Important Components of Health Care Cost Variation

There have been several articles published recently about the wide variation in pricing from one hospital to another. Having this information open and available will help providers begin to think about competing on price and quality and will help control the runaway health care costs in the US.

As we examine the variation in costs from one provider to another, it is good to keep in mind that there are at least three important components of cost variation:

  1. Price per service
  2. Number of services per person or per episode
  3. Actual types of services performed

For example, let’s say identical twins with the exact same health problem enter two different hospitals (Hospitals A and B). These two people could face vastly different health care charges after leaving the hospital, but the difference could be due to any (or all) of the three components mentioned above:

  1. Price per service: Hospital A might charge more for each individual service than Hospital B – say $1,500 for one MRI instead of $500 (e.g., the price variation discussed in the recent media articles).
  2. Number of services per person or episode: Hospital A might perform more services while treating the patient than Hospital B would. The patient’s bill from Hospital A will be higher if he received three MRIs than it would be if only one MRI were performed.
  3. Types of services performed: Hospital A might choose to perform different kinds of services while treating the patient than Hospital B would have performed. For example, Hospital A might decide an MRI is needed, but Hospital B might think a simpler X-ray would suffice.

Each of these components will drive differences in costs between one provider and another. As an extension of HCMS Group’s Human Capital Risk Index (HUI), our Value HUI (V|HUI) methodology (cost per unit of risk) helps us compare providers in a way that adjusts for much of the health risk differences that might exist between the patients who visit one provider and the patients who visit another. This allows us to compare the costs of two different providers as if the health problems faced by them were the same.

By drilling into these three components of cost difference and by utilizing the V|HUI, we help our employer partners understand where inefficiencies lie and provide them with the information and leverage needed as they work with health plans and providers.

 

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