Marketwide Price Transparency Suggests Significant Opportunities For Value-Based Purchasing

DATE : September 06, 2019

Research Article, Health Affairs Vol. 38, No. 9



The extent of price variation across a local market has important implications for value-based purchasing. Using a new data set containing health care prices for nearly every insurer-provider-service triad across a large local market, we comprehensively examined variation in fee-for-service paid commercial prices in Massachusetts for 291 predominantly outpatient medical services. Prices varied considerably across hospital service areas. Prices for medical services at acute hospitals were, on average, 76 percent higher than at all other providers. The service categories with the widest price variation were ambulance/transportation services, physical/occupational therapy, and laboratory/pathology testing. In this market, simulations suggested that steering patients toward lower-price providers or setting price ceilings could generate potential savings of 9.0–12.8 percent. Marketwide price information at the insurer-provider-service level could help target policy interventions to reduce health care spending.

Health care price variation within the United States is attracting increasing attention from state and federal policy makers. But not all price variation is the same. Variation in health care prices across the country can be wide, but it is not a meaningful market signal for patients or local payers whose choice of providers is restricted to those in their local areas.

Variation in health care prices within local areas can also be wide, and this has different policy implications because providers within local areas are close enough to each other that patients could realistically choose and travel between them. For example, a Government Accountability Office report found that the estimated total cost of laparoscopic gallbladder surgery for patients with the same commercial insurer ranged from $3,281 to $40,626 across providers in Denver, Colorado, in July 2014.  Moreover, the prices paid for a service at one provider vary across commercial insurers.

Local health care price variation is not fully explained by differences in qualitybut instead is the result of insurers’ and providers’ holding positions of varying strength during price negotiations. Because of this, there are opportunities to reduce spending without any loss in value.

Growing awareness of health care price differences within local markets has led to calls for policies that “steer” patients to lower-cost options and put pressure on providers to make price concessions.Policy interventions include price transparency tools, benefit designs such as reference-based pricing and tiered or narrow networks, and value-based purchasing. Some states have also considered explicit regulation of health care prices through legislation that would determine the amounts that health care providers must accept as payment for medical services.

As part of an initiative to rein in health care spending and improve value, Massachusetts has begun to make data available on actual prices negotiated between insurers and providers. Although paid prices must be observable if they are to meaningfully influence behavior, paid prices are almost never made available to the public. Only New Hampshire publishes actual insurer prices paid to providers, including both physicians and facilities: Information for approximately 125 medical services appears on a state-run website.

To this end, the Center for Health Information and Analysis (a Massachusetts state agency) created a unique data set that contains prices by procedure, insurer, and provider for 291 predominantly outpatient medical services. This provides the first opportunity to examine marketwide commercial health care price variation for procedure-provider-insurer triads across nearly all insurers and providers within a large local market. These data also allow the examination of price variation by category of service and as a share of spending. In contrast, most existing evidence on price variation within local areas is based on data from a few large insurers or purchasers in a market.

Understanding price variation using marketwide data has important implications for insurers that contract with providers, regulators that evaluate antitrust concerns, employer purchasers that select insurance carriers for employee health plans, and physicians in risk-based payment contracts who decide where to refer patients. In this article we evaluate the extent of price variation for outpatient services across Massachusetts and discuss the implications of our findings for potential savings and for policies targeted at reducing prices.

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  1. Anna D. Sinaiko is an assistant professor of health economics and policy in the Department of Health Policy and Management, Harvard T. H. Chan School of Public Health, in Boston, Massachusetts.
  2. Pragya Kakani is a student in the Harvard PhD program in health policy at Harvard University, in Cambridge, Massachusetts.
  3. Meredith B. Rosenthal is the C. Boyden Gray Professor of Health Economics and Policy in the Department of Health Policy and Management, Harvard T. H. Chan School of Public Health.

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