Many Continue Asking Age-Old Question: ‘Why Do Hospitals Charge So Much?’
A growing number of states, including Oregon, Rhode Island, and Delaware, are enacting laws to control the cost of healthcare, including services rendered at hospitals.1-3
“This is the kind of thing we’re going to be seeing more of. There is going to be huge attention on this,” predicts Suzanne Delbanco, PhD, MPH, executive director for Berkeley, CA-based Catalyst for Payment Reform. As it stands now, “hospitals are charging higher prices because they can,” according to Delbanco. This could change as public frustration and scrutiny increases.
“Hospitals will need to think very carefully about whether they really want to have a profit margin that comes from having high prices,” Delbanco offers.
The widespread perception is that hospitals are raising prices year after year, without addressing the underlying costs.4,5 “Everyone argues that Medicare payments are too low. But if hospitals are more efficient, the Medicare payment turns out to be adequate,” Delbanco explains.6
Earning a reputation as the hospital that charges the most could put that facility in a less competitive position. “It could cause them to lose volume to someone else who’s got a more efficient ship,” Delbanco notes. There is growing awareness that hospitals in the same area are charging significantly different prices for similar procedures.
“Prices at the highest-price facilities are up to two or three times as high as at the lowest-price facilities,” says Anna D. Sinaiko, PhD, assistant professor of health economics and policy at the Harvard T.H. Chan School of Public Health in Boston.7
As patients learn more about the way things work, they likely will choose hospitals that are able to offer good quality care at lower prices. “The challenge is how to get that message out in a way that meaningfully affects patient choices for hospital care,” Sinaiko says. A patient’s hospital choice also depends on his or her physician and insurance. Thus, the most effective marketing message should be directed at all of these groups, Sinaiko suggests.8
Barak Richman, JD, PhD, says state efforts will focus on two areas:
• Curbing the worst abuses. “These are the extraordinarily high prices and price gouging, which usually express themselves either through illegal monopolies or through surprise bills,” says Richman, professor of law and business administration at Duke University.
• Solving the problem of how to provide affordable rural healthcare. “States are learning they will need to support physician groups and other professional partnerships that are independent from hospitals,” Richman says.
The movement toward price transparency began around 2011, Delbanco says. At that time, companies were interested in reference pricing, the idea that health plans and employees agree on what is a reasonable price for a given service. Reference pricing works this way:
- If the provider meets or beats the reference price, the health plan pays the maximum amount allowed;
- If the provider’s price is higher than the reference, the plan member has to pay the difference out of his or her own pocket.
“If you want to put a program like that in place, providers need to share price information with the plan members,” Delbanco explains. That is the only way for people to know what their out-of-pocket costs will be in advance.
Soon, people figured out that there was no easy way for anyone to obtain that kind of price information. This became an obstacle to reference pricing. “Health insurance companies were then pushed to develop these resources,” Delbanco says. It also created an opening for startup companies to create tools to share price information with consumers. “That is how the price transparency movement really started,” Delbanco explains. “Since then, we have seen a lot of progress.”
Major insurance companies all offer some kind of price information, although not for all providers.
“In some cases, it’s even customized in such a way that a patient can see what their personal out-of-pocket costs would be for selecting a given provider,” Delbanco says. Some tools even take into account how much of the deductible has been met.
Initially, people looked to health insurance companies to provide information on the cost of care. Recently, the focus has shifted to healthcare providers’ responsibility to give out the information.
Recent federal legislation requiring hospitals to post prices reflects this expectation, although the information proved to be of little use for consumers. While some hospitals created web pages listing typical charges, the information is rarely customized to a particular patient. “It’s marginally useful,” Delbanco argues. On the state level, some legislation has been passed targeting this area. “A lot of states have done nothing. Of the ones that have, it ranges from something that is pretty hard to find to something much more functional,” Delbanco reports. A few recent developments:
• Some states have passed laws requiring hospitals or health plans to provide price estimates within a certain period. There is no guarantee people will receive good price quotes in the timeframe. In Massachusetts, a law requires that hospitals give the information in 24 hours.
“A secret shopper survey found that most hospitals were not equipped to answer the question, even after the law was passed,” Delbanco explains. An expanded concept of “informed consent” is needed, according to Delbanco.
“When patients sign consent for surgery, why not put in there what’s likely to be charged to them?” she asks, adding that there is no reason for the cost of most care to be a surprise. “When you think of the mental stress getting these surprise bills puts on people, it has to affect their health.”
• Some states, including New Hampshire, have created an all-payer claims database. This pools information from health insurance companies and is searchable by providers and services. Some databases are customized, at least to some degree, to the patient’s health insurance.
“From that, you are able to produce pretty good information on what the patient is likely to pay in a typical hospital after having typical surgery by X provider,” Delbanco says.
• Recent consolidation has changed the way hospitals negotiate with payers. “As healthcare systems have gotten more market share and more market power, it has changed the way they negotiate with payers,” Delbanco says.
Certain hospitals have put provisions in contracts, protecting them from the health plan revealing what the hospital is paid. “Some even prohibit the health plan from offering network designs that would look unfavorably on that hospital,” Delbanco notes. The provisions might prevent health plans from creating a narrow network that does not include that provider or a tiered network that does not list the hospital in a preferred tier. Several antitrust cases were settled recently, prohibiting those practices.9
“We know that these kind of contract provisions exist and that they are pretty anti-consumer,” Delbanco says.
- Oregon Health Authority. Oregon passes bipartisan legislation to slow rising cost of health care and increase transparency for consumers. June 19, 2019. Available at: http://bit.ly/2MykTkn.
- Baum A, et al. Health care spending slowed after Rhode Island applied affordability standards to commercial insurers. Health Aff 2019:38;237-245.
- Murray R, et al. The state of state legislation addressing health care costs and quality. Health Affairs Blog. Available at: http://bit.ly/2VmHDYc.
- Koller CF, Khullar D. The commercial differential for hospital prices. JAMA 2019;322:723-724.
- Sen AP, et al. State efforts to lower health care prices paid by private insurers. JAMA 2019;322:201-202.
- Navathe AS, et al. Cost of joint replacement using bundled payment models. JAMA Intern Med 2017;177:214-222.
- Sinaiko AD, et al. Marketwide price transparency suggests significant opportunities for value-based purchasing. Health Aff 2019;38:1514-1522.
- Sinaiko AD. What is the value of market-wide health care price transparency? JAMA 2019; Sept. 5. doi: 10.1001/jama.2019.11578.
- U.S. Department of Justice. Atrium health agrees to settle antitrust lawsuit and eliminate anticompetitive steering restrictions. Nov. 15, 2018. Available at: http://bit.ly/31S39Xy.
A growing number of states are enacting laws to control the cost of healthcare, including services rendered at hospitals.
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