Why do some hospitals get away with charging such exorbitant prices?

The Center for Medicare and Medicaid Services published a ground-breaking report yesterday looking at the average prices charged by 3,000 U.S. hospitals for the “top 100 most frequently billed charges.”

The report shows that different hospitals appear to charge wildly different prices for the same procedures, seemingly without any rhyme or reason.  While one hospital might charge $5,304 for a hip replacement, another might charge $223,373.

While it’s true that the same types of procedures can be more or less intensive depending on whether or not the patient experiences complications, this study was based on an averaging of costs.  This means that the data is unlikely to be skewed by patients with complications.

Here are a few more choice pieces of data, as summarized by the Washington Post:

• For heart failure with major complications, the average price ranged from $13,960 at one hospital to $75,197 at another.
• For kidney failure with major complications, the average price ranged from $16,366 at one hospital to $80,919 at another.
• To treat esophagitis and digestive disorders, the average price ranged from $7,107 at one hospital to $37,750 at another.
• The prices charged by for-profit hospitals to Medicare were, on average, 29% greater than the prices charged by nonprofit or government hospitals.

Unfortunately, I wasn’t too surprised by some of these findings.  I think that, at this point, pretty much everyone knows someone who’s been screwed over by a crazy hospital bill.

One example is this story about Robert Reed, a patient who was charged $1,525 by a hospital he had not even been to.  Reed had had a procedure performed by a dermatologist who was affiliated with the hospital, but whose physical office was 1.5 miles away.  The doctor only charged $354 for her services, but the hospital charged $1,525 in fees for an “operating room” and “facility” Reed had not even been to.  This kind of price inflation is legal, and it happens all the time.

If you ask me, this is the problem with the American healthcare system.  Until now, medical institutions have been able to keep their prices a secret.

I can’t think of any other industry where it’s legal to keep the price a secret from the consumer until after he or she is legally obligated to pay it.  Buying clothes at a store?  There’s a price tag on them.  Getting your hair cut at a salon?  There’s a sign on the wall with prices on it.  Buying a car?  There’s paperwork to fill out once you and the salesperson have come to an agreement.

Now, to be fair, the prices hospitals list for various procedures are often much higher than the prices individual patients are asked to pay.  For one thing, many insurance companies have their own special “agreements” with hospital networks.  I see this on my own medical bills all the time: the first few lines represent the “actual” price which the hospital would like to charge, and the next few lines show what is called the “allowed” charge—in other words, the special deal my insurance company worked out as part of its contract with the hospital.  As the subscriber, the price I pay is based off of the “allowed” charge, not the much-higher “actual” charge.

But as you can see from the Center for Medicare and Medicaid services report, these “special agreements” don’t do much to level the playing field in the long run.  When hospitals are able to inflate their charges to Medicaid and health insurance companies by tens of thousands of dollars, we all pay in one way or another.

Regardless of where you stand on the political spectrum, it should bother you that up until now, hospitals and other medical institutions have been able to ride roughshod over the consumer.  If you’re inclined to defend these hospitals out of a belief in the “free market,” I’d like to point out to you that it’s not a free market when consumers are unable to make informed decisions.  If we are going to rely on competition to reign in cost, consumers need to be able to know the estimated cost before they undergo a medical procedure.

This report was step in the right direction, and I am cautiously optimistic about the future.  The Center for Medicare and Medicaid Services says that the report is part of an increased push for transparency in the healthcare industry on the part of the Obama administration.  I think we can all agree that the price discrepancies shown this report are totally ridiculous.  Private hospitals may have the legal right to set their own prices, but we as consumers ought to be able to know what those prices are, just as we would for any other purchase.

**Money picture published by 401 K (2013) under a Creative Commons license.