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Health Systems

What’s Behind Hospital Price Discrepancy?

Demographics and input prices are part of the answer, but much is shrouded in mystery.
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Building with large H sign for hospital iStock
Courtesy: iStock

To put it simply, trying to understand hospital pricing is a mystery. In my quest to learn more about hospital prices, I have had many people in the industry tell me that the numbers are divorced from reality, that they are only used as a negotiating point with insurers, and that they are as high as hospitals can get away with.

One source gave me an analogy that stuck with me about hospital prices that seem especially egregious. The hospitals are hoping for a dumb bird to land on their turf. Think of it this way: why don’t we all put our house on the market for $10 million? Unless our home is worth that much, it is straightforward for people to see that price and the home. Consumers are used to shopping for houses, and not only would we not get any offers, but there may also be a social price to pay for posting such a ridiculous price.

But in healthcare, most people show up and pay whatever they are asked. Many have insurance, so the listed price of service doesn’t mean much to them, but those in the cash pay world may not be used to shopping around and asking about costs at a hospital, even though they should.

Transparency laws are making it a bit easier for patients to find out what the price of a treatment or procedure is, but many hospitals are not compliant, while others comply in only the most technical sense of the word, burying prices in difficult to find and decipher documents.

Earlier this year, D CEO Healthcare dived into cash pay prices at local hospitals utilizing Turquoise Health’s price finder tool and found that depending on the hospital you chose, you might pay two or even three times as much for the same procedure. Sometimes these prices vary widely in the same region and same health system. I wanted to learn more about how that discrepancy came to be.

One factor is demographics. A hospital in an area with a higher median income, where real estate costs more, and where people are more likely to have the money to pay higher prices is more likely to have higher prices, just like a neighborhood gas station in a posh suburb is likely to be more expensive than one on the interstate. People will pay for convenience, and even more for convenience in a nicer area. But demographics alone can’t explain the wild price swings that exist in any large city.

Another factor to consider is that each hospital within a system may have the ability to set its own prices. A systemwide CFO may not be setting prices for the entire system, so one hospital may have the ability to go rogue and see if they can land any “dumb birds.” These hospitals each have their own facility rate, which can significantly impact the total price of an operation. The higher price may result in a higher payment to the facility rather than the provider.

A higher cash pay price is also an important negotiating point, even if you don’t get many people to pay that price for a service. “When they put a price out there, I believe they did their homework,” says Sunny Nadolsky, who founded MediBookr, which helps employers lower healthcare costs. “They know what they’re doing. The reality is that they may not get many cash rate patients, but if they can get extra reimbursement from any of the payers, their overall gain is a lot more.”

Another important question hospitals need to ask themselves is what kind of person uses a particular service. If wealthy people frequently use a specific operation without insurance or with insurance that pays well, raising the cash pay price for that service might make sense.

We have all seen articles about MRIs ranging from a few hundred to a few thousand, and more recently, COVID-19 tests ranged from entirely free to hundreds of dollars charged to the patient or the insurer. Because healthcare pricing is so obfuscated and consumers are not conditioned to shop around, the wall between consumers and pricing remains opaque. In 2006, Princeton economist Uwe Reinhardt called healthcare pricing “chaos behind a veil of secrecy,” and the more we learn about hospital pricing today, the more accurate that statement becomes.

When the transparency laws require that insurers share the negotiated rates they pay for all services, that will improve consumers’ ability to shop for healthcare, but there are already lawsuits from the U.S. Chamber of Commerce and a pharmaceutical group protesting the future implementation of the law. As a result, transparency will not come quickly.

“It all goes back to the information asymmetry that characterizes healthcare,” says John McCracken, clinical professor of healthcare management at the Jindal School of Management of the University of Texas at Dallas and adjunct professor of family and community medicine at UT Southwestern Medical Center. “Historically, nobody has known what the prices are, so it’s just an artificial construct. The question is almost, ‘You want an operation? How much money do you have?'”

Author

Will Maddox

Will Maddox

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Will is the managing editor for D CEO magazine and the editor of D CEO Healthcare. He's written about healthcare…

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