Last month’s release of previously undisclosed government data on the prices charged by hospitals for the 100 most common in-patient procedures may prove to be a milestone in American health care reform. For the first time for health care consumers, a true picture is emerging of the haphazard price system that governs hospital care in the U.S.

However, critics point out that the government has had this data for decades, yet always collaborated with the market’s big players, helping to feed the long escalation of health care costs in the U.S. The questions are: why release the data now, and what does it mean for the future of health care pricing in the country?

Data Confirms Suspicions

Although many analysts profess no real surprise with the new information, the data confirm long-held assumptions and are, perhaps, more dramatic than expected when so fully displayed.

Comprised of all charges of 3,300 hospitals submitted to the Centers for Medicare and Medicaid Services (CMS) in 2011, the data show that, across the board, uninsured Americans are charged the highest prices. Further, they show that different hospitals in the same market charge wildly varying amounts for the same procedures, apparently with little regard for actual medical costs, in efforts to maximize revenues. Meanwhile, individual hospitals and the industry in general have persistently avoided publication of their fees in order to protect perceived competitive advantages.

The result is a system of hospital charges – known as the chargemaster – and opaque, insurer-negotiated price reductions that mock the existence of any real consumer market in health care services.

PPACA Opens Door

When the Patient Protection and Affordable Care Act (PPACA) – otherwise known as Obamacare – was adopted, the consensus was that it amounted to insurance price reform, not comprehensive health care reform. But, with the federal government now committed – by private mandates and public programs – to insuring every American, the issue of the cost of services is rapidly acquiring critical importance. Are America’s patients, policy holders and taxpayers (in reality, the same people) simply to pay whatever hospitals charge, or should this “market” be more transparent? As PPACA applied scrutiny to health care insurance premiums, it is also opening inspection of hospital prices. Perhaps, prescription medication and medical equipment pricing will be next.

According to administration officials (who released the hospital price data to the Huffington Post, Washington Post and New York Times without prior discharge to the industry), the newly-released information is intended to help correct distortions in the market, promote competition and provide consumers with information to encourage consideration of less expensive treatment options. It also may help insurers negotiate better deals with hospitals and spur more market research and analysis from health economists and advocates.

“Historically, the mission of our agency has been to pay claims,” said Jonathan Blum, Director of the CMS, in comments to the media. “We’ll continue to pay claims, but our mission has also shifted to be a trusted source in the marketplace for information.” He asked, “What drives some hospitals to have significantly higher charges than their geographic peers? I don’t think anyone here has come up with a good economic argument.”

Medicare Reimbursement and Price Negotiation

Actual payments in hospital health care vary substantially from the amounts charged, a critical fact that adds complexity, confusion and, seemingly, injustice to the overall system.

The reason that CMS was able to release such a comprehensive list of hospital charges is because these 3,300 hospitals (out of about 4,000, total, in the U.S.) serve Medicare patients and submit bills for reimbursement from CMS. When they submit, they bill for the amount they wish to be paid, the amount they “normally” charge for the given service.

However, CMS does not pay what the hospital bills. Rather, as the nation’s single largest purchaser of health care services, CMS is in a position to decide, depending on particular circumstances, what will be paid. According to American Hospital Association spokeswoman Caroline Steinberg, Medicare pays only 91 cents for every dollar that a hospital spends on a Medicare patient.

Insurers also do not pay chargemaster rates. Instead, they enter into negotiations with hospitals to pay a reduced amount. Each agreement is unique and is not publicly disclosed, so it is impossible to know the general state of insurer-negotiated discounts. However, Gerard Anderson, Director of the Johns Hopkins Center for Hospital Finance and Management, says insurers typically pay about 30 percent above what Medicare pays.

Patients bear a portion of insurance-paid billings through co-pays and deductibles, but most of the cost is born by employers who purchase insurance and employees who pay part of the cost of employer-provided policies.

Currently, the only purchasers of hospital services that pay full rate are uninsured patients who can actually afford to pay their bills. This may be a relatively small group, but the injustice of the situation is startling. Unable to purchase insurance in the private market (because of some combination of insufficient income and high cost, perhaps related to pre-existing conditions), these patients are billed at chargemaster rates, that is, what the industry considers its “normal” charges.

Presumably, hospitals attempt to recoup as much as possible of the costs of serving the non-paying uninsured through fees added into the negotiated agreements with insurers. These, in turn, are passed along to the employers and employees who carry this insurance, including LIUNA health & welfare funds and their participants.

Dramatic Discrepancies

The price discrepancies between hospitals operating in the same geographic market are so pervasive that a detailed accounting would be impossible. Examples cited in the media include:

• Treatment for the respiratory ailment known as COPD is $7,044 at the Lincoln Medical and Mental Health Center in Bronx, NY, but is $99,690 at the Bayonne Hospital Center less than 30 miles away (Huffington Post). Near Los Angeles, the Garfield Medical Center in Monterey Park charges $241,654 to care for a patient undergoing renal failure with major complications; that charge is more than three times the regional amount, and a hospital five miles away, Beverly Hospital, charges only a tenth as much (Huffington Post).
• At Brookwood Medical Center in Birmingham, AL, the price for simple treatment of pneumonia is $156,958, almost 12 times the rate at Russell Hospital an hour away in Alexander City, AL, and about four times the local average (Huffington Post).
• A heart attack with four stents and major complications runs $166,174 at the University of Miami Hospital but is only $89,027 across the street at Jackson Memorial Hospital (Washington Post?).
• In Washington, DC, patient treatment on a ventilator costs $115,000 at George Washington University Hospital, but at Providence Hospital, it is just less than $53,000 (Washington Post).
• A lower joint replacement at the Las Colinas Medical Center in Dallas is $160,832, but at the Baylor Medical Center in nearby Irving, it only costs $42,632 (Washington Post).

The list goes on.

Hospital Costs

Teaching hospitals and some other hospitals in neighborhoods that treat a disproportionate number of low-income patients (who have not had consistent health care and are sicker than other patient populations) reacted to the publication of their fees with justifications that their costs are higher.

In the sample list above, the last three compare teaching and non-teaching facilities. In two of these cases, the teaching hospital charged substantially more than its non-teaching neighbor. In contrast, however, the teaching hospital in the last example charged only a quarter of the nearby competitor.

Generally, CMS acknowledges higher costs at certain hospitals and reimburses them at higher rates. For instance, in the last listed example above, the Los Colinas hospital, which billed $160,832 for a joint replacement, received $12,643 from CMS. Baylor, the teaching hospital that billed $42,632, received $14,202.

It is difficult to know the real costs of providing health care, though the publication of this pricing information may lead some hospitals and industry researchers to develop more definitive assessments. Many factors go into costs, including land and construction prices, labor rates, equipment costs, financing rates, utilization rates, administrative expense and profits. For-profit hospitals billed CMS at rates about 29 percent higher than nonprofit or government-owned facilities.

PPACA Impact to Grow

As PPACA’s January, 2014, individual mandate to purchase health care insurance takes effect, a substantial portion of today’s uninsured will move into the insurance market, greatly increasing the number of policies sold by insurance companies. Although insurers cannot bar consumers with pre-existing conditions, they can charge higher premiums based on age, location and tobacco use. For many of today’s uninsured, the present problems (low income relative to cost of insurance) would continue but for the fact that their purchase of insurance in exchanges may be subsidized by the federal government.

To minimize the extent of tax support required for federal subsidies, the government must find ways to constrain the cost of care. Fortunately, after two decades of persistently high health care cost inflation, the rate of escalation has dropped by more than half in recent years. Experts are divided about the causes and whether this trend will continue, but the immediate impact has been good for the federal budget and PPACA’s initial roll-out.

The Administration’s health care planners certainly recognize the value of sustaining this trend, and their decision to expose the haphazard nature of current hospital pricing may be calculated to throw the industry on the defensive. In turn, the industry may attempt to shift cost burdens to its doctors and medical staffs or reorient public concern toward the insurance industry. Whatever happens next and in subsequent policy and research iterations, PPACA’s need to restrain costs is forcing a wholesale re-examination of the health care marketplace.

[Steve Clark]