Normal Limits

"Chance is the very guide of life"

"In practical medicine the facts are far too few for them to enter into the calculus of probabilities... in applied medicine we are always concerned with the individual" -- S. D. Poisson

December 02, 2005

GAO - Geographic variations in pricing and spending of the Federal Employees Health Benefits Program (FEHBP)

Government Accountability Office's Health Care Director Bruce Steinwald testifies before the House's Subcommittee on Health, Committee on Ways and Means, titled "Differences in Health Care Prices Across Metropolitan Areas Linked to Competition and Other Factors".

What can this report tell us? According to the GAO, the prices that FEHBP preferred provider organizations (PPOs) negotiate with hospitals and physicians are comparable to those negotiated by PPOs working with private sector employers. And since prices for FEHBP PPO show great geographical variations--prices for hospital stays vary by more than 250 percent and that for physician services by about 100 percent across metropolitan areas, understanding the factors contributing to these price differences may shed some light on price differences ordinary consumers across the U.S. encounter.


Market competitiveness was defined as either:

  1. Hospital competition: a measure of concentration of hospital beds across all hospitals in the metro area.

  2. Payer bargaining power: measured as percentage of HMO capitation in the area.

Main results

  1. "Areas with the least competitive markets�that is, areas with a higher percentage of hospital beds concentrated in the two largest hospitals or hospital networks�had prices of hospital stays and physician services that were higher than areas with the most competitive markets."

  2. When other factors are controlled for, the associations between hospital competition and payer bargaining power with lower prices are decreased, but remain statistically significant. And much variation remained unexplained.

  3. In general, price (e.g., price per night of hospital stay) contributed to 1/3 of the geographic differences in spending per enrollee, whereas utilization (e.g., number of days of hospital stay) explained the other 2/3.

This report was not very detailed as far as its methodology. We also note that this testimony is not written with the usual and customary tone of neutrality that characterize other GAO reports I have read.

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