Higher costs don’t necessarily translate to better care

By Christopher Wolfington

In a capitalist economy, higher costs for a good or service are usually indicative of one of two things. First, that said good or service is high in demand while the supply for it is low. Second, that the good or service is of higher quality than other goods and services. But in healthcare, neither are true: higher costs for a procedure are not necessarily a sign of higher quality nor supply and demand. 

Is there some link to higher costs and better care? Sometimes, yes. A study published in the Journal of the American Medical Association found that teaching hospitals, which are generally more expensive and comprise about one quarter of all hospitals, have better mortality rates than non-teaching hospitals. 

But even that study is related to hospitals and not the specific costs of procedures. And while it is true that you will sometimes receive better treatment for a higher cost procedure, it is not true enough to matter. Indeed, while 48% of Americans think that higher prices buy better healthcare, multiple studies show that there is no correlation between cost and quality.

So where does this money go? Why are some providers costlier than others despite not offering measurably better health care? Part of the reason for this is the complicated relationship between hospitals and insurance providers. The final costs for procedures exist because of careful negotiation between the two parties. Further complicating the situation is that hospitals must negotiate its costs with multiple insurance providers, leading to a web of varying costs depending on multiple factors. 

To patients, however, it often does not matter. If a given procedure will max out the deductible, it makes no difference to the patient whether it costs $10,000 or $50,000. The end cost is exactly the same. However, patients who incorrectly insist that higher prices lead to better care end up costing the system millions of dollars. That money, while not paid by them directly, must be paid by someone. It translates to higher premiums and deductibles for the other insured participants. 

The healthcare industry’s relationship to both supply and demand as well as quality of service as it relates to price is unique. You can’t truly fault many patients who assume it follows the same patterns as most other industries. At the same time, the variable price model can be leveraged as an asset if done so correctly. It is truly a fascinating dynamic that defines the difficulties and opportunities of the healthcare industry.