Sky-High Hospital Prices are a Result of Government Interference

Despite its editorial position in favor of more government control of people’s access to medical care, the New York Times has an excellent track record of journalism covering the real problems in U.S. health care. A fine example is Elisabeth Rosenthal’s report last Monday (“As Hospital Prices Soar: A Stitch Tops $500″, December 2, 2013) on outrageous hospital prices, including $500 for a single stitch.

dollarshcShe identifies something that we don’t hear from hospitals themselves: Emergency rooms are profit centers. And we are not talking about rocket surgery: As Rosenthal notes, stitching a wound with needle and thread ― a procedure undertaken since antiquity – routinely leads to a charge of over $1,500.

Rosenthal filed her story from San Francisco. California requires hospitals to file all their charges for procedures (the “chargemaster”) with the Office of Statewide Health Planning and Development (OSHPOD), which publicizes them. Many observers believe that the state forcing hospitals to publicize prices will lead to price reductions. However, this is a misdiagnosis: Addressing the symptoms and not the cause.

Rosenthal herself succumbs to the erroneous notion that hospitals gouge uninsured patients the most because they don’t have insurers to “argue” fees on their behalf.  To be sure, insurers regularly pay hospitals about one third of charges invoiced. However, it cannot be true that consumers need insurers to negotiate for us, because we don’t use them to “argue” with Amazon.com, Wal-Mart, or Office Depot about prices they charge. Indeed, those firms achieved market dominance by combining convenience and low prices.

Uninsured patients go through emotional pain when they receive ER invoices, but rarely financial pain. Research (full text by subscription) from California demonstrates that uninsured patients paid only 28 percent of hospitals’ billed charges in 2004-2005. However, this does not mean that each uninsured patient paid 28 percent of her bill. Rather, the statistical distribution suggests that a small proportion of uninsured patients paid a high share of their charges, and most pay a tiny share (if any).

Nevertheless, it is necessary for hospitals to go through the charade of trying to collect high fees from uninsured patients, before writing the costs off to charity care, because Medicare regulations force them to do so. If hospitals do not try to collect from uninsured patients, the government accuses them of giving them a bigger discount than they give to Medicare, and claws back Medicare payments.

Government interference has led to perverse malformation of hospitals’ incentives to treat uninsured patients.

Comments (19)

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  1. Trent says:

    “Nevertheless, it is necessary for hospitals to go through the charade of trying to collect high fees from uninsured patients, before writing the costs off to charity care, because Medicare regulations force them to do so.”

    The same exact thing happened to my grandparents

    • Martha says:

      I understand, but it revolts me. Again, it comes down to messy legislation that interferes into market forces.

  2. Carter says:

    “She identifies something that we don’t hear from hospitals themselves: Emergency rooms are profit centers.”

    And its just proof of how corrupt our system is, thank goodness Obama is seeking to reform all of that.

  3. Sam says:

    Emergency rooms are profit centers. In what world does that make sense? I realize you can charge more when demand is high, but this is rather gruesome. It comes down to life or death in some cases.

  4. Greg says:

    “Rather, the statistical distribution suggests that a small proportion of uninsured patients paid a high share of their charges, and most pay a tiny share (if any).” Essentially, a small portion (most likely, the poorer faction) is boned by the process.

  5. Martha says:

    I feel that doctors have a moral duty to only charge what is fair and reasonable.

    • Dr. Mike says:

      An you, of course, get to determine what is fair and responsible?
      You do realize (well, I guess you don’t) that charges are irrelevant in our system of health care? With or without the ACA the vast majority of “provider” charges are determined by the ones paying the bills, not the ones generating the bills. Almost always when doctors get to set their own fees, they are lower. Almost always, when the government gets involved in price or fee setting, they rise over time compared to what they would have been otherwise.

  6. Benji says:

    “If hospitals do not try to collect from uninsured patients, the government accuses them of giving them a bigger discount than they give to Medicare, and claws back Medicare payments.” With how little Medicare reimburses, I’m not surprised. They have to make up the costs somehow.

    • Brier says:

      We need to fix this fee-for-service system and restore real costs. Check out Devon Herrick’s study on cosmetic surgery costs.

  7. Devon Herrick says:

    John, good analysis as usual!

    There’s a new free-standing Emergency Room just opening up in my neighborhood that was converted from an old Blockbuster store. I certainly hope the people patronizing it don’t succumb to the mistaken notion that it’s anything like an urgent care center.

  8. Jimbino says:

    In an emergency, the sick or injured patient is under duress or even unconscious–not usually in the position to negotiate price.

    In the real world, a contract made under duress, especially with lop-sided power and information, is regularly invalidated, and the party seeking payment for services or goods delivered can resort to a suit for collection under “quantum meruit.”

    Of course, what the service or goods are worth has to be established, and I see no reason why that worth wouldn’t be determined by what the same facility gets for the same service under Medicare.

    Any person who pays more is merely on the losing end in the gummint-sponsored game of transferring wealth.

    I’d like to see a trial in which the hospital tries to explain to a jury why the patient should pay more than what the procedure is worth.

    • John R. Graham says:

      Jimbino, I agree very much with your sentiment. I am not 100 percent confident in what I am about to write, but here goes, nevertheless:

      Obviously, the unconscious or severely ill patient in the ER cannot make an “informed decision”. (This leaves aside that most ER patients are not in that situation. They are there because the doctor’s office is closed.)

      First, if it is a non-profit hospital, founded in the 19th century by a religiously affiliated group of civic leaders, it should be expected to deliver some level of emergent care without reimbursement because that is the mission entrusted to it by its founders. That does not mean the physicians and staff work for free. It means that the faithful subsidize the hospital.

      If it is a for-profit hospital, it may not provide any care for free. However, it must levy a “usual and customary charge”. However, today that term is regulated and meaningless. In front of a jury, I expect it would quickly approach the actual cost. So, I agree with Jimbino that their should be a common-law, rather than regulatory, remedy.

  9. Bob Hertz says:

    Jimbino is on the right track, but in a sense his track comes to a stop.

    Based on my research, which I admit is that of an amateur, virtually all American courts side with hospitals in billing disputes.
    A hospital bill is considered prima facie a fair charge.
    And hospital patients are essentially coerced to sign a form in which they accept liability for all bills.

    (I tried not to sign such a form when one of my children was born. The entire staff gave dirty looks to my wife and me for the entire stay.)

    Note to John Graham:

    The foolish Medicare requirements did not cause hospital bills to increase.
    Emergency patients are powerless by definition.

    What I think we have here is passive and weak regulation. I do NOT advocate regulation and price controls as the best cure for our health care system in general. But I do think that ER care is what the academics call ‘sui generis.’

    Bob Hertz, The Health Care Crusade

    • Dr. Mike says:

      Maybe you could generate the list of Diagnoses that are emergent and thus subject to the price controls, for surely when a patient with a sore throat or sprained ankle presents to the emergency room, that does not represent an emergency. Or, is the fact that it is named “emergency room” the only thing that matters, and that sore throat in the ER is subject to price controls but the exact same sore throat in the urgent care is not?

  10. Bob Hertz says:

    I am not quite tracking this ‘common law’ remedy.

    A person breaks his leg, is taken to the emergency room and gets good care, but gets a bill for $28,000.

    This is about equal to the salary they earned working a $14 an hour job for the full year.

    If the hospital persists in trying to collect the bill, our patient has to deal with stress and potentially ruined credit and possibly hiring a lawyer.

    It is not right for for a helping profession to force the people it helps to go to court.

    The vast majority of other advanced nations have binding national fee schedules for hospital care. Most nations also use general revenues to subsidize hospitals in the first place, so that the hospital does not solely depend on revenue from patients.

    Americans seem to be in love with the idea of hospitals as independent businesses, sustained by user fees no different than a resort. This is in my view a very ignorant concept.

  11. Brian S. says:

    Good post. But the two links in the text are broken. (“Research” and “Medicare regulations force them to do so.”) Looks like you copied & pasted them from Outlook Web Access, so they have a long prefix on them.