Federal Employees Health Benefits
Program: Competition and Other
Factors Linked to Wide Variation in
Health Care Prices
Christine Brudevold
Assistant Director, Health Care
Government Accountability Office
Presentation to AcademyHealth’s
Annual Research Meeting
June 25, 2006
Seattle, Washington
1
Background
• Health care spending varies geographically, but
underlying causes have not been fully explored,
especially in the private sector
• Spending = Price X Utilization
• Most of the geographic variations research has focused
on the utilization of services, not price
2
Study Objectives
1. The extent to which hospital and physician prices
varied geographically in FEHBP PPOs
2. Which factors were associated with geographic
variation in hospital and physician prices in FEHBP
PPOs
3. The extent to which hospital and physician price
variation contributed to geographic variation in
spending in FEHBP PPOs
3
Study Population and Eligibility Criteria
• Study Population: FEHBP
• largest private health insurance program
• contracts with private insurers
• covered nearly 8 million enrollees (2004)
• spent more than $21 billion (2004)
Study eligibility criteria
• FEHBP enrollees in selected national PPOs in 2001
• Individuals under the age of 65
• Primary insurer had to be one of the study PPOs
• Excluded pharmaceutical, mental health and
chemical dependency services
4
Methodology for Objective 1:
Hospital and Physician Price Variation
• Grouped claims by metropolitan areas
• Computed average adjusted price for
• a hospital stay (232 metropolitan areas)
• a physician service (319 metropolitan areas)
• Removed effect of geographic differences in costs of
doing business and the mix of services
• Price included insurer payments and enrollee payment
obligations (deductibles and coinsurance)
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Methodology for Objective 2:
Factors Associated with Price Variation
We examined factors that might be associated with price
variation and developed quantitative measures:
• Market Competition – percent of beds in the two largest
hospitals or hospital networks
• HMO Price Bargaining Leverage – percent of primary
care physician compensation from HMOs that was
capitated
• Cost-shifting – Proportion of population without
insurance, enrolled in Medicare or Medicaid, and
average Medicaid payments to physicians for common
procedures
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Methodology for Objective 3: Decomposing
Spending into Price and Utilization
• Computed average adjusted utilization per enrollee and
spending per enrollee for
• hospital stays
• physician services
• Adjusted utilization for age and sex
• Adjusted spending for costs, age, and sex
• Compared prices and utilization in high and low
spending areas
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Prices Varied Widely Across Metropolitan
Areas
8
Provider Competition and HMO Bargaining
Leverage Associated with Price Variation
9
Cost-shifting Did Not Explain Higher Prices
Results: Observed
Expected relationship between factors
relationship between factors
and price if cost-shifting occurred
and price
Cost-shifting factor
Percent
Uninsured
Average
Medicaid
Payment
Percent on
Medicare
Percent on
Medicaid
Price
Physician price Hospital price



n.s.



n.s.


n.s.
n.s.


n.s.
n.s.
Source: GAO analysis of FEHBP and other data.
n.s. = not significant
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Price Contributed to About One Third of
Variation in Spending
Hospital spending Average hospital price
quartile
index
Average hospital
utilization index
Highest spending
quartile
1.12
1.24
Lowest spending
quartile
0.89
0.80
Percent difference
25.8
55.0
Source: GAO analysis of FEHBP data.
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Summary
• Prices varied widely across metropolitan areas
• Less provider competition was associated with higher
prices
• Less HMO price bargaining leverage was associated
with higher prices
• Cost-shifting did not explain higher prices
• Price contributed to about 1/3 of variation in spending
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Full report available at GAO website
www.gao.gov/cgi-bin/getrpt?GAO-05-856
Title: Federal Employees Health Benefits Program:
Competition and Other Factors Linked to Wide Variation
in Health Care Prices
Report number: GAO-05-856
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