Addressing Price Variation Key for Cutting Healthcare Costs

Reducing price variation and lowering cost for diagnostic tests could save payers and patients $18 billion annually.

By Sara Heath

May 28, 2019 - Reducing the costs of certain diagnostic tests could result in cost savings totaling at $18 billion annually, according to a report from UnitedHealth Group.

Currently, the healthcare industry is seeing considerable cost variation for the most common diagnostic tests. Using 2017 claims data from UnitedHealthcare commercial plans, the researchers looked at how different prices vary, why costs vary, and how reducing cost variation – and costs in general – would impact the medical industry.

The prices UnitedHealthcare and its members paid for the seven most common, minimally invasive, outpatient diagnostic tests were high, the researchers said. Outlining the total costs, not the per-patient cost, the UnitedHealth Group revealed spending that reach nearly $10 million.

Specifically, costs were as follows:

• MRI $9.7 million
• Ultrasound $7.4 billion
• CT scan $5.5 billion
• Pathology $4.8 billion
• Mammography $3.5 billion
• Radioisotope scan and function studies $3.3 billion
• Microscopic exam $3.2 billion

There was considerable variation for costs of diagnostic tests depending on provider and facility, the researchers showed. For example, the cost of an echocardiogram ranged from $210 per patient to $1,830. These high costs, and the variation, are an issue, the researchers said. Echocardiograms and the other studied diagnostic tests are extremely common and essential for basic diagnosing.

Across all studied tests, variation ranged from three-fold to 20-fold.

But the healthcare industry could cut these costs, so long as they agree to cut the baseline cost of the most expensive procedures.

The UnitedHealth Group researchers proposed reducing the costs of the most expensive tests down to those tests priced at the 40th percentile. Tests priced in the top 60 percent of encounters would be adjusted to be less expensive, but those in the lower 40 percent of encounters would remain the same.

In total, these adjustments would result in $18 billion in annual cost savings. In other terms, the total spend for the most common diagnostic tests would go down from $37.4 billion annually to $18.9 billion.

The researchers looked at cost savings by diagnostic test type, revealing the following:

• MRI: $4.6 billion in savings (47 percent lower)
• Ultrasound: $3.7 billion in savings (50 percent lower)
• CT: $3.1 billion in savings (56 percent lower)
• Pathology: $2.7 billion in savings (56 percent lower)
• Microscopic Examination: $1.8 billion in savings (56 percent lower)
• Radioisotope Scan and Function Studies: $1.5 billion in savings (45 percent lower)
• Mammography: $1.1 billion in savings (31 percent lower)

It will be essential for medical professionals to understand the reasons behind the price variation in order to address the issue, the researchers continued.

It is common thought that price variation is tied to differences in the actual cost of the procedure and care quality, as well as differences in cost based on geography.

While it is true that a certain test may be more expensive in one part of the country compared to another, there is less evidence suggesting that higher-cost tests are also higher-quality.

“Prices are not predictive of provider quality or patient outcomes,” the researchers said. “Rather than cost or quality primarily driving price variation, a more likely reason is that health care providers generally are incentivized to use their market power to increase prices, often resulting in overpriced services.”

The issue of cost variation is exacerbated by an opaque healthcare industry. Fragmented care and limited price transparency keep providers from knowing the cost of the diagnostic tests to which they refer their patients.

Creating industry policies or standards for the price of common diagnostic tests could address the astronomical costs payers and beneficiaries currently face, the researchers concluded. Additionally, creating provisions for price transparency will be key to delivering on the promise of lower-cost care.

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