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Prices, not utilization, drive highest healthcare spending

What's driving the highest per capita healthcare spending in the country? A half-decade's worth of government-funded research points to some contentious and perhaps uncomfortable trends.

"Provider prices, not utilization of healthcare services, is the biggest cost driver in the Massachusetts market," Freedman HealthCare concluded from a review of 16 cost and quality studies published between 2008 and 2013 by Massachusetts state agencies.

Massachusetts is one of the most unique healthcare markets in the country, Freedman noted in its review.

The Commonwealth has the nation's highest proportion of insured residents (97 percent), the highest per capita ratio of physicians (about 315 docs per 100,000 patients) and the highest per capita health spending ($9,278 compared to the national average of $6,815).

Massachusetts' combined private and public healthcare spending has grown at a rate faster than the economy, creating downstream impacts "in the form of higher insurance premiums and increased consumer cost-sharing," Freedman analysts wrote in the report, sponsored by the Massachusetts Association of Health Plans.

Health system consolidation in Massachusetts has been in the works for two decades and its continuation is fueling a debate about whether provider integration leads to greater efficiencies and higher quality or just more concentrated economic power -- or all of those outcomes together.

Either way, Massachusetts is facing a crisis of healthcare costs, holding the distinction of the state with the highest per capita health spending for more than a decade.

Utilization flat, spending up

Between 2001 and 2009, as the Massachusetts Health Policy Commission found in a study last year, healthcare prices and spending increased while utilization held relatively flat, and between 2009 and 2011, price and spending continued increasing even as utilization decreased amid the Great Recession.

Local insurers point mostly to provider pricing as the largest source of their rising costs and one of main reasons why employers and consumers have to take premium increases and more cost-sharing responsibilities.

Harvard Pilgrim, the state's second largest insurer, with 20 percent commercial market share, estimated that that 80 percent of its cost growth from 2004 to 2008 could be "fully attributed" to unit price increases from providers.

During the same period, the state's largest insurer, Blue Cross and Blue Shield of Massachusetts, with 45 percent market share, estimated that unit price increases accounted for 50 percent of its cost growth.

And yet not every provider is getting paid high rates.

"There is a significant gap between the highest and lowest paid providers," Freedman analysts wrote in their review, noting that half of the state reports found a "wide variation" in prices. Those disparities exist across a range of specialities and services and are also found among "multiple payers with the same or similar providers in their plans."

Those high prices also do not necessarily mean higher quality of care, the report noted. "Despite a wide variation in provider prices, there is little variation in quality ratings among providers," a trend consistent in both fee-for-service and alternative reimbursements like global risk contracts, Freedman analysts wrote.

Massachusetts providers as a whole do rank above the national average in most quality outcome measures, although that raises the question of justifying the value of higher-priced providers.

"Some providers with higher quality of care are paid lower prices, and vice versa," Freedman's report noted. Comparing outcomes for vaginal births, for instance, there is no relationship between prices and quality, with low- and high-priced providers fairly evenly represented on either side of average, Freedman found.

Other findings from the review portend a number of challenges ahead in Massachusetts' quest to contain healthcare spending through the new Chapter 224 law, which among other things set a 3.6 percent growth rate benchmark for state health spending in 2014.

For instance, global payments so far have shown "limited evidence" of cost savings. Global payments "do not necessarily translate into lower total medical expenses" and "in some cases, they produce higher costs," Freedman analysts wrote, citing reviews by the state attorney general's office.

In 2010, some of the highest healthcare costs in Massachusetts were associated with providers paid under shared-risk arrangements, although those problems could be due to a lack of standardization, Freedman analysts argued. In one commercial payer's network, global budget per-member per-month payments between two providers varied by as a much as $152.