In California, What’s Driving the Variation in Total Cost of Care — Volume or Price?

As the “repeal and replace” debate continues in Washington over the future of the Affordable Care Act, policymakers considering new legislation should not lose sight of the key concept of the ACA — affordability. High and rising costs are among the most intractable health care issues facing consumers across California and the nation, and any discussion must keep underlying cost drivers at the forefront.

But where should the focus be? At the most elementary level, total health care spending boils down to two main factors: how much care we use (volume, or utilization) and what we pay for that care (price). Teasing out how each factor — utilization or price — contributes to costs is important because cost-control solutions vary depending on the answer.

Across 19 regions in California, the annual risk-adjusted, per capita total cost of care for commercially insured people varies dramatically — from an average high of $5,400 in San Francisco to a low of $3,600 in Kern County, according to 2013 data in the California Regional Health Care Cost & Quality Atlas, a web-based interactive tool produced by the Integrated Healthcare Association (IHA) to monitor cost and quality trends across the state.

Adjusted to reflect differences in population health status, the atlas shows a clear geographic cost pattern. All Northern California regions have higher costs than the statewide average of $4,300, all Southern California regions have lower costs than the state average, and Central California regions have mixed costs.

Three Key Measures

What is driving these differences? Is it variation in per capita utilization, or is it price? While the atlas does not have unit price information, it does include three important hospital utilization measures: emergency department (ED) visits, all-cause readmissions, and inpatient bed days. This allows for basic comparisons of total cost per enrollee vs. three critical measures of utilization. If hospital utilization were driving the overall cost of care, there would be a positive correlation between the cost and utilization measures. However, an analysis of atlas information actually shows the opposite. When considering all commercial health maintenance organization (HMO) and preferred provider organization (PPO) products and regions, cost and volume tend to move moderately in opposite directions.

The quadrant chart below illustrates the relationship between total cost of care and hospital utilization, based on a composite score representing the three utilization metrics. Each orange circle represents a region’s PPO products, and each blue triangle represents a region’s HMO products. With the exception of one outlier region, the data show a moderate negative correlation between hospital utilization and cost. In other words, lower hospital utilization is associated with higher total costs of care.

Linking Hospital Utilization and Total Cost of Care for Commercially Insured Californians, by Product Type, 2013

In the atlas data, total cost of care includes both what the enrollee pays — for example, deductibles and coinsurance — as well as the insurance payments that go to providers. That means cost variation can’t be explained by differences in benefit design among commercial products. Because higher total costs are not driven by greater hospital utilization, and not accounted for by benefit design differences, price seems to be playing a strong role.

There is also an alternative but less likely explanation. Because the atlas only looks at hospital utilization, it’s possible that the total cost of care could be driven by nonhospital utilization as much as the price of care. But because hospital utilization accounts for almost one-third of overall spending on average, it is unlikely that utilization of other services, such as physician and other ambulatory care, has as great an impact on cost variation.

Much of the focus to date on making health care more affordable has involved transferring more financial responsibility to individual patients, the idea being that if consumers have “skin in the game” they will be more discriminating in their care purchases. But if the cost problem is primarily driven by price, which is related to market forces prevalent in a geographic region, is shopping really the solution?

The next version of the atlas, scheduled for release in 2017, will include additional utilization measures and cost information. These will offer a clearer picture of the roles of utilization and price in determining health care costs for commercially insured Californians. Until then the atlas findings stress the need for a better understanding of how pricing differences contribute to total cost variation and encourage us to search for more effective strategies to influence prices as well as utilization.

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