Making (some) Sense Of Hospital List Prices

Hospital list prices – often called “Chargemaster prices” – have become infamous in health care. From a $500 single stitch to a 10,000% markup on Aspirin, it is tempting to regard hospital Chargemaster pricing as another bewildering feature of U.S. health care. In a newly published article, I investigate whether there might be more of a method to this madness than it seems.

Chargemaster prices represent the official list price for each service a hospital provides, and until recently, were largely hidden from the public eye. That all changed in recent years when a series of articles drew attention to some of their unusual characteristics.

Most notably, unlike most industries, hospital list prices seem to have almost no relation to the underlying costs or what patients actually pay. Over the last 40 years, list prices have increased markedly — to the point where charging 300 or 400% of costs is commonplace in the current market (“high priced” hospitals charge closer to 1000%). Moreover, nearby hospitals can have widely different list prices.

In response to criticism, hospital administrators have long argued that concern over Chargemaster prices is overblown since they are largely irrelevant for patients. They have a point. For insured patients, an in-network hospital will agree to much lower payment rates. But is this still true for uninsured patients without an insurer to bargain on their behalf? Or for a patient that is unexpectedly taken to an out-of-network hospital by ambulance? If list prices are irrelevant, then why do hospitals continue to increase them?

With limited data, disentangling how and why hospitals set list prices this way has long been challenging. It’s no wonder that Uwe Reinhardt, an economist from Princeton, famously deemed hospital list pricing as “chaos behind a veil of secrecy.”

In this month’s Health Affairs, Mike Batty, an economist at the Federal Reserve Board, and I bring together a number of data sets to investigate this issue more closely. Our empirical work shows that list pricing behavior is more systematic than often suggested and that Chargemaster prices do directly matter for some patients.

Our paper begins by establishing a simple, but important fact: regardless of your diagnosis, the hospital you go to makes a very large difference in the list prices a patient could encounter. This may sound obvious, but there are many reasons it might not be true. If hospitals really set prices in a haphazard manner, for example, one could imagine prices within a hospital varying considerably by diagnosis. Moreover, knowing some basic information about a hospital can tell you a lot about how high their prices will be. For example, a large, urban, for-profit hospital that is part of a multi-hospital system will have average list prices that are over 3 times higher than a small, rural, independent, non-profit hospital.

Importantly, we were also able to use a policy change in California to test the widely held belief that Chargemaster prices are irrelevant for patients. Absent any regulations, hospitals can legally attempt to collect full list prices from the uninsured. That means setting higher list prices can potentially allow a hospital to collect more from the uninsured (at least from those who can afford to pay). Indeed, the data show that this was the case in California — uninsured patients paid more at higher priced hospitals. But was this really because of high list prices or something else? Fortunately, we were able to test this.

In 2007 California enacted a “Fair Pricing” law which changed the way hospitals billed the uninsured. The new law limited payments from the uninsured the rate paid by Medicare, which is administratively set and has no relationship with the hospital’s list price. If higher list prices were actually causing higher payments from the uninsured, this should no longer be possible after 2007. Indeed, this is exactly what the data show — after 2007, high priced hospitals did not collect any more than hospitals with relatively low list prices. In other words, list prices do directly impact payments from some patients.

While hospital Chargemaster prices have unusual features, the data show that they also reflect systematic decisions by hospitals and have real implications for some patients. Together the evidence points to a disarmingly simple and familiar story: prices matter.

Source: American Enterprise Institute

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