Prices and the Affordable Care Act

by The Incidental Economist on May 8, 2013 · 5 comments

We have long known that one of the reasons that health care costs so much in the United States is the prices. It’s an unsatisfying answer, but it’s just true that health care costs so much because it… costs so much. Things are expensive because they can be.

Stephen Brill described this fact in detail in what is the longest article ever published in Time magazine. It is full of anecdotal stories of patients who were hit with enormous hospital bills that seemed completely out of proportion to the care they received. More important, hospitals appeared to charge whatever they liked to people without insurance, while charging much less to those who had help paying for their care.

The plural of anecdote is not data, however. Until this point, it has been almost impossible to examine the difference in costs between hospitals in any rigorous manner. That, however, has now changed:

As part of the Obama administration’s work to make our health care system more affordable and accountable, data are being released that show significant variation across the country and within communities in what hospitals charge for common inpatient services.

The data provided here include hospital-specific charges for the more than 3,000 U.S. hospitals that receive Medicare Inpatient Prospective Payment System (IPPS) payments for the top 100 most frequently billed discharges, paid under Medicare based on a rate per discharge using the Medicare Severity Diagnosis Related Group (MS-DRG) for Fiscal Year (FY) 2011. These DRGs represent almost 7 million discharges or 60 percent of total Medicare IPPS discharges.

It’s important to note that these data are not perfectly complete. They don’t represent every single facility in the United States, nor every single aspect of care. However, they account for more than enough to give us a representation of what’s going on in this country. You can go to the CMS website and download the data yourself in Excel or CSV formats.

The numbers are hugely variable. As Sarah Kliff points out, the cost for a joint replacement could run from just over $5000 to more than $223,000, with an average of about $52,000. How can that be? Even looking at states, instead of counties, the results are all over the place. Treating pneumonia could cost under $10,000 in one state and more than $50,000 in another.

Of course, relatively few people pay these actual prices. The variability exists, but not to the extent we likely see here. Anyone who has health insurance will pay far less, because their plan will have negotiated for a discounted rate. This is especially true of Medicare and Medicaid. Their large purchasing power allows them to force hospitals to accept much less in the form of reimbursement in order to handle the volume of patients those plans control.

It’s individuals – without the ability to negotiate in groups – who get stuck with these charges. Ironically, it’s mostly the uninsured, who lack even the basic protections against health care costs, who might get stuck with an astronomical bill.

That will, of course, change under the Affordable Care Act. Making these data public may get policymakers or advocacy groups to act in order to bring thee prices more in line with each other. But there’s a larger point above the actual numbers themselves. Individuals will no longer contract individually for health care. Theoretically, everyone will be represented by an insurance company, and everyone will benefit from larger purchasing power. If no one is uninsured, no one will be paying these prices at all. It may not reduce the variability all at once, but the Affordable Care Act should immediately reduce the actual numbers of people who might be subject to the prices in the database. That’s certainly a step in the right direction.

–Aaron Carroll, M.D., M.S.


Updated by AcademyHealth, May 8, 2013 at 2:30 p.m.: 

RWJF and CMS to Hold Webinar on Hospital Pricing Data
AcademyHealth will facilitate a joint webinar by RWJF and the Centers for Medicare & Medicaid Services on May 15, 2013 (2:00 – 3:30pm EDT) to discuss the new hospital pricing data. Details on how to join will be forthcoming on our website. If you would like to be notified when registration opens, please email us.



Minivet May 8, 2013 at 1:11 pm

Another place where charges make a real difference is for insured patients who are being treated at an out-of-network hospital. Commonly the hospital will bill at its full charges, as they would with an uninsured patient, and naturally the insurer will only pay a fraction of that, leaving the rest demanded of the patient, even though they often didn’t make the decision to be taken to that particular hospital.

(Also, in many cases, what insurers pay out-of-network is a set percentage of billed charges, which sets up perverse incentives – though this is changing.)

The federal government mandates that states set prices for out-of-network emergency services to Medicaid beneficiaries in managed care plans and that hospitals accept these rates as payment in full (the Rogers amendment). Given the lack of prior arrangement and extraordinary asymmetry of information and consumer decisionmaking ability, commercial out-of-network service is a big market failure even by the standards of the health care market, and is a good target for regulation.

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