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More Proof that Health Care Prices are Irrational

Across states, average commercial prices for physician services ranged from 98% of Medicare prices in Alabama to 188% in Wisconsin, according to a new analysis by the Health Care Cost Institute, exposing unjustified variations in prices that drive up U.S. health care spending.

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Commercial insurers pay physicians, on average, 122 percent of what government-backed Medicare pays for the exact same medical services in the exact same regions, according to a new analysis by the Health Care Cost Institute (HCCI), injecting fresh data into a national discourse about the irrationality of health care prices. This estimate is an average across all types of physicians, ranging from primary care doctors to specialists. 

The HCCI analysis, which was supported by Arnold Ventures, found that while the variation differed by region, commercial payers on average paid doctors more than Medicare, and in some extreme cases, paid nearly twice as much as Medicare rates. Research on hospital prices have also found commercial prices were higher than Medicare, on average more than twice what Medicare would pay, with wide variation across states and even within the same metropolitan area.

The wide variation in commercial rates and gap between commercial and Medicare rates raise questions about whether the health care market is truly functioning as it should, especially since numerous studies have shown no correlation between higher prices and better quality or better outcomes. 

The variation in prices helps explain why U.S. health care spending has been rising to unsustainable levels in recent years. The prices charged by doctors and clinicians for their professional services have increased substantially, suggesting some physician groups are using their market power to demand unjustified higher prices. Previous research has found that physician prices are higher in less competitive areas. 

While Medicare has been able to exert some control over keeping prices in check, commercial payers do not have the same tools to control prices, and therefore the gaps between what they pay have been growing wider. 

To study the difference between Medicare and commercial rates, researchers with HCCI analyzed 210 million health care claims in 2017 from across the United States. They found the greatest difference between Medicare and commercial prices, in general, in northwestern states and along the Great Plains. The state with the greatest difference was Wisconsin, where commercially insured families paid on average 188 percent more than Medicare rates for the same physician services.

The variation between commercial and Medicare rates is even more extreme if you look at specific metropolitan areas in Wisconsin. According to the analysis, five metro areas have commercial rates that are 200 percent or more of Medicare, all of them in Wisconsin: Green Bay, Sheboygan, Marinette, Eau Claire, and La Crosse-Onalaska.

Wisconsin’s high health care prices have been the focus of previous studies; a previous analysis by HCCI of claims data ranked the state has having the second-highest medical prices in the U.S. behind Alaska. 

The gap between commercial and Medicare physician prices varies widely even within the same state — for example, commercial prices averaged 95 percent of Medicare in Bakersfield in Southern California, but 181 percent of Medicare in Santa Cruz, about 250 miles away.

This irrationality in health care prices — and the added cost to commercial insurance — has drawn the ire of patients, families, and employers who have sought greater clarity around prices and demanded answers about why the prices are higher than what the government pays for the same thing.

The coronavirus pandemic and the ensuing national economic crisis have amplified the problems with U.S. health care pricing, heightening the urgency around pricing reform. Tens of thousands of people across the country have suddenly found themselves in need of testing and treatment for COVID-19 — and are facing expensive bills for care that vary widely depending on the provider and the region. Meanwhile millions more have lost their jobs — and their insurance coverage — leaving them exposed to higher health care prices at a time when they can least afford it.

As the crisis continues to wage its toll and states face looming budget deficits, policymakers are increasingly looking for opportunities to make health care more affordable for patients and to lower health care costs — a key driver in state and federal spending. HCCI’s findings help inform policy solutions that would link commercial prices to Medicare rates — an idea sometimes referred to as Medicare Prices for All.”