Why does health care cost so much? That’s the question of the hour. How much things cost has a lot to do with how much power different players have in our healthcare system.  Individual people have very little ability to negotiate the fees we pay our doctors and hospitals.  And we now know that even health insurance companies have a lot less leverage to negotiate good prices than they used to have.

Massachusetts Attorney General Martha Coakley investigated the secret negotiations that insurers conduct with each hospital and physician group in their networks to set the prices that the insurers will pay for services to their members.  In an effort to understand the root causes of rising healthcare costs, Massachusetts gave Coakley authority to subpoena data on price, quality, and costs from the states’ insurers and providers. 

In a preliminary report, Coakley found that large, powerful hospital and physician groups in Massachusetts get paid more for their services than smaller or less well-known providers even though they don’t necessarily provide better or safer care.

 In fact, their higher prices are not based on any of the things we traditionally think cause health costs to rise — higher quality of care, differences in the sickness of patients, academic or teaching status, or differences in a hospital’s costs to provide the care.  They are paid more simply because the big doctor and hospital groups have more “market leverage.”

 Here’s the key set of findings from the report:

• Prices paid by health insurance companies to hospitals and physician groups vary significantly within the same geographic area and amongst providers offering similar levels of service. 
•  Price variations are not correlated to (1) quality of care, (2) the sickness or complexity of the population being served, (3) the extent to which a provider is responsible for caring for a large portion of patients on Medicare or Medicaid, or (4) whether a provider is an academic teaching or research facility. Moreover, (5) price variations are not adequately explained by differences in hospital costs of delivering similar services at similar facilities.
• Price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers. 
• Variation in total medical expenses on a per member per month basis is not correlated to the methodology used to pay for health care, with total medical expenses sometimes higher for globally paid providers than for providers paid on a fee-for-service basis. 
• Price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts. 
• The commercial health care marketplace has been distorted by contracting practices that reinforce and perpetuate disparities in pricing. 

 The study reinforced some preliminary findings by the Boston Globe in 2008.

A 2008 Globe Spotlight Team series focused on the Boston market found that hospitals such as Massachusetts General Hospital and Brigham and Women’s Hospital typically are paid 15 percent to 60 percent more for essentially the same work as other hospitals, even though the quality is not superior. Coakley’s statewide investigation found that the payment gap was wider than the Globe determined.

In the early days of managed care, if hospitals or doctors demanded prices that were too high, insurers could beat back these demands by threatening to drop them from the networks, which would result in lost patients and revenue.  But hospital and physician groups merged or otherwise teamed up to strengthen their brand names and increase their bargaining power in negotiations.  Now these big groups of doctors or hospitals can refuse to accept an insurers’ patients if their price demands are not met.  It’s the insurers who can’t afford to lose these popular systems from their networks, so they cave in to higher prices. And then pass on those higher prices to you. 

Coakley will release more details and a final report in coming months.  Another state agency will hold hearings on the issue.  Getting under the hood of our healthcare markets in this manner is a great step toward figuring out why our healthcare is costing us so much.