Why Are We Not Surprised? Hospital Charges Are The Largest Driver Of Medical Cost Inflation

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In a recent front page report, The New York Times provided multiple examples of outrageously high hospital charges and pointed the finger at hospitals for being one of the principal drivers of rapidly increasing healthcare costs.

Examples of excessive charges included a charge of $2,229 for three stiches and a charge of $1,696 for a dab of skin glue provided to two patients the same afternoon in a California emergency room; and a bill of $3,355 for five stitches at a New York City emergency room. The article also cited costs from a California hospital's chargemaster (price list): $32,901 for an x-ray study of the heart's arteries; $20 for a codeine pill ($ .50 at Walgreen); $4,495 for a CT of the abdominal ($400 at a nearby outpatient center). An inpatient day in a U.S. hospital costs, on average, five times as much as in many other developed countries.

According to an economist cited in the article, "chargemaster fees are basically arbitrary, not connected to underlying costs or market prices. Hospitals can set prices at any level they want. There are no market constraints." Hospitals charge the prices they do because they can. Many hospitals do not face competitive pressure, and patients have little information about pricing and are unable to comparison shop for the best prices.

The Affordable Care Act focuses primarily on providing broader access to health insurance for all Americans. The Act devotes less attention to controlling health care costs. The ACA does include provisions which require hospitals to develop written financial assistance policies to assist patients who are unable to pay the full charge, to observe fair billing and debt collection policies, and to limit charges for patients eligible for financial assistance to the "amounts generally billed" to insured patients for the same services. Such provisions are applicable only to not-for-profit hospitals, however, so approximately 40% of the nation's hospitals are not subject to these requirements. Further, enforcement of these statutory provisions is subject to adoption of final regulations by the IRS, which has not yet occurred. Thus, the few provisions of the ACA which seek to limit hospital charges have not yet been implemented.

Another potential check on rising hospital charges is the ability of insurance companies to negotiate favorable contractual rates for hospital services provided to their insured patients. Such negotiations have little or no effect, however, on charges for uninsured patients, on charges for hospital services which are not covered by insurance, or where the hospitals have strong bargaining positions.           
   
The New York Times article devoted approximately 3,500 words to discussing the problem, but did not even begin to suggest possible solutions. This indicates how difficult it will be to address the problem of high hospital costs. Until such time as regulations effectively limit hospital charges, and increased price transparency, heightened antitrust enforcement, or other market forces promote increased competition among hospitals, high costs for hospital services will continue to escalate U.S. healthcare costs.