Yesterday, for the first time, the government revealed how much hospitals charge for 100 of the most common medical procedures. The data revealed a seemingly random pricing scheme with the cost of the same procedure varying by tens of thousands of dollars from hospital to hospital.
But it also painted a misleading picture of how the health care system works. Hospitals charge prices they know Medicare will not pay. They use these high prices as a starting point for negotiation and in the end, Medicare and private insurance pay just a fraction of the original charge. Consumers rarely foot the bill.
“These charges are semi-fictional numbers,” said Chapin White, a senior researcher with the Washington-based Center for Studying Health System Change. “It’s like the hospital’s opening bid. The higher the bid, the better the chances they will be able to collect more revenue.”
The White House views this massive database as a consumer “health care shopping guide” and a victory for the Affordable Care Act.
“Today’s data release … is one step towards putting people and families in charge of their own health care,” White House spokesperson Jay Carney said Wednesday afternoon. “By making this data available we are allowing everyone to see the huge pricing variations from hospital to hospital for the same procedures, sometimes from one hospital that's just in the next neighborhood over to another.”
The numbers provided a glimpse into a world that had been closed to most Americans. A cover story in Time magazine by Steven Brill, “Bitter Pill: Why Medical Bills Are Killing Us,” unearthed some of the discrepancies cited in the database, along with outrageous costs for common things like aspirin.
Before, the public could see a health care menu, but did not know how much each item on the menu cost. It’s now possible to determine what a procedure will cost before having it performed.
But the data raise a number of questions. First, it’s not clear why the cost of the same procedure fluctuate so wildly. It’s also unclear whether hospitals that charge more for a procedure provide a better level of care.
“The complex and bewildering interplay among 'charges,' 'rates,' 'bills' and 'payments, across dozens of payers, public and private, does not serve any stakeholder well, including hospitals,” said Rich Umbdenstock, president of the American Hospital Association. “ This is especially true when what is most important to a patient is knowing what his or her financial responsibility will be.”
These prices do not represent what the consumer actually pays. Only those without insurance or at a hospital outside of their provider’s network would be on the hook.
“Most people are enrolled in a health plan that’s negotiating prices. They’re not paying these charges,” White said.
COSTS SEEMINGLY SET AT RANDOM
The cost of procedures varies greatly from hospital to hospital. Prices were seemingly chosen at random: here in Washington, treatment for a respiratory infection cost $70,219 George Washington University Hospital, while the same procedure cost just under $39,890 at Sibley Memorial Hospital, located across town.
After the fees were negotiated, Medicare paid George Washington $22,538, 32 percent of what the hospital charged, - while Sibley received $13,450, or 34 percent of what the hospital charged.
There is no obvious reason for the variation in prices. Both George Washington and Sibley are located in upscale neighborhoods, and many of the patients who use these hospitals are wealthy. This is a geographic trend that continues around the country.
DISPARITY SHOWS DISCONNECT
The disparity between what is charged and what is paid back illustrates a vast disconnect between what Medicare and private insurance pays and what hospitals charge. Once a claim is submitted, insurance companies negotiate the price down, while the government uses a formula to determine how much is reimbursed.
White said there is a second reason why hospitals overestimate the cost of procedures. Private insurance companies and Medicare often pay hospitals outlier payments, or extra money meant to cover cases of especially sick patients.
To illustrate, imagine it cost $100 dollars to receive five stiches to close a small wound on a man’s arm. But the patient is squeamish, faints while being treated and hits his head, sustaining a concussion. The hospital now must treat him for the concussion as well, raising the cost of his care to $1,000 (these prices being kept artificially low to illustrate the point).
This is an outlier case – an atypical instance when the hospital only expected to spend $100, but ended up spending $1,000. Insurance companies and Medicare will occasionally pay more than the cost of a typical procedure to treat cases that cost more than the baseline price.
“These payments help hospitals out if they have an unusually sick person that’s getting an unusual set of treatments.” White said. “They’re meant to cover much sicker patients.”
As more complicated and more expensive procedure have the greatest potential to cause complications, raising the outlier cost. So hospitals keep the cost of procedures well above what private insurance or the government will pay to receive greater outlier payments.
White called these payments “somewhere between a loophole and the plan” by hospitals to increase outlier payments. “Inflated charges just kind of live on,” he said.