HC Statistics Health Insurance Hospitals Supply of Medical Services

Regional Variation in Medical Spending: A Texas Case Study

A large body of research (including my own) indicates that there exists significant regional variation in medical spending. What is the source of these differences: differences in the prices paid per service or differenes in the amount of healthcare services used? The conventional wisdom is that Medicare does a better job of controlling prices, and private plans do a better job of controlling volume. Is this true?

A paper by Franzini et al. (2014) examines regional variation in spending across hospital referral regions (HRRs) in Texas. They authors use data from Blue Cross Blue Shield of Texas (BCBSTX) to examine regional variation in spending for the privately insured population and data from Medicare to examine regional variataion in spending for the publicly insured. They find the following:

Price had a considerable impact on spending variation across Texas HRRs in the privately insured population, but a much smaller impact on Medicare spending. This is expected since Medicare rates are not negotiated but rather regulated to use nationally applicable price schedules. Price accounted for 32 percent of BCBSTX spending variation…

However, these results varied by service category. Only 15% of regional variation in outpatient spending and 12% of physician and other professional fees is explained by regional differences in price. fees (i.e., physician fees). The authors claim that:

In this case, it is likely that because professional service providers tend to be in relatively small practices, particularly in Texas where small and solo practices are the norm, they have limited market power and are likely to be price-takers from BCBSTX

On the other hand, hospitals use their market power to negotiate higher rates.

Our finding that a large portion of spending variation for inpatient services is due to price variation is likely due to many hospitals having significant market leverage in negotiating prices. In Texas, price negotiations in the inpatient setting revolve often on an overall spending increase; for example, BCBSTX may target a 5 percent spending increase for a given hospital but leaves it to the hospital to allocate the increase internally. Thus, high-priced markets for inpatient services continue to be high priced over time.

The authors find that in Texas, outpatient and professional services have little market power and are price takers from both private insurance and Medicare. Hosptials, however, have more market power and can negotiate higher prices from private insurers.


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