The Irrationality of the US Hospital Billing System

Courtesy of Piper Report

Courtesy of Piper Report

By Maya Durvasula.

Imagine you are going grocery shopping with a friend, but before you are allowed in the store, you are both blindfolded, then told to proceed with your shopping. Months later, you receive incomprehensible bills with boxes at the bottom that say: “pay this amount.” Although you two ended up buying more or less similar items, your bill is 10 times that of your friend because you were wearing a blue shirt while shopping and he was wearing grey.

Confused yet? The US hospital billing system will make you think that the Black Friday mob you found yourself trapped in at 4am on Friday morning (even though prices really aren’t lower on Black Friday) was rational.

This convoluted grocery story is, in essence, how the hospital billing system works in most of the country, with the exception of Maryland (though that’s a story best saved for next time). There’s one big difference: when it comes to hospitals, not only are there many, many zeroes added to the end of that grocery bill, but consumers are blindfolded while shopping for medically necessary procedures that are priced using a system that University of California, Davis, Health System CFO William McGowan describes bluntly:

“There is no method to this madness.”

Take my home state of New Mexico, which is currently working on implementing changes to this system, for example. Healthcare costs in New Mexico were at 16.9% of gross state product in 2009, an increase from 5.9% in 1980, according to legislative budget analyses. Put more simply, 17 cents of every dollar New Mexicans earn goes toward healthcare costs.

The billing nightmare facing our hospital system (and fictional grocery store) is two-part: (1) the blindfold – there is no transparency about either price or quality of care; and (2) the random bills based on color of t-shirt – different payers using the same provider pay vastly different (though, with one notable exception, largely exorbitant) prices for the same service. According to a project done by Washington University in St. Louis senior Jaime Rosenthal, hip replacements across the country can range from $11,000 to $125,000.

This system is not only illogical, but also quite devastating. According to a recent Harvard University study, authored by now-U.S. Senator Elizabeth Warren, 62.7% of bankruptcies in the United States can be attributed to debt resulting from illness or other healthcare costs. This isn’t just a question of families lacking insurance either. According to this study, many of these individuals who were pushed into bankruptcy by medical debt were well-educated homeowners, three-quarters of whom had insurance.

This system is irrational, unsustainable, and – given the impact that a lack of transparency often has on uninsured and low-income individuals – immoral, and it warrants prompt reform. In order to make healthcare both transparent and affordable for all, the market for healthcare needs to be restructured so that it functions like other markets: prices need to be central and accessible in all transactions and must be allowed to reflect actual costs. Pricing for healthcare ought to be transparent and uniform at individual providers, eliminating the opacity and discrimination that have created this administrative nightmare of a system.

Some changes are already on the horizon, following the implementation of the Affordable Care Act (ACA), though the specific measures to increase transparency have yet to be implemented. Regardless, under the ACA, hospitals will be required to make their master list of prices – the “chargemaster” publicly available.

It is crucial to note that, although every hospital maintains one of these “chargemasters,” they are sticker prices that are only used when billing uninsured patients; third-party payers (private insurers, the federal government through the Center for Medicare and Medicaid Services) negotiate different, much lower rate schedules. In New Mexico, according to the Santa Fe New Mexican, chargemasters rates are “547 percent higher on average” than the rates for the same procedure charged to Medicare.

Some progress has also been made when it comes to transparency in hospital pricing. Fourteen states have built healthcare cost comparison websites, which include information that is far more extensive than the ACA disclosure requirements mandate. These user-friendly websites, with aggregate healthcare cost data, not only allow stakeholders to compare cost and quality information, but also have the potential to significantly impact the prices paid by patients. A 2013 nationwide study by the University of Chicago found that these cost transparency measures have the ability to reduce the price of uncomplicated, elective procedures by approximately 7 percent, by allowing patients to shop around for the highest quality care with the lowest price tag and giving doctors an indication of the prices of the procedures that they are recommending.

Implementation of this kind of system could effectively remove the blindfold. But since each shopper is paying a different price for the same service, the question then becomes which prices should be released. Payment schedules, as they exist today, are excessively and incomprehensibly complex, meaning that releasing all of the payment information for every purchaser would not provide much meaningful information to patients.

The more logical solution, then, would be to streamline the entire payment process, by implementing a system in which every patient (or payer on behalf of the patient) pays the same rate for the same service from the same hospital. With insurers across the country who have significantly consolidated their grasps on insurance markets, resulting in one or two companies in each state that control most of the market, these groups have used their size as leverage to drive down the prices that they pay for hospital services. With large discounts given to patients insured by large insurers, the costs are often shifted onto others – individuals insured by smaller companies, as well as the uninsured.

Price discrimination is often hailed as a “Robin Hood” solution to the hospital billing conundrum, with higher prices for some meaning lower prices for others. However, Princeton economist and health policy expert (and proponent of this uniform billing system – the “all-payer” billing model) Uwe Reinhardt argues that no theory of distributive justice or ethics would dictate “charging higher prices to small insurers than to large insurers… and [levying exorbitant charges] on uninsured, middle-class Americans who are sometimes hounded mercilessly for payment.”

The end of price discrimination would mean that all insurers, including the federal government, would pay the same price at individual providers. To determine price schedules, hospitals would negotiate with insurers as they do today, the primary difference being that resulting prices would be the same for all payers and fully transparent. Hospitals will need the flexibility to forgive uncompensated care; some of those costs will still be shifted onto the rest of the payers because they will be factored into the price schedule.

Families across the country struggle daily to pay indecipherable medical bills, while hospitals themselves fight to keep their doors open. In August 2012, 23 health care experts co-authored a piece in the New England Journal of Medicine titled, “A Systemic Approach to Containing Health Care Spending,” in which they advocated for this type of system – more transparency and an end to price discrimination. While the American healthcare system requires far more than the removal of a blindfold and the implementation of an all-payer system in order to be healthy itself, these changes are certainly a start. 


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