Medicare Study Exposes Wildly Divergent Hospital Charges

Although we’ve addressed the difficulty of knowing the cost of medical care before the bill arrives, few recent stories have illustrated the problem as well as one widely covered last week, including by the New York Times.

A hospital in Livingston, N.J., for one example, charged an average $70,712 to implant a cardiac pacemaker, while another in nearby Rahway, N.J., charged $101,945. One hospital in Saint Augustine, Fla., charged an average $40,000 to remove a gallbladder via minimally invasive surgery, while one not far away in Orange Park, Fla., charged more than double that–$91,000. A hospital in Dallas charged $14,610 to treat pneumonia while another in that city charged more than $38,000 for the same treatment.

As summarized by The Times, “Data being released for the first time by the government on Wednesday [show] that hospitals charge Medicare wildly differing amounts – sometimes 10 to 20 times what Medicare typically reimburses – for the same procedure, raising questions about how hospitals determine prices and why they differ so widely.”

The Center for Medicare and Medicaid Services (Medicare) released cost data for 3,300 hospitals around the country, and costs were divergent not only regionally, but sometimes practically across the street. The data cover bills submitted in 2011 for the 100 most common treatments and procedures performed in hospitals.

Federal officials ascribed the variation, in some cases, to varying degrees of sickness and to some patients requiring longer stays in the hospital.

Still. This is not a new issue and people continue to be stung by costs they had no way of anticipating.

As The Times notes, how hospitals price medical services remains a mystery, and at a time when America is gearing up for the Affordable Care Act’s broader health-care coverage, you’d think it would be in everyone’s interest to solve it.

Medicare and insurance companies that contract with providers don’t pay the “rack rate”-a term commonly used in the hotel and other industries to indicate the suggested retail price of a service or product; that is, the rate paid by the ignorant, the uninsured and schlubs who lack the power of an economy of scale.

Because these large entities pay reduced amounts for certain services for certain conditions (Medicare standardizes costs, insurers negotiate them), their patients generally don’t see the bills and aren’t as affected by the charges as people outside of this coverage. And as The Times says, “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.”

After the report was released, The Times contacted some of the hospitals whose charges were examined. Some of their representatives said that the higher bills they submitted reflected their status as either teaching hospitals, which tend to see patients who are sicker and/or have more complicated issues, or that their patient base was older and sicker, and cost more to treat.

Some hospital said that if their charge was more than what Medicare would pay, they would write off the difference instead of trying to collect it from the patients.

Those are valid points, but in big-picture terms, there are still too many people paying far more for the same care that someone else gets. And if costs are written off when people can’t pay, ultimately we all pay when insurance premiums rise in response.

The data, The Times says, do not explain “why one hospital charges significantly more for a procedure than another one. And Medicare does pay slightly higher treatment rates to certain hospitals – like teaching facilities or hospitals in areas with high labor costs.”

One Medicare official interviewed by The Times said he would have anticipated, at the most, two to three times the difference among hospital charges. But bills submitted to Medicare were, on average, about three to five times what it typically pays to treat a condition, according to The Times’ analysis. And some variations could be even greater.

The data also show that significant cost variations occur even for procedures that are standardized and not susceptible to patient complications.

Bills submitted by for-profit hospitals to Medicare are higher than those submitted by nonprofit facilities, and public hospitals generally bill Medicare less than both.

One hospital finance expert told The Times, “If you’re charging 10 % more or 20% more than what it costs to deliver the service, that’s an acceptable profit margin. Charging 400% more than what it costs has no rational basis in it at all.”

The Medicare official had no explanation for the wide cost swings, but a representative from the American Hospital Association ascribed them to what we’ll call “business as usual”-as insurers demand bigger discounts from a hospital, it might raise its rack rates to protect its bottom line.

A representative of America’s Health Insurance Plans said some of its members (insurance companies) were reporting price increases of 20% to 30% for some services. No one is surprised that many of those underwriters impose premium increases to compensate.

Give Medicare credit for releasing the report in the interests of transparency. We’ll withhold any additional applause until providers and insurers take more responsibility for making the medical care market fair to all payors.

Patrick Malone & Associates, P.C. listed in Best Lawyers Rated by Super Lawyers Patrick A. Malone
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