Anatomy of a Walletectomy

It all began when Dr. Renee Hsia of the University of California at San Francisco received a simple request from a good friend who had checked into a local hospital for an emergency appendectomy. The fairly routine procedure took place 19,368 times during 2009 in California.

After he returned home, he received a bill from the hospital for $19,000, his co-payment for the parts of the $54,000 operation that his insurance company didn’t cover. “He wanted to know if this was the usual and customary charge for a one-day stay in the hospital,” she recalled.

And thus began her research into pricing variability in the state, which was published this week in the Archives of Internal Medicine. The prices ranged from $1,529 to $182,955 with the median hospital charge of $33,611, the study showed.

The prices not only varied between hospitals, they varied within hospitals. The largest spread occurred at one hospital, which Hsia wouldn’t reveal, where the cheapest appendectomy went for $7,504 while the most expensive charged was $171,696. There were numerous hospitals where the spread was $100,000 or more.

“They had the same diagnosis, but different things could have been done,” she said. For instance, one patient could have had multiple imaging tests and robotic laparoscopy, while the other received no imaging and a regular laparoscopy. There’s no evidence to suggest one set of alternatives had better outcomes than the other.

The patients also were charged different rates based on their insurance coverage. Medicaid pays the least while people with either no insurance or in individual plans that don’t negotiate rates paid the most.

She saw no solution in publishing prices or shopping around. “It’s not like when you check into a hospital with an emergency that you can ask for an estimate,” she said. “People shouldn’t have to wonder about that when they need care. As a consumer, you don’t get to choose when it’s an emergency.”

It’s not just the patients who are in the dark. The physicians have no incentive to pay attention to the cost of what they order. “Our findings suggest that there are inherent limitations of market theory within the health care system,” she and her co-authors concluded.

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect, The Washington Post and The Fiscal Times. You can read more pieces by him at GoozNews, where this post first appeared.

17 replies »

  1. if you have an attorney willing to play ball I would look to take it class action. It appears they have made statements that it is a systemic pratice. All people over charged would be a pretty big class and the dollar amount being sued for would get plenty of press coverage.

    Its on a much smaller scale but there was an article this weekend avout hospitals charge 99 or 125 for a CT scan to screen for lung cancer. The charge is so low becuase insurance doesn’t cover it. The hospital said they would usually charge 300+ if they could bill insurance.

    This is exactly what hospitals do, bill as much as possible and hope to find people with a % off discount, uninsured, or sock the insurance company for as much as possible.

    Good luck in getting some damages from them, it’s well past time they paid for what they have done.

  2. Thank you for this insightful information Nate. The situation I ran into involved a cochlear implants supplied by a contracted hospital for a charge of $99,999.99. Their disclosed invoice cost was approximately $14,000. The specific code billed by the hospital was not addressed on the fee schedule so the charge was paid at a percentage. The contracting staff for the large national hospital chain stated that we got of easy because they could not figure out how to bill greater that $100,000 on a line item. We eventual settled and looking for protections against “Unconscionable charges”.

  3. We would probably need State attorneys general to bring consumer protection suits. And/or the John Grisham-style lawyers who took on the tobacco industry.

    I still think we need as a nation to clarify whether hospitals are public or private institutions. We let them accumulate funds and collect debts like they are private, and then turn around and expect them to provide EMTALA care like they are public.

    Plus many Americans grew up with county hospitals and church-run hospitals. The immense infusion of public dollars from Hill-Burton and then Medicare has transformed the hospital industry, but our public perceptions of hospitals are from back in the 1940’s.

    99% of politicians do not understand this issue, including most recent Presidents. The Democrats from Lyndon Johnson on have only cared about insurance coverage, so they have not wanted to confront hospitals on anything. Republicans are mostly like Rick Scott of FLA.

  4. Nate’s post at 4:03 pm is remarkable. Does this language really exist in a state law or set of laws in Ohio?

    Good for you Nate. As you say, if this kind of law was widely known we would barely need the PPACA 1000 page bill.

    I have been looking for this kind of legal language for 20 years in my heatlh care research. And I come from Minnesota, which is a relatively protectionist state.

    How have I missed this?

    Seriously Nate, this language would destroy medical price gouging including the price gouging for orphan drugs and cancer drugs.

    I know it sounds grandiose to say this, but this single post in a single blog on a Friday afternoon could revolutionize the world of health care reform.
    In this vein, I recommend the writing of Kevin Carson on health care monopolies. He is a libertarian and I forget his web address for now.

    At least one half the hospital bills in Americe would become completelyi uncollectible if this language was fiollowed.

    That may cause other problems but my first reaction is that I love it.

    Bob Hertz

  5. one more point your last sentance gets into a new area of dispute. The payers contract will govern allowance but the provider is balance billing back to the member. If the provider accepted payor allowance in full there would not be an argument. But if the payor allows less then the provider wants those are the claims be fought over.

    The argument isn’t really happening between contracted providers and payors, its happening between providers and payors that are not using PPOs as they feel the discounts are insufficent.

  6. I’ll see if I can the court cases, each state is different but in Ohio for example most hospital billing would be in violation of the following;

    (1) Whether the supplier has knowingly taken advantage of the inability of the consumer reasonably to protect the consumer’s interests because of the consumer’s physical or mental infirmities, ignorance, illiteracy, or inability to understand the language of an agreement;

    (2) Whether the supplier knew at the time the consumer transaction was entered into that the price was substantially in excess of the price at which similar property or services were readily obtainable in similar consumer transactions by like consumers;

    (4) Whether the supplier knew at the time the consumer transaction was entered into that there was no reasonable probability of payment of the obligation in full by the consumer;

    (5) Whether the supplier required the consumer to enter into a consumer transaction on terms the supplier knew were substantially one-sided in favor of the supplier;

  7. Nate,

    Do you have a citation of courts ruling against 10x cost mark-ups? Absent of generalized concepts of “waste and abuse”, it’s always been my assumption that health care provider have a near unlimited right to establish charges. The thought being that the payers contract will govern the actual allowances.

  8. We are getting here quickly. People that are doing cost + allowable are using existing consumer preotection laws to fight any balance billing.

    While it would be nice for some politician to pass a clean simple bill that says you can’t charge more then 4x cost I would be more afraid of what else they stick in the bill and how poorly they write it. One page bill that sets that maximum would have been thousands of times more effective then PPACA and all its pages. We won’t ever get a simple and effective solution from legislation.

    Courts have already ruled against 10x cost and also against private payors trying to use Medicaid or Medicare as they are unreasonable low.

    Best bet is to give the courts 2-3 years and let existing laws solve the problem.

  9. A well-functioning market has prices that tend to converge and are well-known. In the car market, every dealer and customer is free to negotiate any price they want, yet nobody ends up paying $100k for a Toyota Camry that can be bought at another dealer for $25k. Negotiation skills and market power might results in a 5% or 10% difference in price, but not a 200% or 1000% difference.

    When a market is as dysfunctional as health care, price caps can be a partial or temporary solution. There is no need to fix prices. Let insurance, providers, and even patients negotiate for a 5% or 10% better deal. But don’t let anyone pay 500% more just because they are uninsured, uninformed, or incapacitated. Why can’t there be a universal consumer protection provision that limits the maximum price to some percentage (e.g. 200%) of the best negotiated price? What is the economic rationale for having an unlimited price range?

  10. “However, the courts in general have sided with providers not patients.”

    What court cases lead you to say this? I have seen far more side with the patient then I have against the patient. The problem is people don’t fight the charges. That applies to both insured and uninsured patients.

  11. Also, Paul Levy is a valued contributor to this blog and he has run a hospital.
    Perhaps he can weigh on this bazaar-like practice of hospitals charging $50,000 and accepting $7,000 and still being profitable.

    Maybe the insurer demands for discounts have pushed this.

    What price transparency will mean if we ever get it is that a hospital which charged $50,000 for discretionary care would get no business. The market would solve things.

    The problem is that at least 20% of hospital admissions are emergencies.

    Americans long ago gave up on having private fire departments competing for business and overcharging the victims of fires. You can call 911 at least without economic fear that the fire department charges will bankrupt you.(You have enough physical fear as it is.)

    So a way must be found to effectively nationalize or at least regulate the pricing of emergency care. Comments welcome!

  12. There is a deep flaw in American commercial law as it applies to health care.

    Anyone needed emergency surgery is obviously in no position to review competing prices and make a rational decision about which facility to use.

    So for many years now, the law has stepped aside and allowed hospitals to charge whatever they want.

    California and about five other states have had to claw back with laws like AB 774, which limit the charges to the uninsured. That may or may not help someone who has insurance but has a high out of pocket limit. Also it may not help someone who has insurance, but the hospital tries to bill them for any amount which the insurer reasonably does not pay.

    The spectacle of hospitals becoming economic predators on their patients
    does not happen everywhere — but when it does occur, I think that most judges would desire to punish the institution just on sheer repulsiveness.

    However, the courts in general have sided with providers not patients.

    I am no mood to wait for 50 years of case law to correct this. I would favor a simple legislative edict that limits hospital charges during emergencies.
    Maybe the way to do it is to deny a hospital its Medicare patients if it attacks a patient with outrageous bills. No hospital that I know of can survive that.

    Bob Hertz, The Health Care Crusade

  13. I love it when economists label every surgical procedure as “routine.”

    I’m all for pricing transparency. Hospitals should not do any surgery until they sign a form stating that they know that the price for their “routine” surgery is $X.

    Of course, then Mr Economist would start crying about how patients cant make an informed choice in such a situation, despite the fact that the surgery is “routine”

  14. The article essentially opens with the classic disclaimer about charges vs. actual cost vs. actual reimbursement. Regarding the issue of different rates for different payer: I am unclear about the true benefit of setting different charges for different payers. The reimbursements are set by the contract or CMS. Certainly they can charge whatever they want to self-pay or non-contracted coverage, but what is actually received is an entirely different matter. Once again speaks to the need for accurate and transferable costing for health care.