- - Thursday, August 21, 2014

Research published last week in the British Medical Journal Open provides interesting insight into the cause of rising health care costs. Analysis of the study raises concerns that Obamacare could ultimately bend the cost curve up. The University of California at San Francisco research studied variations in the average charges of 10 commonly ordered outpatient blood tests in California hospitals in 2011, using data from the reports of nonfederal, general acute-care California hospitals to the California Office of Statewide Health and Planning Development.

The researchers uncovered significant and substantial variation in hospital charges across the Golden State. For example, the median charge for a basic metabolic panel (a routine laboratory test that includes such tests as sodium, potassium and glucose) was $214. Yet, for the 189 California hospitals that reported this test, the charges ranged between $35 and $7,303.

The authors found an even greater range for the 178 California hospitals that reported the charge of a lipid panel. The median California hospital charged $220 for this test with a range of $10 to $10,169. Hence the maximum charge was more than a thousand times the minimum.

This variation is astonishing and has been shown to exist in reimbursements as well. A Thomson Reuters white paper on the subject found significant price differences in Detroit for common medical procedures. According to the paper, the typical large insurer pays $1,509 for a spine MRI at Henry Ford Hospital, but only pays $905 at Beaumont Hospitals. The paper showed similar differences for left heart catheterization reimbursement; St. John Providence Health received $3,672 from the average large insurer, compared with $2,542 for Sinai-Grace Hospital.

The brunt of the problem highlighted by this research transcends mere thousandfold differences in charges. Much of the blames lies with the third-party payer system that separates the customer from the cost of health care services at the time of consumption. Given the nature of health care, it can never be a perfect market. That said, these are routine, non-emergency, outpatient labs. Typically, cost-conscientious customers would seek out the $35 item and avoid the one across the street for $7,303. This would force higher-priced providers to improve efficiency and operations to lower costs, change business plans or go out of business.

However, consumers of health care do not behave typically. The third-party payer system leaves the patient with little incentive to take cost into account when making medical decisions and shop around for the best deal. Patients view these purchases as essentially free, which allows these variations to persist. It also leads to unnecessary tests, procedures and medical interventions with the potential for little medical benefit.

One would think that the insurance companies and government payers would take notice of these inefficiencies and waste, but they typically don’t, either. They merely pass the cost along to the employer in the form of higher premiums or to the taxpayers in the form of higher taxes.

It is no coincidence that as the third-party payer system has exploded, so too have costs. As out-of-pocket health care spending has fallen from 52 percent in 1965 to only 15 percent in 2005, real per-capita health care expenditures have increased approximately sixfold.

Obamacare was passed to lower health care costs, but in reality, it will likely have the opposite effect. With its individual mandate and mandated benefits package, this mindset that encourages wasteful spending and inefficiencies will be brought to more people and more health care services, whether they are wanted or not. This will likely change the behavior of not only patients, but doctors, private practices, clinics, hospitals and health networks. It will lead to additional services and inefficiencies that will simultaneously increase costs. New regulations will also be passed along to the patient in the form of higher costs.

If policymakers are serious about bending the cost curve down, they need to empower patients to be smarter consumers of health care. They need to incentivize patients to shop for the $10 laboratory test and avoid the $10,169 one. Solutions such as price transparency, expanding health savings accounts, making insurance portable across state lines, and tort reform would be a good place to start.

Given the medical side effects that unnecessary tests and procedures can have, these policies are not only good economics, but also good medicine.

Jason D. Fodeman, a physician, is an assistant professor of medicine at the University of Arizona.

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