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The Great Unsolved Mystery of Health Care Prices


A new study out of Stanford University looks at the rates at which private insurance companies reimburse doctors nationwide, and finds the results utterly baffling. Doctors are paid dramatically different rates for doing the same procedures (some twice as much as others), and there doesn’t seem to be any reason at all for it. Reuters:

The price differences couldn’t be explained by the patients’ age or sex, the physicians’ specialty, the patients’ insurance plan type – preferred provider organizations (PPO) or point of service (POS) – or whether the physician was in the plan’s network.

Geographic location accounted for some of the price variation, but only about one-third of it.

“The point is that (there is) very little that can explain these price differences, no matter what information you put into the model,” Dr. Renee Hsia, professor of emergency medicine at the University of California at San Francisco, told Reuters Health.

What’s clear is that we still know very little about our health care system, about why it functions in such bizarre ways. But even if a complete picture still eludes us, an important cause of these variations is that our system is totally unresponsive to market forces. No other industry has arbitrary price fluctuations of this wind, because no other industry is insulated from consumer pressure by third party payer systems and complicated systems of subsidy and cost-shifting. Any sustainable health care reform has to target that problem.

[Photo of stethoscope and money courtesy of Shutterstock.]

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  • Jacksonian_Libertarian

    Without the feedback of competition, the quality, service, and price of Healthcare is irrational.

    • Andrew Allison

      I think that’s the point VM was making. There is however an alternative, one which has been adopted by every other developed nation and which VM inadvertently endorses above, namely eliminating third party payment. (grin)

      • Bruno_Behrend

        Eliminate single payment as well then.

      • Jeff Jones

        They tried that in the UK and Canada and both have ignored their own laws and allowed private companies to fill the gaps left by their public systems.

        10% of Britons have private supplemental plans and are getting the best, most efficient care. Canadians use clinics instead of general practitioners and the government is predictably not enforcing its law that prevents the growth of private clinics, much to the chagrin of unions and other left-leaning groups.

        There really is no such thing as single-payer, at least not any system that can stand on its own for more than thirty years.

        • Andrew Allison

          You are misinformed. The was never a law prohibiting private insurance in the UK, Canada or any other developed country with single-payer coverage. The fact that 10% of Brits have supplemental coverage is entirely irrelevant to the fact that everybody has basic coverage. And, last but not least, the NHS celebrated its 65th birthday this year.

          • Jeff Jones

            Canada Health Act:

            The health insurance plans must be “administered and operated on a non-profit basis by a public authority, responsible to the provincial/territorial governments and subject to audits of their accounts and financial transactions.” (Section 8).

            Private insurers can only cover areas that are not covered by the public plan, which is severely restrictive.

            And if the market for private care in Canada is so insignificant, why we’re their public employee unions so worried about it as far back as 2002?


            > 10% of Brits have supplemental coverage is entirely irrelevant to the fact that everybody has basic coverage.

            I disagree that it’s irrelevant. More and more people will have to get that insurance to keep from getting substandard care, or left in ambulances, as has been known to happen in the UK.

            If their single payer systems were so good, there would not be any market for better care. The basic care you cite must be poor, just like Medicare and Medicaid are without supplements.

          • Andrew Allison

            The regulation you quote, as I suspect you know full well, applies to the public health plans, not private ones.
            100% of legal residents in countries with single payer are covered, the fact a mere 10% chose something better is, as I wrote, irrelevant to the discussion (think Mercedes vs Chevy). You simply don’t know what you’re talking about.

          • Jeff Jones

            >. The regulation you quote, as I suspect you know full well, applies to public health plans not private ones

            Then why the accusation by public unions that the government wasn’t upholding the Canada Health Act by allowing the very existence of private clinics? Are you saying they were all full of it?

            > You simply don’t know what you’re talking about

            What are you? The new bpuharic? Your opinion is the law and it’s not open for debate?

          • Jeff Jones

            By the way, google “Canada’s private clinics surge as public system falters.” Even the New York Times admitted in 2006 that Canada’s “single payer” system was not equal to the task.

          • Jeff Jones

            I don’t buy your assertion that this only applies to public plans:

            “The health insurance plans must be “administered and operated on a non-profit basis by a public authority responsible to the provincial/territorial government.”

            If we follow your logic, it would be saying “public plans must be administered by a public authority,” which is so obvious that it garners a no-$h1t response. If public agencies offered private healthcare to their employees, it would be administered and operated on a for-profit basis, which violates this mandate.

          • Jeff Jones

            Bottom line, if the Democrats ever manage to implement single payer, it will fail for a number of reasons:

            1) At least half of the country will be seething and nothing can last with that, including the political careers of those who voted for it.
            2) We are $17 trillion in debt with another $100 trillion in obligations from existing bad government entitlements.
            3) Democrats will continue to reduce doctor payments until any sane doctor moves to concierge care. At that point, people without concierge will push to outlaw it, but it will be too late and we’ll have a bifurcated health system.

            I would love to keep my plan before Obamacare, as was promised, but that is now out of the question. So, to compensate, I will have to pay the $6000/year for MDVIP so I can go to a doctor who only has 1000 patients. We’ll see how long it takes liberals to cry foul that concierge is unfair, if they aren’t already screaming about it.

          • Jeff Jones

            > the NHS celebrated its 65th birthday

            Good lord. Talk about irrelevant. Government programs never go away. Social security is older than that and it’s going broke. I look at that age and see a program that needs to be put out to pasture.

  • USNK2

    Was there any consistency within a specific insurer’s reimbursements?

    • Andrew Allison

      Great question!
      Is it that some providers have more leverage with a given insurer than others or, for example, that less dominant insurers are more generous than others?

  • AnnSaltzafrazz

    I think they may have been looking in the wrong place. I would be interested in the socio-economic level of the MD’s patients. In the absence of much in the way of information on the abilities of MD’s, patients are left with thinking that expensive=quality. If you’re wealthy, whether insurance is paying or not, you will assume that the more-expensive the doctor, the better the care. If you see an MD with lots of wealthy patients, you will assume that they’re good. Price is a stand-in for a measure of quality.

  • NCMountainGirl

    It would be interesting to look at how geographic variance correlates with a state’s tort system. Also, practitioners and institutions in smaller communities are less likely to be sued in general, which reduces overhead. When I was doing the accounting work for two noted surgeon sin a large city that is friendly to tort lawyers I saw that my clients paid more in malpractice insurance than he netted from his practice before tax. Indeed, one of them netted more from a part time business of reviewing files for an insurance company than he netted from his surgical practice.

  • rheddles

    Why golly, maybe we could go back to the old system where people were responsible for their own health care. If they wanted to buy insurance, they could. If they wanted reimbursement, they submitted a claim. Things seemed to work much better then.

    Andrew Allison’s, and all single payer advocates’, problem is that they think people are incapable of taking responsibility for their own lives so some paternal government or business has to do it for them. And that is true of countries made up of peasants and serfs who look to their master for everything. That was not true in the US until the 20th century when we imported terrible German ideas like the Bismarkian welfare state. Enough! Time to throw off the fetters of paternal government.

    All we have to do to restore rationality to health care is repeal Obamacare and the employer deductibility of insurance premiums. It would be chaotic for a year or so, sort of like it is now. But once doctors and patients make the decisions again, order will emerge. And there will be Wal*Mart medicine and Nordstrom’s medicine and you will be able to buy what you can afford.

    Give free enterprise a chance. It works with food, why not health care?

    • Andrew Allison

      The knee-jerk reactions from individuals who oppose single-payer healthcare insurance are tedious. As VM acknowledges above, third-party payments result in opacity, which in turn results in price inefficiency. Simply put, there’s a reason than my GP accepts 2/3 of the regular charge for an office visit as payment in full from the single-payer system known as Medicare.
      None of which has anything to do with people taking responsibility for their own lives. Every other developed country has figured out that the only way that a basic level of coverage to all is single-payer, with the option to purchase additional insurance if one so desires. The US system meanwhile costs twice as much and delivers worse outcomes. If we as a Nation want to provide health care for all, there’s only one way to do it affordably.

      • rheddles

        Tedious? Andrew takes to the divan with the vapours. And exposes his ignorance of how medical care was formerly delivered. When the customer paid the bill and sought reimbursement from the insurer. Then the customer knew the price. Under neither third party payer nor single payer does the customer know the price.

        And why doesn’t Andrew want to get his food from a single payer grocery?

        • Andrew Allison

          What an utterly ridiculous response. The world in which people paid and billed their insurance companies is irretrievably lost due to the cost escalation produced by the current mess. Suggesting a return to it displays a monumental lack of understanding. The closest we are able to get today is high- deductible coverage, which discourages unnecessary use by those who can afford to pay the deductible should the need arise.

          Your closing sentence beggars belief. Groceries are pay as you go, not insured, and there is lots of competition for my business.

          • Jeff Jones

            So then we should forget the reimbursement for routine things like physicals and flu shots. There is absolutely no reason to use insurance for those. We don’t use car insurance for oil changes and new tires.

            Insurance exists so that a person or entity can transfer risk by making regular premium payments. Covering every wart and sniffle, or pre-existing conditions, transforms the whole system from the insurance provider accepting risk to the provider taking on guaranteed expense/burden.

  • free_agent

    In the referenced article, “Baker suggested that some variables, such as the quality of service provided by physicians, or the market power of insurance companies, could influence payments, but these were not analyzed in the study.”

    Uh, yeah, so one variable they didn’t study was the relative market power of the medical practice vs. the insurance companies. Why was this overlooked, given that the anecdotes suggest that it is the *major* determinant of medical prices?

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