The Rest of the Story About Hospital Pricing

The recent Medicare report on variation in hospital “prices” is not exactly news. In fact, I wonder why anyone (including the NY Times and NPR) covered it, let alone make it a lead story.

As you probably know, Medicare reported that hospital charges for specific treatments, such as joint replacement surgery, greatly vary from one hospital to another. (This includes charges for all services during the hospitalization, including room charges, drugs, tests, therapy visits, etc.) Everyone in the healthcare business knows that charges do not equal the actual prices paid to hospitals, no more than automobile sticker prices equal the prices that car buyers actually pay. Except that for the past thirty years, the gap for hospitals greatly exceeds (in percentage terms) the gap for cars. This is not just a nonstory, it is an old nonstory.

So reporters tried to give it a new spin. One angle concerns the uninsured, who may have to pay full charges. I will write about this in a future blog. Another angle is that by publishing these charges, Medicare will encourage patients to shop around. That is the subject of this blog.

I suppose it is okay to tell patients that the amount they might have to pay out of their own pockets may vary from one hospital to the next. But the published charge data is useless for computing out of pocket payments; in fact, it may be worse than useless. As even the NY Times noted, insured patients make copayments based on prices that their insurers negotiate with hospitals. These prices are essentially uncorrelated with charges. So a patient who visits a hospital with low charges may well make higher out-of-pocket payments than a patient who visits a high charge hospital. It is a crap shoot.

Even if charges did correlate with prices, a simple comparison of charges for a given treatment is useful only if hospital care is a commodity. You can compare the prices of a Toyota Prius or my latest book from one seller to another because they are selling identical products. But the cost of treating a patient, and therefore the price of treatment, depends a lot on the severity of the patient’s condition. This can make for very misleading comparisons.

Here is a simple example. Suppose there are two types of patients receiving joint replacements – those with simple problems and those with complications. Suppose that Community General Hospital and Doctors Township Hospital both set prices of $20,000 for simple cases and $40,000 for complicated cases – they have identical prices. But suppose further than 25 percent of CGH’s cases are simple, whereas 75 percent of DTH’s cases are simple. We would report that CGH’s “price” for joint replacement is $25,000, while DTH’s “price” is $35,000. The failure to control for complexity makes the pricing comparison all but useless.

To make matters worse, publishing prices without publishing information about quality may encourage patients to pretend that hospital care is a commodity and choose providers that skimp on quality. As I showed in a 20 year old paper with Mark Satterthwaite, this can also encourage a disastrous race-to-the-bottom where hospitals deliberately disinvest in quality in order to bring down their prices. Medicare has published hospital quality report cards, but these receive little media attention, certainly not like the lavish attention given to this new report on charges. Most consumers remain unaware of Medicare’s hospital quality ratings and, those who do take a look may find the data-filled tables too much to handle. Many consumers will be tempted to shop only on the basis of price.

So what is a consumer to do? It is all but impossible for individuals to comparison shop for the best hospital price; with rare exceptions hospitals cannot and will not tell anyone their prices in advance of admission. (They will tell you their charges.) Fortunately, market forces may be coming to the rescue. As more consumers enroll in health plans with high deductibles and large copayments, there is demand for information about actual prices. And where there is demand, supply usually follows. Some private insurers are beginning to post pricing comparisons on their websites, allowing consumers to determine which hospital is likely to offer lower out-of-pocket costs. Insurers are naturally reluctant to disclose the actual amounts they have contracted to pay hospitals, so this information is somewhat sketchy. Several consulting firms have sprung up to work with self-funded employer-sponsored health plans. They use employers’ own data to help employees find the best prices. To my knowledge, these insurers and consultants are not doing much in the way of risk adjustment; the real world equivalents of my fictional CGH will come off poorly in such comparisons when, in fact, they may offer very good deals. But it is still early days and such refinements to the data are sure to follow.

By intelligently shopping around, employees can save hundreds or even thousands of dollars in copayments for costly hospitalizations. But in order to shop around they require valid data. Employees should demand this information from their employers. A nascent market for pricing data has already formed. It only needs an extra nudge.

And, with apologies to the late Paul Harvey, that is the rest of the story about hospital pricing.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

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30 replies »

  1. To P Manner —

    1. If Medicare is that harsh about lowering payments, then how has Medicare spending per beneficiary grown every single year?

    I agree that the False Claims Act is needlessly punitive. But an awful lot of Medicare spending must be escaping its reach.

    2. You are correct about the waiting lists in Canada as a problem.

    It does seem that we can either have many thousands of persons in physical pain from waiting in Canada, versus many thousands of person in financial difficulties paying hospital bills in America.

    Since you cannot die from a hospital bill, then we can say that the American system is more humane. Maybe the issue is what we can do to make the American system easier to survive financially.

  2. A couple points.

    First, any time an entity is doing something completely strange and counterproductive, it’s probably because of government. And that’s exactly the reason here. A little history is in order. Until recently, many insurers would pay a set percentage of charges, say 30%. So a procedure which was expected to bring in $1500 would be charged at $5000. Why not just charge the real amount? This is where government stupidity comes in, in the form of the False Claims Act. Let’s say the reimbursement from a commercial payer comes in lower than Medicare (say $1000 for our example). The Federal Government can then demand that the reimbursement for EVERY Medicare patient be brought down to that level. And the False Claims Act has only a 60 day window to return that reimbursement. If not, it’s treble damages, plus up to $10,000 per case, plus prison. So no hospital CFO in his right mind would risk that.

    As for the joy of capitation and a yearly budget in Canadian hospitals, Mr. Hertz, I trained in them. Guess what happens in November when the money starts to run short? Right – no elective procedures, no appointments, until the new year. Not so bad if you have back pain, but not too nice if you have a breast mass, and you have to wait 12 weeks for your biopsy.

  3. Medical services need to be competitively offered with price transparency. Given the information, consumers can then make more informed choices. An example is a recently enhanced tool from BCBS that shows out the door prices for many different procedures. In my case, I was “shopping” for a colonoscopy since I now have an HSA plan and now I really do care about price. The price differences between the 20 or so practices was dramatic and I can definitely save money by not using my incumbent physician.

  4. I am a physician who serves mostly Medicaid and non insurance unsophisticated patients. I find this essay smug and not helpful.

  5. There is no reason a hospital cannot do this. It is only a poor excuse to say they cannot give the cost of a procedure. I don’t know how hospital financial decisions are made when assessing what, if any, “discount” or even free care.
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  6. We’ve posted over 400 chargemasters from California hospitals on HospUtell.com. When you compare procedural and supply charges between hospitals and then to the Medicare data, it is interesting (emphasis added)

  7. The real problem is that the official “prices” are actually fraudulent, as the author of this blog entry notes. They have nothing to do with anything.

    This type of fraud on cash payers is illegal in most states (you’re required to charge “reasonable and customary” prices), but nobody’s brought a class action suit about it yet.

  8. Thanks for the perspective. We built a free site where consumers can see, share and talk about their hospital costs and experiences. The Medicare data is the tip of the iceberg.

  9. In an ideal world — let’s call it, oh, “Canada” — hospitals would not have prices to debate about.

    Any more than fire stations do in the USA.

    The local hospital would get a fixed amount of money each year to care for the citizens in its community.

    Fire departments do not have chargemasters to determine the cost of a one-alarm fire, a five-alarm fire, or a cat in a tree.

    Fire departments do not have to meet payroll by collecting from indifferent insurance companies or near-bankrupt patients.

    The Canadian system has its share of conflicts over money, and it has shortages in some areas of heroic medicine.

    But overall it would be a great relief.

    Bob Hertz, The Health Care Crusade

  10. Thank you Peter.

    I wonder how many uninsured persons are getting quotes from any hospital for discretionary care. I doubt that the number is very large.

    I was mainly thinking about the larger group of persons with insurance but high copayments and deductibles. I think that tiered pricing and full disclosure for this group will have mroe effect on lowering hospital pricing.

    Because if an economist from Mars wandered into the current debate about hospital price discrepancies, he would ask why the hospitals with the highest charges have any patients/customers at all.

    • “I wonder how many uninsured persons are getting quotes from any hospital for discretionary care. I doubt that the number is very large.”

      If the number is small then it’s because not many go past the initial phone call. A quote over the phone is charge master. After that it requires the initiative of the patient to apply further – at least here in NC.

      I don’t know how hospital financial decisions are made when assessing what, if any, “discount” or even free care. In NC the law is very clear, unpaid hospital bills will result in seizing your home. So, I don’t think there is any consideration beyond, if you have resources the hospital wants them – even if that strips the patient of all their assets.

      • “In NC the law is very clear, unpaid hospital bills will result in seizing your home”

        Given this, every ax-murdered hospital administrator is a step in the right direction. I don’t think anyone really disagrees.

  11. Brian is correct that these phony charges, dressed up to help in negotiation with private insurers, can be very damaging to self pay patients.

    In my writing under The Health Care Crusade, I have advocated two laws which will solve most of this problem in 30 days — I kid you not.

    Law #1

    In the case of a clear emergency, the maximum bill to a patient is 110% of the Medicare fee. No exceptions

    If a non- network Dr tries to bill more for emergency surgery, his bill is non collectible.

    If a hospital tries to charge more, their bill is uncollectible.

    Law #2

    For non-emergency care, a patient has the right to demand an estimate of his/her cost, whatever his or her level of insurance

    If the estimate is not provided, and the care happens anyways, the patient has no liability.


    We will probably need special health courts to enforce these laws.
    In these courts, the patient is always right.

    Bob Hertz, The Health Care Crusade

    • “For non-emergency care, a patient has the right to demand an estimate of his/her cost, whatever his or her level of insurance”

      Bob, that already exists for the uninsured. The hospital just quotes charge master. Hospitals in my area will negotiate (off charge master) when you provide them with your financials to decide financial need – they’re quite up front about this. As for insured their insurance company can produce an estimate now.

  12. In my 30 years in healthcare, letting the patient know the cost of a procedure is not much different than what happens when a mechanic or contractor gives an estimate. They say what an uncomplicated repair costs and then outlines the added cost if various contingencies arise.

    There is no reason a hospital cannot do this. It is only a poor excuse to say they cannot give the cost of a procedure. At times they may have to say, I cannot give the cost, but will have to wait till I get in there. I have had mechanics do the same.

    Yes, in most cases, reliable costs can be given.

  13. Having clear, shoppable information in this marketplace is huge. The HHS release doesn’t do that much for this goal.

    We’re part of the growing ecosystem of pricing transparency tools. Our view is that pricing has to come out of the shadows, and then quality metrics will have to improve.

    There’s a bunch of shoppable info on our web site at clearhealthcosts.com, including a quick search box to find the Medicare reimbursement rate for individual procedures (an MRI? a mammogram? a sleep study?). We also have a solid and growing collection of cash or self-pay prices for these core procedures. WCome over, and take a look. then let us know what you think!

  14. Before departing, Rube Goldberg shared his undying admiration for American hospitals and their ability to outdo him in imaginative pricing and obfuscation. The industry’s success in this area is still evident in the widespread public use of the word “reimbursement., which should have logically been abandoned more than a quarter century ago.

    Sam Walton is reportedly planning to return from the grave to take on the American healthcare industry, and the Consumer Union has begun to assemble and publish meaningful guidance on “value,” not just “price” and the industry’s often intentionally-misused– but objectively measurable–“quality.”.

    For patients not requiring emergency or immediate hospital treatment, “the market” has now begun to respond, bringing world-class remote diagnoses– and sometimes treatment– using mobile telecom, computer assisted instruments and all-inclusive, volume pricing (with guaranteed clinical outcomes!) for patients, families, employers and insurers willing to look and travel beyond local markets.

    Ron Hammerle
    Health Resources, Ltd.

  15. Bryan Sivak, HHS CTO tweeted that there had been 100K downloads of the data set in the first day. Given that there are 5,000 odd hospitals in the US, that means that each one already has 20 employees or consultants doing a compare & contrast with others in their region to see how much they can increase pricing to make sure they’re at the “average” for their region! After all that’s how it works for their CEO’s salaries!

  16. Dave,

    It is neither false nor meaningless information. If you are self-pay, a person with a health plan that permits balance billing, or a member of a health plan that does not have a contract with that facility, then you are on the hook for that amount and the hospital can and will take legal action to enforce payment.

    It’s relevance to Medicaid and negotiated arrangements may be non-existent, and its lack of correlation to quality or actual cost is profound. But for the person caught up in receiving services without the necessary contractual protections, this is a very real and profiteering mechanism.

    • I’ve started refusing to sign the “I agree to pay” statements, or writing “under duress” on them if the hospital is refusing to provide care unless I sign them.

      Billing people without having given them a chance to find out in advance what the charges are is quite illegal. Hospitals do it all the time, of course, because hospital administrators are evil.

  17. I suppose Medicare does this because of some dim mandate from back in the 1960’s. I do remember that in its early days Medicare always made a big deal about paying just its proper share of costs, whatever that means.

    The effrot to seem proper has probably aggravated the accounting mess of hospitals, i.e. the relentless effort to cost out every needle and sheet of kleenex.

  18. I would like to know more about why a hospital would “charge” Medicare $20,000 for a DRG which will clearly be paid at $7,500.

    Do hospitals then get to claim they are “losing money” for tax purposes?

    Do hospitals use the money that is “lost” on Medicare to leverage better deals from private insurers?

    Do hospitals maintain the $20,000 charge in case a Saudi prince shows up and pays full price?

    It is a much more bizarre system than anything in the car business.

    Of course, my preference for 20 years has been to fund hospitals on some form of global budget so that there are no individual patient bills, or damn few of them.

    Bob Hertz, The Health Care Crusade

    • Excellent points Bob. One thing we do know is that the unrealistic posted car prices (MSLP) are there so car dealers can use the word “sale” to hoodwink the buyer into thinking they’re getting a deal. But at least they compete on price to a point – not so hospitals.

      My take on the hospital prices were they did not differ because of “quality” or patient difficulty, but simply hubris.

      To argue that we need this blotted price system to preserve “quality” is in itself hubris. Canada, Britain, Germany have great hospitals with great surgeons – just not the price disparity.

      • There is a lot of research into why hospital prices (I mean the actual prices negotiated by insurers, not the bogus charges) differ. The evidence strongly suggests that they differ for the same reasons that prices for other goods and services differ. Some hospitals have market power. Others are in greater demand — though it is fair to question whether demand equates to value.

        The disparity in actual prices is actually pretty narrow, certainly nowhere near the disparity in charges. And the disparity in Medicare and Medicaid price is, well, virtually nonexistent.

        I am not sure why one would want identical prices. This nation’s history with price regulation (including regulation of medical provider prices), and resulting need for command and control regulation of all aspects of production, is not exactly stellar.

        There are lots of reasons to support a single payer system. But single prices is not one of them.

        • “I am not sure why one would want identical prices.”

          David, I’m not sure why prices would differ, other than regional higher cost of living and surgeon skill, and maybe hospital amenities (which should be patient optional).

          “Hospitals within the same city also vary greatly. At Beth Israel Medical Center in New York, the average charge to treat a blood clot in a lung is $51,580. Down the street at NYU Hospitals Center, the charge for the same care would be $29,869.

          At the Mayo Clinic in Minnesota, the list price is $16,861.”

          Starting at a higher bloated list price means you’ll pay more in actual charges.

          David, when you shop and see a higher price for the same item in a different store what questions come to your mind? Standard surgery procedures SHOULD cost the same within reason, but not a 40% -50% higher rate when we don’t have the option of comparing quality or even negotiating, or maybe choosing another facility.

          This story also shows that insurance companies are useless in fulfilling their role as cost containment middlemen.

          Here in NC there is Senate Bill 473 which just passed unanimously.

          “It would require hospitals to outline the costs they would charge to someone without insurance, as well as to people covered by Medicaid, Medicare, the State Health Plan and the range of rates negotiated with insurers.”

          Maybe shame will help change hospital attitudes – but I doubt they feel any remorse for gouging, and it will take more legislative action.

    • The hospital doesn’t charge Medicare anything. The hospital agrees to accept Medicare’s rate. But Medicare insists that the hospital submit a false bill using meaningless charges and then publishes this false information.

  19. Where we agree:
    “market forces may be coming to the rescue. As more consumers enroll in health plans with high deductibles and large copayments, there is demand for information about actual prices. And where there is demand, supply usually follows. Some private insurers are beginning to post pricing comparisons on their websites, allowing consumers to determine which hospital is likely to offer lower out-of-pocket costs.”

    This could have been and IMHO should have been the thrust of your article. I can agree that release of Medicare pricing data is not a panacea, but it’s in the right direction and the momentum is building on many fronts toward the retailization of healthcare.

    Markets don’t function w/o information, so I say “kudos” to Medicare for releasing this information.

    The glass is getting half full.

  20. The fact that prices don’t equal charges is not new, but the data is. Real, previously unreleased government health care data is never a non-story.

    Now there’s the opportunity to match charges to quality. For those in Brill’s Time article, who were underinsured, that would matter, and at the very least, a point of negotiation..

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