Federal Employees Health Benefits Program: Differences in Health 
Care Prices Across Metropolitan Areas Linked to Competition and  
Other Factors (02-DEC-05, GAO-06-281T). 			 
                                                                 
Differences in utilization of health care services across the	 
country have been well documented, but less has been reported on 
geographic variation in price. As health care spending is the	 
product of utilization and price, information on health care	 
prices and factors contributing to price differences provides an 
additional perspective on drivers of health care spending. In an 
August 2005 report, GAO examined claims data on enrollees of	 
preferred provider organizations (PPO) participating in the	 
Federal Employees Health Benefits Program (FEHBP) and found	 
substantial price variation across metropolitan areas, after	 
adjusting prices to account for area differences in the cost of  
providing services and in the types of services provided. This	 
statement is based on GAO's August 2005 report entitled Federal  
Employees Health Benefits Program: Competition and Other Factors 
Linked to Wide Variation in Health Care Prices (GAO-05-856). It  
focuses on (1) factors that underlie area differences in price	 
and (2) the contribution of price to geographic differences in	 
spending on health care.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-281T					        
    ACCNO:   A42517						        
  TITLE:     Federal Employees Health Benefits Program: Differences in
Health Care Prices Across Metropolitan Areas Linked to		 
Competition and Other Factors					 
     DATE:   12/02/2005 
  SUBJECT:   Comparative analysis				 
	     Competition					 
	     Cost analysis					 
	     Economic analysis					 
	     Health insurance					 
	     Health insurance cost control			 
	     Health maintenance organizations			 
	     Hospitals						 
	     Medical fees					 
	     Medical services rates				 
	     Physicians 					 
	     Price regulation					 
	     Prices and pricing 				 
	     Federal Employees Health Benefits			 
	     Program						 
                                                                 

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GAO-06-281T

Testimony

Before the Subcommittee on Health, Committee on Ways and Means, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 11:30 a.m. CST

Friday, December 2, 2005

FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

Differences in Health Care Prices Across Metropolitan Areas Linked to
Competition and Other Factors

Statement of A. Bruce Steinwald

Director, Health Care

GAO-06-281T

Madam Chairman and Members of the Committee:

I am pleased to be here to discuss the findings from our August 2005
report entitled Federal Employees Health Benefits Program: Competition and
Other Factors Linked to Wide Variation in Health Care Prices.1 In this
report, we examined differences in prices paid for hospital stays and
physician services across selected metropolitan areas in 2001,2 the most
recent year for which data were available when the study began.
Differences in utilization of health care services across the country have
been well documented, but less has been reported on geographic variation
in price. As health care spending is the product of utilization and price,
more information on health care prices and factors contributing to price
differences provides an additional perspective on drivers of health care
spending.

Our study examined claims data on behalf of more than 2 million enrollees
of preferred provider organizations (PPO) participating in the Federal
Employees Health Benefits Program (FEHBP). The prices these PPOs
negotiated with physicians and hospitals were the same for the enrollees
in FEHBP as for PPO enrollees insured through other employers. Our study
found that prices for FEHBP PPO hospital stays varied by more than 250
percent and prices for physician services varied by about 100 percent
across metropolitan areas. We adjusted prices to account for area
differences in the cost of providing services and in the types of services
provided using Medicare's methods of adjusting hospital and physician
payments for these area differences, with some modifications.

A detailed account of our findings and methodology is included in our
August 2005 report. My remarks today will focus on (1) factors that
underlie area differences in price and (2) the contribution of price to
geographic differences in spending on health care. These remarks are based
on the information contained in the report. The work done for the report
was performed from September 2002 through July 2005 in accordance with
generally accepted government auditing standards.

1GAO-05-856 (Washington, D.C.: Aug. 15, 2005).

2We excluded some of the 331 metropolitan areas in the 50 states and the
District of Columbia for lack of adequate claims information or sufficient
number of hospital stays to support our analyses. We had a sufficient
volume of hospital stays and physician services to analyze hospital prices
in 232 metropolitan areas and physician prices in 319 metropolitan areas.

In summary, market characteristics were closely associated with price
differences across metropolitan areas. 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. The percentage of primary care physicians'
reimbursement that was paid on a capitation basis in health maintenance
organizations (HMO)-a proxy for a payer's power to bargain with providers
on price3 -was also associated with geographic price variation.4 We found
that in areas where either market share was concentrated among few
providers or HMO bargaining power was weak (as measured by lower levels of
HMO capitation), hospital and physician prices paid by the PPOs in our
study were higher than average. When we controlled for other factors that
might be associated with geographic price variation, hospital competition
and payer bargaining power remained associated with lower prices, but the
effect was reduced, and much variation remained unexplained.

Price contributed to geographic differences in spending per enrollee, but
less than utilization. For both hospital and physician services, price
contributed to about one-third and utilization to about two-thirds of the
variation in spending between metropolitan areas in the highest and lowest
spending quartiles. Price was positively associated with spending, as was
utilization, for both hospital and physician services. Therefore, areas
with either high prices or high utilization tended to also have high
spending.

                                   Background

In public programs, such as Medicare, prices are administratively set,
whereas in the private sector, prices are generally negotiated between
providers and health insurers, or payers. Payers may negotiate discounted
rates with providers, for example, in exchange for an anticipated share of
patient volume. Some payers, especially HMOs, may negotiate capitation
arrangements with providers, under which the fixed payment per patient
puts providers at risk of losing financially if the costs of treating a
patient exceed the payment. In contrast to this arrangement, which fixes
the provider's payment regardless of the number of services provided, the
traditional fee-for-service arrangement affords providers the opportunity
to increase payments by increasing the volume of services provided. Payers
that can negotiate a capitated rather than fee-for-service payment
arrangement with providers likely have more negotiating power relative to
providers, which in turn can affect prices. In our study, we measured
payer negotiating power in a metropolitan area as the percentage of
compensation that was capitated for primary care physicians.

3We use the term providers to refer to hospitals, physicians, and other
providers of health care services unless otherwise specified.

4Capitation is a payment method used by managed care organizations where
physicians are paid a fixed, predetermined payment for caring for an
enrollee for a specified period of time, regardless of the number or type
of services ultimately provided

The extent of competition among providers in an area may also affect
prices. In general, economic theory holds that areas with more competition
among providers are likely to have lower prices. Consolidation of
providers, such as hospital mergers, reduces the number of competitors in
the market, giving the consolidated competitors a larger market share.
Recent trends of provider consolidation suggest that some markets are
becoming less competitive.

  Competition, Payer Bargaining Power, Associated with Area Price Differences

We found that in metropolitan areas where market share was concentrated
among few providers or HMO bargaining power was weak (as measured by lower
levels of HMO capitation), hospital and physician prices paid by the PPOs
(in FEHBP) were higher than average. Many of the metropolitan areas in our
study had few providers in competition; about one in four areas had only
one or two hospitals or hospital networks serving the entire market. In
these areas, prices for hospital stays and physician services-after
adjusting for differences in these areas' cost of doing business and mix
of services-were substantially higher than prices in the most competitive
metropolitan areas. For example, in Rapid City, South Dakota, one of the
least competitive markets in our study, hospital and physician prices were
higher than average by 25 percent and 10 percent, respectively. In
contrast, the hospital and physician prices in Pittsburgh, one of the most
competitive markets in our study, were lower than average by 14 percent
and 16 percent, respectively.5

FEHBP PPO hospital and physician prices were also higher, on average, in
metropolitan areas with low levels of HMO capitation, suggesting little
power on the part of payers to negotiate with providers on price. Across
all metropolitan areas in our study, the average percentage of primary
care physicians' compensation that was capitated was about 8 percent. More
than a third of the areas in our study had almost no HMO capitation; in
these areas, less than 1 percent, on average, of the payments to primary
care physicians were paid on a capitated basis. In the quartile of
metropolitan areas with the highest levels of HMO capitation, the average
proportion of primary care physicians' compensation that was capitated was
23 percent.

5Rapid City, South Dakota was in the quartile with the least competition,
and Pittsburgh, Pennsylvania was in the quartile with the most
competition.

     Price Contributed to Geographic Differences in Spending, but Less than
                                  Utilization

Our study showed that prices contributed substantially to geographic
differences in spending for hospital and physician care, but to a lesser
extent than utilization. When we compared price differences and
utilization differences in the metropolitan areas with the highest and
lowest quartile of spending per enrollee, we found that the price of
hospital stays contributed to about one-third of area differences in
spending on hospital care while utilization-that is, the number of
hospital stays-contributed to the remaining two-thirds. We found a similar
relationship between the price of physician services and an area's
spending on physician care-namely, one-third of spending differences was
attributable to price differences and two-thirds was attributable to
service use differences. We also found positive associations between price
and spending and between utilization and spending. That is, areas with
higher prices or higher utilization also tended to have higher spending.
In the case of physician services, price and utilization were modestly but
negatively associated, such that areas with high physician prices tended
to have somewhat lower utilization of physician services and areas with
low physician prices tended to have somewhat higher utilization of
physician services.

                            Concluding Observations

In conclusion, our study results underscore the importance of examining an
area's market structure-including interactions between payers and
providers-to fully understand private sector spending differences from one
area to another. We found that, in addition to utilization of services,
prices played a significant role in an area's total health care spending.
Therefore, it is important for participants and policy makers in
geographic markets to understand the effect of prices as well as
utilization on health care spending to make informed decisions about the
actions needed to moderate spending in their local area.

Madame Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or the other Subcommittee Members may have.

                          Contacts and Acknowledgments

For further information regarding this testimony, please contact A. Bruce
Steinwald at (202) 512-7101 or [email protected]. Christine Brudevold,
Assistant Director; Hannah Fein; and Michael Kendix contributed to this
statement.

(290507)

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www.gao.gov/cgi-bin/getrpt?GAO-06-281T.

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact A. Bruce Steinwald at (202) 512-7101 or
[email protected].

Highlights of GAO-06-281T, a testimony before the Subcommittee on Health,
Committee on Ways and Means, House of Representatives

December 2, 2005

FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

Differences in Health Care Prices Across Metropolitan Areas Linked to
Competition and Other Factors

Differences in utilization of health care services across the country have
been well documented, but less has been reported on geographic variation
in price. As health care spending is the product of utilization and price,
information on health care prices and factors contributing to price
differences provides an additional perspective on drivers of health care
spending. In an August 2005 report, GAO examined claims data on enrollees
of preferred provider organizations (PPO) participating in the Federal
Employees Health Benefits Program (FEHBP) and found substantial price
variation across metropolitan areas, after adjusting prices to account for
area differences in the cost of providing services and in the types of
services provided.

This statement is based on GAO's August 2005 report entitled Federal
Employees Health Benefits Program: Competition and Other Factors Linked to
Wide Variation in Health Care Prices (GAO-05-856). It focuses on (1)
factors that underlie area differences in price and (2) the contribution
of price to geographic differences in spending on health care.

GAO found that market characteristics were closely associated with price
differences across metropolitan areas for the FEHBP PPOs we reviewed.
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. The percentage
of primary care physicians' reimbursement that was paid on a capitation
basis in health maintenance organizations (HMO)-a proxy for a payer's
power to bargain with providers on price-was also associated with
geographic price variation. We found that in areas where either market
share was concentrated among few providers or HMO bargaining power was
weak (as measured by lower levels of HMO capitation), hospital and
physician prices paid by the PPOs in our study were higher than average.
When we controlled for other factors that might be associated with
geographic price variation, hospital competition and payer bargaining
power remained associated with lower prices, but the effect was reduced,
and much variation remained unexplained.

Price contributed to geographic differences in spending per enrollee, but
less than utilization. For both hospital and physician services, price
contributed to about one-third and utilization to about two-thirds of the
variation in spending between metropolitan areas in the highest and lowest
spending quartiles. Price was positively associated with spending, as was
utilization, for both hospital and physician services. Therefore, areas
with either high prices or high utilization tended to also have high
spending. In the case of physician services, price and utilization were
modestly but negatively associated, such that areas with high physician
prices tended to have somewhat lower utilization of physician services and
areas with low physician prices tended to have somewhat higher utilization
of physician services.
*** End of document. ***