The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured

by Zack Cooper (Yale University) Stuart Craig (University of Pennsylvania) Martin Gaynor (Carnegie Mellon University, University of Bristol, and NBER) John Van Reenen (Centre for Economic Performance, LSE and NBER), December, 2015

Abstract

We use insurance claims data for 27.6 percent of individuals with private employer-sponsored insurance in the US between 2007 and 2011 to examine the variation in health spending and in hospitals’ transaction prices. We document the variation in hospital prices within and across geographic areas, examine how hospital prices influence the variation in health spending on the privately insured, and analyze the factors associated with hospital price variation. Four key findings emerge. First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals.

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pg 15-- …there is substantial variation in private spending across the nation. In 2011, overall spending per privately insured beneficiary in the highest spending HRR (Napa, California) was $5,515.95, more than three times as high as spending in the lowest spending HRR (Honolulu, Hawaii), which spent $1,707.38 per person….

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CB: Honolulu is among the few nationwide where spending for Medicare and private insurance are both low