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The Obama administration was kidding itself when it declared this month that its release of Medicare charge data for the 100 most common hospital procedures would be a help to consumers.
There followed a flood of news reports about the vast difference in charges for identical procedures from one hospital to another. Newspapers and websites ran maps and colorful charts, all billed as a breakthrough tool for consumers.
The problem is, everyone assumed that charges at hospitals function in a similar way as in the rest of the economy—you know, the part of the economy where supposedly rational buyers send rational signals to sellers by their purchasing decisions, and prices gradually adjust to reflect those interactions.
But this isn’t the rest of the economy. This is health care. And the two worlds have very little in common with each other.
“Comparing hospital charges is almost totally worthless,” wrote Dr. Bernie Emkes, the medical director of managed care services at the Indianapolis-based hospital system St. Vincent Health, in an email to me.
Hospital charges have evolved over time in response to payment policies implemented by the federal Medicare program and in response to the intense negotiations with private health insurers.
Medicare has for years paid hospitals the lesser of a hospital’s actual charges or the “usual and customary” fees or “prevailing” charges that Medicare essentially sets on its own, Emkes wrote. So it made sense for hospitals to hike their charges so they were always at least as high as the “usual and customary” or “prevailing” rates.
Hospitals also hiked charges higher and higher, so they could give larger and larger discounts to insurance companies and yet still get paid more and more each year. (I'm not defending this practice—or health insurers who went along with it, while disingenuously touting that their large discounts were actually holding down the cost of health care—I'm just describing what happened.)
Actually, hospital charges have become so meaningless that few health insurers even use them in their negotiations anymore. The insurers just negotiate a fixed fee with the hospitals, which will be far lower than the charges and probably has no mathematical relationship with those charges at all.
“No one pays full charges in this day and age,” Emkes wrote. “Insurance plans negotiate discounts and [the] indigent receive massive discounts if warranted.”
Indeed, the only way I found to make good use of the Medicare charge database was to ask each Indianapolis-area hospital for its standard discount for the uninsured. That is one instance in which hospitals still use their charge data: to calculate a discount for the uninsured.
Now this practice can be abused horribly, as Steve Brill documented so well in his mammoth "Bitter Pill" article in Time magazine. But it also can be used to at least get an idea of how much each hospital is actually getting paid for the 100 most common procedures.
Indianapolis-area hospitals give standard discounts to uninsured patients with modest incomes, and those discounts range from 35 percent to 40 percent. Those adjustments bring the hospitals’ bills at least in the range of what private insurance plans and their customers are paying, local hospitals said.
Indiana University Health takes the averages of the three largest discounts it has negotiated with private health plans to arrive at its discounts for the uninsured, which average 40 percent at its three downtown hospitals.
Joe Stuteville, a spokesman for Franciscan St. Francis Health, said his hospital system’s 35-percent discount for uninsured patients is “an amount virtually equal to what insured patients get through their [insurance] providers.”