Variation in Inpatient Hospital Prices and Outpatient Service Quantities Drive Geographic Differences in Private Spending in Texas

Health care costs account for almost 18 percent of GDP in the United States, higher than in all other developed countries, which has prompted an intense search for opportunities to increase the efficiency of the health system (National Institute for Health Care Management 2012; Hartman et al. 2013). While a very large literature has examined variation in Medicare spending, evidence on private medical spending is much more limited due to difficulties accessing private claims data. With private spending representing 55 percent of total spending (Hartman et al. 2013), it is critical for policy and budgetary purposes to understand what drives variation in spending in the private sector. Based on several recent analyses of variation in private spending, it is becoming increasingly clear that Medicare and private spending patterns differ, such that Medicare spending may not be a good proxy for the overall health system. In this article, we use newly available data from the largest private insurer in Texas, Blue Cross Blue Shield of Texas (BCBSTX), to examine the role of prices and utilization as drivers of geographic variation in health care spending. An extensive literature examining geographic variation in Medicare spending has been influential in framing health care policy, including the Affordable Care Act. The literature distinguishes two main sources of Medicare spending variation with different policy implications (Newhouse and Garber 2013). The first emphasizes health status variation to explain geographic spending variation (Reschovsky, Hadley, and Romano 2013). The second focuses on differing provider practice patterns, including the intensity of health care use, as the root of geographic spending variation (Dartmouth Atlas Project 2007). Disentangling those two factors has proved exceedingly difficult. While disagreements remain over the role played by health status, it is clear the spending variation in Medicare is at least partly explained by unwarranted differences in postacute care utilization (Institute of Medicine [IOM] 2013). Recent studies have found considerable spending variation in the private sector as well (Chernew et al. 2010; Philipson et al. 2010; White 2012). However, the drivers of spending variation among the privately insured differ from Medicare, in particular the role of utilization and price. Price variation plays a relatively small role in Medicare variation, because Medicare uses a nationally administered price-setting system. In contrast, negotiated prices are the norm in the private sector, which can result in prices for similar services that vary widely even within a geographic area (Reinhardt 2011). The role of price and utilization in spending variation has important policy implications (Ginsburg 2010; White, Reschovsky, and Bond 2014). For example, if spending variation is mainly due to utilization, policies that control utilization variation (particularly at the higher-use end) such as those promoting greater care management efforts to prevent unnecessary aggressive treatment or efforts to improve population health when utilization variation appears due to variation in health status. If, on the other hand, price is the largest source of spending variation, policies designed to rein in price variation, such as those promoting increased competition or price regulations, may be more appropriate (Oberlander and White 2009; Ginsburg 2010). New Contribution In previous work (Franzini et al. 2011), variations across Texas in total spending and inpatient utilization were found to be similar in BCBSTX and Medicare both in level and in direction. However, in that study, the role of price and utilization in spending variation could not be investigated. This study expands previous work by using newly available and more detailed claims data to measure market-level prices, utilization, and health risk among the BCBSTX privately insured population in Texas. This approach allows us to directly compare various components of variation in BCBSTX and Medicare spending, both for overall and service-specific spending such as inpatient hospital care. Our analyses of BCBSTX private spending adds geographic diversity and generalizability to previous studies which originated in the Midwest and Northeast (Ginsburg 2010; White 2012). Moreover, other research has largely focused on national trends (e.g., Health Care Cost Institute, Inc 2013). By taking a more in-depth look within a specific state, we hope to further the spending variation research to better be able to inform effective policies for reducing unnecessary spending variation.