If you asked almost anyone the actual cost of medical services they’ve received, you’d be surprised to find anyone who knows. With 84 percent of people getting their health insurance through their employer or a government program, third-party payers (insurance companies, government, or employers) obscure the true costs of health care by removing the consumer from the process of purchasing care.
This separation encourages overconsumption of health care, which increases health care prices—not subject to market pressures to lower costs—and deepens demand for insurance, perpetuating a brutal cycle in the economy.
Lack of price transparency not only allows providers to overcharge for their services but also leads hospital providers to use restrictive language in their contracts with insurers to stifle competition, which, unfortunately, keeps prices high for consumers.
Tepid measures to make prices transparent in some states have been implemented, but more is needed to truly bring costs down to manageable levels or the current health care system will bankrupt America.
Since 2007, health care prices increased 21.6 percent, while prices in the general economy grew 17.3 percent. US health care spending is reaching 20 percent of GDP, and hospital care is the largest contributor to that, accounting for $1.1 trillion in 2016.
The amount hospitals charge for services is found on their “chargemasters” list, which contains the procedure codes and corresponding prices for all billable items. It’s also a starting point for negotiations with insurers to determine how much insurers will cover for medical expenses.
In most states, these chargemaster rates are not subject to any limits. A Health Affairs study analyzed 50 US hospitals with the highest charge-to-cost ratios in 2012 and found these hospitals marked up prices “approximately ten times their Medicare-allowable costs compared to a national average of 3.4.”
Negotiations between providers and insurers are kept secret, which makes it difficult to compile the necessary data to produce a competitive market that will lower costs.
While consumers think their insurance would cover a satisfactory portion of their medical expenses, out-of-pocket costs are still an issue, sometimes even when the providers are in-network. Take, for example, an ER bill that cost a Texas man with a broken jaw $7,924 because the out-of-network surgeon was working at an in-network hospital. This is a common theme in Texas, but individuals wouldn’t typically know this prior to seeking emergency treatment.
Workers with employer-sponsored health insurance (ESI), which covers nearly half the insured population (49 percent), are continually bearing increased out-of-pocket expenses for health care, with one in 10 workers spending over $2,000 a year. In 2017, nearly half of Americans under age 65 with private insurance had annual deductibles ranging from $1,300 to as much as $6,550, according to government data. This trend is showing no signs of declining, and doctors are becoming increasingly annoyed with playing debt collector due to this shifting of the cost of care from employers and insurers to workers and customers.
Medicare Distorts the Market
In the early 1960s, consumers directly paid out-of-pocket (as opposed to third-party payers paying) $1.80 for every $1 paid by a third party. After Medicaid and Medicare were introduced a few years later, it became $1 to $1. Today, consumers pay less than 20 cents out-of-pocket for every $1 paid by a third party. However, when you have overinflated prices gradually increasing over time, the frequency of out-of-pocket expenses also increases, which means higher consumer costs.
All that’s left is a vicious cycle promulgated by third-party payers. Higher costs equal demand for more insurance. More insurance dulls consumer price sensitivity, leading to over-consumption of health care, which means more costly spending; and as health care becomes more expensive, demand for insurance rises.
Massive price discrepancies for the most common procedures (i.e. appendectomies, hysterectomies, cesarean deliveries, knee replacements, etc.) exist between different hospitals without any reasonable explanation for the variation. In California, the price for an appendectomy (appendix removal) can vary from as low as $1,529 to as much as $182,955 depending on the location where it is performed.
The problem is there’s no real discernable difference in the type of medical approach or treatment options different providers take when performing these common procedures, so there’s no justification for the vast price gap other than intentionally inflating prices, which has origins dating back to the beginning of Medicare in 1965.
The reimbursement rates from Medicare are mostly configured by American Medical Association committee members, which base that rate on the time it takes to do a procedure. The longer the estimate they give, the higher the pay they receive.
Once deference was given to physicians to determine “reasonable charges” to Medicare, which laid the foundation for increasing prices, along with higher physician fees. As professor Theodore Marmor stated, “In the first year of Medicare’s operation, the average daily service charge in America’s hospitals increased by an unprecedented 21.9%. The average compound rate of growth in this figure over the next five years was 13%.” Additionally, total expenditures increased from $3.4 billion in 1966 to $7.9 billion in 1971.
What’s further unfortunate is that the private insurance market follows Medicare pricing in lockstep: A $1 change in Medicare payments forecasts a $1.30 change in private insurance payments. Moreover, if the government is wrong and bases the prices on faulty premises, for example, those faulty prices are then duplicated throughout the US health care system.
Most states don't require providers to disclose their prices, and the ones that do have other limitations, such as Colorado, where if a provider is delivering services but is not employed by the hospital where they’re delivering those services, they’re not required to disclose prices.
Restrictive Contracts and Monopoly Power
Making prices transparent is only partially effective because insurance plans are what determine the price patients actually pay unless patients self-pay. The other problem, even if all prices were transparent, is that insurers charge higher rates for those seeking treatment out-of-network.
However, that is just a symptom of a larger problem: hospitals use their market power to eliminate their competition by including restrictive language in their contracts with insurers.
In one case, a contract between insurer Cigna Corp. and NewYork-Presbyterian didn’t allow Cigna to permit lower cost competitor, Northwell Health, to sell cheaper plans because of restrictive language in the contract.
Some hospitals are able to demand such advantageous terms from years of mergers, which saw an annual increase by 40 percent to 59 percent in 2010.
Prices are, in fact, higher where hospitals have merged. Large hospital systems that are the single providers in an area, or hospitals that exclusively offer a special treatment, can set their own prices, and they have to be included in insurance plans, which means higher insurance costs for consumers.
Some contract clauses don’t even allow patients to access hospitals’ prices because hospitals are contractually permitted to prevent prices from appearing on insurers’ online shopping tools, which makes getting a health care estimate for cost comparison impossible.
Hospitals’ acquisitions of other physician practices, clinics, and outpatient surgery centers bring them in under the hospital’s reimbursement rates, which can cost much more for the same services.
Price signals are necessary to dictate proper market conditions where consumers choose between competing providers offering the best value for the lowest price. Insurer-hospital contracts that prevent competition distort market signals and encourage hospital monopolies that increase prices.
If all medical providers supplied their price lists to a universal databank (akin to Kelley Blue Book), consumers and agencies could compare prices among providers and heavily scrutinize price discrepancies, which would apply pressure to insurance companies and providers to negotiate lower prices for consumers.