Five different people emailed me regarding the New York Times article about the vast differences in hospital billing to Medicare.
The revelation that hospitals charge vastly different prices shouldn’t surprise you. For one thing, I’ve commented on this before – here, here, and again here. (seriously, what have you people been reading?) Part of the problem is the historical underpinnings of the ways hospitals used to be paid, much of this is due to the fee for service payment system that continues to dominate American healthcare. But the fact is, we’ve allowed the system to operate this way by championing free markets and allowing hospitals to run like businesses while also piling on regulation after regulation.
Quite frankly, hospital charges are not based on a solid foundation of cost nor are they based on quality of care provided. There is little to no evidence to support that costs or quality are the basis for what hospitals charge. Furthermore, when hospitals negotiate with insurers for reimbursements, those negotiations are considered trade secrets; an insurer cannot tell hospital B what it is reimbursing to hospital A for the same service. Similarly, hospital X is under no obligation to tell insurer Z what insurer Y is reimbursing. As the article states, it truly is a cat and mouse game between hospitals and insurers. And the game is only expected to get worse as hospitals merge and combine into large systems in order to form “accountable care organizations” or ACOs under the Affordable Care Act.
You might think that price transparency might be a solution to this dilemma. Make hospitals report their prices and that should fix the problem, right? Patients would naturally switch to lower cost providers, and high cost providers would be forced to lower their prices, regressing toward a new lower average price. Makes sense…that’s how competition works so this should work, right? Wrong. In 2007, New Hampshire did just that after health officials noticed huge variations in the hospitals prices within the state. Not only did the tactic not work, it had the opposite effect. Patients had little incentive to shop based on price as those with insurance rarely saw the bills. Many of the hospitals in the state are in isolated geographic areas and therefore experience little to no competition from other hospitals. Even more concerning, the lowest reimbursed hospitals raised their prices to match their well reimbursed competitors. The hospitals regressed toward a new mean price, but that new average price was now higher, not lower.
Some in the health policy community use this evidence to advocate for a single payer system with universal insurance as the only solution to this problem. Others suggest we adopt payment setting similar to the Maryland all-payer system (you’ll notice that none of the data comes from Maryland). I’ll admit I’m not a huge single payer fan for too many reasons to details here, but Medicare is about the closest thing we have to a single payer in this country. As the largest single nationwide insurer, Medicare is in the unique position to provide a stabilizing force to the wide variations (you could argue that the Veterans Administration does this as well, but the VA both finances and delivers care, while Medicare merely finances it.) But with a myriad number of private insurers out there, the “single payer” Medicare effect gets diluted.
The thing is, the Centers for Medicare and Medicaid Services (CMS) looks at the hospital bill, laughs, and then says “here’s what we’re going to pay you”. The payment is formula based – a base price is set based off of what CMS thinks the average cost of the provided service is and then multiplies that by certain factors such as geographic location, severity of illness, teaching status, etc. To be fair, there are a lot of factors, but ultimately CMS arrives at a reimbursement which is much less than what the hospitals charge. So in reality, even though two hospitals across the street from each other taking care of two patients for the exact same condition with the exact same illness severity might charge CMS widely different prices, CMS will reimburse them almost the same amount.
The most important section of the NYTimes article is in fact this one:
Medicare does not actually pay the amount a hospital charges but instead uses a system of standardized payments to reimburse hospitals for treating specific conditions. Private insurers do not pay the full charge either, but negotiate payments with hospitals for specific treatments. Since many patients are covered by Medicare or have private insurance, they are not directly affected by what hospitals charge.
Experts say it is likely that the people who can afford it least — those with little or no insurance — are getting hit with extremely high hospitals bills that may bear little connection to the cost of treatment.
Steven Brill made this exact point in the TIME magazine commentary “Bitter Pill – Why Medical Bills are Killing Us”. The fact of the matter is, very few people pay those ridiculously high prices, because almost everyone negotiates a lower rate. But if you are one of those people paying out of pocket, uninsured or with little insurance (what we call underinsured), you should be angry. Because the price of your care (and therefore the cost to you) may have been dramatically different if you had simply crossed the street. And don’t for a minute think that the higher price means better quality. In fact, crossing the street might mean that the quality of that care may have been better too.