The release of average charges for common procedures in more than 3,000 U. S. hospitals last week by the Centers for Medicare and Medicaid Services (CMS) elicited divergent reactions – not surprisingly. On one hand, it was front-page news for most of the major newspapers: “Hospital Billing Varies Wildly, Government Billing Data Shows,” was the headline in the New York Times. The article went on to speculate that these new data would likely “intensify a long debate over the methods that hospitals use to determine their charges.”
On the other hand the data were “old hat” to most health policy analysts. Several colleagues mentioned to me that “this is old news” and “it isn’t meaningful at all because we all know that charges don’t mean anything.”
“No one pays charges” is the common refrain. “Charges are merely an accounting fiction.”
Charges Do Matter — They Matter A Great Deal
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Counter to the belief of both hospital industry representatives and many of my colleagues, hospital charge levels and rapidly escalating charges matter a great deal. While individual states and the Affordable Care Act (ACA) have instituted limits on the amounts low-income uninsured patients pay hospitals, insured patients that receive care at hospitals that are “Non-Par” or “out-of-network” are still victims of hospital’s exorbitant charging practices. When patients receive emergency services at an out-of-network hospital, the patient and/or insurance company (depending on insurer cost sharing for out-of-network care) pay full charges.
High and increasing hospital charges, combined with increasing proportions of cases admitted through the hospital Emergency Department (ED), are major factors behind the ever-declining negotiating leverage of private health insurers. This situation, coupled with the increased pricing power of the ever-more-concentrated provider industry, will be a major contributor to the almost certain rapid escalation in total U.S. health care costs in coming years.
First however, I would argue that charges are important because increasing charges are a symptom of the forces that lead to ever-increasing payment levels. As Steven Brill showed in his recent Time magazine article on the madness of hospital pricing and payments, one doesn’t have to go very far from the charge data to get to a conclusion that actual payments are extraordinarily high and wildly variable.
Chart 1 below shows the increase in hospital “markups” of charges over costs for both hospitals nationally and in Maryland, as reported annually by the American Hospital Association (data are from the AHA annual statistical guide 1980-2011).
Chart 1 – Hospital Markups over Cost 1980 – 2011 (American Hospital Association annual statistics)
As the chart shows, across the country, hospitals have marked up charges ever higher, from 20 percent above costs in 1980 to 220 percent in 2011. Although the data on actual payment levels (as opposed to the “sticker price” charges) are “trade secrets” of health insurers, other data on hospital payment levels (also available from the AHA Hospital Statistics 2012) show that hospitals have been able to increase the price they actually receive from privately insured patients from 120 percent of cost to around 135 percent of costs over the past decade.
Chart 1 also shows the much lower charge levels (which more or less equal payment levels) in Maryland, where the unique all-payer hospital rate setting system determines what hospitals get paid. While rate regulatory systems as extreme as Maryland’s may not be everyone’s “cup of watered down hospital tea,” one benefit of rate setting (whether it be Maryland or Medicare) is more rational price levels that actually reflect relative resource use and bear some relationship to underlying costs.
So, at the very least, the CMS charge data reinforce the conclusion that hospital prices and payment levels nationally are not rational in the sense that they are not the prices that a truly competitive market would produce. This lack of competition, these ever-escalating payment levels, and misallocations of resources clearly add to our nation’s overall health care bill.
Date: May 16. 2013