Ouch! Indy hospitals charging employers three times more than Medicare

September 5, 2013
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I stirred up a hornet’s nest back in May when I wrote that Indianapolis hospitals were charging patients with private insurance about double what the federal Medicare program was paying for exactly the same inpatient services.

A new study confirms that I was right, more or less. Indianapolis-area hospitals charge 88 percent more for inpatient care than Medicare would pay for exactly the same services.

But that isn’t the half of it.

Indianapolis-area hospitals are billing patients insured by their employers far, far more for outpatient services—that’s anything done in a hospital facility that doesn’t require an overnight stay.

How much more? 264 percent more than what the federal Medicare program has determined as the hospital’s cost of providing care. (Many hospitals say Medicare pays below cost, but no one says it pays any more than about 25 percent lower.)

This means that when you go to a hospital for, say, an MRI or for a minimally invasive surgery, your employer-sponsored health plan is paying, on average, a price that is 3.6 times as much as the price Medicare would pay for a senior patient with same degree of sickness that went to the same hospital for the same service.

That’s what researchers at the D.C.-based Center for Studying Health System Change found when they analyzed claims data for 590,000 patients, all below the age of 65, who were covered in 2011 by the union-negotiated health plans at automakers General Motors, Ford and Chrysler. The study was paid for by an organization that is funded by the automakers, the UAW and the International Union.

The study compared the claims from 13 different metro areas against each other, all of them in the Midwest. Indianapolis had the highest hospital outpatient prices among all cities and the second highest inpatient prices, behind only Kansas City. Interestingly, Kokomo had the third highest inpatient prices and the second highest outpatient prices.

Physician prices in Indianapolis here were in the middle of the pack, about 10 percent to 20 percent higher than Medicare prices.

The beauty of this study is that its design cuts off all the typical objections of health care providers right from the start.

The demographics of the patients are roughly the same, since they are all autoworkers or retired autoworkers and their dependents.

Their health benefits are essentially the same, since the Big 3 automakers all negotiate similar contracts with the UAW union.

The cost of doing business is roughly the same in all 13 cities, which include St. Louis, Detroit, Cleveland and Buffalo.

By comparing the private insurance price data against Medicare’s prices, the study eliminates any difference in sickness. That’s because Medicare’s prices are adjusted for how complex each patient’s care is.

Also, Medicare adjusts its prices so hospitals that train new doctors get more money to cover those costs.

So what’s left, ask the authors of the study, Chapin White, Amelia Bond and James Reschovsky?

One factor they don't mention is cost-shifting. Since the uninsured end up paying only a small portion of their bills, and since the Medicare and Medicaid programs pay at less than cost, hospitals have to charge patients with private  insurance more to make up the difference. This is a real issue and, at one hospital system, leads to overall prices for private insurance plans that are 34 percent above cost.

But, obviously, cost shifting does not account for a 264 percent difference. So what other explanation is there?

Market power, say the study authors.

In other words, hospitals charge higher prices because they can.

And health insurers—most especially Anthem Blue Cross and Blue Shield, whose network is used by most of the Big 3 in Indiana—either cannot or will not force hospitals down on price.

I’ve written before on the game played by hospitals and health insurers that has allowed health care prices in Indiana to soar. But this finding stunned me.

Two-hundred-sixty-four percent.


  • Great Article
    JK, Great article. Nice investigative work.
    • doctors not to blame
      This proves right there that doctors are NOT the primary culprits of high health care costs. So many people want to blame the physicians when in fact physician fees are a tiny fraction of hospitals/labs costs/charges. Thanks for proving this JK!
      • cost shifting
        Some one has to pay for all those 'top doctors' commercials and billboards
      • Welcome to reality
        Everybody in the health insurance business has known this for 30 years, but nobody chooses to listen as the doctors and politicians blame high costs on insurance companies (HealthCare reform?). Thanks for bringing some common sense to the masses.
        • Any wonder?
          I can't believe this comes as a surprise to anyone! Someone has to pay for all the "freebies" B.O. decided to bestow upon the uninsured or government-insured masses, and the continuing reductions in reimbursements through Medicare and Medicaid mean someone else has to pick up the remainder of the tab. That is what's happening here. If hospitals charged only what the government was willing to pay for these services, they'd likely go out of business. Can a doctor shortage be far off?
        • Hospital overcharges
          Why do insurance companies allow hospitals to get so much more than their actual cost plus a modest profit factor built in? This is not a rhetoric question. I am genuinely sincere. Wouldn't insurance companies want to negotiate the lowest price possible? Wouldn't that be better for their bottom line? I can't believe that most hospitals could succeed if they refused to work with most insurance companies. Please educate me.
          • To gojeepdog
            Good point, but before you completely let doctors off the hook, remember that nearly everything a hospital does happens because a physician first ordered it.
            • Healthcare pricing is ripe for change
              Thanks for the article. As noted in some other comments, this cost shifting situation has been the norm for some time, and takes on a new form under healthcare exchanges where healthy people will pay more for insurance and patients with chronic conditions will pay less. Hospitals have been allowed to operate for years in a fairly inefficient manner because of cost shifting and reimbursement policies that come from industry averages, not best practices. Payment policies are moving towards being more outcomes based, and as costs are shifted more towards employees, pricing transparency is going to cause radical shifts towards the "low cost provider." Patients assume quality is the same across hospitals, health insurers expect parity, so price becomes the deciding factor. As a physician it is a painful reality to comprehend, but medical tests and procedures are about to become a commodity.
            • To Carl
              I do not view the health care situation as hospitals = bad, health insurers = good. Hospitals are not bad guys, they're just rational actors responding to the incentives and opportunities before them--same as any business would. Insurers have encouraged higher health care spending with the methods of payment they have used, and have accepted higher prices so long as they could still claim to have the best discount off those spiraling prices. The insurers sold discounts to employers as if they were lower prices, when in fact they were not. Does this make the insurers bad? No. They too were responding rationally to the dynamics in the marketplace. Employers, who should have wised up to this game long ago, did not, because they operate on a principle that when something isn't your core competency, you outsource it. In other words, employers did not view it as their problem to hold down hospital prices. Those that did--such as the Big 3 and the UAW--failed utterly in the attempt, in large part because employers were shielding their employees from the true cost of their health care buying decisions. Employees just wanted maximum choice and minimum out-of-pocket costs, and didn't really want to know about the rest. Only when "the rest" caused their premiums to triple over the past decade did they start to get upset. So who's the bad guy in health care? Everyone is.
            • To Alan
              I have asked this question myself for several years: Why have health insurers, especially in the Indianapolis area, failed so spectacularly to hold down prices? I cannot claim to know the answer fully. But here is my best explanation. First of all, in spite of their rhetoric, the big Indianapolis hospitals have had Anthem over a barrel for a long time. (When it comes to independent physicians, the opposite has been true.) Because each hospital system had a distinct territory (St. Francis = south, St. Vincent = northwest, Community = northeast, IU Health = downtown), no insurer could afford to exclude any one of those insures from its provider network. Why not? Because employers, who have workers who live on all sides of the city, would have a worker revolt if their health plan did not include the hospitals on all sides of the city. Since the hospitals had the upper hand in the negotiations, prices went up and up. (At least in Indianapolis; elsehwere in the state, the story can be quite different.) The second reason is that employers, who are the real customers of private health insurance, demanded two rational things: the most choices and the lowest prices. We get that at Wal-Mart, right, so why not in health care? Well, in health care, insisting on the widest choice almost guaranteed higher and higher prices. Insurers sold employers "the best discounts" off of hospitals' prices. So long as an insurers, like Anthem, had the best discount, it would have the lowest prices, and most employers, obviously, wanted the lowest prices. But those prices were only lowest in a relative sense. In absolute terms, hospital prices kept marching up and up. Anthem really had little incentive to halt this march, so long as it could offer lower prices than all its competitors. Anthem also had a strong reason not to fight hospitals on prices too much, so that it wouldn't lose any of them from its network, because employers also wanted the widest choice. So, ultimately, employers' (and their workers') demand for the widest choice and the lowest prices, led to a situation where Anthem allowed (indeed, was forced to allow) hefty price increases year after year. Does that help, Alan?
              • Technical correction
                Actually, it's not that the hospitals *charge* one payer more than the other - it's that they have different payment contracts and expectations. One payer (like Medicare) may pay a flat rate per clinical condition (DRG) while other payers reimburse on a percentage of charges, which varies by contract. Your comment about "who is the bad guy" is incomplete. Patient, family, and societal expectations all contribute to the high cost of health care. 95% of an individual's lifetime healthcare costs occur in the last 5 years of life. Is this because families won't accept that their loved one is too broken to fix? What about the impact of potential litigation in over utilization of services? And how about those brand spanking new private rooms? Are we as a society willing to go back to wards? No? Cadillac care comes at a high price, and someone has to pay. We can't demonize insurers, or providers in this discussion. We *all* own responsibility for the mess. Now, how do we fix this? We can start with payment reform, tort reform, managing society's expectations about what is reasonable care. Sound a bit too much like "death panels" for your comfort? You want to have whatever procedures are available, when you feel you need them, and not pay for them yourself if your physician can't prove that they are absolutely medically necessary? OK, what's your suggestion?
              • Royal Privilidges !
                What do you call someone who has: 1)Power to take money from their constituents with no recourse no matter how outrageous the charges are, 2)Power of life or death 3)Power to build palaces with lots of empty rooms and for no good reason 4)Power to live a royal lifestyle while millions scrimp for bread money If you think I am describing Royalty, I am. I am also describing our modern hospital conglomerates who keep buying out the competition so that they can impose their will on patients, doctors, nurses, and everyone else they can suck money from. People are really getting sick of this. Wake up Governor!
                • Too many hospitals
                  The fact that hospitals are allowed to open less than 1/2 mile from existing hospitals (as they have done in Carmel may contribute to the high costs. In other states, hospitals must provide 'proof of need' to state agencies. The result is endless promotion of competing hospitals, the money for this has to come from somewhere.
                • Nice work
                  Nice to see these type of articles. The other newspaper has pretty much given up on this type of reporting.
                • Charges vs. costs?
                  JK - great article but this still misses the key question. Please explain why the "cost" structure of the Indy area hospitals is so much higher than similarly sized hospitals in cities with almost identical cost of living? Why are Indy area hospital's overhead costs so much higher than even in cities where the cost of living is dramatically higher than Indy? What is it about the way Indy hospitals do business versus other hospitals across the country that cause their fees to be so high relative to their peers? Indiana's general cost of doing business is considered to be one of the most competitive in the country, e.g taxes - labor costs - workers comp costs etc - what are these other city's hospitals doing differently than the Indy hospitals to be so much more cost efficient? Is this truly a "cost" based system or just a "charge" based system that has no relevance to actual cost and can those costs be lowered without compromising quality? Is the quality of care that much better in Indy than other cities? I have seen no evidence that it is.
                  • Consolidation
                    Good Point. Stephen Brill mentioned this in a long article about how hospitals are driving up the costs of Health Care . See the Charge Master
                  • To Jeff
                    Yes, you raise a very good question. The Indy hospitals do fine financially, but they do not seem to have operating margins that are astronomical. So their costs must be higher? Why? Some might say they've built more facilities than their peers in other cities, and are making up for those costs with higher prices. But I'm not really sure. You give me good questions to pursue for future stories. Thanks a lot.
                  • But...
                    What this post fails to account for is the relatively small percentage of individuals in Indianapolis who are using private insurance as their primary source of payment. When the majority of individuals are uninsured, or covered by Medicare or Medicaid, cost-sharing due to the small percentage of payers with private insurance is essential. Let's also discuss how Mike Pence's backwards healthcare policies and failure to accept federal funding for Medicaid will further exacerbate the cost-sharing problem, due to the large numbers of Hoosiers who will remain without any health insurance. Healthy Indiana Plan is a joke.
                  • Agree with many of the comments
                    There have been many great comments posted here. Not_a_player hit the nail on the head in a variety of issues and seems to be an informed insider that understands what really needs to happen to gain control of costs. Anthem learned a painful lesson in Fort Wayne in 1996 or 1997. For an extended period of time they had been attempting to strong arm providers into accepting payments that were much lower than cost. Their method was to just refuse to pay claims. Providers finally posted a full page notice in the newspapers that anyone with Anthem insurance was considered to be a self-pay patient immediately. The employees at GM came up for air and demanded to know why their insurance was useless. The end result was that Anthem backed down and started paying the claims. This would never have happened if Anthem would have been reasonable in their negotiations with providers. On the other hand, providers were used to increasing fees with no valid reason. Fees were getting out of hand and hospitals didn't even know what their costs actually were. No one felt the need to look into their processes to check if they could be more efficient or provide better care at lower cost. They were used to annually raising the prices because insurance always paid. Market reality still did not hit health care providers until about the past 10-15 years. Cost reduction and outcomes based payment is long overdue for hospitals. Medicare started demanding outcomes based care from home health agencies back then and thought bundling DRGs for hospitals would solve that problems - until the hospitals realized they could make even more money by kicking out patients before they were healthy enough to be released. The bottom line is that people in our country have become used to demanding more services than they really need because "someone else" is paying the bill. They are being forced into consumer driven health care decisions. Even though it's painful, high deductibles are causing people to get care when they truly need it and not for every sniffle. We have a long way to go to resolve this. I see single payer Medicare coverage for all as the only fair way to cover everyone. Those who want to keep things the way they've been for decades have obviously been happy getting whatever they want whenever they want it while others are paying for it. Reality is finally here and we are never going back to those days.
                    • Indy Cost structure...
                      The Indy hospital cost structure isn't much different than any mkt across the country. Nearly all of the hospitals behave in the same manner with private rates much higher than medicare. They are driven by profits just as any business. Many hire consultants to show them how to code claims in order to get more money from insurers (Hospitals not docs).
                    • Where Are the Incentives?
                      Good article. Health care cost seem to be in sync with college costs--no market forces, limited comparative information, and no hospital/university management pressure to really hold down costs. (Sure, Daniels is making a cosmetic effort at Purdue with limited results on cost control--costs have not gone down.) My wife recently had an emergency appendectomy--one night in the hospital at Community North and the bill came to about $34,000. After Anthem/Blue Cross adjusted to their agreed to costs, the bill was reduced to about $23,000. I was shocked at the cost of this age-old procedure and wondered how others can afford care. Moreover, my wife was about 3 weeks short of being eligible for Medicare and I wondered how much the procedure would have cost. I still don't know but, based on this article, it would probably have been considerably less and our out-of-pocket costs would probably have been much less than the nearly $4,000 we have to pay. Perhaps, the adjective "Affordable" in the Affordable Care Act can be achieved in some fashion if we use Medicare costs as a starting point for "reasonable" costs.
                      • Further Research
                        This article is comparing apples and oranges. Two completely different concepts all wrapped up into one. You are comparing the gross charges that go to commercial insurance companies and the "net receipts" from Medicare (or "What Medicare pays"). These are two completely different animals. Yes, this article makes it look like these big, mean, hospitals are charging all of us "working" individuals so much more, blah blah blah. Hospitals have managed care contracts with commerical insurance companies. These contracts specify what each hopsital will get paid for specific procedures, stays, etc. Commercial insurances DO NOT pay what the hospitals "charge" them. They only pay what is specified in their contract, thus if you looked at a hospital's financial statement you will see "contractual write-offs". This is the portion of the gross charge that the commercial insurance company did not pay. So, if you want to compare what "hosptials are charging commercial insurance companies compared to what Medicare pays". What you really should look at is what hospitals net from commercial insurance companies and then compare what medicare pays. You will also need to consider what hospitals get back or have to pay back to Medicare on their cost report. There are a lot of factors that are not considered in this article.
                        • RE: Where Are the Incentives?
                          Jim F- The concept of "living within Medicare" is not new but finally taking root in the healthcare industry. Rather than using the higher private insurance (non-Medicare) rates as a buffer, hospitals should have been finding better ways to produce a higher quality product at a lower cost. Now if we could just get Congress and the President to use the same healthcare system as our seniors, we might see some improvements there as well!
                        • To Further Research
                          This is an apples to apples comparison. I used the words "charge" and "charging" in my post in a layman's sense, not in a technical sense. The study that is the basis of my post looks at claims data, so it is looking at the actual amount of money paid by employers and their workers for hospital services. That means the study looks at "net receipts" from commercial payers and compares them to what the net receipts would have been from Medicare for the exact same service. My apologies if my verbiage ended up being confusing. But the study's comparisons are valid.
                        • To Uninsured/Self Pay
                          Thank you for your comment. It was tremendously insightful. I did not know about the goings on in Fort Wayne in the mid-1990s.
                        • Thanks Dr. Hannon
                          To Dr. Tim Hannon - Thanks for responding to my comment. I am hoping that all the players in the health care field will adopt your approach for being proactive in trying to identify reasonable costs (while still allowing for profit) while ensuring good outcomes. I too hope the President and the Congress can work toward real progress for affordable health care.
                        • Overly simplistic
                          The issue of medical "cost" is embarrassingly complex. For starters, "charge" does not equal payment to providers or hospitals. "Charge" is the beginning of a protracted negotiation between payers and providers. It is the inflated "sticker price", that in no way truly reflects reimbursement and certainly not the actual costs of delivering care. The outrage is that the uninsured are not able to be part of this negotiation and have no leverage to do so. The Affordable Care Act may change this dynamic to some degree. Hospitals and practitioners lose money on the treatment of Medicare and Medicaid patients. Insurance companies, or "payers", supplement the shortfall through relatively higher payments as a type of "tax", which is in turn passed on to policy holders and contracting employers in the form of higher premiums and higher deductibles. Determining the actual cost of care is also daunting, if not impossible. We like to break healthcare up in to episodes of care, or defined procedures in a very finite way. But medicine is not a transactional commodity or even one-time service. It is a process that is delivered longitudinally over a long time period which is affected by many uncontrollable biological and environmental factors. This is why it is attractive to look to new payment models that focus on the global costs spread out over periods of time longer than the the time enrolled in a traditional health plan, and which emphasize and reward efficiencies and prevention. This has been termed "Population Health". The transition from traditional fee-for-service payment of healthcare to truly "Accountable Care" will be messy and not quick. Providers, hospitals, and integrated health systems must learn how to accurately measure and then control costs of care. They must learn to delivery higher quality at lower cost (and lower reimbursement) and be held accountable to manage those costs. Given that the governmental contribution to care through Medicare and Medicaid will be capped, if not reduced, contributions from patients and insurers will still be needed to fill the gap between actual cost of care and payment for that care. Discussions of "charge" alone does not even begin to scratch the surface of the complexities of healthcare finance.
                        • Shell game
                          JK has gotten himself into some murky waters here. Ever since the advent of Medicare, with the government telling health care providers what they will pay, billings and collections have become a big shell game. I am at an age (as JK likely knows) where I have quarterly lab tests. They bill about $400 and get about $40, due to "contracts." No one, not even health providers, can provide services for less than the cost. Thus, the big shell game to make up for Medicare and Medicaid losses with insurance and self-pay billing. It is going to get much worse.
                        • Keep up the investigations
                          Keep up the good work Mr. Walls. We need more of this. Personally, I'm still working to understand why 2-3 tests were ordered for our brief ER visit but more importantly trying to understand why the bill for just 2 (MRI & cat scan) was well over $5,000. I know there are many variables that must be understood, but as self-payers now, its now more critical we have the facts in hand to make financial decisions about our care. Thus transparency by the hospitals is a subject we'd like you to cover more. We need to be able to make informed decisions when sitting in an emergency room, waiting for more than an hour to be in line for each test...seems like there is plenty of time in some cases to answer patient's questions about what they are going to be charged.
                        • Hospitals and insurers
                          Will the (theoretical) clarity that should come from the health care marketplace do anything to better educate consumers about their choices, or will the information, while accurate, not result in driving down costs? If hospitals always begin with hyperbolic prices, then does the "cost comparison" in the market even matter? I have always believed that health care is not a product that works (for consumers) in the free market. Your explanation is helpful to me, but depressing.
                        • Yes, but.....
                          The reasons the doctors order the tests, in too many cases, is because they're afraid of being sued for malpractice if they don't. Let's not forget the attorneys' role in the outrageous cost of today's healthcare.
                          • And,too..
                            It's silly to let the insurance companies off the hook, by them claiming they are nothing more than innocent riders on the crazy hospital pricing rollercoaster. After figuring out what they have to pony up, they still manage to eek out 10-20% profits.
                          • Thanks a lot, St. V 86th!
                            In Feb, an immediate care facility sent me to the emergency room when abdominal pain didn't go away after a few days; went to St. Vincent 86th. Spent 4 hours on my back in a room, got an IV for dehydration and an EKG. Talked to a doctor and a few nurses. No imagery; doctor couldn't figure out what was wrong. He asked what I was doing there! Told him I was sent there. I was sent home with a script for Naproxen. EKG cost $200-and-some dollars (it's $67 at my cardiologist's office). Total bill was $4000+ (i.e., $1000+/hr spent mostly alone); my out of pocket share was $2300+. I have Anthem through my employer (State of IN) and a large deductible to keep down premiums. Ouch!

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