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Ask the Experts: Why Do Health Care Costs Vary So Widely?

Ask The Experts Health Care Pricing Disparities

A report from the Centers for Medicare and Medicaid – the government agency that administers and oversees the disbursement of many federal health care benefits – has revealed that the amounts hospitals charge insurance providers often vary widely at the regional, state, and even hospital level.

The study examined the way in which more than 3,000 hospitals nationwide bill for the 100 most common types of inpatient stays – which together account for more than 60% of the market, according to the CMS.

Among the findings were some fairly stark pricing mismatches, including the following:

  • The average hip replacement can cost you anywhere from $5,300 (at a hospital in Ada, Oklahoma), to $223,000 (at a hospital in Monterey Park, California).
  • The average treatment for heart failure can vary by tens of thousands of dollars within the same city.  For example, it can cost anywhere from $21,000 to $46,000 in Denver, Colorado and from $9,000 to $51,000 in Jackson, Mississippi.

The Goal:  Transparency for Consumers

The release of this information is part of a larger push toward greater cost transparency in the health care industry.  The Department of Health and Human Services announced a three-part initiative on May 8 aimed at bringing consumers better information about what hospitals charge and, ultimately, making health care more affordable.  The aforementioned report on hospital charges is part of this, as is a new funding for data collection centers and a $87 million grant for states to improve their rate review procedures and contribute to the fight toward transparency

“Currently, consumers don’t know what a hospital is charging them or their insurance company for a given procedure, like a knee replacement, or how much of a price difference there is at different hospitals, even within the same city,” HHS Secretary Kathleen Sebelius said in a press release. “This data and new data centers will help fill that gap.”

This uphill battle against industry opacity is much like what the credit card industry underwent in recent years.  Banks were notoriously tight-lipped about their policies prior to the Great Recession, and often resorted to shady bait-and-switch practices – advertising promotional terms and then revoking them at the drop of a hat – as well as predatory pricing.  That all changed with the CARD Act of 2009, however, which revamped a number of key consumer rights.

Problems & Expectations

New legislation is unlikely when it comes to health care, at least under the current Congress, but funding and information are a good, not to mention, much-needed start.  CardHub consulted a number of leading health care policy and law experts about the current state of health care pricing in this country, and the overarching sentiment seems to be that while health care accounting is undoubtedly a mess, there are no easy solutions.

“In order to have a good regulatory structure, you need to have a good definition of what the product is,” James Blumstein, Director of the Vanderbilt University Health Policy Center, said.  “It’s like on an airplane – you start billing for food, you bill for drinks, you bill for this.  It’s called charging for ancillaries. … With a hospital, there’s so much more flexibility.  How much of the director’s salary is going to be allocated to a particular matter and what is the matter? How many gauze bandages can you bill for?  Can you bill for extra time for electricity?”

With that said, let’s turn things over to the experts in earnest.  You can check out what they have to say on matters ranging from what to make of the new CMS data to what the future holds for healthcare pricing and, ultimately your wallet below.  After all, “the issues eventually always come back to the patients,” according to Blumstein.

You can also read the Takeaways section that follows for a quick synopsis of the CMS findings and experts; opinions.

Expert Opinions – Health Care Costs and Transparency

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Alice L. Kassens

John S. Shannon Professor of Economics at Roanoke CollegeData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

Market power and the balance of power in negotiation.

Insurance companies and hospitals negotiate prices for services. If the hospital/physician group has significant market power, they can negotiate prices higher than their less powerful peers (ex., those in more competitive markets.) If more consumers live in areas where the high price/powerful hospitals/physician groups reside, health care costs go up.

How should we correct this market discrepancy (if, in fact, we need to do so)?

Competition can help. Let consumers purchase health insurance across state lines! Additionally, moving away from the now popular ACOs will help. The development of ACOs is giving these groups significant market power in areas and will lead to higher prices.

Competition can also be increased by allowing APRNs to practice to the full scope of their education and training. This will increase the supply of providers for basic services and reduce their cost (and wait time.) Obviously, APRNs cannot perform high level surgeries, but the step could free up physicians to do more of the more intensive procedures and potentially drive down their price.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Insurance policies typically have maximum payments for the year and lifetime which can essentially cap bills.
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Charles Pendola

Assistant Professor and Director of Graduate Management Studies at St. Joseph's College New YorkData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

This is the case mainly because different parts of the country have different costs of living for health care delivery. For instance areas that have a high concentration of union membership tend to have higher wage/salary and benefit costs. Issues such as corporate sponsorship, be it not-for-profit versus for-profit versus governmental owned facilities, can cause variations.

Rural facilities also contribute to variances due to their isolated nature and low volumes of activity. Finally, whether a facility is a teaching or tertiary facility would be an additional variable.

How should we correct this market discrepancy (if, in fact, we need to do so)?

The best way to correct for this issue would be to use a WEF (Wage Equalization Factor) or cost compatibility adjustment that is readily available from CMS.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

This answer would vary by state or venue of service, i.e., inpatient versus ambulatory versus office based procedures. Another factor is the type of coverage plan and in versus out of network reimbursement.
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Ashley Hodgson

Assistant Professor of Economics at St. Olaf CollegeData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

One problem here is that it is rare to know the true cost of a procedure. So many of the costs that go into the procedure are "overhead", such as maintaining the technology. Even allocating nursing time can be difficult. In a hospital setting, the cost probably also includes the emergency cost of addressing something that might go wrong, and spreading that cost over all patients, for this reason. This podcast goes into some of the issues. So, even if a hospital gives a price for a procedure, it is not clear that the price is accurate.

Assuming the prices are accurate, variation can happen for many reasons - variation in pay rates for nurses and doctors, variation in bargaining power that the hospital has against device companies, variation in the cost of technology, variation in complication rates, and variation in efficiency of the surgical team.

How should we correct this market discrepancy (if, in fact, we need to do so)?

Market forces do not do a very good job of standardizing prices in the health care industry. Sometimes that is for legitimate reasons (wage differences in nurses due to cost-of-living differences), and other times this is because of random imbalances in power between doctors, hospitals, insurers, device companies, etc.

When Medicare sets a standard reimbursement for a procedure, that does help to stabilize prices. But there is not good comparison of prices that is public to consumers. Even doctors who recommend a surgery but don't perform that surgery, may have no idea how much it costs.

Better information available about pricing and quality might help to stabilize pricing, particularly if that information was available in an easy-to-access public place. However, that would still be difficult information to come by. In California, they require hospitals to report prices, but the prices hospitals give are more of a "starting point" for negotiation than they are reflective of the actual cost.

Basically, it is a bit messy.
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Ketki Sheth

Assistant Professor of Economics at University of California, MercedData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

One reason for the large price disparities in health care is the lack of transparency. In most markets, you can look around and see what prices are being offered and this transparency causes suppliers to keep their prices competitive. However, in health care, prices are not public, making comparison shopping difficult and reducing competitive forces to keep prices similar across suppliers. In addition to hidden prices, market power in negotiations with insurers also affects prices and in places where there is less supply (e.g., rural markets with fewer health care providers), we should expect prices to be higher, as it is with many different markets. The lack of information on prices impedes competitive market forces to reduce prices and so much attention and efforts have been placed on having providers make their prices more public.
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Michelle Ruiz

Assistant Professor of Management in the School of Business Administration at University of Houston-VictoriaData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

There are many reasons why the cost of a procedure can vary; the list is long but I can talk about a few of the most frequent causes, such as provider costs, negotiated pricing for medical supplies or medications, negotiated reimbursements from insurance providers, and even factors of the individual patient can play a role in the cost of the same procedure.

When thinking about a procedure done in a hospital or outpatient facility, what the provider charges are can be different, depending on whether they are a hospital employee or a contracted provider. Contracted providers will often bill the patient separately from the hospital and there can be various billing rates, depending on what the individual providers have contracted. This variation in provider costs can be seen directly in the cost of the procedure billed to the patient.

Next, smaller regional facilities do not necessarily have the buying power that larger hospital system do, so their individual cost for supplies and medications could be higher than their larger counterparts. This could mean that a smaller hospital will have to bill at a higher rate, in order to get the same amount of return that a larger hospital would see. This same economy of scale can be seen in the rates negotiated with insurance providers; if a city has four hospitals and three of them are within the same system, that larger system can work to get a higher reimbursement rate for the same procedure. The customers of the insurance company will want to have access to the majority of hospitals in town and not be limited to the one remaining facility. Smaller hospital systems or stand-alone facilities do not have the same scale of operation, so their ability to negotiate could be more limited.

Finally, even if there are two patients having the same procedure done by the same doctor, using the same support team, with the same supplies and medications, this does not necessarily mean that the cost will be the same. Patient A might have a textbook procedure with no complications or unexpected findings, while Patient B might not have the same - if their blood pressure spikes, there are breathing complications, or any number of unplanned moments that could happen - the providers have to individualize the procedure to adapt to those things. This individualization is a good and necessary thing, since it allows for the best outcomes possible, but it does mean that the cost of the procedures can vary.

How should we correct this market discrepancy (if, in fact, we need to do so)?

I don’t know if there is a way to correct for this market discrepancy, the way our healthcare system is currently arranged. Some insurance companies have taken steps to work towards eliminating this pricing inconsistency, by only reimbursing at a set rate with no regard to what the billing cost was - meaning that even if two neighboring clinics billed the same procedure at different rates, the insurance would reimburse at same rate across the board. This works to eliminate the pricing disparity that patients see on their bills, but at the same time it can be a hindrance to practitioners and facilities. If a procedure did not go as expected and the costs for the procedure were higher than anticipated, there is no recourse for collecting on the additional expenses within this setup.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

When talking about what laws have been established to protect patients, 22 states have taken steps to limit hospital charges, billing, and collection procedures. For example California has one of the more aggressive patient billing protections and has put a limit on charges to patients whose household income is less than 3.5 times the federal poverty limit and does not allow for unpaid medical debts to be reported to the credit agency until 150 days after the initial reporting. Maryland prohibits charging interest on self-pay patients unless the billing organization has received a court judgment. A few states have made a small effort to protect patients, like Utah who limits what a nonprofit hospital can charge indigent patients or in Texas where there are some limits on claims billed after the proper amount of time has passed. The majority of states have not taken this up as an issue, though.
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Walter J. Lane

Associate Professor and Chair of the Department of Economics and Finance at University of New Orleans Data from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

Because there is no true competition for medical procedures. Such competition requires that the person choosing the procedure must be the one paying for it and must have knowledge about the alternative suppliers and their prices. None of these requirements are met in this market. The prices are set by negotiation between providers and insurance companies and thus are based on relative bargaining power.

How should we correct this market discrepancy (if, in fact, we need to do so)?

Price transparency. Insurers should be required to publish the prices they pay to providers.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Medicare and Medicaid set the prices, but in the private market there are no such laws in the US of which I am aware. Pharmaceutical prices clearly reveal this to be the case.
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Edward Miller

Professor and Co-Director of the Center for the Small City at University of Wisconsin-Stevens PointData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

Because health care is characterized by market failure. Individuals typically do not know the price of the service. In a few places, such as California, some information is provided. But if individuals are paying for most of the cost because of third party payments, they may not be concerned. They may be more concerned if they know and they are paying a percent rather than a fixed fee. Studies have shown that the quality of services is unrelated to the cost in health care. Institutes do not market their services by price (the major exception is where the patient is paying the full cost such as in refractory surgery). The price that they say they charge is not the price that is typically paid. Insurance companies negotiate discounts and Medicare, for example, pays a fixed price regardless of the charges of the provider. If you ask hospitals to justify their prices based upon their true costs, I doubt that hospitals even know what their costs are.

How should we correct this market discrepancy (if, in fact, we need to do so)?

One way is, of course, to adopt a single payer plan. This plan would determine how much they would pay for services. This is similar to Medicare which pays a specific amount for services for outpatient and a specific amount to hospitals based upon the diagnosis (DRG). The effort today is to encourage consumer driven health care, whereby the prices and quality rating is made available. Insurance companies are also refusing to including higher cost institutions in their network. This is leading to the narrow networks that have been in the news. This keeps consumers from having choice and keeps them from going to top institutions, such as university health systems, where the cost is higher. It also creates strange situations such as a hospital being listed in network but the emergency room doctors not.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Medicare does, which limits balanced billing over Medicare determined rates. Medicare pays 80% of the determined rate and providers who do not take “assignment’ can balance bill an additional 15%. If they take assignment, they accept Medicare rates. Since physicians and hospitals are private, they can charge what they want. There is no law to limit them. In some states, there is a hospital regulatory commission that hospitals must get approval of to get a rate increase. This is state law.
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Phoebe Chan

Associate Professor of Economics at Wheaton CollegeData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

There are a number of factors that can explain price discrepancies across hospitals for the same medical procedures. First, factor prices (such as labor wages, property prices) can vary from area to area. Second, hospitals do not act competitively. Market power can vary from market to market. If there are several competing hospitals in a single area which provide the same services (in terms of both quality and types of services), this may lead to lower prices. However, if there is a single, leading major hospital in an area, it will tend to have greater market power and can command higher prices due to lack of competition. Finally, hospital costs are typically paid for by patients through insurance companies, so that direct price comparisons across hospitals by consumers (patients) is practically non-existent. As a result, hospitals tend to compete less on price (and more on other factors such as quality, availability of procedures and technology, etc.).

How should we correct this market discrepancy (if, in fact, we need to do so)?

One way to improve this market discrepancy is to introduce and create incentives for greater price competition among hospitals, while still maintaining high quality. One way would be through greater use of high-deductible health plans (HDHP), which create greater incentives for consumers to compare both prices and quality across hospitals. However, this can be difficult because the patient will inevitably encounter difficulties in effectively evaluating prices differences for necessary medical procedures due to limited medical knowledge. Heavier dependence on HDHPs also carry with it other possible problems, such as the potential for greater adverse selection within insurance markets. Another way to do this would be to introduce greater price regulation, but this also carries with it its own set of difficulties (does the government have enough information to optimally set prices, regulatory capture, etc.). Antitrust officials should carefully evaluate proposed hospital mergers.
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Zafar Nazarov

Assistant Professor of Economics in the Doermer School of Business at Indiana University – Purdue University Fort WayneData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

It is true that the substantial dispersion in prices for the same medical services (procedures) exists across regions of the US. In addition, the substantial dispersion in prices is present within the same region. You can run a simple experiment and survey different physician offices and I guarantee that for the same procedure you will get different prices. There are different competing explanations for the price dispersion phenomenon; however, the most appealing one is on the demand side of the market. Specifically, consumers are lazy enough not to search for best price options, allowing producers to exercise something known as price discrimination (one of the properties of the monopolistic market): producers of health care services, due to consumer inadequate search behavior, obtain higher bargaining power and charge higher prices for the same procedure. Especially, we observe the higher price dispersion in the highly populated areas. First, search for the best price option is more costly in the large cities. The results of some studies show that in some situations, consumers may pay two times more than the minimum price that physicians are willing to receive for the procedure. Second, consumers living in the large cities value their time more, signaling to health care providers that they demand health care services with short waiting times but with higher prices.

Sometime, prices for the same procedure may vary because of varying perceptions of doctors about marginal productivity of various medical procedures. Specifically, doctors may have different views on the effectiveness of certain procedures in different regions, leading to variability of prices across regions.

How should we correct this market discrepancy (if, in fact, we need to do so)?

If incomplete search is the main reason for the price dispersion phenomenon, then the effective solution is very simple. Somehow, we have to make consumers to become more informed about better and cheaper health care services. An increase in the information set about cheaper health care services without compromising on quality may move the market to the more socially desirable equilibrium that may include lower prices, better quality and sufficient supply. For example, encouraging advertising of health care services among health care providers can be one of the effective market-oriented tools to push consumers toward more complete search. At least, there have been some studies in the past which point toward the fact that advertising may have a positive impact on quality of health care services.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Logically, Affordable Care Act should cap the cost of certain health care procedures reducing any variability in prices; however, I guess that there is a common agreement that the ACA would inevitably increase demand for health care services in the future, further enticing health care providers to be involved in price discriminatory activities. If, in the future, there would be excess demand for health care services because of higher health care coverage, then health care prices should feel the substantial pressure to go up. However, if prices are capped, then instead of prices, quality of services would be compromised and go to the opposite direction. There is no guarantee that the given scenario with high health care coverage, restricted prices but compromised quality is the more socially desirable equilibrium than what we have had before.
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Donald Lavanty

Chair and Professor in the Department of Health Care Management & Legal Studies at Marymount UniversityData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

Like all cost of living adjustments, health insurance reimbursement was originally based upon the “actual charge” of the provider in the area where the service was delivered. Thus, like real and person property, there would be a variation of those actual charges based upon the area of the country where they were delivered. The cost of living in New York or Los Angles is dramatically different then the cost of living in Hattiesburg, Mississippi. Since physicians would have their actual charges reflect the cost of living in the area of practice, it would take on the cost of living adjustment.

When Blue Shield (the payer for practitioner services) began reimbursing for MD and other services, their formula would be based upon the practitioner’s actual change in the region of the country they provided the service (LA or Mississippi), which always reflected the cost of living in that area. Once Blue Shield got all of the practitioner’s charges in the area, they would obtain the prevailing charge and reimburse 75% or 80% of the prevailing. So a chest film in LA would be at the charge at $75.00 and in Mississippi $45.00 and the reimbursement would reflect that difference in reimbursement.

For Blue Cross (the payer for hospitals), generally, reimbursement would be on a charge basis and would reflect the area of the country the same as Blue Shield. Ultimately, when the commercial carriers, (Aetna, Prudential, etc.) began health insurance coverage, they just adopted the Blue Cross, Blue Shield formula with the geographic payment scale.

When Medicare and Medicaid was enacted in 1965, the program provided that the payment for Medicare and Medicaid beneficiaries would be administered by private insurance companies and they would reimburse for services based upon the charges in the area of the country where the service was delivered. When implemented, Medicare had 74 different carrier areas and 74 different payment schedules based upon the geographic location of the patient.

Thus, like all other goods and services in our economy, health care reimbursement was subject to the cost of living adjustment. In future healthcare reimbursement programs, like the Clinical Laboratory and DME fee schedules and the RBRVS adopted by Congress for payment of Part B Medicare services in1987 and 1990, the payment formula would always include a geographical adjustment to reflect the cost of living adjustment.

How should we correct this market discrepancy (if, in fact, we need to do so)?

The correction of this discrepancy was completed for Medicare and Medicaid in two changes to Medicare and Medicaid. In 1983, Congress adopted the DRG’s where, over a three year span, all hospital payments would be reimbursed on a prospective payment system based upon the value of the diagnosis and treatment. This would be uniformly applied, but would still take into account some geographic adjustments in the final formula. In 1997, the Congress passed the Balanced Budget Act and required the same concept of a prospective uniform payment for Medicare services be adopted for “outpatient services”.

For Medicaid, that uniformity has to be analyzed on a state by state basis as the states control the payment process. In many states today, however, the state (Medi-Cal, TennCare, etc.) has adopted a fee schedule for all services or they may be an HMO or managed care program.

On the physician and other practitioner side, managed care plans adopted by employers or the Medicare Advantage plans will have pre-determined payment rates but many of those still will adjust for the historic cost of living or geographic adjustment to reflect the difference in payment based upon the area of the country.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Under Medicare, over the past 30 years, changes have been made requiring reductions in reimbursement for both surgical and diagnostic services. For example, a global fee has been developed for cataract surgery and most other surgical procedures have seen global fees and percentage reductions in payment. The same is true for reimbursement of laboratory services, which is on a pre-determined fee schedule, DME (durable medical equipment) which is on a fee schedule and also subject to competitive bidding and there have been yearly reductions in payments for CAT scans and MRIs.

Once Medicare implemented the above changes, the private plans (employee and union plans of private health insurance companies) have followed suit and made the same adjustments in payments.

The term “outrageously high” needs some additional context. The American Patient should remember from whence we came. There was the development of a private insurance market to pay for services on a regional basis as determined by the providers. That payment system was adopted by Union plans and employers and implemented under Medicare and Medicaid programs and grew from there. Note that in each of the stages, there was never a new payment schedule, we never started from zero. When Medicare was enacted, the payment was based upon the existing private pay system, which included the high price of technology and the treatment of high cost episodes of diseases and conditions of the elderly population.

The American healthcare system is like none other in the democratic world. Those countries all have a system of National Health Insurance where the Government runs the systems or the providers, hence uniformity. We do not do that. We have a third party market based health insurance system (which is deemed a condition of employment and is part of the private market place) and a government managed health insurance program (Medicare and Medicaid to provide a safety net for those not in the private system). We also have members of our society who do not meet either criteria and they are called the uninsured or underinsured and those are the ones health reform laws try to find ways to provide insurance coverage. The question is raised, do we want to be like all the other democratic nations and have the government run health insurance or do we want the third party system of insurance to be our system. If the later, we will always have these disparities, in my opinion.
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Emily Whelan Parento

Associate Professor and Gordon D. Schaber Health Law Scholar at University of the Pacific, McGeorge School of LawData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

There are a number of different factors that contribute to geographic price disparities, including things like market concentration of both providers and payers, utilization rates, financial incentives of providers and patients, patient preferences, health status of the population, and others.

One critical issue on which there is an emerging movement is the need for price transparency -- as patients are increasingly asked to be "responsible healthcare consumers" and "shop around" for the best value in healthcare services, it is becoming clear that in the absence of meaningful pricing information, patients have very limited ability to compare providers and make an informed decision. Importantly, the existence of price transparency alone will not allow patients to be "responsible consumers" -- there must be accompanying transparency on quality data, to enable patients to select high-value providers, i.e., those who deliver high quality services at an affordable price.

How should we correct this market discrepancy (if, in fact, we need to do so)?

I would reiterate the need for transparency of both price and quality data to be an important component of the way forward. However, states will have to think creatively about how best to collect this information following the Supreme Court's decision in Gobeille v. Liberty Mutual, in which the Court held that as applied to ERISA plans, ERISA preempts Vermont's law requiring certain health care entities, including insurers, to report payments relating to health care claims and other information relating to health care services for inclusion in the state's all payer claims database. Given that self-insured plans are a large segment of the employer-based insurance market, it will be important to develop other means of obtaining and incorporating this data into mechanisms that support increased price and quality transparency.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

There are some laws that aim to protect patients from high costs for out of network providers who practice at an in-network facility (for example, a patient has hip replacement surgery with an in-network doctor at an in-network hospital, but the anesthesiologist is out of network, and the patient is billed for the full cost of the anesthesiologist's services). Excepting these types of laws, a primary protection for individuals as to the cost of certain procedures (aside from the limits on out-of-pocket costs and requirements for actuarial value of coverage established by the Affordable Care Act, which are considerable), are the rates negotiated by third-party payers. For example, an uninsured individual is usually billed for the "list price" for a given procedure, whereas an insured person is billed for a far lower rate, and is usually protected from "balance billing" from providers in an insurer's network.
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Angelique Harris

Associate Professor of Sociology, Director of the Center for Gender and Sexualities Studies, and Director of the Women and Gender Studies Program at Marquette UniversityData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

There are a number of factors, such as the quality of the facility in which the procedure will take place. Some simply cost more than others. So for example, if you have plastic surgery completed, possibly a nose job, in a suburban Milwaukee, it will likely cost less than in Beverly Hills. Some doctors simply cost more to hire and retain. The cost of living in a number of cities is also a factor. If you are comparing Milwaukee with Beverly Hills, again, you see that the cost of rent, staff, etc. would cost so much more, and then driving up the cost of the procedure. Also, where you have people that have higher incomes and are willing to pay more, you can charge more.

How should we correct this market discrepancy (if, in fact, we need to do so)?

There should be a standard, fixed price for all medical procedures based on the cheapest estimate for the procedure. The remaining balance should be covered by the government. If the government is paying the difference, there will certainly be a lot of oversight into these costs. Capping costs would be key.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Some states (I think Maryland) do set the price of procedures. However, this is a capitalist society; the point is to make a profit, even when it comes to issues of life and death. People will pay whatever is necessary (even if they don't have the money) to get better. The government knows that and is working to address this. States are beginning to look into capping and setting the price for procedures, but it needs to be done on a more national level.
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Tracy M. Collins

Assistant Professor of Economics at New College of FloridaData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

The same procedure costs different prices because of a lack of transparency. Consumers can go online and find out how much an iPhone costs, but can't do the same for medical procedures. Prices are typically charged based on what type of insurance a person has and each insurance company (and the government with Medicare and Medicaid) usually has negotiated different rates for different plans with different doctors/hospitals. Most patients (myself included) have no incentive to shop around to find the best price - it can be too time consuming and complicated. Once, a billing specialist told me that even she didn't know how much I would have to pay.

How should we correct this market discrepancy (if, in fact, we need to do so)?

We should do what France has done and regulate prices and make it compulsory for doctors/hospitals to make their prices easily accessible to patients.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

Caps, etc. are based on what has been negotiated by the insurance company (the government). For example, because I have good health insurance, I never have to pay more than $2000 out of pocket for a fiscal year.
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Archish Maharaja

Assistant Professor of Global Management and Organization, Director, Master of Business Administration Program, Point Park UniversityData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

This is the case as each provider/facility does not follow same criteria as to what to charge each patient since reimbursement by each insurance company is also not the same. Every insurance company bases what they pay based on RBRVS Schedule. So each insurance company could pay different amount for different procedure. Hence to maximize the reimbursement providers charge different amount.

How should we correct this market discrepancy (if, in fact, we need to do so)?

If insurance companies have different reimbursement rates I am not sure that this can be or should be done, looking at it from the provider/facility point of view.

How will this issue play out in the days, weeks, and months to come?

I am sure there will be discussion on the issue, but the only way it can happen is if every provider/facility gets paid the same regardless of size or other contractual conditions.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

I am not familiar with it because cost is dictated by medical condition and it should not be capped by law. Otherwise we may not get the best quality of care.
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Uma Kelekar

Assistant Professor of Health Care Management, Marymount UniversityData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

Under Medicare, physicians get reimbursed based on a fee-for-service basis (i.e. get reimbursed for every procedure that they perform).

Reimbursement for physicians is determined based on the resource-based relative value scale (RBRVS) approach. This approach uses three different components: work (technical skill and physical effort), practice (direct and indirect facility or non-facility expenses) and malpractice liability (MP) (professional liability) in order to determine how much a physician should get reimbursed for a procedure. Further, each of these components is adjusted for GPCI’s, or Geographic Price.

If you are interested in the formula: [(RVUwork * GPCIwork)+(RVUpe * GPCI pe)+(RVUpli *GPCI pli)]*CF. So if you look at this formula, the relative value units for every procedure do not change (except for the practice component which varies based on whether the procedure is carried out in a doctor’s office or not, the former being associated with higher costs borne by the physician) based on the geographic location. What changes are the GPCI’s across locations, primarily because the costs associated with work, practice and liability change across locations. So differences on the city, state levels are expected and justified. These are reviewed and adjusted at least every three years.

The RVUs are converted into a dollar amount by using a conversion factor that is tied to the growth rate of the nation’s economy that is measured by GDP. This adjustment is necessary and ensures that the total per capita spending for physician payments does not grow faster than the growth in the GDP. The conversion factor is determined by the CMS and does not vary across locations.

Therefore, although the payment is based on a formula, the differences arise because the physicians continue to get reimbursed on a fee-for-service basis, an approach that is linked to the volume of procedures carried out. So if two hospitals in the same region are billing for a different number of procedures, the costs for one surgery will vary. Therefore, a lot of the variation may stem from the fact that physicians across the country have different practice patterns.



How should we correct this market discrepancy (if, in fact, we need to do so)?

There are new payment or care delivery models that are shifting from a fee-for-service approach to Accountable Care Organizations (ACOs), bundled payments and value-based payment modifiers. These models will see changes in the payment of physicians based on value (determined based on quality metrics) instead of volume.

There have been several proposals made (for instance, MEDPAC and Bowles-Simpson Commission) of freezing/reducing payment rates for specialists through 2021. However, these proposals were not received well by many physician groups. According to the most recent extension, enacted by Congress on January 1, 2013, Medicare physician fees will not change through the end of 2013.

Primary care physicians will receive higher reimbursements in the form of bonuses. Primary care physicians' Medicaid reimbursements for evaluation and management services and vaccinations are being raised to Medicare rates in 2013 and 2014.

How will this issue play out in the days, weeks, and months to come?

Section 3007 of PPACA provides value-based payment modifiers (penalty) that will adjust physician reimbursements based on the quality of care under the Medicare Physician Fee Schedule during a performance period. This will lead to differential payments to a physician or a group of physicians. In other words, cut-offs might apply to the acceptable physician costs. Some believe that this might compromise the quality of care given to patients in the years to come. The value modifier might be calculated using the quality tiering methodology. Quality of care may be reported through the physician quality reporting system, a system that a group of physicians might choose to participate in.

Are there any laws that cap the cost of certain procedures and/or protect patients from outrageously high bills?

In the 2012 Medicare Physician Fee Schedule Final Rule, CMS finalized a policy to apply the multiple procedure payment reduction (MPPR) to the technical component (TC) and professional component (PC) of the second and subsequent studies of certain advanced imaging procedures (i.e, CT, MRI, and ultrasound) provided to the same patient in the same session by a single physician, or multiple physicians, in the same group practice (the latter part was passed later in the 2013 Final Rule). The Multiple Procedure Payment Reduction also applies to other services such as therapy, cardiovascular and ophthalmology diagnostic tests. However, this law if applied to the technical and professional component should not cause any variation of costs across the country.
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Gabriel Picone

Associate Professor of Economics, University of South FloridaData from the Department of Health & Human Services indicates that the same procedure can vary in cost by tens of thousands of dollars, depending on where it's done (costs vary on the city, state, and even hospital level). Why do you believe that is the case?

Yes, there is a great geographical variation in the cost of medical procedures that cannot be explained by demographic factors and cost of living factors.

There are many theories, but we don’t know for certain. You must be aware that it is very difficult to know the exact amount of money that a hospital receives for a procedure. Insurance companies pay a fraction of what the hospital charge.

How should we correct this market discrepancy (if, in fact, we need to do so)?

If we don’t really know the causes, it is not possible to correct for these price disparities. More transparency on actual prices charged to different consumers should help, but I am not sure whether is possible to implement such a law.
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Timothy Jost

Professor in the Washington & Lee University School of Law and Author of the widely-used Health Law casebookWhat do you make of the CMS’s findings?

Just comparing charges from different hospitals doesn’t really tell you what, in fact, is being paid. It would certainly seem to be the case that if you have a hospital that is treating much sicker patients or patients with a lot of complications, the probably would be charging more for the same general services than a community hospital that basically had patients that could be treated quickly and released. I think those are important factors.

On the other hand, I think that it certainly tells us that charges vary tremendously from region to region, probably in ways that don’t exactly reflect the difference of cost in different regions. It’s always been that way.

One reason is certainly that it varies based on competitiveness within a region. … Probably another factor might be how competitive the insurance market is and how much the insurance companies were forced to get hospitals to compete with each other. But it’s also the case that if you have a hospital that has a very good reputation – deserved or not deserved – for being the best hospital in the area, they can often charge much higher rates as well.
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James Blumstein

Director, Vanderbilt Health Policy CenterWhat do you make of the CMS’s findings?

I think there are differences in cost structure across hospitals. It’s unsurprising that certain kinds of hospitals – teaching hospitals – will have cost structures that vary from other kinds of hospitals : non-profits, for-profits. So, the disparity –if one is to believe there is one – is pretty eye opening. We don’t know whether there is a difference in case mix, which is always the researchers’ concern here as to whether it’s an apples-to-apples comparison. I don’t believe that government data really answered that question. So, I think it may not be as big as projected there, but it is substantial. I think the case mix adjustments are not likely to take away all disparities, and I think some of the disparities relate to cost structure and competitiveness within the hospital.

Now, why hospitals insist on driving up the charge rate is partly enigmatic in a sense that very few patients pay the ‘rack rate,’ or the charge rate. Some hospitals sometimes try to exact this out of those who don’t have insurance, but that’s 6-8% of the market normally. So, I think some of it is strategic gaming. The way hospitals negotiate at least with private payers is percentage discount off the rack rate, and to the extent that the buyer doesn’t know what the data are, that becomes kind of a gaming strategy. Every time you go to a sale, you wonder if the price was jacked up or not, right? So I think having the light of day on this is eye-opening and gives the insurance companies and self-paying employers the ability to have a more constructive negotiation.

The issues eventually always come back to the patients… Yes, patients should care about this, but it’s an indirect thing. I think the first line of concern is with the direct buyers – the employers who are contracting with the hospitals, or more typically, the insurance companies which are contracting. And I think it does raise considerable issues about accountability and openness – transparency is the current word – about these processes
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Gwendolyn Majette

Assistant Professor of Health Care Law at the Cleveland State University College of LawWhat do you make of the CMS’s findings?

The use and purchase of health care services is unlike other services. Health care is one of the few services that individuals receive without knowing the price in advance. This is because many people use some type of insurance to purchase these services. It is also because health care is ‘special.’ Receipt of health care can prevent death, serious illness, disability, and the spread of contagious diseases. Thus there is a desire to not allow costs to prevent receipt of necessary care.

The mere fact that CMS is collecting and publishing this data will affect future prices because consumers, regulators, and researchers can use the information to comparison shop and begin to investigate further the reasons for the price variation. Additionally, the hospitals themselves now know what their competitors’ prices are and they will have to justify the prices they charge in the future. Antitrust laws preclude hospitals from sharing their prices with each other.

What does the future hold for health care pricing?

Health care costs in the United States are high. We spend a significant portion of our gross domestic product on health care yet we do not have better health outcomes that other industrialized countries that spend less. The largest percentage of the spending is for hospital care. Thus to lower costs, we must focus on making this segment of the health care sector more efficient.

PPACA [the Patient Protection and Affordable Care Act] requires hospitals to disclose their charges annually. This information is critical to the work of other features in the health care reform legislation that are designed to control health care costs such as the Independent Payment Advisory Board (IPAB). IPAB is a presidentially appointed 15-member board of experts tasked with making recommendations to slow the growth of Medicare costs if they are projected to exceed a specific target level. If Congress does not pass any legislation, then the IPAB recommendations become law. It is also tasked with providing an annual report on cost, access, quality, and utilization of healthcare services for Medicare and private payers. Finally, IPAB is tasked with submitting a report every two years, beginning in 2015, to make recommendations to curb the growth of private health care costs nationally.

We will continue to see efforts flowing from PPACA, new legislation, private sector initiatives, and research to control the cost of health care in the United States.
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Mitchell Glavin

Assistant Professor of Healthcare Administration at Stonehill CollegeWhat do you make of the CMS’s findings?

The data release from the Department of Health & Human Services refers to what hospitals submit as their charges, but this are not the costs that Medicare actually pays. Hospital charges are kind of like list prices for medical care services, but the amounts actually paid to hospitals by private health insurance plans, Medicare, and Medicaid are typically much less (they are more or less retail prices). List prices are only paid by patients coming from other countries (medical tourists, often wealthy) or Americans without a health insurance policy (some very wealthy folks, but mainly lower-income folks or those excluded from coverage due to pre-existing medical conditions). Yes, you read that right, poorer folks without health insurance or lousy insurance are sometimes billed for (and expected to pay for) services at the very highest list prices.

How did we arrive at this point where health care prices vary so drastically?

In the 1980′s Medicare moved to the prospective payment system whereby Medicare was no longer used the cost-plus methodology, but was now essentially paying a uniform national rate for each type of hospitalization. In effect, Medicare would pay any U.S. hospital a flat fee of say $4,500 for an inpatient stay for an appendectomy. The fee paid by Medicare would be the same no matter how many drugs and tests were used to care for the patient and no matter if the patient stayed in the hospital 3 days, 5 days, or 9 days.

The Medicare payment was adjusted for certain factors such as a bonus if the hospital was located in a more expensive high-wage area, if the hospital had a high percentage of Medicaid and uninsured patients, and if the hospital was involved in teaching a lot of physicians-in-training. So, for Medicare the list prices charged by hospitals lost much of their meaning and relevance. At the same time, private health insurance plans moved to adopt their own prospective payment schemes, or negotiated significant discounts off of the list prices or bundled payments for hospital care into the total services provided to plan members via managed care plans.

The end result since the 1980′s has been that very few insurance plans, both the private plans (which most Americans have via their place of employment) and the public programs (Medicare, Medicaid, CHIP), were paying anything close to 100% of hospital charge amounts.

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Richard Alderman

Director of the University of Houston’s Consumer Law CenterWhat do you make of the CMS’s findings?

Few consumers shop for health care. Unlike most providers of goods or services, health care providers are often able to set a price without regard for the market. Consumers rarely ask questions about the cost of health care.

What does the future hold for health care pricing?

I think it needs to be “corrected,” by establishing a truly competitive market. This may be difficult because many consumers believe they don’t pay for health care, insurance pays for it, and consumers are often afraid of even asking questions about cost because they fear it may affect the quality of care.

Hopefully, it will play out through greater education and information, and perhaps some degree of competition among providers. We need to do something to lower the cost of health care in this country.

Takeaways

  • While differences in the prices that hospitals charge for certain services are revealing, the average person typically doesn’t pay anywhere close to full freight.
  • The health care industry is, however, marred by important underlying accounting issues.
  • Initiatives led by the U.S. Department of Health and Human Services will help provide the information necessary to evaluate pricing practices as well as devise a solution for making the industry both more transparent and less expensive.

 
Image:  Marynchenko Oleksandr/Shutterstock

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