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Wildly Varying Hospital Prices Keep Health Care Expensive

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May 21 (Bloomberg) -- If further proof were needed that price competition doesn’t exist in the expensive U.S. health-care market, it arrived this month. The Centers for Medicare and Medicaid Services published 2011 charges for medical treatments set by more than 3,000 American hospitals.

In suburban Denver, a patient treated for a respiratory infection with complications could be billed $28,000, $46,000 or $97,000, depending on the hospital. In the Los Angeles area, knee and hip replacements cost seven times as much at one hospital as another.

The wide -- and wild -- variation exposes a critical weakness in the national effort to control costs. Hospital charges, which account for about a third of spending on health care in the U.S., are uncontrolled by either government or competition. Even as states and the federal government work to hold down health-insurance rates, hospital prices will continue to exert powerful pressure on them to rise -- along with the overall cost of care.

Private insurers negotiate for discounts, but with many hospitals they bargain at a disadvantage. Why? Because health-insurance buyers, including companies that purchase group coverage for employees, demand a choice of hospitals. They especially want their insurance to cover treatment at hospitals that have strong reputations or provide a special service such as organ transplantation or neonatal intensive care. Such hospitals are able to command the highest prices, while stand-alone community hospitals accept rates similar to the standardized payments made by Medicare.

Growing Clout

In the past decade and a half, the “must have” hospitals have compounded their clout, merging into regional and national health-care chains that typically negotiate for all their institutions in a single package.

So prices keep rising. Although the Affordable Care Act gives states greater ability to control increases in insurance premiums, it doesn’t restrict what hospitals can charge insurers.

Instead, the law aims to lower prices indirectly by encouraging the creation of “accountable care organizations” -- groups of hospitals, doctors and other providers that coordinate patient treatment to make it more efficient. If these organizations achieve lower costs, they get to keep some of the savings -- a welcome incentive. If they are successful, though, accountable care organizations will also increase cooperation among health-care providers, which may further consolidate their market power.

Publicizing prices, as CMS and others have done, is a step in the right direction, raising awareness of how arbitrary hospital charges can be. Ideally, it also signals to hospitals that aggressive price-setting strategies may invite regulators’ attention.

States might consider, for instance, rules to prevent hospitals from charging different rates to different insurers, or to set caps on what hospitals can charge patients with little or no insurance. (Even as more Americans gain insurance on the state exchanges that are gearing up to operate next year, some people are expected to remain uninsured or buy catastrophic-care policies that won’t cover all their hospital bills.)

Standard Payments

Maryland sets the prices that hospitals can charge all payers, including private insurers, uninsured patients, Medicare and Medicaid. The state takes into account the hospitals’ costs, the quality of treatment and the level of uncompensated care they provide. As a result, Medicare and Medicaid pay hospitals more in Maryland than elsewhere, but the state’s average hospital cost per case is 2 percent lower than the national average. Since 1976, when the state program started, Maryland’s rate of cost increase per hospital admission has been the second-lowest in the U.S.

Another way for a state to achieve uniform hospital charges without actually setting them would be to let public and private insurers collectively negotiate them with hospitals, as health-care-policy experts writing in the New England Journal of Medicine last fall recommended. Once set, such charges could then be allowed to rise at the same rate as average wages in the state.

This “all payer” strategy keeps hospitals from cost-shifting -- charging private payers more to make up for underpayments from Medicaid. Getting rid of cost-shifting, in turn, saves administration costs.

Not all states would want a system as regulated as Maryland’s. But all states -- and the federal government, too -- would be remiss not to address out-of-control hospital charges.

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