Shifting Patients from Higher-price to Lower-price Providers: What Are the Potential Savings?

Efforts to help patients choose higher quality and lower cost care seek to eliminate wasteful spending in health care. Because prices of health care vary substantially even among providers within the same geographic area, and price is weakly correlated with quality, shifting patients to lower-priced providers could yield savings without sacrificing quality. Motivated by this evidence, health plans have focused on raising the salience of and exposure to prices for patients through price transparency initiatives, high-deductible health plans, or other benefit designs. Given the ongoing policy interest, we aim to quantify potential partial-equilibrium savings from shifting patients from higher- to lower-priced providers in the same geographic area. Potential savings depend on the extent of price variation across providers in a market and the share of patients receiving care from higher-priced providers.

We examine three services (laboratory tests, imaging services, and durable medical equipment (DME)) that are good candidates for shifting to lower-priced providers. They are often used in non-emergent scenarios, do not require patients to switch physicians, and patients typically do not believe they vary in quality. Using commercial claims data from a large insurer in California, we estimate potential savings from shifting patients to lower-priced providers. We first characterize price variation within markets and describe the relationship between providers’ market shares and their relative prices in the market. In our main analyses, we simulate savings if patients visiting higher-priced providers instead received care from the median-priced provider in their market for the same service.

We find significant within-market dispersion in lab tests (coefficient of variation = 63) and imaging (CV = 67) and less so in DME (CV=29). Moreover, high-priced providers commanded high market share. Specifically, providers with above-market median prices commanded 45%, 52%, and 54% of market share in labs, imaging, and DME, respectively. We find that shifting patients to the median priced provider in their market would generate average savings of 42%, 45%, and 15% in lab tests, imaging services, and DME, respectively, though the range of potential savings varied significantly across markets. These savings represent 9% of total outpatient spending. Relatively high savings in lab tests and imaging are driven by the high degree of within-market price dispersion coupled with high market share commanded by high-priced providers in these services. In contrast, though high-priced DME suppliers command high market share, due to relatively less within-market price variation, potential savings from shifting patients to lower-cost providers is more limited.

Our results imply significant opportunities for savings if payers can steer patients to lower-cost providers via price transparency initiatives or alternate benefit designs such as reference-based pricing and tiered provider networks. Moreover, policies that promote competition in the health care delivery system, such as stricter antitrust enforcement may limit the ability of increasingly large health systems to negotiate higher prices, which puts downward pressure on prices for health care services.