What's Driving Variation in New York's Hospital Spending and Prices?

A new study covered in yesterday's New York Times looks at how hospital spending and prices vary across the country. This is a careful study done by some of the most respected academic economists in the country. It adjusts for many factors that could legitimately affect the cost (or price) of, for example, a specific procedure at different hospitals.

To date, analysis of spending variation has been very difficult to do because hospitals and insurers tend to hide this information from consumers (and researchers) because it is considered "commercially sensitive." But, these researchers had access to a large data set of claims from private insurers across the country.

There is lots of information that flows from the study, but I find four items are most important to those of us interested in the New York health care system:

1) Many parts of New York State have low hospital spending compared to national averages. Rochester and Buffalo, for example, have the third and fourth lowest spending for private insurance across 306 hospital referral regions. Elmira, Binghamton, Syracuse, and Albany also have relatively low hospital spending.

2) New York City and Eastern Long Island, by contrast, have quite high spending; they are ranked as the 34th and 68th most expensive markets in the country, respectively, for private insurance spending.

3) Prices vary as much across hospitals within a community as across communities. For example, for five hospitals in Manhattan, the price of a knee replacement ranged from just over $20,000 to about $45,000.

4) Hospital prices are 15% higher when a hospital has a monopoly in a community, 6% higher when it is one of two hospitals, and 5% higher when it is one of three hospitals.

What are the implications of these findings when we think about how to keep the costs of health care down in our State? Here are three that come to mind:

1) It is important to recognize that our large DSRIP initiative is encouraging greater consolidation of providers and hospitals across the State. This study suggests that we'd better keep an eye on competitiveness as we rush towards consolidation. Consolidation could improve efficiency and care, but it could also lead to price increases. Competition among hospitals does seem to matter!

2) We need to understand fully why hospital spending is as low as it is in many upstate communities. Is this a sign of stressed hospitals not doing well negotiating with insurance companies (there tend to be fewer insurers per community upstate than downstate)? Or, are upstate hospitals model providers of care (as we often brag is the case for Rochester, which also has low per capita Medicare costs)? If the former is the case, we may be hurting the long-term ability of upstate hospitals to provide high-quality care. If the latter is the case, let's learn from upstate and apply the lessons downstate!

3) Similarly, we need to understand why spending is so high in New York City and Eastern Long Island. It is possible that the costs of graduate medical education, unfunded medical research, unfunded bad debt and charity care, and relatively low rates paid by Medicaid all affect what private insurers pay downstate hospitals. But, perhaps inefficiency also impacts prices. On the flip side, perhaps high quality and access to state-of-the art technology also affect spending. We really need to understand the relative roles each of these factors play.

We need to get to a point where we are confident about what is driving variations in spending and prices. To do so, it is imperative that hospitals and insurers make their data available and accessible to both researchers and consumers. We need better information about both the costs and the quality of care delivered to understand whether more spending is associated with better care, or if that spending is wasteful and avoidable. Only then can we provide reasonable incentives for New Yorkers to use efficient, high-quality hospitals--and for low-quality or inefficient hospitals to change their ways. Without transparent data, it will be impossible to tamp down unnecessary spending and to make care more affordable for patients.