monopoly power command prices that are 15.3 percent higher than hospitals in competitive markets.  So, a knee replacement in South Dakota costs more than a knee replacement in Manhattan. An MRI of the lower limb, a standard procedure, can cost 12 times more in one area than another area.  Within a market, prices for a given procedure at one hospital can be four times more than at another hospital.

This makes no sense. It also rewards inefficient hospitals. And, it drives up our overall health care costs and individual insurance premiums considerably. It’s time Congress stepped in to rationalize hospital prices and rein in spending on medical care since insurers are unable to do so.

A recent report from the Center for Improving Value in Health Care looks deeper into these findings and shows both tremendous variation in commercial insurance prices in different areas of Colorado as well as just how much more commercial insurers pay for hip and knee replacements in Colorado than Medicare. In the northeast of Colorado, the price of hip and knee replacements is $55,000 more (232 percent higher) than Medicare. In Denver, the price is $17,000 more. It’s not surprising that a single-payer health care proposal is on the Colorado ballot this year.

Here’s more information from Just Care on health care costs:

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