Understanding the Cost Conundrum

Medicare data has long been used as a barometer for health care costs overall, but a new study illustrates the vast differences between Medicare spend and private insurance spend, per capita, in various regions and hospital systems across the country. While it may come as no surprise that spending levels differ between Medicare and private insurance, the extent of the discrepancy is startling. Grand Junction, Colorado, with the third-lowest rate of Medicare spending in the country, was exemplified as a model of better, cheaper health care in Atul Gawande’s widely read “Cost Conundrum” article in 2009. However, it turns out to be one of the most expensive health care markets for the privately insured. As Gawande points out in his take on the recent data findings in this New Yorker article, one of the reasons is that “Medicare can use its authority to set prices for hospitals. Private insurers can’t.” Private insurers must negotiate with hospitals and so the leverage of either party in a particular region is going to directly impact prices. The differences in cost also expose other problems in health care spending, including how hospitals are compensated (for quantity, rather than quality of services) and the lack of competition (meaning, no incentives to keep prices down). While the hospital payment system is not an issue that is going to resolved today, this study lends new urgency to the ongoing movement to transform provider reimbursement.

Go to full article: newyorker.com

Beth Umland
by Beth Umland

Director of Research, Health, Mercer

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