Health-Care Costs: Why Your Location Really Matters

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It’s no secret that the tab for health care in America is soaring. But did you know that what you pay for health care depends–heavily–on where you live? Consider:

  • In Milwaukee, physicians’ standard office visit rates are 166% of what they charge to see Medicare patients. But Cleveland doctors charge private-pay patients almost the same amounts that they get from Medicare, according to the Center for Studying Health System Change, or CSHSC.
  • Inpatient hospital prices in Los Angeles average 149% of Medicare rates; in Richmond, Va., those rates are 192% of Medicare’s prices, according to CSHSC.
  • In Connecticut, the average annual out-of-pocket health-care cost for a senior in excellent health is $4,344–16% above the U.S. average. But in Arizona, a senior with the same health profile spends an average of $3,144–16% below the U.S. average, according to the Elder Economic Security Standard Index, or EESSI.
  • The average annual occupancy cost for a one-bedroom single assisted-living facility room in New York state is $44,400–but just $31,800 in Utah, according to Genworth/Carescout.

The Big Picture

Overall, national health spending has moderated somewhat in recent years. This week, the federal government announced that spending rose 3.9% in 2011, the same increase recorded for 2009 and 2010. But few experts are convinced that health-care cost inflation has been tamed, and health care continues to take a bigger bite out of household budgets. For example, per capita expenditures for claims filed through employer-sponsored insurance plans rose 4.6% in 2011, according to the Health Care Cost Institute; the U.S. Consumer Price Index rose just 3.2% last year.

Fidelity Investments Health-care inflation for retirees has increased an average of 6% per year since Fidelity first began tracking it in 2002.

Our rate of health-care spending far outpaces that of other industrialized nations. The United States spent 18% of its gross domestic product on health care in 2010–about 7 percentage points higher than the average for all other industrialized countries, according to the Organization for Economic Cooperation and Development

Per capita spending on health care in our country was $8,233 in 2010. That was 36% higher than the next biggest spender–Switzerland. It was 47% higher than what Germany spends, and 46% higher than Canada’s spending level.

But the variations in health-care costs the U.S. are just as dramatic.

Private Group Health Insurance

Data on private health insurance market coverage is hard to come by because the system is fragmented among many providers, and insurers usually aren’t compelled to disclose detailed information on rates they pay to providers. But health researcher Chapin White of the CSHSC provided a glimpse into regional cost variations when he gained access to detailed 2009 health-care spending records for a large group of nonretired auto workers living in 19 communities around the country. They were all covered (through the United Auto Workers) by a series of Blue Cross Blue Shield preferred provider organizations. Spending varied from a low of $4,500 in Buffalo, N.Y., to a high of $9,000 in Lake County, Ill.

White found that the largest regional variations occurred among hospitals. He benchmarked prices paid against Medicare rates and concluded that hospital inpatient prices averaged 55% higher than what Medicare would pay. But some of the variations he uncovered were nothing short of stunning: In the lowest-priced communities (Syracuse, N.Y., and St. Louis), the autoworker prices were 30% above Medicare rates; in the highest-priced area (Lake County, Ill.), they were more than 2-1/2 times Medicare prices.

White found no correlation between the prices paid and the quality of care provided. Rather, the differences stemmed from the relative pricing power of hospitals in their markets.

“The big-picture trend is that hospitals have been gradually consolidating, merging and forming into big integrated systems,” White says. “They have been buying up more and more physician practices and outpatient facilities. Once they become big integrated systems, private insurers are helpless against them when trying to negotiate prices.

“If a big system has the key hospitals in a market, then all the employers are going to want that system in their plans. They become ‘must-have’ networks–the hospitals, and that gives them the upper hand in setting prices.”