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We Still Don't Really Know How Much Health Care Costs We Still Don't Really Know How Much Health Care Costs

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Policy

We Still Don't Really Know How Much Health Care Costs

(AP Photo/Mike Wintroath)

photo of Margot Sanger-Katz
May 8, 2013

By releasing a big new spreadsheet Wednesday, the federal government just revealed the insane nature of health care pricing. What it didn’t do was give us information that truly explains actual health care costs.

The data, released by the agency that oversees Medicare, shows how much hospitals charge for various common health care services—suggested payments that vary widely from region to region and even hospital to hospital just miles from each other. (Check out these great interactive graphics from The New York Times and the Washington Post—both of which got a head start with the spreadsheet.) Jonathan Blum, the Medicare director at the Department of Health and Human Services, said even he was “startled” by the huge swings in price from hospital to hospital when his office began compiling the list.

“We don’t see a business reason why there’s so much variation in the data,” Blum said in a conference call with reporters Wednesday. “We haven’t heard a logical business argument of why there’s a 20- 30- 40-1 variation in charge-masters.”

 

It might sound surprising that Medicare didn’t even know what hospitals were charging them, but that’s because, in health care, there is little relationship between “charges” and the actual prices that insurers pay. Medicare has a system of fixed prices it pays hospitals, with some limited variation. It just ignores the prices listed on its hospital bills.

Private insurers don’t pay those figures either. Insurance companies negotiate with doctors to develop their own list of prices. The numbers vary widely, too, but weren’t included in the Medicare dataset. Hospitals and insurers generally guard their payment rates carefully as proprietary, meaning there is little detailed public scrutiny of how much hospitals are actually getting paid.

In some hospitals, the charges are related to actual costs; in others, they are basically random. A report prepared for a group that advises Congress on Medicare policy in 2005 concluded that there is no standard methodology. The new data suggests that the trends haven’t changed much since then.

“These are sticker prices for hospital services, so they don’t bear a direct relation to what the hospital gets paid, or to what insurance companies have to pay, or patients have to pay,” said Martin Gaynor, a health economist at Carnegie Mellon University.

There is one important exception: the only people likely to experience the wide variation demonstrated by the new spreadsheet are the uninsured. Because they don’t have an insurance company or the federal government to bargain on their behalf, they pay the rack rate for services. Many hospitals have discount programs for patients with low incomes—or allow patients to try and negotiate on their bills, starting at the charge rate, of course. Not everyone qualifies for such discounts, and hospitals often pursue unpaid bills aggressively.

That means that the astronomic charge rates from some hospitals in the Medicare list—one Philadelphia hospital charges $321,918 for a joint replacement procedure—don’t tell us much about how expensive hospitals really are for the insured patients who still make up the majority of the market.

The spreadsheet also includes the price that Medicare actually paid the hospitals for various services, which may be more helpful than the charge information for uninsured patients hoping to negotiate a reasonable deal. (That Pennsylvania hospital with the six-figure charge rate was paid only $26,328 by Medicare.)

Mike Green, the CEO of Concord Hospital in New Hampshire, described the charge-master system as “a little bit anachronistic.” Concord Hospital’s charges are near the national averages, according to the New York Times analysis of the data. Even so, the Concord Hospital charges are more than double the Medicare payment rate. And the hospital gives an automatic 40 percent discount to patients who pay their bills right away, meaning there, at least, they don’t pay the charge rates either. Scott Sloan, the hospital’s vice president for finance said that the hospital collects less than half its charge rate, on average. “There are no big payers paying close to charges,” he said.

Getting the numbers paid by private insurers may be a tougher task, but at least one group is trying to compile and analyze such data. Gaynor is leading an organization called the Health Care Cost Institute, which has claims data from several large insurers around the country. When its spreadsheet is released, we’ll understand more about the startling variation in what hospitals actually get paid.

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