Healthcare Soundoff. Tracking Today's Vital Issues.

Hospital Pricing Part One (8/6/2007)

This is the first of a series on hospital pricing.  In this first column we will try to give you some history.  In the next column we will try to help you calculate what you will pay if you purchase medical services at a hospital.  Our aim is to try to give consumers who are facing higher deductibles and co-insurance a way to save money. This first tip discusses the basics of hospital pricing and reimbursement.

We talked with a benefits consultant recently in Ohio.  He told us a story that is typical.  He had a client with a high deductible health insurance policy with a large co-insurance who needed an MRI. 

The client decided to shop around to see if he could save money on the procedure.  He called the local hospital who quoted a price of $1,200.  Just to compare, his daughter, who had different insurance, called the same hospital.  She was quoted a price of $900. These were the prices that had been negotiated between the hospital and their insurance companies.  He called another facility operated by a group of doctors and was quoted a price of $400 and achieved the savings he was looking for. 

Something is wrong with hospital pricing, not to mention the increased costs at hospitals versus physician operated facilities (we will comment on this issue in the future).  An MRI is an MRI.  There is no difference in our minds about the quality.  The picture is what it is.  Why then is there a $300 difference between his cost and his daughter’s?  How do hospitals price?

If you asked hospital executives, you would probably get as many answers as the number you talked with and their explanations would be confusing. There appears little relationship between hospital costs and hospital prices.    Hospitals have a price list of “charges.”  But hospitals rarely receive charges for services.  They receive different “reimbursement” for each hospital service from Medicare, Medicaid, insurers, HMOs, managed care companies, and third party administrators.

According to the experts the “reimbursement” they receive is similar to a “wholesale price” that has been negotiated with the listed payers. The way the “wholesale price” is calculated differs with each payer.  If you have ever seen a hospital bill, you know that each item is priced separately, down to the bandages used, and in some cases an item that only costs $1.00 may have a $100 price.  Hospitals do this because they are trying to recapture as much revenue as possible, wherever they can.   How did this system come about?

The largest payer of hospital services is Medicare.  It generally accounts for around 50% of all hospital revenue. What Medicare pays is set periodically by the federal government. In the early days hospitals were reimbursed by Medicare according to their costs.  Each hospital files a Medicare Cost Report annually.  Naturally the incentive for hospitals under that system was to report costs at the highest possible level to increase “reimbursement.”

Medicare changed that system to one that fixes Medicare prices for inpatient services. The system was devised by academics and is called the Prospective Payment System.  It soon will be a list of 700 plus types of illness requiring hospitalization called diagnosis related groups (“DRGs”).   So hospitals now are paid a fixed price based on a variety of factors including the costs to deliver that service.  Hospital costs for each DRG are critically important and need to be calculated precisely in order to determine if a hospital will at least break even for a particular illness requiring an inpatient stay.  If a patient consumes too many services (previously paid at cost) the hospital could lose money on the fixed price they are paid for treating that patient. 

Instead of calculating costs more precisely, most hospitals negotiated higher rates from insurers, HMOs, third party administrators and managed care companies. This has been labeled “the cost shift.”  Hospitals also shifted emphasis to providing outpatient diagnostic and surgical procedures that were not covered by the fixed price DRG system.  The latter shift produced higher costs for those procedures, thus the differences in the cost of the MRI.  Medicare is now addressing the outpatient costs, especially surgical procedures by lowering “reimbursement” for them.

Most health insurers, HMOs, managed care companies, and third party administrators negotiate rates with hospitals based on the system used by Medicare.  So what an insured person will pay is probably some percentage of Medicare.  Depending on where you live that price may be 150% of Medicare or less.  For some procedures in the Washington, DC metropolitan area the reimbursement is 85% of Medicare.

So there really is no rhyme or reason to how hospitals price and what you will pay for services.  But with your deductibles, co-pays, and co-insurance going up, you have an incentive to do some shopping.  Where should you start?

Some insurers and some states now have web sites that have some price comparisons. The data supporting these sites is very general but is a good starting point.  For instance if you live in Indianapolis and are insured by Anthem you can go to their web site for comparative hospital pricing information.  Texas, Virginia, West Virginia, and South Dakota all have price comparison web sites.  They all have the name “pricepoint” in their URL so go to Google and ask for your state name and hospital prices and this should reveal whether your state has a hospital price comparison data base on the web. If this does not work go to the web site of your state hospital association and see if there is hospital pricing information there.

If you have time you can go to the Centers for Medicare and Medicaid (“CMS”) website and pull down the Part A Hospital DRGs.  This is difficult and time consuming but available if you are patient and resourceful.  There is no easy way to get to these prices.  Once you have the Medicare DRG for your particular inpatient need you can compare that to what an insurer has negotiated.

Shopping is important now that our out of pocket costs are going up.  Hospitals are aggressively attempting to collect deductibles and co-insurance and do not care if your credit rating suffers.  It is important for you to get the lowest possible price. 

If you have a story about hospital prices we would like you to share it with us.

In our next column we will try to give you some simplified resources to calculate what you will pay at the hospital.