DHA 721 Week 6 Health Care Spending and Prices Example

Same MRI, Different Price: Health Care Spending, Prices and Waste Seen From a Rural North Carolina Region

[Student Name]

University of Phoenix

DHA/721: Health Care Economics

Week 6 Assignment

[Instructor Name]

[Date]

The rural hospitals, the employer, prices, spending figures, payer shares and waste estimates for the region are composites written for a model paper; research findings come from the sources cited.

The furniture plant's benefits manager called the regional vice president with a question. The company's claims data showed that a knee MRI cost its health plan about $2,400 at the network's academic center, $800 at one of the region's rural hospitals and $450 at an independent imaging center an hour away. The same scan, read by radiologists with similar training, had three very different prices. She asked why, and whether the network planned to do anything about it. This paper uses her question to examine health care spending and prices.

Spending Equals Price Times Quantity

Health care spending is the product of price and quantity. Spending can rise because people use more services, because each service costs more or both. Separating the two matters because each suggests different policies: if quantity drives spending, the focus is on use; if price does, the focus is on market power and payment.

The International Evidence Revisited

In 2019, Anderson and colleagues revisited their earlier argument using updated data from the Organization for Economic Cooperation and Development and concluded that prices remain the primary reason the United States spends more than other countries; on resources per person such as hospital beds, physicians and nurses, the United States still provides fewer than the median country, and the gap between what public and private payers pay has grown (Anderson et al., 2019). The finding matters for the trustee who first asked why care costs so much: Americans are not using far more hospital beds or physician visits than people elsewhere. They are paying more for each one, and the difference flows to hospitals, physicians, drug makers and device makers as income.

Commercial Prices and Medicare

Within the United States, price differences are large across payers. Chernew and colleagues examined commercial prices relative to Medicare across a broad set of states and services and found that commercial prices for hospital inpatient and outpatient services averaged about double Medicare fees, while professional services ran about 60% higher; they estimated that limiting commercial prices to Medicare rates would cut hospital revenue by about 35%, with wide variation by state (Chernew et al., 2020). For many hospitals, commercial patients are where the margin comes from.

Why Prices Vary: Market Power

Economic theory explains much of the variation. Providers with market power, because they are large, prestigious or the only option in an area, can negotiate higher prices from insurers. The academic center, as the region's only tertiary hospital and a brand insurers must include, commands higher prices than rural hospitals that insurers could leave out of a network.

Why Prices Vary: Cost Shifting

Hospitals often argue that high commercial prices make up for low public payments. The rural hospitals, where Medicare and Medicaid cover about 70% of patients, depend on their small commercial share to break even. Economists debate how much true cost shifting occurs, but the rural hospitals' finances show the dependency clearly.

What This Means for the MRI

The MRI prices reflect these forces. The academic center's price reflects its bargaining power and higher costs of teaching and research. The rural hospital's price reflects weaker bargaining power. The independent center's low price reflects lower overhead and a business model built on volume. None of these prices reflects the cost of the scan alone. A hospital's price also carries a share of its emergency department, trauma readiness and uncompensated care, which an independent imaging center does not provide. That explains part of the gap, but not a threefold difference, which is mostly market power.

National Spending Trends

National health spending reached about 17% to 18% of the economy in recent years. For employers like the furniture plant, rising premiums hold down wages, since money spent on health benefits cannot be paid as salary. For the region's workers, rising deductibles bring prices directly to their household budgets.

Waste in Health Care

Not all spending buys value. Shrank and colleagues pooled 71 estimates across six domains and put the yearly cost of waste between $760 billion and $935 billion, roughly one dollar in four, with administrative complexity at about $265.6 billion and pricing failure at $230.7 billion to $240.5 billion the largest categories, followed by failures of care delivery, overtreatment, fraud and abuse and failures of care coordination (Shrank et al., 2019).

Waste in the Region

Applying those categories to the region showed where waste appears locally. Failures of care coordination show up in readmissions and repeated tests after transfers. Low-value care appears in imaging for uncomplicated low back pain. Administrative complexity consumes billing staff time spent on prior authorizations and denials. A rough review found that the four hospitals employ more people in billing, coding and authorization than in pharmacy. Failures of care delivery, such as preventable complications, add days to hospital stays. The region cannot fix pricing failure on its own, but it can act on coordination, low-value care and some administrative waste.

Policies Aimed at Prices

Several policies target prices. Price transparency rules require hospitals to publish negotiated rates. Reference pricing sets a maximum the plan will pay for a service, with patients paying the difference. For shoppable services such as imaging and laboratory tests, reference pricing can move patients toward lower-priced sites; for emergencies, it cannot, because patients do not choose where they are treated. Rate caps, such as limiting commercial prices to a multiple of Medicare, directly lower prices.

Effects on Rural Hospitals

Price policies affect hospitals differently. A cap at a modest multiple of Medicare would reduce the academic center's revenue sharply. The rural hospitals, whose commercial prices are already lower, would lose less per service but have thinner margins. A uniform cap could push one or more into losses, so any policy should consider rural protections.

Recommendations for the Network

The vice president recommended that the network publish shoppable prices clearly, bring imaging and laboratory prices at the academic center closer to community levels and steer employers' routine imaging to rural sites with capacity, lowering costs for employers while adding volume that helps rural hospitals cover their fixed costs. The furniture plant agreed to test the approach, directing routine scans to the rural hospital with no added cost to workers.

Recommendations for Waste Reduction

The region will target three areas: shared records to avoid repeat testing after transfers, clinical decision support for imaging and standardized prior authorization processes to reduce administrative time.

Measures

Measures include commercial prices relative to Medicare for common services, the share of routine imaging performed at rural sites, repeat testing after transfers, low-value imaging rates and staff time spent on prior authorizations.

Conclusion

The same MRI carries different prices because of market power, payer mix and cost structures. International evidence shows prices drive high US spending, and commercial prices run about double Medicare's. Waste consumes a quarter of spending. By pricing routine services competitively and reducing waste, the network and region can lower costs while protecting rural hospitals.

References

Anderson, G. F., Hussey, P., & Petrosyan, V. (2019). It's still the prices, stupid: Why the US spends so much on health care, and a tribute to Uwe Reinhardt. Health Affairs, 38(1), 87-95. https://doi.org/10.1377/hlthaff.2018.05144

Chernew, M. E., Hicks, A. L., & Shah, S. A. (2020). Wide state-level variation in commercial health care prices suggests uneven impact of price regulation. Health Affairs, 39(5), 791-799. https://doi.org/10.1377/hlthaff.2019.01377

Shrank, W. H., Rogstad, T. L., & Parekh, N. (2019). Waste in the US health care system: Estimated costs and potential for savings. JAMA, 322(15), 1501-1509. https://doi.org/10.1001/jama.2019.13978