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It’s Not The Cost Of Health Care, It’s The Price

posted by AHIP Coverage

on March 7, 2016

We often confuse the “cost” of health care with the “price” of health care. The cost of health care combines all of the factors that contribute to health care spending, notably utilization driven by emerging technologies and demographic changes. The price of health care is the amount charged for a given product or service.

America has a price problem.

Martin Gaynor, the E.J. Barone Professor of Public Policy at Carnegie Mellon University, explains this issue in a recent Health Affairs blog post. He looks at hospital consolidation and concludes that the evidence is overwhelming that hospital consolidation raises prices without reliably increasing quality.

According to Gaynor, a major factor driving up prices in health care is the ongoing trend toward greater consolidation among health care providers. In addition to hospitals buying each other, they also now employ 32.8 percent of physicians.

blog hospital mergers and acquisitions AHA

Many studies have documented the effect of lack of competition in the provider market. One analysis by the Los Angeles Times found that hospitals in Northern California’s most populous counties collect 56 percent more revenue per patient per day than hospitals in Southern California’s largest counties. Health care economists point to the outsized market power of Sutter Health in Northern California as a driving force behind this pricing disparity.

Gaynor also deconstructs cost increases and finds that it was price – not utilization – that is driving rising health care costs. He uses the chart below that separates utilization from price increases, and the net result is illuminating.

blog changes utilization med prices

Gaynor warns us that provider consolidation “could undermine attempts to control costs, improve care and increase the responsiveness and innovativeness of our health care system.”

Health plans will continue to drive payment reform and improve care delivery. Those changes depend on a robust and competitive provider market that can stem the tide of rising costs and, in particular, rising prices.