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Mark Miller: Remaking Retirement

Health-Care Costs: Why Your Location Really Matters

What Americans pay for doctors, hospitals, and long-term care can vary dramatically from region to region.

It's no secret that the tab for health care in America is soaring. But did you know that what you pay for health care depends--heavily--on where you live?


  • In Milwaukee, physicians' standard office visit rates are 166% of what they charge to see Medicare patients. But Cleveland doctors charge private-pay patients almost the same amounts that they get from Medicare, according to the Center for Studying Health System Change, or CSHSC.
  • Inpatient hospital prices in Los Angeles average 149% of Medicare rates; in Richmond, Va., those rates are 192% of Medicare's prices, according to CSHSC.
  • In Connecticut, the average annual out-of-pocket health-care cost for a senior in excellent health is $4,344--16% above the U.S. average. But in Arizona, a senior with the same health profile spends an average of $3,144--16% below the U.S. average, according to the Elder Economic Security Standard Index, or EESSI.
  • The average annual occupancy cost for a one-bedroom single assisted-living facility room in New York state is $44,400--but just $31,800 in Utah, according to Genworth/Carescout.

The Big Picture
Overall, national health spending has moderated somewhat in recent years. This week, the federal government announced that spending rose 3.9% in 2011, the same increase recorded for 2009 and 2010.

But few experts are convinced that health-care cost inflation has been tamed, and health care continues to take a bigger bite out of household budgets. For example, per capita expenditures for claims filed through employer-sponsored insurance plans rose 4.6% in 2011, according to the Health Care Cost Institute; the U.S. Consumer Price Index rose just 3.2% last year.

Retirees face similar health-care inflation: The lifetime cost of health care for a couple age 65 jumped 4% this year, to $240,000, according to Fidelity Investments. Health-care inflation for retirees has increased an average of 6% per year since Fidelity first began tracking it in 2002.

Our rate of health-care spending far outpaces that of other industrialized nations. The United States spent 18% of its gross domestic product on health care in 2010--about 7 percentage points higher than the average for all other industrialized countries, according to the Organization for Economic Cooperation and Development.

Per capita spending on health care in our country was $8,233 in 2010. That was 36% higher than the next biggest spender--Switzerland. It was 47% higher than what Germany spends, and 46% higher than Canada's spending level.

But the variations in health-care costs within the U.S. are just as dramatic.

Private Group Health Insurance
Data on private health insurance market coverage is hard to come by because the system is fragmented among many providers, and insurers usually aren't compelled to disclose detailed information on rates they pay to providers.

But health researcher Chapin White of the CSHSC provided a glimpse into regional cost variations when he gained access to detailed 2009 health-care spending records for a large group of nonretired auto workers living in 19 communities around the country. They were all covered (through the United Auto Workers) by a series of Blue Cross Blue Shield preferred provider organizations. Spending varied from a low of $4,500 in Buffalo, N.Y., to a high of $9,000 in Lake County, Ill.

White found that the largest regional variations occurred among hospitals. He benchmarked prices paid against Medicare rates and concluded that hospital inpatient prices averaged 55% higher than what Medicare would pay. But some of the variations he uncovered were nothing short of stunning: In the lowest-priced communities (Syracuse, N.Y., and St. Louis), the autoworker prices were 30% above Medicare rates; in the highest-priced area (Lake County, Ill.), they were more than 2-1/2 times Medicare prices.

White found no correlation between the prices paid and the quality of care provided. Rather, the differences stemmed from the relative pricing power of hospitals in their markets.

"The big-picture trend is that hospitals have been gradually consolidating, merging and forming into big integrated systems," White says. "They have been buying up more and more physician practices and outpatient facilities. Once they become big integrated systems, private insurers are helpless against them when trying to negotiate prices.

"If a big system has the key hospitals in a market, then all the employers are going to want that system in their plans. They become 'must-have' networks--the hospitals, and that gives them the upper hand in setting prices."

Another study--issued last year by the Massachusetts Attorney General's office--offers additional eye-popping insight into differences in pricing. The report examined the progress of the state's 2006 health-care reform law and took advantage of the attorney general's subpoena power to obtain detailed, aggregated data on pricing by health-care providers in the state.

The report found wide disparities in prices in the state unrelated to "differences in quality of care, complexity of services, or other characteristics that might justify variations in prices paid to providers. Instead, prices reflect the relative market leverage of health insurers and health providers."

The prices paid to physicians groups differed by 145% at most major Massachusetts insurers--and the difference was more than 230% for two health insurers. Likewise, the study found a 170% difference in prices paid to hospitals for most insurers, with a difference of more than 300% for two insurers.

Medicare sets national rates for all health-care goods and services, but it does adjust those prices to account for regional variations in underlying provider costs. The premiums seniors pay for Medicare Part B don't vary, but the availability of supplemental policies--Medigap and Medicare Advantage--can vary, along with the market competitiveness. For example, Advantage--an all-in-one managed-care plan option that tends to hold down out-of-pocket costs--tends to be less available in rural areas.

A study of 2009 spending patterns by the Centers for Medicare & Medicaid Services--which administers Medicare--found that New England and Mideast regions (Delaware, District of Columbia, Maryland, New Jersey, New York, and Pennsylvania) had the highest per capita health-care spending, "averaging 29% and 17%, respectively, higher than the national average of $6,815." The Rocky Mountain and Southwest regions had the lowest per capita levels, 15% lower than the national average.

"Medical practice patterns differ around the country," says Jan Mutchler, associate director for social and demographic research at the University of Massachusetts Boston Gerontology Institute, which developed the EESSI in collaboration with Wider Opportunities for Women. "Some regions pull out all the stops with specialists, and others have more conservative norms."

Long-Term Care
The cost of long-term care services also can differ widely by region. An annual survey of private-payor long-term care providers by  Genworth Financial (GNW) and its subsidiary Carescout shows wide variances in the cost of everything from assisted-living facilities to nursing homes and home health care.

The variations stem from a complex set of factors, says Robert Bua, vice president of Genworth and business leader of Carescout. "It's everything from demand factors for different services to competition, and the cost of labor and building facilities."

New York City offers an instructive example. "Nursing care is very expensive there because of high costs for facilities, maintenance, utilities, and insurance," Bua says. "And you have very high fixed labor costs for nurses and other skilled workers who you've got to employ for the whole year, no matter if you're filling all your beds."

"But home-care costs in New York are relatively low," he adds. "It's less skilled work, and the city has a large immigrant workforce of low or unskilled workers to fill those jobs."

The results of the Genworth/Carescout survey are available as a free online tool that can be used to research and compare costs in local areas. Bua recommends it not only as a planning tool but also as a guideline for anyone seeking out long-term care services.

"It's empowering information to know the cost of care in your local area. If you are looking for care for a loved one today, you can see what the median rates are for your area. It can give you negotiating power."

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. The views expressed in this article do not necessarily reflect the views of

Mark Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.