Areas like Grand Junction, which show lower Medicare spending, often have highly consolidated hospital marketplaces. The Medicare cost savings in these areas come largely from eliminating duplicative treatment and testing which is possible when you aggregate multiple hospitals and clinics into a large network.

But those same large systems command higher prices on the private insurance side because…well….because they can.

The new study points out some dizzying variations in the prices different hospitals charge for the same common surgical procedures across the country. The difference can be as high as 12-fold. The authors point out that on average, areas dominated by a single hospital monopoly have across-the-board average prices 15% higher than regions with four or more hospital systems, even after controlling for population variables and clinical quality.

In markets dominated by one or two major hospital players, there’s little competition, so networks have strong bargaining muscle with the private plans. They make up dollars lost from Medicare cuts by raising prices on the private side.

A 3-Way Blame Triangle

Feeling that squeeze, the health plans raise their premiums, which makes costs go up for employers and insured individuals. And this puts more political pressure on the fed to “do something.” The something usually amounts to finding still more ways to cut reimbursement and titrate service utilization.

It’s an elegant three-way blame triangle between the fed, the private insurance plans and the hospital systems: each player can point a finger at the others as the “root” cause of the crisis. And business can go on as usual.

The architects of healthcare reform thought they’d be able to manage the crisis by incentivizing big-spend regions to replicate practice patterns in places where Medicare spending was lowest but care was at or above par. That makes sense in theory, but only works if there’s no cost-shifting to the private plan side.

As pointed out in The Price Ain’t Right, those shift-free zones are relatively few.

Statistics and statisticians being what they are, one could argue that The Price Ain’t Right is really nothing more than using a balloon sword to stab a balloon dragon.

It rightly points out the flaws that come from building policy around an incomplete statistical model, and its message that private plans are bearing the fiscal brunt of Medicare cuts is sure to be a hit with ObamaCare haters.

But the report is still a statistical balloon animal. It is almost entirely focused on hospital care, and its major upshots are based largely on price comparisons for specific discrete advanced care procedures.

That focus is understandable given that hospital care represents 31% of all health care spending (and 5.6% of the nation’s GDP), and that well-defined surgical procedures such as knee replacements or lower limb MRIs are relatively easy to quantify and compare.

But in a larger sense, the world as described by The Price Ain’t Right as incomplete and potentially misleading as the ObamaCare statistical model guided by Medicare spending data only.

Balloon Dragon, Balloon Sword

This new report, valuable though it is, is really a model of the advanced disease management system, not of the “healthcare” system. It’s not a description of “health spending” as its authors claim, but of late-stage disease care cost shifting. The report has almost nothing to say about the role of prevention, unless you—like many policy wonks—consider colonoscopies to be “preventive” medicine.

It also perpetuates some big fallacies such as the notion that health insurance is actually insurance (it’s more like a fiscal transaction processing than true insurance such as car insurance), or the idea that early detection modalities like colonoscopy represents preventive medicine.

The authors present their numbers as if the private sector and federal programs are separate and oppositional worlds. That’s fallacious because A) much of the federal medical spend is funneled through private companies (think Medicare managed care); and B) in reality many people have both Medicare and private insurance.