That's a pricey MRI

[Greenbeard]

Bloomberg has a good read today: "Why Baby Costs Less Down the Road in Silicon Valley". It's essentially an article on how provider consolidation is driving up health care prices:

After Mark Logsdon tore a ligament in his knee skiing at Lake Tahoe in March, he returned home to suburban Sacramento and had an MRI scan at Sutter Davis Hospital.

Sutter’s price for the knee scan was $1,271, payable by Logsdon and his insurer. Exactly the same MRI at one of the local imaging centers owned by Radiological Associates of Sacramento would have cost $696 -- 45 percent less.

It turns out that Logsdon didn’t know something that his insurance company does: Sutter Health Co., the nonprofit that owns Sutter Davis, has market power that commands prices 40 to 70 percent higher than its rivals per typical procedure -- and pacts with insurers that keep those prices secret.

Sutter can charge these prices because it has acquired more than a third of the market in the San Francisco-to-Sacramento region through more than 20 hospital takeovers in the last 30 years, according to executives of Aetna Inc., Health Net Inc. and Blue Shield of California, who asked not to be named because their agreements with Sutter ban disclosure of prices.

This is a point I've brought up before, in a thread on the courts overturning Massachusetts' cap on insurance rates and a thread about a possible alternative to the public option concept (all payer rate setting). Providers are playing a role in our rising spending and the consolidation mentioned in that Bloomberg article is a good illustration of that. To quote from a paper from a few years ago:

Table 1 provides statistics on concentration in hospital markets at 5 year intervals over the period 1985-2000.1 The table shows that the Herfindahl-Hirschmann Index (HHI) for U.S. hospitals has been steadily increasing over time. In particular, the median HHI increased from 3,028 in 1985 to 3,995 in 2000. This is an increase of almost 1,000 points on a very large base. An HHI of 3,000 indicates a very concentrated market— for example, a market with three equally sized firms will have an HHI close to this value (3,333). The FTC and DOJ consider markets with an HHI above 1,800 as highly concentrated. For highly concentrated markets such as these, the enforcement agencies consider any increase in the HHI of 100 points or more as presumptively anticompetitive (Federal Trade Commission and Department of Justice, 1992). The increase in median concentration from 1985 to 2000 is far greater than that threshold.

 

[auditor0007]

I've been pointing this out for a long time. The prices charged, and paid for by the insurers, by many of the big players in healthcare are completely out of line in comparison to the actual costs. I have to have an ultrasound done of my liver once per year. When I was having it done at the hospital, and paid for through my insurance, the cost was billed out at over $1600; my insurer paid a bit over $1200. Last month I paid out of pocket to have this same ultrasound done at a private imaging center. Cost? $220.

I also have to have a phlebotomy every 10 to 12 weeks. In the past, I went to the hospital's infusion center. They billed out over $600, and the insurance company paid out a bit over $400. Now I go to an infusion center at a doctor's office. Actually it's a hematology and oncology practice with multiple doctors, and they have their own infusion center. They charge me $145 cash.

Here is the real problem; since the insurance companies have no real competition, other than other insurance companies, they readily accept these much higher rates as it increases costs. As costs increase, they can justify charging more, and in doing so, they make more money. As a basic example, if the insurance company can only realistically charge $200 per month for a policy, and they make a gross profit margin of 10%, then they bring in a gross profit of $20 from that policy. On the other hand, if they can charge $400 per month with the same gross profit margin, their gross profit increases to $40 per month from that policy. So in the end, the insurance companies want costs to increase. And knowing this, the providers, especially in situations where they can create a near monopoly, charge as much as they want. Why not if the insurance companies are going to pay those rates?

This is where a public option really could come into play and work, if it was done right. A public option could be offered, and run at a much lower cost per person without any tax subsidies. Unfortunately, those at the government level don't even understand this. If they did, costs for Medicare and Medicaid would be much less than they are as those programs would better utilize these more competetive providers.

The bottom line is that the only way we will ever really reduce costs is by forcing providers and insurers to be competetive. How we do that is the real question.