The mystery of online hospital pricing

Thank you for being one of our most loyal readers. Please consider supporting community journalism by subscribing.


Under federal rule, all hospitals must post an online listing of prices for all services they provide beginning Jan. 1, the general thought being that increased pricing transparency will accelerate consumerism, increase competition and result in lower pricing.

There is little correlation between the cost of health care and the charges for health care. Publishing a hospital chargemaster is sort of like publishing the sticker price for a new car. It has no bearing on what is actually paid. Without going much deeper, simply requiring hospitals to publish their “sticker price” for procedures without corresponding context is likely to have little effect on consumerism or competition-based cost reduction objectives.

Cost-to-Charge Ratio Relevancy

All hospitals maintain a “chargemaster,” which is a hospital’s comprehensive listing of all procedural charges and serves as the starting point for the “billing charges” that are assessed to the general public for treatment. There is virtually no regulation of chargemasters, which leaves providers with a nearly unbridled flexibility to define prices.

A recently published Health Affairs study found that the average hospital had an overall charge-to-cost markup ratio of 4.32, meaning, the average hospital set a chargemaster price of $4.32 against a Medicare-allowable procedure cost of $1. Some specialty procedures had charge-to-cost markup ratios approaching 28.5. In order to maximize revenue, U.S. hospitals typically mark up prices more than 20-fold.

Many health care providers will overstate prices knowing they are likely to receive a significantly reduced percentage from billed charges from a commercial insurer based on negotiated network discounts; and even less from Medicaid and Medicare reimbursements, which they seek to offset. In many cases, the networks themselves are only concerned with demonstrating the “deepest discounts” from providers.

The charges within the same facility can be completely different depending on the network agreement with each insurance carrier. Providers will charge different networks different prices which in turn receive different discounts. For example, a Blue Cross network could receive a 60 percent discount from billed charges and a competing Aetna network may only receive a 40 percent discount for the same procedure. However, the Aetna network may only be charged $5,000 for the procedure while Blue Cross was charged $7,500. Even though Blue Cross will have the deeper discount off billed charges, the end cost is the same for both. In some cases, the “smaller discount” might even work out to a lower end price.

To put this in perspective, different people with same medical condition who go to the same doctor in the same hospital are likely to be assessed completely different charges for the exact same treatment simply because they have different medical insurance cards.

The actual cost of health care is largely irrelevant as the insurance carrier will only respond to the pre-negotiated charge with the provider. There is no systemic consistency in terms of what hospitals and providers can charge for medical care. It is also worth noting that there is, typically, little correlation between the charge for health care and the quality of health care. We will never achieve useful transparency until the network agreements with the hospitals are published along with the chargemasters to provide appropriate charge-to-cost context.

The Consumerism Conundrum

The concept of consumerism has been a big buzzword in the health care and insurance industry for the past several years, but adoption has been slow. Consumers (patients) do not know how to shop for medical services and, as the average chargemaster will have more than 20,000 items listed, the system can be very intimidating.

Patients rely on their primary family physician for treatment prescriptions and referral to the “appropriate” provider for whatever specific care is needed. Unfortunately, there are very few truly independent practitioners left; most have become employee practitioners within large systems and are incentivized, and even mandated, to direct patients for care within their employer’s system to maximize profit of the health care system by capturing more services.

The concept of consumerism will lag without more access to independent patient advocates who can serve as impartial care concierges to remove the intimidation factor, provide objective advice and assist patients with appropriate provider selection.

Further impinging increased consumerism is that many employees who have employer-paid health insurance tend to be more apathetic toward provider charges. They really don’t care about the cost as long as someone else (the employer) is paying the bills. Plan designs such as high-deductible health plans and tiered network structures have helped increase consumerism-related awareness with plan participants, however, this is cost shifting rather than cost solving. These only treat symptoms rather than providing a cure.

Control through consistency

In the U.S., there really is no regulation of what hospitals and providers can charge for medical care. Many people overlook the fact that hospitals and health care systems are, in fact, big corporations that, in addition to providing quality health care, exist to generate income and deliver profits for their stakeholders. Even many nonprofit hospitals have done a pretty good job of generating large amounts of operational surplus. Without any formal regulatory controls, health care systems will essentially look to charge whatever a free market will tolerate in terms of billed charges.

The solution for containing cost through health care reform needs to be based on developing a systemically consistent, metric–based approach to pricing of charges from providers for all procedures. The reference point for all charges needs to be based on a consistent base standard nationally. Using Medicare with a realistic margin for profit (e.g., Medicare plus 50-60 percent plus) and appropriate geographic cost-of-business adjustments would be a logical charge basis. The reimbursement formula must also acknowledge the qualitative patient outcome performance of the provider. This will help contain costs while still fostering qualitative-based competition; both of which will serve to mitigate the cost of insurance.

It would effectively put every segment of the health care chain on an equal playing field. Providers would have the ability to receive an appropriately consistent profit margin while competing via operating efficiency and qualitative effectiveness.

Requiring increased transparency is a start, but it’s still only a small drop in a very large and tumultuous sea.

Phillip C. Giles is vice president of sales and marketing for QBE North America’s accident and health division.