“How Medicare and Private Spending Differs – And Why That’s Important to Employers”

How Medicare and Private Spending Differs – And Why That’s Important to Employers 
A recent Commonwealth Fund blog – Understanding Differences Between Medicare and Private Insurance Spending -validates what many of us might have guessed all along:  Medicare and private insurance spending – while both high – are high for nearly opposite reasons.  Specifically… 

  • Medicare spending is (generally) utilization driven.  Commercial spending is (largely) driven by high prices.
  • Moreover, commercial prices are not only high but also wildly variant.  They typically exhibit a 9-fold variance within markets (without relation to quality) and a 12-fold variance across markets.

To this second fact, we’ll pass along an insight that was shared with us by Healthcare Bluebook:  The 9- to 12-fold variance takes place within a given health plan network.  The differences between the networks themselves is a mere 5-10%!
This should matter to employers as they plan for future purchasing and contracting.  From these facts, we think it is reasonable to conclude two things:

  • Decades of “discount” contracting – largely as the result of preferred provider organizations and the narrowing of choice – have done nothing to control health care costs.  In fact, such contracting practices, it would seem,have prompted unprecedented market consolidation that has further inflated pricing by limiting competition.
  • “Choice” – at least for the approximately 35% of services that enrollees can reasonably be expected to shop for – is exactly what’s called for if we are to expect providers to compete on price (rather simply get bigger and bigger).  For most routine procedures, employers should be promoting employee choice and encouraging competition.

In our recent C-Suite Forum, Healthcare BlueBook’s Graham Chalfant profiled pricing variations in the Denver market.  The bottom line was this: if we equated health care services to a gallon of gas, you’d be paying anywhere from $2.00 a gallon to $11.00 a gallon or more.  (Making matters even worse is the likelihood that the highest pricing typically represents lower quality since high volume providers generally are the most efficient and effective.)

To be sure, not all health services are suited to shopping.  But for those that are – which is the majority of episodic diagnostic and procedural services – employers should be encouraging choice – and providing incentives through value-based benefit designs to make the right one.

Call us if you have any questions.

CBGH @ 303-922-0939