Why are hospital “sticker prices” so high?

Right off the bat we should explain that the question is not, “why are medical costs are so high?” Answers to that are so varied and complicated you could devote almost an entire blog to it (ahem). Instead, this question is why there is such an enormous difference between two prices:

• The “Sticker Price” – what the patient is charged by the hospital, and has to pay if he or she is uninsured
• The “Insurer Price” – the heavily discounted price the insurer pays

There is a HUGE difference between these prices. In this post we’ll try to figure out why.  

Seton Hall University’s Health Reform Watch outlines the problem:

When patients are not protected by large private or public insurers, doctors and hospitals charge them astonishingly more than patients with Medicare or managed-care insurance. Some price difference would make sense, because insurers offer providers large volume and economies of scale.  But we are not talking about discounts of 10, or 20, or even 30 percent.  Providers routinely double, triple, or even quadruple prices for unprotected patients.  Such huge mark-ups can only be regarded as price-gouging — exploiting market power to charge prices virtually unrelated to actual cost or market value.

Obviously, the uninsured can’t afford to pay these prices— even the relatively wealthy (the top 10% of uninsured) can only afford to pay for half of their hospital stays in full. But even the insured are vulnerable to price-gouging if they go out-of-network:

• Balance billing-  The trick here is that most insurers will pay 70%-80% of charges that are “usual and customary.” But if a provider wants to get paid more than the “usual and customary” fee, they simply charge anything above that– the balance– to the patient.

Which leaves us with the question: If hardly anyone can afford to pay the sticker price, and the sticker price is more than double the cost of actually providing care… why are the sticker prices so high in the first place?

Excuses hospitals give

Health Reform Watch lists the ways providers defend themselves:

1. First, they call these price differences steep discounts rather than huge mark-ups.  This is almost laughable.  Most providers charge “list prices” to only a small minority of patients (10-20%), so these are hardly a genuine baseline.
2. Second, providers argue that because they often cannot collect list prices, they are on balance receiving little more than they would receive from insurers.  However, when patients cannot pay inflated bills, doctors and hospitals regularly send them to collection agencies, ruining patients’ credit and bankrupting millions of them.
3. Third, providers blame the government by claiming that program and accounting rules require them to bill this way.  But governmental agencies have declared that this is not true, and while some rules may still be irksome, rules about billing certainly do not require providers to set their prices as high as they do.  Many tax-exempt (non-profit) hospitals recently wilted under scrutiny and adopted sliding-scale policies for low-income uninsured patients, but these policies do little to help insured patients who are receiving care out-of-network or uninsured patients from the broad middle class.

The Real Reasons Sticker Prices Are So High

1. Some insurers will pay the inflated price

Jeanne Pinder, a former NY Times reporter who founded the website Clear Health Costs, talked to a woman who works in the medical billing office of a radiology center in New York about prices. Here’s what the center charged for a simple lower back MRI:

• Sticker price: $1500
• Medicaid pays $542
• Medicare pays $497
• Empire Blue Cross pays $400

Yes, in this case, the private insurer pays less than Medicare. But… not every plan gets that same discount:

“Some insurance plans do pay the full amount, or close to it — the Empire Government plan, for example, pays “up to $1,200″  for that procedure, S. says, and so the sticker price stays where it is.”

2. Insurers demand a big discount

Again from the interview with a medical billing office worker:

“If you reduce your rate, the insurance company can come in and say, ‘you’re only taking this much from patients,’ ” she said, and thus further reduce the rate.

3. To game government payment systems

Sometimes the amount government health programs will reimburse hospitals is based partly on the hospitals’ own fee lists. For example, in 2004 the Ohio Bureau of Workman’s Compensation was paying 75% of hospitals’ list prices for inpatient care, and 60% for outpatient care. As an SEIU report noted, this payment system encouraged hospitals to jack up their sticker prices:

These rates were paid to all hospitals, regardless of the hospital’s mark-up. If one hospital charged $200 for a simple emergency room visit, BWC would have paid the hospital $120 in 2004. However, another hospital that simply decided its sticker price for the same emergency room visit was $500, BWC would have paid the hospital $300. In this system, there is no way to hold the hospital accountable to whether the amount BWC is paying is actually reasonable.

Another recent example was Medicare’s outlier program. Medicare normally reimburses hospitals based on a nationwide cost rate for each procedure, with adjustments made to reflect local labor costs. The hospitals’ sticker prices have no bearing on how much they’ll get from Medicare… most of the time.

But occasionally, certain patients require a much longer hospital stay than would be normal for someone with their illness. Medicare would pay hospitals extra for these “outlier” patients– and this rate based partly on the hospitals’ sticker prices. Hospitals jacked up their prices accordingly, until federal regulators began to crack down. Tenet, one of the nation’s largest hospital chains, was charged with defrauding Medicare of nearly $2 billion dollars using the outlier scheme.

Most government agencies seem to be recognizing these loopholes and closing them, but once hospitals have raised their rates, they have no reason to lower them.

The Lesson

The health reform debate focused mainly on the abuses of insurance companies, but hospitals can be just as bad. There are plenty of examples of hospitals gouging patients, refusing to treat the uninsured without payment up front, and even “patient dumping.”

The lesson here is that both insurance companies and hospitals will do whatever they can get away with to make money. The real problem is a health care system that is based on profit rather than service, and allows participants to reap massive profits at the expense of patients.

[In our next post we’ll look at some ways patients can avoid price-gouging.]