Imagine going to the grocery store and being told that the price you’d pay for food would depend significantly on whether you had a job and where you worked. If you worked for one company, you’d get milk and bread at a price close to what the store paid the wholesaler. If you worked for a different company, you would have to pay 20% or 30% more. If you didn’t have a job at all, you’d have to pay three or four times as much. Same milk and bread, same store, but a different price for different customers.
Bizarre, right? Yes, but that’s exactly the way things work in our health care system. What hospitals “charge” is double, triple, or quadruple what it actually costs them to perform the procedure. But the only people expected to pay those full charges are those who don’t have insurance. In most cases, those are the people who can least afford to pay. If you have insurance, your health plan typically pays only a percentage of the published charge amount, but the discount may be bigger or smaller depending on which health plan you have. Same procedure, same hospital, but a different price depending on where you work.
How big of a discount do hospitals give health plans? That’s a closely guarded secret, but on average in Pennsylvania, hospitals are only paid about one-fourth of what they charge. If you have insurance and you’ve had a procedure performed, you’ll see the discount on your “Explanation of Benefits” (EOB) form, where it lists both the amount that was charged and the “allowed amount,” i.e., the discounted price paid by your health plan.
The difference between what is charged and what is actually paid by those with insurance varies dramatically from hospital to hospital. Several years ago, the Pennsylvania Health Care Cost Containment Council issued a report showing the published charges and the actual payments that hospitals received for heart bypass surgery. In some hospitals, such as Butler Memorial, Excela Westmoreland, Jefferson Regional, and the Medical Center of Beaver, patients without insurance were charged about twice as much as those with insurance. At other hospitals, such as Allegheny General, St. Clair, and Washington Hospital, the charges were about 2.5 to 3 times as much as what insurance plans paid. But at a couple of hospitals -- UPMC Passavant and Presbyterian/Shadyside -- the charges were quadruple what the hospitals were actually paid by insurers. However, even though the UPMC hospitals gave bigger “discounts” than the other hospitals, the average amounts they were actually paid were still higher because their charges were so much higher than the other hospitals; i.e., regardless of whether you had insurance or not, the cost of treatment was higher at those hospitals than at most of the others.
If you have health insurance, does any of this matter to you? After all, most people with insurance just pay a copayment or coinsurance regardless of where they go; the rest of the payment is up to your health plan and the hospital to work out.
It will start to matter if you find that your preferred doctor or hospital is no longer in the “network” of your health plan. When you go to an “out of network” hospital, you can face having to pay those full hospital charges with no discount, just as if you had no insurance at all.
In most cases, a hospital will want to be “in network,” because otherwise, most patients couldn’t afford to go there. However, a big, expensive hospital might decide to stay out of a health plan’s network and try to force patients to switch to a health plan that has less negotiating clout so the hospital could get paid higher prices. If a new health plan tells you it has the biggest, most expensive hospitals in its network, there’s a good chance that the plan is paying a lot more for hospital care than if it only included hospitals that offered high-quality care at more reasonable prices. And even if that health plan offers you a low premium now, it might be forced to raise it in the future in order to have enough money to pay those higher prices.
There’s one case, though, where a hospital can’t charge more if it is “out of network.” When a senior citizen with a Medicare Advantage insurance plan goes to a hospital that’s not in the plan’s contracted network, the hospital is required by federal law to accept standard Medicare fees for treating that patient, and those fees are generally significantly lower than what the hospital would be paid if it had a contract with the Medicare Advantage plan. So it’s not surprising to find that a hospital would want to be “in network” for an insurance company’s Medicare Advantage plans (since that would give it higher payments for treating seniors), yet refuse to be in network for the same insurance company’s commercial health plans (so that it wouldn’t have to give big discounts for treating younger individuals).
Not surprisingly, there is growing evidence that this bizarre system of price discrimination and secret discounts is actually making health care less affordable. Both health plans and hospitals try to get bigger and bigger in order to “win” in price negotiations, and it’s the patients and local businesses who are the biggest losers.
Is there a better way? One approach would be to have the government regulate prices, so that hospitals can’t charge someone more based on what type of insurance they have. Maryland does that, and their analyses show their hospital costs are lower than in many other states. However, regulating prices also removes the incentive for hospitals to find innovative ways to deliver care more cost-effectively.
A better approach would be to let hospitals charge whatever they want, but require them to charge everyone the same amount regardless of what kind of insurance they have, and to make their prices public. Instead of being restricted to a narrow network, patients could go wherever they wished for care, but if they chose to go to a higher-priced hospital, they’d have to pay more to do so. That would create pressure on the high priced hospitals to either lower their costs or lose patients to the more affordable high-quality hospitals in town.
Employers and health plans in other parts of the country are doing just this. Rather than restricting where their employees can get care, they’re charging them less for their health insurance if they choose hospitals that deliver high-quality care at a lower cost, or they’re giving the employees a fixed amount of money for a procedure – an amount they know is adequate to get good quality care at reasonably-priced hospitals – and then letting the patient choose which hospital offers the best combination of quality and cost.
Just like sunshine and fresh air can be good for your health, bringing health care prices out in the open and creating a fresh approach to competition could give us better quality, more affordable health care.
(A version of this post appeared as the "Regional Insights" column in the Sunday, March 4, 2012 Pittsburgh Post-Gazette