Gasoline costs a dollar more per gallon in Hawaii than it does in South Carolina. No big surprise there – things are different from place to place, even if the gas itself is the same everywhere. But why should a broken leg, a heart attack, or an appendicitis cost a lot more in one place rather than another?
No one has a complete explanation, not even the National Academy of Sciences (NAS). (Pre-publication report released online July 24, 2013)
Some factors are known to make one place more expensive than another:
- Wages paid to medical workers, such as nurses.
- Sicker people.
- Age and sex of the population.
None of these make a dent in the problem. After taking into account everything they could, NAS found that most of the variation in costs is (and I quote) “unexplained”.
They have a very interesting theory about it: private insurers, such as Anthem, United, and Humana, negotiate with local hospitals and doctors in each state. Both parties at the table have more or less negotiating power, depending upon the state or even the city. Sometimes the insurer has the upper hand; sometimes, the hospital is the only game in town.
NAS concludes that 70 percent of the place-to-place variation in total private insurance (commercial) spending comes from these one-on-one negotiations. The high-cost areas have high-power providers. That is, where hospitals and physician groups have the leverage, they charge a much higher price to the insurance company.
How much variety are we talking about? How wide is the range between low-cost and high-cost?
Employers in the highest cost region, Northeast United States, pay on average 14 percent more than the lowest cost Southern region. (Source: Kaiser Family Foundation’s 2012 Annual Survey) On a family health insurance plan, that translates into more than $2,000 per year.
Using NAS’s 70 percent estimate, this means that families in New England pay $1,400 more per year for health insurance because the market gives medical providers more negotiating power. It’s not that the providers are doing something different or better. It’s not that our people are sicker, older, or that we have more women (who tend to live longer and use more medical care).
It’s simply that providers can and do command more from the private insurers.
Government rate setting wouldn’t solve the problem either. Medicare sets a national rate and then allows for certain adjustments for regional or local factors such as wages. Yet Medicare still has a wide variation in how much it pays per member: members in low-cost regions take a full 50 percent less per person than members in high-cost regions.
The wide ranging prices are a side effect of localized capitalism. The other impacts of localized capitalism may be positive – innovative care, efficient systems, etc. But knowing that you are paying more for the same product is still a bitter pill to swallow.