Ask the Experts: Why Do Health Care Costs Vary So Widely?

June 13, 2013

A report from the Centers for Medicare and Medicaid – the government agency that administers and oversees the disbursement of many federal health care benefits – recently revealed the amounts that hospitals charge insurance providers often vary widely at the regional, state, and even hospital level.

One of the experts quoted in the story is Healthcare Administration Professor Mitch Glavin. Below are Professor Glavin's excerpted comments:

Poor Pay More For Healthcare
"The data release from the Department of Health & Human Services refers to what hospitals submit as their charges, but this are not the costs that Medicare actually pays. Hospital charges are kind of like list prices for medical care services, but the amounts actually paid to hospitals by private health insurance plans, Medicare, and Medicaid are typically much less (they are more or less retail prices).  List prices are only paid by patients coming from other countries (medical tourists, often wealthy) or Americans without a health insurance policy (some very wealthy folks, but mainly lower-income folks or those excluded from coverage due to pre-existing medical conditions).  Yes, you read that right, poorer folks without health insurance or lousy insurance are sometimes billed for (and expected to pay for) services at the very highest list prices.”

List Prices Lose Their Meaning
“In the 1980′s Medicare moved to the prospective payment system whereby Medicare was no longer used the cost-plus methodology, but was now essentially paying a uniform national rate for each type of hospitalization.  In effect, Medicare would pay any U.S. hospital a flat fee of say $4,500 for an inpatient stay for an appendectomy.  The fee paid by Medicare would be the same no matter how many drugs and tests were used to care for the patient and no matter if the patient stayed in the hospital 3 days, 5 days, or 9 days.

The Medicare payment was adjusted for certain factors such as a bonus if the hospital was located in a more expensive high-wage area, if the hospital had a high percentage of Medicaid and uninsured patients, and if the hospital was involved in teaching a lot of physicians-in-training. So, for Medicare the list prices charged by hospitals lost much of their meaning and relevance. At the same time, private health insurance plans moved to adopt their own prospective payment schemes, or negotiated significant discounts off of the list prices or bundled payments for hospital care into the total services provided to plan members via managed care plans.

Pricing Disparities
The end result since the 1980′s has been that very few insurance plans, both the private plans (which most Americans have via their place of employment) and the public programs (Medicare, Medicaid, CHIP), were paying anything close to 100% of hospital charge amounts.”

To read the full Card Hub Ask the Experts article, visit here.