The Dose

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Health Care & Life Sciences / Life Science & Biotech

Hospitals proving themselves wrong about prices

June 6, 2013

The reactions were telling last week after I wrote that Indianapolis hospitals charge twice as much money to the uninsured and privately insured patients than they do to the federal Medicare program.

A couple of readers calling themselves health care CFOs or health care controllers wrote back saying I had not fully accounted for all the nuances in health care prices, had not given hospitals credit for the services they are not paid for.

My response? Mea culpa.

I was not writing a 30-page case study about hospital pricing, but instead a 500-word blog post. So did I leave out some nuances? Of course.

Here are some of the ones that were mentioned: I did not take into consideration the charity care services hospitals provide. I did not consider that not every dollar billed to private patients is actually paid.

These are valid points. But they do not fully account for the 100 percent difference in prices between Medicare and private payers.

Furthermore, health care CFOs, of all people, ought to know that hospitals themselves are in the process, right now, of undermining those arguments.

Here are a couple of pieces of evidence for that:

Earlier this year, the Indiana University Health hospital system cut its prices for its imaging services. IU Health made the change in response to feedback from its customers, according to spokeswoman Lauren Cislak.

Some of that feedback came from large employers beginning to use a new software tool from San Francisco-based Castlight Health. Castlight’s software provides comparable prices based on the insurance discounts relevant for each employer and its workers.

So far in Indiana, such mammoth employers as Purdue University, Cummins Inc. and the state of Indiana are using Castlight. And many other large employers are set to roll it out soon.

“I believe that, as an industry, we have been inefficient,” said IU Health CEO Dan Evans in an April interview, where he revealed that IU Health is working to cut out as much as $1.2 billion—or 25 percent of annual expenses—over the next four years.

And that brings me to my second piece of evidence that hospitals have been charging higher prices than they needed to—because they could. In fact, as I wrote two months ago, nearly all hospitals in Indianapolis and around the country are working to cut their expenses 15 percent to 20 percent.

It has become a mantra at hospitals across the country that they are going to reduce expenses to the point that payments from the federal Medicare program are, in fact, profitable for the hospitals.

“You frequently hear the phrase, ‘We have to be able to make money on Medicare,’” said Kevin Holloran, a hospital credit analyst at Standard & Poor’s.

Why didn’t hospitals do this before? Well, as in most businesses, they tended to focus more on growing revenue than on cutting expenses—until they were absolutely forced to do so.

Will there be consequences from these cuts? Absolutely. People will lose their jobs. Some experts are warning that there will be longer waits for health care or that there will be other access issues. Some are warning that life-saving and life-improving innovations will be slow to come to market, or perhaps never will.

Does this vindicate the Medicare system of price controls, where bureaucrats in Washington, D.C., try to control something like 800,000 prices each year? That’s a question where political philosophy comes in in a much bigger way, with single-payer advocates saying yes and consumer choice and free marketeers saying no.

Either way, I don’t think hospitals’ recent efficiency and price-lowering kick validates Medicare’s price control system.

Instead, I think it’s merely a sign that hospitals have been maximizing revenue from the customers that would bear the costs—employers and private-paying individuals—and were defending those high prices with arguments that, while valid, did not explain the entire difference between their prices to private consumers and to Medicare consumers.

“It proves that hospitals have been maximizing revenue,” said Alex Slabosky, former CEO of M-Plan HMO and former president of IU Health Plans.

Some, like Slabosky, consider that wrong of the Indianapolis-area hospitals, since they are all not-for-profits that receive tax advantages for serving the public good.

I simply think that all people and institutions run by people will always look to serve their own interests. I find it hard to criticize someone for looking to make money while also doing a great job taking care of me and my family. The one helps them do the other, in my view.

I just think they need to acknowledge that they’re doing it—and not cry foul when others point it out.
 

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