An unprecedented behind-the-scenes look at the prices that major insurers pay for medical services presents a serious challenge to prevailing beliefs about how to lower health care costs.

For years, experts have argued that hospital mergers can play an important role in driving down medical spending. Their evidence was data on Medicare spending around the country. President Obama even highlighted exceptionally low Medicare spending costs in Grand Junction, Colorado as an example of a health system that could deliver better prices to consumers.

But new data shows that what consumers and insurers are spending in the private market in a given area doesn’t necessarily align with Medicare spending. Grand Junction, for instance, has higher-than-average private sector health costs. While the area’s large hospitals may drive down Medicare spending by avoiding duplicative costs, according to the New York Times, they often force insurers in the private market to pay more for procedures because of the bargaining power they gain from their size and lack of competition.

Martin Gaynor, the Carnegie Mellon economics professor who authored the groundbreaking study, used to subscribe to the bigger-is-better theory about hospitals. But since looking at the prices that Aetna, Humana and UnitedHealthcare pay hospitals for services, he has radically changed his tone.

“We have this large body of evidence covering many, many years that consistently shows if you happen to live in an area with only one hospital you are going to pay a lot more,” Gaynor told Marketplace. Based on the data, the New York Times has created an online tool that allows people to compare private insurance spending in different markets across the country. The results are remarkable because there don’t appear to be any clear geographic trends. While big cities tend to have higher costs, that’s certainly not always the case. For instance, while Los Angeles has the third highest Medicare spending, it has below-average private insurance spending.

Instant Insights /

Hospital mergers drive up costs for private insurers

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