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Hospital Pricing Transparency
by Amy Gooch
Introduction
Fueled by
a number of unsatisfactory outcomes, many advocates, academics, and healthcare
professionals propose price transparency as a strategy to curb hospital pricing
system problems. Price transparency is
anticipated as an important step to improving the ailing healthcare system in
the United States, but is only one component to healthcare reform. It is thought that transparency will reduce
price distortion[1] and
discrimination[2], leading to
improved market efficiency. Although
many stakeholders are already supportive of transparency initiatives,
developing a system of price transparency will not be easy, as the healthcare system
is extremely complex.
Background and History
“In its
purest form, pricing transparency is simply providing the consumer with useful
information about the cost of services,” (Clarke 2007, 8). Demand for such hospital price transparency
has grown considerably in recent years.
Nichols et al. (2006, 82) state that “demand for payment reform arises
when trust in the efficiency and fairness of the existing payment system breaks
down.” The cause of this distrust is
largely thought to be price distortion and consumer disconnectedness[3]
(Clarke 2007).
Price
distortion has evolved over time and has been largely driven by the diverse
payment systems used in healthcare. For
example, hospital underpayment by government has caused price distortion. To make up for low reimbursement by
government, hospitals shift costs to self-pay patients. Additionally, hospitals are incentivized to
keep charges high, even though most consumers pay a discounted rate. This is because Medicare outlier
reimbursement and some managed care payments are based on charges, rather than
negotiated rates (Clarke 2007).
Presently,
every hospital has discretion to determine the prices listed on its
chargemaster, the undiscounted price list for all the hospitals services. A number of justifications have been
established by hospitals for choosing to charge high prices, including that
patients are responsible to negotiate price discounts before the time of
service, uninsured pay only 10% of charges, making up for underpayment by
Medicaid and Medicare, and incentivizing health plans to sign contracts to
procure lower rates (Anderson 2007).
These strategies cause further price distortion, making price comparison
difficult for consumers.
As noted
by Anderson (2007), hospitals have been under scrutiny because of the ever
increasing number of uninsured who are charged, on average, 2.5 times more than
private and public insurers. Other
patients pay this rate also, including visitors from abroad, those with health
savings accounts, those covered by auto insurance, and those covered by workers
compensation. Together they make up the
group known as “self-pay” patients. The
uninsured represent the majority of this group, by far (Anderson 2007).
Another
measure demonstrates this same pattern.
A charge-to-cost ratio measures hospital charges relative to allowable
costs as determined by the Center for Medicare and Medicaid Services
(CMS). In 2004, this ratio was 3.07 for
all U.S. hospitals, meaning they charged $307 for every $100 in CMS allowable
costs. Interestingly, the ratio was
higher at proprietary hospitals (4.10) than at public hospitals (2.49). Hospitals would have experienced 200 percent
profit margins if this had been collected.
In reality, profit margins averaged 5.7 percent. Another ratio, called the gross-to-net
revenue, was 2.57 in 2004. This means
for every $257 charged by hospitals, $100 was actually collected (Anderson
2007).
Historically,
the gap between charges and costs was much narrower. In 1984 the charge-to-cost ratio and gross to net revenue were
1.35 and 1.25, respectively. Over the
years, hospital charges increased much faster than costs increased, widening
the gap. Meanwhile, revenue increased
parallel to costs, not charges. A reason for this is that as hospitals increase
charges, private insurers negotiate lower rates, leaving only self-pay patients
to pay the higher charges (Anderson 2007).
Current Impact
The
variability of hospital charges and the distortion of those charges over time
have led to the current hospital pricing structure. It is hoped that transparency initiatives will reduce price
distortion and variability, possibly even lowering prices (Congressional
Research Service 2008). California, a
state early to adopt transparency laws, has demonstrated the price disparity
among hospitals and types of payers. Figure
1 demonstrates pricing variability for specific items between hospitals. Table 1 shows the disparate prices charged
by type of payer. Interestingly, the
California initiative has had little effect on hospital prices (CRS 2008).
Figure 1. Hospital Charges
for Selected Diagnostic Tests, 2004
Source: CRS
2008
Currently,
over 30 states mandate hospitals provide pricing information to the public
(NCSL 2008). In Utah, transparency
projects are underway. The Utah
PricePoint system, modeled after other successful state systems, allows
consumers to compare charges and other information for a number of procedures
at Utah hospitals. Additionally,
hospital comparison reports have been published for several procedures. Also, funding has been provided for a Health
Data Committee to collect information on health care costs.
Table
1. Average Costs and Charges for Selected Hospitals by Type of Payer, 2002
Source: CRS 2008
Current Status and Solutions
If
hospital pricing transparency is to be successful in the future, several
problems will need to be examined.
First, the average chargemaster contains around 25,000 items, so only
collecting data on a few dozen items,
as California does, lends itself to price manipulation by the hospital. Second, patients cannot comparison shop
beforehand if they are unaware of the services they need (Clarke 2007). Third, chargemaster items are usually
written in code, impossible for a lay person to interpret. Fourth, since hospitals may change prices at
any time, comparison shopping will not be helpful unless prices are guaranteed
(Clarke 2007). Fifth, though
transparency initiatives evolved out a desire to assist those least able to
pay, posting prices will likely not improve the uninsured’s position to bargain
with hospitals for discounted rates (Anderson 2007).
To
successfully implement price transparency, important considerations must be
made to ensure information is presented to consumers in an understandable and
useful way. This will require hospitals
to create common terms and explanations (AHA 2006). Regulation to deter price discrimination and require posting
prices in an accessible form may also be necessary (CRS 2008).
Additionally,
most consumers only want information on what they will be expected to pay
out-of-pocket, that is, after third party payment, adjustments, and discounts
(Anderson 2007). At a minimum, Clarke
et al. (2006) suggests hospitals provide an estimate of treatment cost tailored
to the patient before the time of service.
Employers may require different information to make decisions. Having great market power to effect
transparency model development (employer sponsored health plans account for 30
percent of hospital revenue, equal to Medicare), the ideal system for this
group requires a limited number of negotiable prices and allows payers to
access information necessary to compare quality, services, and prices across
hospitals (Nichols et. al 2006). As noted
by the American Hospital Association (AHA) in a 2006 policy statement, other
consumers will likely be interested in different information, though it is not
fully known what consumers want to know (AHA 2006).
The
process of developing a useful, comprehensive, transparent price system will be
costly and lengthy. It is thought that
price transparency in healthcare will lower prices, as has been the result in
other markets. However, due to the
unavoidable complexity of third party payers, intermediate agents, and
complicated products, it is unknown whether the healthcare market will behave
this same way (CRS 2008). It should be noted that price transparency should not
been seen as simply a way to gain cost savings, since those savings may not be
realized (Anderson 2007).
Though the
process to achieve pricing transparency will be difficult, some important
parties have expressed support of the initiative. In a 2006 editorial, Secretary of Health and Human Services,
Michael Leavitt, said “people deserve to know, indeed they have a right to
know, what their healthcare costs and how good it is” (Leavitt 2006). Further, the American Hospital Association
has endorsed pricing transparency initiatives, stating that “more can, and
should be done to share hospital pricing information with consumers.” Also, over 30 states have mandated
accessibility of hospital charge information for consumers. More states will likely follow suit (NCSL
2008). Lastly, President Bush has made
transparency a priority of the administration (Clarke 2007), and in fact,
Congress has had several hearings on the issue and several bills have been
introduced (Anderson 2007).
Conclusion
Efforts to
further hospital price transparency are certain to continue. The process will be slow since many of the
proposed solutions have drawbacks and leave no easy answers. It is hoped that transparency may improve
healthcare market efficiency and prevent pricing discrimination, but the
complexities of the healthcare system ensure that perfecting price transparency
will be a difficult process. However, with
so many critical allies in place, it is unlikely that transparency initiatives
will lose momentum anytime soon.
References
American Hospital
Association. Hospital Pricing Transparency. www.aha.org/aha/content/2006/pdf/5_1_06_sb_transparency.pdf
(accessed May 2, 2008).
Anderson, G. F. 2007.
From ‘soak the rich’ to ‘soak the poor’: recent trends in hospital pricing. Health Affairs 23(5): 780-789.
Clarke, R. L. 2007.
Price Transparency: Building community trust. Frontiers of Health Services Management 23(3): 3-12.
Clarke, R. L., Davidson,
R. J., Jessee, and W. F., Rappuhn, T.
A. 2006. Consumerism in Health Care. Patient Friendly Billing Project.
Congressional Research
Service. 2008. Does price transparency
improve market efficiency? Implications of empirical evidence in other markets
for the health sector. Retrieved May 29, 2008 from www.fas.org/sgp/crs/misc/RL34101.pdf.
Leavitt, Mike. 2006.
Transparency in healthcare a priority. The
Hill. thehill.com/healthcare-may-2006/transparency-in-healthcare-a-priority-2006-05-10.html.
(accessed May 29,2008).
Lutz, S. 2007.
Transparency-“deal or no deal”? Frontiers
of Health Services Management 23(3): 13-23.
National Conference of
Sate Legislatures. 2008. State
legislation relating to transparency and disclosure of health and hospital
charges. www.ncsl.org/programs/health/transparency.htm. (accessed August
15, 2008).
Nichols, L.M., and
O’Malley, A.S. 2006. Hospital payment systems: will payers like the future
better than the past? Health Affairs
25(1): 81-93.
Note: Amy
Gooch is enrolled in the MPH/MHA Program at the University of Utah, and is
pursuing a career in healthcare administration. This policy brief was originally written for her Health Policy
course in June 2008.
[1] Price distortion refers to a disparity
between price and cost. Price
distortion may be created by charging a higher price to one buyer in order to
afford charging a lower price to another buyer.
[2] Price discrimination refers to the
practice of charging unequal prices to different buyers for the same
product. Buyers of healthcare are often
health plans, uninsured patients, government (Medicaid, Medicare), etc.
[3] Consumer disconnectedness refers to the
lack of consumer participation in the healthcare payment process, largely due to
third party payers and complex billing practices.
[PRINTER FRIENDLY VERSION]
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