The Role Of Prices In Excess US Health Spending | Health Affairs Brief

El papel de los precios en el gasto excesivo en salud de EE. UU. | Resumen de asuntos de salud

Top Findings From The Literature

  • Prices for health care services are a critical driver of health spending growth in the US.
  • US health care prices vary widely among hospitals and between public and private insurers.
  • Across a range of services, US prices are higher than those in comparable countries.

 

For decades, the level and growth of US health care spending has diverged from both international and domestic norms, leading many to characterize rising health expenditures as “unsustainable.” Between 1970 and 2019, total US health spending grew from 6.9 percent of gross domestic product (GDP) to 17.7 percent of GDP, according to the Centers for Medicare and Medicaid Services (CMS). In 2020, amid unique strain on the health care system and a dramatic economic downturn due to the COVID-19 pandemic, health spending accounted for nearly one-fifth (19.7 percent) of US GDP. According to prepandemic analysis, health spending was not projected to reach this level until 2028, and it remains to be seen how the pandemic will affect the long-term trajectory of health spending. Meanwhile, the Organization for Economic Cooperation and Development (OECD) estimated that total health spending averaged 8.8 percent of GDP among member countries in 2019 compared with 16.8 percent in the US.

In 2019 Health Affairs launched the nonpartisan Council on Health Care Spending and Value to study excessive health spending in the US and recommend strategies to address it. The council, which plans to release its recommendations in late 2022, defines excessive spending as that which both diverges from a norm and is not commensurate with the health it produces. This research brief is one in a series of briefs that provides snapshots of key literature that informed the council’s inquiry into health spending drivers. 

Why Focus On Prices?

Various factors, some of which are amenable to policy intervention and others that are not, are potential contributors to excess health spending and growth, including but not limited to population growth, demographic changes, changes in disease prevalence, changes in use, and changes in service price and intensity. This research brief outlines evidence pointing to high prices in the private sector as a critical driver of excess health spending and growth in the US and highlights several proposals to address this issue (notably, it does not address drug prices, which are affected by a unique set of laws and regulations that are not applicable to prices for physician and hospital services. Detailed information about factors in drug pricing can be found in a 2017 series of Health Affairs policy briefs).

Prices Are A Critical Driver Of Health Spending Growth In The US

After disaggregating many of the factors mentioned above, researchers have consistently found that prices are one of the most important contributors to health spending growth, especially in the commercial sector. The Health Care Cost Institute, one of the major sources of data on US private-payer provider prices, found that commercial US health spending per enrollee increased by 21.8 percent between 2015 and 2019. Rising service prices accounted for approximately two-thirds of that growth, with prices for drugs, professional services, and in- and outpatient care rising by 18.3 percent. At the same time, increased service quantity accounted for approximately one-fifth of overall spending growth, as per person use (number of inpatient visits, outpatient visits and procedures, professional services, and filled prescription days) increased by only 3.6 percent. General inflation accounted for approximately a third of total spending growth during that period. Finally, changes in the mix of services used and demographic changes in the population offset some of the total per person spending growth.

In a 2017 article, Joseph Dieleman and colleagues conducted a similar analysis of spending growth that was focused on all payers—including Medicare—rather than exclusively on private payers, and estimated a more mitigated impact of changes in service price and intensity, which accounted for half of increased health spending in the US between 1998 and 2013. Demographic changes had a more significant impact, with increases in population size accounting for just less than one-quarter (23.1 percent) of the increase in health spending and population aging accounting for 11.6 percent. Changes in disease prevalence accounted for a 2.4 percent reduction in spending during the same period; changes in service use were not associated with a statistically significant change in spending.

Looking ahead, CMS’s prepandemic projections suggested that increasing personal health care prices will continue to be the largest driver of increased health spending in the near future, accounting for 43 percent of the 5.5 percent expected average growth between 2019 and 2028.

US Health Care Prices Vary Widely Among Hospitals, As Well As Between Public And Private Insurers

Studies of price variation among hospitals and insurers within the US suggest that much of the price growth driving spending growth is excessive, particularly in the private sector. In their 2018 article “The Price Ain’t Right?” Zack Cooper and colleagues used Health Care Cost Institute data from 2011 to find enormous variation in private insurer spending by hospital for the same procedures. The authors found that price variation accounted for half of overall hospital spending variation, with quantity variation accounting for the remaining half. The authors also found that prices at monopoly hospitals were 12 percent higher than those in markets with four or more rivals, indicating a clear association between hospital market consolidation and hospital prices—an association that has been documented extensively and that does not appear to be driven by postconsolidation improvements in quality.

A 2021 Henry J. Kaiser Family Foundation (KFF) analysis (also of commercial payers) showed massive variation in prices for common hospital and physician procedures by geographic area. According to the KFF analysis, in 2018 the average price for a knee or hip replacement at an in-network facility varied by a factor of two between the Metropolitan Statistical Area with the lowest average price (Baltimore, Maryland, at about $23,000) and that with the highest average price (New York City Metro area, at about $58,000).

Comparing Medicare prices with prices paid by private insurers offers another measure of variation in US health care prices and provides further evidence of excessive prices. Christopher Whaley and colleagues at the RAND Corporation analyzed data on spending for hospital inpatient and outpatient services from a selection of employers and private insurers and found that in 2018 those insurers paid 247 percent of what Medicare would have paid for the same services at the same facilities. Payment discrepancies between Medicare and other insurers were even higher in some states.

Both the variation in commercial hospital prices and the discrepancy with Medicare rates were also documented by Michael Chernew and colleagues, who analyzed data encompassing nearly one tenth of total commercial hospital spending in 2017. They found that average prices paid by commercial insurers for inpatient and outpatient facility services were nearly double the average Medicare prices for the same services, with wide variation among states.

Across A Range Of Services, US Prices Are Higher Than Those In Comparable Countries

International comparisons strengthen the case that US health care prices are excessive. In their seminal 2003 article, “It’s the Prices, Stupid,” Gerard Anderson and coauthors found that although the US spent more on health care than any other OECD country, there was not a corresponding discrepancy on most measures of health services use, leading to the conclusion that higher prices were the primary driver of the wide discrepancy in overall spending. A 2019 update to that article reinforced the original findings by demonstrating that “on key measures of health care resources per capita (hospital beds, physicians, and nurses), the US still provides significantly fewer resources compared to the OECD median country. Since the US is not consuming greater resources than other countries, the most logical factor [contributing to overall higher per capita health spending in the US] is the higher prices paid in the US.”

In 2018 Irene Papanicolas and colleagues compared the US with ten other high-income countries, examining differences in structural features, types of health care and social spending, and health system performance. Consistent with Anderson and colleagues’ work, Papanicolas and colleagues found that despite the US spending almost twice as much as other high-income countries on medical care, there was not a corresponding disparity in health care use rates, indicating that excess health spending in the US is likely not driven by “the fee-for-service system encouraging high volumes of care, or defensive medicine leading to overutilization.” Their findings, and those presented in a more recent article by Papanicolas and colleagues, also do not support the notion that the US has higher health spending because it underinvests in social spending. Instead, the authors conclude that “prices of labor and goods, including pharmaceuticals, and administrative costs appeared to be the major drivers of the difference in overall cost between the United States and other high-income countries.”

Analysis of more recent OECD data by the KFF further reinforces the findings of Anderson, Papanicolas, and others. The KFF found that in 2018, per capita health spending in the US ($10,637) was nearly twice as high as average per capita spending in nine comparable countries ($5,527 per person). The discrepancy was explained in large part by an even more dramatic differential in spending on inpatient and outpatient care: the US spent $6,624 per person on inpatient and outpatient care compared with $2,718 per person in comparable countries. Although the US also spent more on prescription drugs and medical goods, as well as on administration, the differentials for those spending categories were much smaller. The authors note that US patients have shorter average hospital stays and fewer per capita physician visits than patients in comparable countries, which provides further evidence that higher prices, rather than use, are driving higher spending on care in the US.

More granular comparisons of prices for specific procedures also indicate that health care prices in the US are simply higher than in comparable countries. The International Federation of Health Plans published international price data for fourteen in- and outpatient procedures in 2017. With one exception, procedure prices in the United States were uniformly higher than prices in the seven countries featured in the report (Switzerland, Australia, South Africa, the United Kingdom, Holland, New Zealand, and the United Arab Emirates).

Proposed Policy Solutions

The evidence summarized in this brief makes a powerful case for focusing policy interventions on high prices as a means of controlling excess health spending—or spending that both diverges from a norm and is not commensurate with the health it produces. One line of reasoning suggests that with better information for payers and consumers, free markets can correct outlier prices on their own. This is the thinking behind a new Department of Health and Human Services (HHS) rule that took effect on January 1, 2021, despite an unsuccessful legal challenge by the American Hospital Association before its enactment. Under the HHS rule, hospitals must make their standard charges for a set of 300 services publicly available. This increased transparency could allow employers to choose insurers with lower negotiated rates, which may in turn produce lower prices as insurers compete for consumers. A recent Health Care Cost Institute report found uneven compliance with the rule since its implementation, and another study found that an estimated 55 percent of hospitals were not in compliance during the first half of 2021. It is still too early to tell how this transparency initiative will affect prices nationally.

Other proposals take a more aggressive or direct stance toward correcting outlier prices. As noted, hospital market consolidation is an important contributor to high health care prices. The pace of provider mergers and acquisitions has increased dramatically in recent years. Accordingly, some experts believe that monitoring postconsolidation prices—and intervening if needed—may be a viable approach to mitigating outlier high prices. Experts involved in the Bipartisan Policy Center’s Future of Health Care initiative have suggested setting maximum rates for hospitals in highly consolidated, noncompetitive markets. These standards would be tied either to the market’s average Medicare Advantage rates or to average private insurance rates in a competitive market. During the past several years, members of Congress have included similar proposals in bills aimed at increasing provider competition. State regulators have also implemented a range of mechanisms to prevent postconsolidation price growth, including rate setting and budget setting.

Another possible intervention is implementing rate caps based on the very highest end of the commercial price distribution by geographic area, regardless of the level of market concentration or any recent mergers or acquisitions. Michael Chernew and colleagues have advocated for this approach, in combination with annual caps on service-, insurer-, and provider-specific price growth and flexible oversight from state and federal agencies.

Conclusion

Although a range of complex and intersecting factors has the potential to drive excessive US health spending and growth, decades worth of evidence indicates that prices are a particularly important contributor. As discussed in this brief, international comparisons and comparisons between providers and insurers within the US highlight the extent to which US health care prices are higher than would be expected, particularly for hospital services. Proposed policy solutions for high prices range from promoting competition through market-based solutions such as price transparency to imposing rate regulation and rate caps. The potential impacts of these interventions, as well as the effects of the COVID-19 pandemic on consolidation and prices, are rich areas for further study and investigation.

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