There are three major types of pricing variations in healthcare. The first is general product level pricing variations. Medicaid tends to pay less than Medicare which tends to pay less than large group Commercial.
There is also regional variation. New York City is more expensive than its suburbs. North Dakota and other very rural places which have a hard time attracting and holding onto docs are more expensive than medium sized cities.
Finally there is in-region, in-product idiosyncratic pricing variation. A new paper in Health Affairs looks at the pricing variance within markets and between markets for commercial insurers. **
Our study included prices for up to 242 services in each of forty-one states and the District of Columbia. Prices for 162 of these services were reportable in all forty-one states and the District of Columbia. We found that the ratios of average state prices to the average national price for these 162 services varied from a low of 0.79 in Florida to a high of 2.64 in Alaska. Ratios at the twenty-fifth and seventy-fifth percentiles—Oklahoma (0.97) and New Mexico (1.25)—differed by 0.28….
Average prices were computed for 242 services, some of which are standardized collections of common groupings of diagnostic and procedure codes.9 Some services have a single code (for example, Current Procedural Terminology [CPT] code 76811 is for pregnancy ultrasound). Other services encompass an episode of care, such as knee replacement, which includes a specialist’s evaluation, surgery, physical therapy, and follow-up evaluation.…
Examining price variation by service provides an understanding of the impact of the variation on patients and insurers. We selected three services—pregnancy ultrasound, knee replacement, and, again, cataract removal—for this examination because they exemplify the range of services and the extent of price variation that exist for common medical services….
Based on the interquartile range ratio, knee replacement prices appear to have the least variation: 1.32, compared to 1.54 for pregnancy ultrasound and 1.47 for cataract removal (Exhibit 3). However, the national average price for knee replacement is more than a hundred times higher than the national average price for pregnancy ultrasound and ten times higher than the price for cataract removal (see the Appendix).11 Thus, even though knee replacement has less variation in price than the other two services do, its variation can have a substantial impact on total expenditures and on patient cost sharing….
Price variation within states was examined though MSA-level prices….We also found considerable variation in the average price for pregnancy ultrasound (Exhibit 6). The average price in Cleveland ($522) was almost three times that in Canton ($183), even though these two Ohio MSAs are only 60 miles apart. Conversely, Virginia Beach ($275) and Richmond ($271), both in Virginia and 107 miles apart, had nearly identical average prices.
I would want to overlay the pricing variations with some type of medical provider market concentration factor. I would bet that areas within a state that have higher levels of pricing than other areas in the state are also areas where the providers are relatively more concentrated than the payers. Elective procedures that are deferrable (knee replacements) and quasi-elective procedures that are fairly low skill and generic (pregnancy ultrasounds) should have variance in pricing due to local general price levels (New York City should be more expensive than Buffalo on this logic) but the wild swings should not be present if the medical services markets were vaguely efficient or functional.
** Newman, D., Parente, S. T., Barrette, E., & Kennedy, K. (2016). Prices For Common Medical Services Vary Substantially Among The Commercially Insured. Health Affairs, 35(5), 923-927. doi:10.1377/hlthaff.2015.1379