The Health Care “Market” is So Not a Market

May 9th, 2013 at 9:12 am

This recent spate of articles about hospitals releasing what they charge for procedures is interesting, predictable, useful, and a timely reminder that our health care system lacks fundamental characteristics of markets, like symmetrical information and consistent pricing.

For example, there’s a huge difference between sticker prices and what insurers, especially Medicare, actually pay.

Data being released for the first time by the government on Wednesday shows that hospitals charge Medicare wildly differing amounts — sometimes 10 to 20 times what Medicare typically reimburses — for the same procedure, raising questions about how hospitals determine prices and why they differ so widely.

These early results won’t answer that question, but they do make this point very clearly: in case you didn’t know this already, if you’re uninsured, you’re the one they’ll try to hit with the sticker prices.  It’s a classic example of why pooling is so important.

You go to buy a Snicker’s bar, you a) face a similar price across the nation, and b) pay that price at the register.  Of course, health care provision is far more complex and varied, but the variation in price goes well beyond legitimate bounds, into “rent seeking” by hospitals and providers.

That’s not their fault–the current system incentivizes it.  And in fact, the more costs are controlled in the covered sector, the more they’ll try to gouge those on the uncovered side.  All of which should remind you of the urgency of getting everyone covered and into the pool.  In other words, the best medicine to treat this diagnosis is the implementation of the ACA.

Bonus update:

Here are some price comparisons pulled off the NYT interactive site (H/t: Gleeps):

White Memorial Medical Center, LA
Procedure/case: Major joint replacement
Avg. amount hospital billed Medicare $112,653
Avg. amount paid by Medicare: $22,706
 
Northwestern Memorial Hospital, Chicago:
Procedure/case: Permanent pacemaker insertion
Avg. amount hospital billed Medicare: $73,688
Avg. amount paid by Medicare: $16,589
 
Christ Hospital, Jersey City:
Procedure/case: Heart failure/shock
Avg. amount hospital billed Medicare: $120,635
Avg. amount paid by Medicare: $13,420
 
Hospital of University of UPenn:
Procedure/case: Pulmonary edema & respiratory failure
Avg. amount hospital billed Medicare: $82,293
Avg. amount paid by Medicare: $13,211
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17 comments in reply to "The Health Care “Market” is So Not a Market"

  1. azlib says:

    I am so glad these “prices” are being made public. The hospital I had my prostate surgery at sent me a “non-bill” of over $50K for the hospital costs for the procedure. The actual charges my insurance and I paid was around $12K.

    What I do not understand is why they sent out the “non-bill” and wasted paper and postage plus staff time to produce it. The “non-bill” is a total fiction. Do they send it to make me and my insurance company feel better about only paying $12K? I found it really bizarre.

    BTW, the actual care I got at the hospital was excellent. But this non-billing paperwork was really odd.


  2. H. S. Rockwood says:

    JB,

    I think you mean “gouge” vice “gauge” above.

    It would help readers if you listed the time of your posts.


  3. The Raven says:

    …and in the states that do not implement the Medicaid expansion?

    Insurance companies also have an incentive to raise their spending as high as the market will bear, since that’s a way they can up their profits under the medical loss ratio rules.

    I think the PPACA may end up being one of the most reviled laws ever passed by this benighted Congress and country.


  4. wkj says:

    A practical implication of the variability in medical charges is that even if you are healthy and well off, health insurance is still an urgent purchase so that you will have the benefit of the discounted hospital & physician rates negotiated by the carrier.


  5. Bearpaw says:

    Some things to note:

    1) Snicker’s bars are mass-produced. Hospital care isn’t. I haven’t looked at the data yet, but if the price numbers aren’t accompanied by quality-of-care numbers, local costs, and other relevant factors, they’re of limited use.

    2) Medicare nearly always reimburses quite a bit less than other payers. (Cost control is a good effect of the presence of Medicare, but it does distort the market. Even more than it already is.)

    3) Like many other sectors of the financial industry these days, the lack of “symmetrical information and consistent pricing” is a feature, not a bug, as far as the people at the top of the industry are concerned.

    4) The ACA is a bandaid and a couple of aspirin for this diagnosis, when what’s actually needed is a full private-insurance-ectomy, and implementation of public health-financing procedures that have worked well for other “patients” around the world.


  6. Perplexed says:

    Do you think maybe this article had anything to do with it: http://www.time.com/time/magazine/article/0,9171,2136864,00.html? (Editor & Publisher Award for it here: http://www.editorandpublisher.com/Awards/Article/Steve-Brill-Wins-Sidney-Award-for-Time-Article-Exposing-Price-Gouging-in-Medical-Care)

    Once upon a time, price discrimination was against the law in the U.S., now we just take for granted that its not a problem:

    “What is important here is merely to note that during the neoprogressive revival, Congress in 1975 undid the entire structure of pricing policy that had been erected in the previous centuries when it passed a law called the Consumer Good’ Pricing Act, which at last legalized price discrimination.” – Barry Lynn (from his book “Cornered: The New Monopoly Capitalism and the Economics of Destruction”)

    So why is it again that we make no attempt whatsoever to measure rents?


    • urban legend says:

      That law had nothing to do with price discrimination. It prevented manufacturers from setting minimum prices retailers could charge when states had so-called fair trade laws. It allowed discounting by the retailer at the retailer’s choice.

      You are generally correct, though, that the law that did apply to price discrimination, the Robinson-Patman Act designed to protect smaller resellers from aggressive pricing by national retailers, became essentially dead-letter in the courts.


      • Perplexed says:

        Sorry, in my attempt to keep it short I may have confused Lynn’s point; he was actually saying that it was the start of a process that led to the legalization of price discrimination and suspension of enforcement of anti-trust laws. Here’s his follow up to the original statement:

        “The goal of those who promoted the act was laudable. They believed that big manufacturers like Procter & Gamble had become too fat and lazy. Yet rather than take on the giant conglomerates directly, such as by using antitrust law to make them smaller, the neoprogressives apparently decided that it would be easier to empower retailers to serve as ‘countervailing’ powers able to exert more pressure on the producers.

        Though all but forgotten today, the Consumer Goods Pricing Act must be credited with setting into motion the fantastic concentration of power in the hands of the giant retailers and trading companies that we have witnessed in the last generation. The decision six years later, in 1981, to all but suspend enforcement of our classic antitrust laws only accelerated the process. Perhaps the biggest proof of the lack of wisdom of the act is that the consolidation of power among the retailers eventually provided an excuse for round after round of consolidation among the very producers that the authors had originally set out to weaken, like Procter & Gamble.”

        Lynn make a pretty compelling case that the upshot of the collective changes was to weaken manufacturers and enable new forms of trading monopolies that are ultimately limiting our choices, controlling markets, and extracting monopoly profits in the process.

        The price discrimination being practiced in the medical industrial complex just takes this to a whole new level.


  7. PeonInChief says:

    It’s a simple matter: if you are uninsured, you’re effectively poor and powerless, and desperate for care. We’re going to do what the major banks do with their payday loan operations–charge you a whole lot more than people who aren’t poor and powerless. And we can get away with it too. Hehehe!


  8. Fred Donaldson says:

    High billing and big discounts show high sales, even increasing sales year to year, which appeases the investors, even though net revenues (after discounts) are not much higher.


  9. ck_in_nc says:

    Doesn’t charging a high amount and receiving low payment also allow them to count the difference as a write-off or loss against income? Even non-profits have to pay income taxes on earned income, but if they have all of these “losses,” that should be insignificant.


  10. Larry says:

    Parts of the health care market are actually markets. And they work very well to control prices. I’m talking about Lasik, minute clinics at CVC and Walmart and the like.

    The best way to understand health care that I’ve found is Clayton Christensen’s paradigm. He distinguishes three tiers:

    – intuitive medicine is for things we don’t understand very well, and that therefore require the highest skilled professionals to apply their carefully nurtured judgment to the problem. This is very expensive. Think “House”.
    – empirical medicine is for conditions that we absolutely know how to treat. prices should be published and very competitive. this is Lasik and lots of procedures such as colonoscopies, stents, etc. It’s also where deskilling (shifting care from docs to PAs and nurse practitioners) can make a huge cost/price difference.
    – patient networks, to help with chronic disease management, where arguably the most important variable is patient compliance with treatment regimes. eat right, check your blood sugar, exercise, etc. watchful nursing can help.

    A big problem is that we often use a single system to handle all three types of care. This is incredibly expensive (think mainframes vs PCs) and wasteful.

    He explains it all, in Innovator’s Prescription. If you haven’t read it (and Goodman’s Priceless, as well) you’re behind the curve, and you don’t want that, right?


  11. Bobby Goren says:

    “In other words, the best medicine to treat this diagnosis is the implementation of the ACA.”

    Actually, the best medicine to treat this diagnosis is a single-payer system akin to those in one of the major Euro Zone countries. However, if an antibiotic is unavailable, a sulfonamide will have to do. That’s what we’ve got with ACA.


  12. genrtm says:

    The roots of this problem go a lot deeper than most realize. In Brill’s TIME article, he reports asking a hospital CEO the rationale for chargemaster prices that bore no relationship to actual cost. The CEO consulted with his staff and, even then, had no explanation.

    This problem began in the late 60s and 70s when Medicare paid hospitals using a cost-based formula. The formula computed the hospital’s reimbursement by multiplying the Medicare patient’s accumulated charges by the ratio of cost to charges in the revenue-producing departments. During this era, hospitals maximized their reimbursement by manipulating charges to affect this ratio. That’s where things like $50 band-aids came from.

    By the time Medicare shifted away from this cost-based formula to prospective prices in the late 80s, hospital chargemasters bore no resemblance to reality. Then, with the spread of preferred provider networks in the 90s, the inflated chargemasters became useful as a starting point in negotiating contracts with health plans.

    Most likely, the reason Brill’s CEO (and his staff) didn’t know how the inflated charges were calculated is that they were probably in kindergarten at the time all this got started.

    The health care market is a market only in the senses that price setting is essentially at the level of monopoly vs monopsony. An individual without a health plan (Medicare, Blue Cross, etc.) acting as her agent, has no power in this market.


  13. Don Levit says:

    These postings of the amount billed Medicare versus what was paid, makes the hospital pricing system one big joke. That is, unless you are uninsured. Why would one’s insured status or lack thereof have anything to do with the joke of pricing?

    To have each insurer negotiate prices for every procedure with every provider seems to be very costly.
    Why not have the Exchanges in each state serve as the negotiator for every insurer, and for every person without insurance?
    Don Levit


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