Prices fluctuate wildly: GAO.

In a study that health economists say is an intriguing first, the Government Accountability Office found private insurers pay radically different prices for patients' care from one U.S. city to the next, regardless of how much it costs doctors or hospitals to provide care.

The GAO analysis is perhaps the broadest look yet at how prices for private insurers fluctuate, said experts inside and outside the agency. The 80-page report examines geographic swings in price and spending by using claims data from large, national private health insurers that contracted to offer coverage for the nation's 8.5 million federal employees in 2001.

The report found puzzling and dramatic geographic price differences for hospital stays and physician services. Hospital prices in Syracuse, N.Y., ran nearly 80% of the national average, but 139 miles away in Buffalo and nearby Niagara Falls, hospital prices were 45% above average. Meanwhile, New York City's hospitals came in at 68% of the national average price.

Why prices vary--by as much as 259% for hospitals, the report said--can be partially explained by competition among hospitals and insurers' leverage when negotiating contracts, said GAO Healthcare Director Bruce Steinwald, who oversaw the analysis. Physician prices varied by roughly 100%.

Hospital prices in competitive markets were 18.3% lower and physician prices 10.6% lower than more consolidated markets, the report found. Hospital and physician prices fell about 10.5% in markets with the greatest presence of managed-care plans that negotiate a flat rate per enrollee, called capitation.

But market clout can't totally explain why hospitals in Buffalo, Salinas, Calif., or South Bend, Ind., outprice Chicago, Los Angeles and San Diego. Researchers designed the study to filter out regional wage, rent or overhead expenses and also adjusted data for geographic differences in the mix of healthcare provided by using a federal formula.

Other possible culprits, such as shifting the cost of low-income or uninsured patients onto private insurers, turned out to be unimportant in driving prices, the GAO found, leaving Steinwald and others perplexed. "We don't have a complete explanation for it," he said.

Nevertheless, pinpointing what separates high-price from low-price markets may help the slow steady growth in U.S. healthcare spending, said economist Jack Zwanziger, director of the University of Illinois at Chicago School of Public Health's health policy and administration program. "It's an intriguing, intriguing finding," Zwanziger said.

Many studies have documented wide geographic variation in spending by Medicare, the federally subsidized insurer for the elderly in the U.S. But overall spending includes not just price, but use, or how often patients get care. Estimates of how much price and demographic differences contribute to Medicare spending swings range from 18% to 40%, according to a 2004 Robert Wood Johnson Foundation report.

The GAO undertook the analysis at the request of Paul Ryan (R-Wis.); the study found that that state's doctors ranked among the nation' priciest. Eight of the study's 10 highest-priced metropolitan areas for physician services were in Wisconsin, including the top four. Wisconsin's hospital and medical associations quickly disputed the survey's conclusions. In a joint statement, the trade groups dismissed the rankings as "hugely misleading" for focusing on price rather than spending. High prices don't mean high costs, they argued.

But Donna Friedsam, associate director of the Public Health and Health Policy Institute at the University of Wisconsin at Madison Medical School, isn't writing off the results. The study's findings deserve scrutiny, said Friedsam, who admitted she was surprised to see so many Wisconsin cities among the nation's 10 priciest physician markets. She said she believes the study's formula to control for business costs such as wages and rent could have distorted healthcare prices.

Wisconsin has a low concentration of federal workers compared with a market such as Washington, D.C., where physician prices ranked fourth from last on the GAO's ranking of 319 metro areas. The more federal employees that a private insurer has, the more clout it has when when negotiating hospital and doctor fees.

PHOTO (COLOR): Friedsam: Wisconsin's results surprising.

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By Melanie Evans