Two Simple Steps to Immediately End Hospital Overcharging

Update to this post on August 4, 2013: If you want to read about one organization that is doing it right, not a hospital, but a surgery center that is not overcharging, but driving prices down in their market, then read about the Oklahoma Surgical Center.

This was originally posted more than five years ago (on January 18, 2008) but is being read now, a lot — so I’m re-posting it, unchanged below:

The jointly commissioned report on hospital prices, by the California Public Employees’ Retirement System (CALPERS) and the Pacific Business Group, deserves more attention.

Click here to download the eleven page executive summary study.

The heart of the summary of the study’s finding is contained in the CALPERS media release, quoted extensively below:

“A new study designed to uncover the key to understanding hospital prices confirms what large purchasers have long suspected: a disturbing number of hospitals appear to be grossly overcharging and not being held accountable.

“The study analyzed how hospitals compare with each other relative to their total costs of service, the total amount they charge private insurers and patients (after negotiated discounts), and a ratio of charges to costs – after adjusting for patient severity and regional wage differences – showing relative hospital markups.

“Among the troubling findings in the report were that:

  • Private payers, such as employers and their covered employees, pay about 40 percent more than they should to make up for both shortfalls from the uninsured and government reimbursement programs, such as Medicare and Medi-Cal, and hospital profits.
  • There are wide and unexplained regional differences in what hospitals are charging private insurers and patients. For example, the average price paid to hospitals in the Sacramento region was 30 percent higher than the statewide average for the same mix of hospital services – even after adjusting for wage differences. Across the state, the markup for some hospitals is about five times that of others.
  • These differences would appear to be due primarily to variation in hospital pricing policies related to market conditions. They cannot be explained by charity and indigent care or by teaching status. For example, several of the major teaching hospitals in the state were found to have prices at or below their regionally-adjusted norms.

“This report underscores what we have long suspected: that some hospitals are basing their prices to private insurers and patients on what they can get away with,” said Peter V. Lee, Chief Executive Officer of PBGH. “Not only do we see a vast disconnect between hospitals costs and what they charge, but to add insult to injury, it is incredibly difficult for patients and purchasers to do anything about it.”

“This is the second time in five years that a study has shown evidence that hospital pricing is not related to costs of service for many hospitals.

“This new study validates our decision three years ago to drop hospitals where the price made no sense,” said George Diehr, Chair of the CalPERS Health Benefits Committee. “It was extraordinarily difficult to figure it out, but once we did, we were able to narrow our hospital network. And that has saved taxpayers more than $73 million so far. We believe this study is just the tip of the iceberg. A closer industry look at hospital prices and costs at the specific service level could help expose the wrongdoing and help purchasers and patients get the best value for their health care dollar.”

In particular, the courage shown in the CALPERS media release, by specifically stating that this study exposes only the “tip of the iceberg,” and that a closer look at hospital costs versus service levels “could help expose the wrongdoing,” is reflective of the moral certainty of the study’s sponsors that they used the phrase “the wrongdoing.” ( CALPERS did not say there may be wrong doing.)

Of course there is wrongdoing by hospitals in their prices. When you have markups about “five times that of others,” by some hospitals — and those markups cannot be explained by “by charity and indigent care or by teaching status,” then the only explanation can be that these hospitals are using their system of hiding their prices through incomprehensible bills, overcharges, and their anti-trust exemption to profiteer and price-gouge people and employers whose health and lives as they now know them are at stake. These hospitals prey on the weak, the sick and the dying — forcing massive insurance premiums on employers and the public in general, causing more Americans to be uninsured because they cannot afford insurance — and usually have an image of the community of a place of caring and healing.

There are two simple steps that can and should be taken immediately by President Bush:

1. End the anti-trust exemption granted hospitals by the U.S. Justice Department and Federal Trade Commission under the Clinton administration, which allows hospitals to share their prices with each other and price fix their prices with their “competitors;” and,

2. Force all hospitals to print on each patient’s bill what Medicare would have paid for the same products and services that patient received, and what the price that the most-favored private payer would have paid for that patient’s treatment.

The first step could be done by President Bush via an Executive Order. (This would be an excellent follow-up step to President Bush’s recently issued executive order on hospital price transparency.)

The second step could be mandated by Medicare for any hospital that expects to be paid by Medicare for any services. As far as the billing software, every single hospital has that in place and up and running, so printing the what-Medicare-would-have-paid-for-your-procedures-and-visit-to-our-hospital, would be easily done by every single U.S. hospital.

The entire reason that this study was even able to be completed by the actuarial firm Milliman is because California is the only state in the country that has OSHPOD reports (California Office of Statewide Health Planning and Development) that detail the amounts billed, amounts collected and the actual costs for every hospital in the State of California.

Finally, every state should mandate every hospital in their state must complete the same OSHPOD reports that California hospitals now must submit annually.

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