The Department of Health and Human Services (HHS) released new data on May 8, showing significant variation in what hospitals charge for inpatient services. The release is part of a health care transparency initiative designed to help patients compare charges for common procedures. Increasing transparency is an important step toward effective health care reform, but simply providing data won’t help patients navigate and better understand the complex system used to price and pay for health care services.
To chart a path forward, we must understand how our current system was built and why it is so complicated. Many charges were established before hospitals could accurately assess costs. The assessment has improved substantially, but the payment system formed around hospital chargemasters—extraordinarily lengthy lists (some containing up to 45,000 items) of the costs of every hospital procedure and supply item. While the chargemaster reflects individual item prices, the prices that hospitals are actually paid are largely reflective of the payment rates negotiated by private insurers and the extensive payment rules that Medicare and Medicaid follow.
Medicare relies on a system of centrally administered prices by paying hospitals a flat fee for groups of services that are assigned a relative payment weight, multiplied by a conversion factor, and then adjusted for a range of variations that impact cost of care (such as the regional cost of labor and the costs associated with training residents). Medicaid also uses flat fees for groups of services, per diem payments, or cost reimbursement based on fee schedule unique to the state and the setting in which the service is provided. Commercial insurers apply steep discounts to hospital charges, negotiate rates on contracts irrespective of the charges, or pay flat charges for cases (modeled to some degree off of the Medicare system).
In short, the prospective payment system, flat payment arrangements, and contractually negotiated rates have made hospital billed charges much less meaningful. Therefore, solely making information about charges available to the public does not generally help patients become informed health care consumers.
It is clear that the system is not optimal. It is burdensome for hospitals to manage and update extensive chargemasters. It can be confusing and stressful for patients when they look at charges on their bills, even if they understand that the charges are much higher than the prices they or their insurers will have to pay. Further, billed charges can matter for patients whose insurers do not have contracts based on discounted charges, or who are required to pay coinsurance based on a portion of the hospital bill. While uninsured patients were billed based on the chargemaster in the past, many hospitals now offer means-tested discounts for these patients. Additionally, those patients with very low incomes may receive free care.
So where do we go from here?
Hospitals and health care policy experts are evaluating better ways to price health care services. Academic medical centers, which are responsible for training the nation’s future doctors as well as providing quality care, are committed to transparency and standardizing different cost accounting methods and assumptions used to capture costs across health systems. This is a challenge to all stakeholders in the health care system, including private payers and government health care programs. We all play a role in understanding and reflecting actual costs, as well as in simplifying payment systems and their communication to consumers. We must contain costs together while maintaining the quality of health care we deliver to our nation’s patients.