Lifting the Veil on Hospital Charges

This year, Medicare took a major step toward promoting real price transparency for hospital care. The federal agency posted online the prices charged by more than 3,000 hospitals for the most common inpatient and outpatient procedures. This caught the attention of media across the nation.

Medicare's public release of hospital charge data was the first time that hospital charges had been aggregated to show a "bundled" price for specific procedures, including all hospital-related services except physician fees. Previously, data were available only for individual hospital services.

Medicare presented these bundled charges in a standard format that made charges readily comparable between hospitals and revealed widely different prices for the same procedure: Charges varied across hospitals in different parts of the country, and even in the same city. For instance, the charge for a hip replacement varied from $123,885 at one hospital in Los Angeles to $220,881 at a nearby hospital. A hospital in Stockton, Calif., charged $7,566 for a level 3 diagnostic ultrasound, while a hospital in Hamilton, N.Y., charged $157 for the same test.

In response, hospitals were quick to point out that almost no one pays the full amount of charges on hospital bills, which represent the "asking price" for services. In general, this is true. Medicare does not pay based on hospital-specific charges or even hospital-specific costs. Medicare's payments to hospitals are based on a formula that uses the average costs of many hospitals, and these payments are well below what hospitals typically charge. For instance, Medicare pays $14,325 for a hip replacement, not the $220,881 charged by the highest-priced Los Angeles hospital. Most private insurers pay some variation of Medicare rates or negotiated rates that are deeply discounted and bear little resemblance to hospital charges. These rates, however, are not readily available.

If charges do not bear any resemblance to prices paid, how does release of the data take us any closer to price transparency and help to reduce prices? First, we need to remember that some people do pay hospital charges. Those who are uninsured and do not qualify for charity care may get stuck with a bill for a hospital's charges.

Second, Medicare's initiative on hospital charges is part of a broader effort to increase price transparency. By taking the first, bold step, Medicare may encourage or embarrass hospitals to review and adjust their charges. It may also encourage other payers to share their prices.

Consumers, providers, regulators and policy makers are all seeking greater price transparency. Shortly after Medicare released hospital charge data, the Senate Finance Committee held a hearing on the issue. In addition, Congress is considering legislation that would require the public release of Medicare payment data in electronically searchable format.

People are often encouraged to "shop around" to get the best price for medical care. Previously, that was nearly impossible because hospitals resisted providing price quotes for an entire procedure. Now, consumers can make far more informed choices.

With the release of hospital charges, efforts to achieve greater transparency of health care prices - not just charges - may also gain traction.

Keith Lind is a senior strategic policy advisor at the AARP Public Policy Institute. His areas of expertise include Medicare, hospital observation, medical devices, and fraud and abuse.