Hospital Pricing Strategies: Behind The Scenes

The cost of healthcare is a significant concern for many Americans, with medical debt being the leading cause of personal bankruptcy in the United States. While hospitals are required by law to post their prices online, few are fully compliant, and the market for hospitals is extremely uncompetitive, with healthcare monopolies dominating almost half of metropolitan areas. In such a market, hospitals and insurance companies set their own prices for procedures, and these prices are often unrelated to the actual cost of providing care. This results in a lack of transparency, with patients often unaware of the costs they will face until they receive the bill. To address this issue, some have suggested direct regulation of hospital prices, while others argue for increased price transparency to enable patients to shop around for the best prices.

Hospitals set their own prices

Hospitals, doctors' offices, and other providers set their rates. The prices are totally up to them and are sometimes, but not always, based on their costs. For example, a hospital's costs could include electricity bills, material costs, and administrative overhead. These costs are divided by all the procedures and services they provide. This list of prices can be found on a document called a Charge Master. Hospitals then negotiate with insurance companies, which pay for many patients' procedures.

In the United States, the Hospital Price Transparency Law requires hospitals to list the cash prices for procedures on their websites in two forms: one that is easily accessible for patients and includes a cost estimator for common services, and another that is machine-readable. However, a study published in the Journal of the American Medical Association found that hospitals are largely ignoring this law. Only about a third of hospitals are complying with the Transparency Rule.

The market for hospitals is extremely uncompetitive, with the top 10 private hospital health systems owning one-sixth of all hospitals in America. Almost half of metropolitan areas are dominated by a healthcare monopoly. These market conditions mean that even the Transparency Rule wouldn't bring down hospital prices. Market forces don't increase consumer power if there's no competitive market. As a result, the only way to ensure fair pricing may be direct regulation.

Maryland practices "all-payer rate setting," which allows the state to set the prices hospitals can charge for care.

Insurance companies influence pricing

Insurance companies have a significant influence on hospital pricing, and this is a complex interplay of factors. Firstly, market concentration, or the lack of competition, is a key issue. When only a few insurance companies control a large share of the market, they can drive up prices. This concentration has increased over the years due to mergers and acquisitions, and when new insurance companies are unable to enter the market, prices can be kept artificially high.

The ability of lawmakers to influence prices is limited, and federal policies may not always be effective in reducing insurance company prices. However, policies targeting market concentration and promoting competition among providers can help. For example, antitrust policies can be enforced using data from a federal APCD (All-Payer Claims Database). This database can also be used to monitor and project healthcare spending and pricing trends.

The lack of standardized reporting and transparency in pricing also impacts the market. Hospitals are required to provide pricing information, but the variety of formats makes it difficult for consumers and employers to compare prices. This lack of transparency makes it challenging for consumers to make informed choices and for employers to select the best health plans for their employees.

Additionally, state-level data on insurance company payments to providers is often not publicly available or easily comparable, making it difficult for individuals to understand the pricing dynamics and make informed decisions about their insurance choices. This lack of transparency at the state level limits the ability of consumers to hold insurance companies accountable for their pricing practices.

Hospitals must post prices online

Since 1 January 2021, hospitals in the United States have been required to post their prices online. This is part of a price transparency rule that aims to help patients compare prices across hospitals and estimate the cost of care before seeking treatment. This rule was implemented by the Centers for Medicare & Medicaid Services (CMS), which audits hospitals and can issue penalties for non-compliance.

The new rule requires hospitals to post their prices in two ways: firstly, as a comprehensive, machine-readable file with all items and services; and secondly, in a display of at least 300 "shoppable" services in a consumer-friendly format. These shoppable services refer to non-emergency services that can be planned in advance, such as colonoscopies or knee surgeries. Hospitals can also satisfy this requirement by offering an easily accessible online price estimator tool that provides patients with real-time estimates of their out-of-pocket costs.

The machine-readable files must meet certain accessibility requirements and include specific data elements. For example, they must be easily accessible online and include applicable billing codes and descriptions of the items and services covered. Hospitals are also required to display whether a price applies to an inpatient or outpatient setting, or both. However, there have been challenges with the implementation of these files, including technical issues with their location, size, and formatting, which have made it difficult for users to compare prices across hospitals.

The consumer-friendly format of the pricing information allows patients to shop around for the best prices and choose hospitals based on value for non-emergency services. This information can be found on hospitals' websites, typically under their billing and insurance pages. While this information has been described as "obscure" in the past, the new rule aims to make it more accessible and useful for patients.

Price transparency helps patients

Since January 1, 2021, hospitals in the United States have been required to provide clear, accessible pricing information online about the items and services they offer. This includes a comprehensive, machine-readable file with all items and services and a display of shoppable services in a consumer-friendly format.

Secondly, price transparency can help patients avoid unexpected and exorbitant medical bills. Knowing the costs upfront allows patients to seek alternatives or negotiate prices with providers before receiving care. It also holds healthcare providers and insurers accountable for their pricing practices, helping to identify cases of price gouging or overcharging, and leading to greater fairness and equity in healthcare billing.

Thirdly, price transparency can improve access to care. Some patients may delay or forgo necessary medical treatment due to concerns about the cost. When pricing information is transparent, these individuals are more likely to seek timely treatment, potentially preventing more serious health issues and reducing overall healthcare expenses.

Finally, price transparency can lead to more efficient allocation of healthcare resources. It encourages providers to offer cost-effective services and may reduce unnecessary tests or procedures, improving the efficiency of the healthcare system. While price transparency rules alone cannot remedy all the inefficiencies in healthcare, they do empower industry stakeholders, including consumers.

Market forces don't reduce prices

Market forces don't always reduce prices in the healthcare sector. There are several reasons for this:

Firstly, healthcare is unlike any other consumer industry. Patients who require medical attention may not be in a position to research prices and choose between hospital systems. In life-threatening emergencies, such as car accidents or heart attacks, the only priority is reaching the nearest medical facility for treatment. Even when patients have the time to conduct research, they may not be able to make informed decisions due to a lack of pricing transparency and information. Until recently, hospitals and healthcare providers were not mandated to disclose cost information with patients, and most facilities still don't publicly display their prices. This opaque pricing makes it challenging for patients to calculate and compare costs.

Secondly, consolidation in the healthcare marketplace limits choices and can drive up prices. After a wave of mergers and acquisitions in the 1990s and another surge beginning around 2010, the percentage of community hospitals belonging to larger hospital systems increased significantly. Between 2007 and 2019, 19% of markets serving over 11 million people had only a single hospital system, reducing competition and giving patients fewer options.

Thirdly, consumer demographics and behaviours can influence the availability and cost of healthcare. Patients may lack knowledge about hospital quality and insurance coverage, reducing their incentive to seek better deals. Additionally, public sector reimbursement policies may not adequately incentivize providers to improve efficiency and reduce costs.

Lastly, insurance coverage can distort market forces in healthcare. Generous health insurance plans can insulate consumers from the direct financial consequences of their healthcare choices, reducing the incentive to shop for the best prices. As a result, hospitals with superior outcomes may not be rewarded with more patients, hindering innovation and quality improvement efforts.

While market forces are at play in the healthcare sector, they are often counteracted by unique factors that can prevent price reductions. These include consolidation, opaque pricing, consumer demographics, insurance coverage, and reimbursement policies.

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