News is getting out that the conference committee tasked with reconciling the health care cost control bills in the House and the Senate has run into areas of gridlock, and is running out of time. One of the key areas of contention is whether the House bill’s proposal to prevent some hospitals from charging much higher prices than others for the same care should be included in the final bill.
The Globe has been a study in contrasts. On Sunday the news department published an article arguing that the market power of hospitals is a key cost driver, and the legislature abandons this problem at its own risk. On Monday the op-ed page ran the other way, editorializing that the conference committee should pass whatever it can and not overreach, while also publishing an op-ed from the President of the Mass. Hospital Association, predictably arguing that health reform will be ruined if the government over-regulates hospital reimbursement rates.
So here’s an interesting myth-buster question: is hospital market power actually a key driver of health care costs?
The answer is… no. It is a driver, but most evidence indicates it is not a large one.
Isn’t this answer contrary to the well-publicized, and carefully researched reports released by the AG’s office for two years running now? As stated in the Sunday Globe article: “Attorney General Martha Coakley blamed the leverage of the best-paid providers as a main driver of health care costs. She found that insurers pay some hospitals and doctors twice as much money as others for similar care, because they have name-brand recognition or geographic dominance.”
The confusion is due to a common statistical fallacy, whereby some observers think you can explain a group trend by comparing across members of the group. Take the average height of Americans for example. If we were to analyze why some Americans are taller than others, the overwhelming explanatory factor would be the height of their parents. However, this provides an obviously flawed explanation for why Americans as a group have been getting taller over the last few generations, or why Americans on average are taller than, say, Guatamalans. As it turns out, the height of our parents explains to a large extent the variation in height within the group of Americans, but totally different factors explain height trends for the whole group, or compared to other groups (mostly diet and nutrition).
The same is true for medical costs. In Massachusetts, the market power of providers is the primary factor explaining variation in the price of medical care across providers, but market power explains very little of why our health care costs are rising so rapidly, or why some states and countries have higher costs than others. A 2006 study published by the Robert Wood Johnson Foundation found that the wave of hospital consolidations in the 1990s probably increased hospital prices by 5% for the entire decade. This is actually logical when you think about it – provider consolidation has slowed considerably since the 1990s, but health care costs have risen more rapidly. Also, consolidation went much further in the South, where hospitals are not regulated as strictly, but most Southern states are characterized by lower costs compared to the Northeast.
Somebody please send a memo to Atul Gawande, whose phenomenally popular series of New Yorker articles (see The Cost Conundrum and The Cost Conundrum Redux for example) are all premised on this fallacy. Analyzing the vastly different Medicare costs in one Texas town compared to another, Gawande finds that the difference is due to utilization, or patients at some facilities receiving much more care than others. Applying this comparison of providers to our broad health care trends, however, immediately lands Gawande in the realm of factual inaccuracy. It has been definitely proven, over and over, that utilization is not the cause of America’s high and rising health care costs: our costs are not going up because of rising utilization, and we actually do not use more care than other countries (see the benchmark Health Affairs article explaining this finding, “It’s the Prices, Stupid“).