May 31, 2013 -- Major joint replacement surgery costs $128,000 at a hospital in San Francisco and $59,000 at one in Chicago. Post-heart attack care ranges from $34,000 in a Little Rock facility to $81,000 in a Miami hospital.
The wide variation in pricing among U.S. hospitals became public when the federal government recently released prices charged by more than 3,000 hospitals. The Department of Health and Human Services (HHS) said it released the data to fulfill a mandate of the Affordable Care Act to bring more transparency to hospital pricing practices.
Yet, do these numbers really help people save money and make more informed health care choices?
WebMD went to a health care economist, the American Hospital Association (AHA), and the HHS for answers.
What does the information on hospital pricing show?
The HHS data shows the prices hospitals in different markets charged in 2011 for the 100 most common inpatient services for Medicare patients. It also shows what the government paid to the hospitals for those services. The numbers are rarely the same.
Medicare sets a fixed payment rate for the overall type of service or treatment, such as joint replacement surgery, as opposed to the number of times a doctor sees a patient or the number of procedures a patient receives during one hospital stay. This is known as paying by episode. The rate it pays varies by hospital. Things affecting that rate include the number of low-income or sicker people the hospital serves and whether the hospital is an educational teaching facility.
Why is there such a big cost difference for the same services?
Hospital rates are based on a number of factors, according to the American Hospital Association, including:
- Scope of services provided
- Whether the hospital serves a large portion of poorer and sicker patients
- Community reputation of the hospital
The difference in costs between one hospital and another is a "byproduct" of the marketplace, says the AHA.
Caroline Steinberg, the AHA's vice president of trends analysis, believes the focus should shift from pricing to what hospitals actually collect for their services. Medicare and private insurer payments to hospitals are typically far lower than the stated cost. Medicare sets the rate of reimbursement, even though it adjusts the rates according to factors like the number of poorer people the hospital serves, Steinberg says.
But economist William Custer, PhD, director of health services research at the Institute of Health Administration at Georgia State University, says these factors can't explain the cost variations.
"Hospitals have historically set prices based on their own methodology. One hospital can set prices three times greater than another; there's no real pattern," says Custer. "If we had a healthy health services market, you would expect those prices to be much closer aligned."
What does the publication of hospital pricing mean for the average person?
The bottom line: not much. The charges made public are for Medicare patients, and Medicare pays standard amounts for care. If you're covered by Medicare, the deductibles and co-insurance you pay for hospitalization are also set amounts.
For people who carry private insurance -- a PPO or HMO -- the pricing may also not be relevant to what they pay for inpatient care as long as they're in-network. That's because hospitals charge private insurers a rate they negotiate between themselves. Very few people have traditional insurance plans in which they pay the difference between what the hospital charges for a service and what the insurer will pay.
There are still other rates for people without health insurance. They need to negotiate with the hospital themselves. Knowing what Medicare pays is a good place to start negotiations.
If they aren't going to be paid what they charge, why do hospitals even set prices?
The hospital charges, theoretically, reflect the cost of providing a service. Some insured people have higher out-of-pocket costs that could be affected by the rate a particular hospital charges, and uninsured people might be able to use the data to get a baseline cost for an inpatient procedure, according to an HHS spokesperson.
The release of the pricing data was intended to get people to ask providers about the cost of their own health care, according to HHS. Ultimately, the agency believes that having the information will empower people and pressure health providers to make procedures more affordable.
Will this practice be the same when the Affordable Care Act takes effect?
As the government tries to drive down costs of health care, insurance companies will be under greater pressure to get better rates in hospitals, says Custer.
"Insurers may be squeezed a bit between consumers and providers," he says.
Under the Affordable Care Act, hospitals will follow the lead of the Medicare pricing system, billing for episodes rather than services. And rates may be capped for the episode, depending on whether it's stroke care or internal bleeding, for example.
That's a positive, says Custer. "Right now, we pay for each service," he says. "If we begin to pay for an episode of care and weigh payment on the quality of care provided, providers will be given incentive to give only care that is necessary and to identify the most appropriate services.''
So, how should ordinary people choose a hospital if they need one?
Think quality rather than cost.
Pricing varies for reasons other than the actual cost of the services provided, anyway, so you're better off looking at quality-of-care information, says Custer.
That's not easy information to gather these days. But some of that data are available in the "Hospital Compare'' section of the Department of Health and Human Services web site.
"Consumers are going to have to do a lot more to make choices," he says.
The American Academy of Family Physicians says in a statement that people need both pricing and quality-of-care data to make informed choices. "That would allow patients to have a conversation with their primary care physician and then make the best decision for their individual needs," the statement reads.
If you're not on Medicare, will you be able to find out how much a service will cost you?
That's questionable. HHS is providing $87 million in grants to states to set up data review centers, with the goal of improving health pricing oversight and transparency.
The Rate Review Grant Program would provide states with the money to collect, analyze, and publish health pricing and medical claims reimbursement information.
Also, there's a movement underway, mostly led by large employers, to gain greater price transparency from health care providers. Today, many firms that provide employee health benefits, and most insurers, offer a pricing tool to help people determine their medical costs before they go for care. The goal in part is to encourage people to become better health care consumers by comparing providers on price vs. quality.
Steinberg of the AHA says the organization supports the drive for greater transparency and accountability. She says insurance companies should make pricing data available to their subscribers so they can go online and find out exactly what their financial obligation is -- the rates negotiated by their carrier and their copays.
"That needs to come from the payers,'' Steinberg says. "We're supportive of all stakeholders coming together and providing meaningful information to consumers.''