If she had been eligible for Medicare, the hospital would have charged the government $10,000 for the services it provided to her, with Medicare picking up most of the tab. But lacking insurance, she was billed directly from the hospital, and not for a mere $10,000. The total charge: $120,000!
That 1200% markup is extreme. But out of the 50 U.S. hospitals with the largest price markups, 49 are for-profit institutions, marking up charges 9 to 12 times above what Medicare would pay. That is the conclusion drawn in a recent study published in Health Affairs. The U.S. hospital industry has a price problem. And as it turns out, that problem is especially problematic at some of our largest for-profit hospital chains.
Before I dig in to the details of these markups, let me provide a quick refresher on hospital pricing. If you call up the nearest hospital and ask what they charge for, say, a hip replacement, you will quickly learn that most hospitals don’t charge a single price for this procedure. (To keep things simple, let’s ignore the physician fee part of this equation, and just stick with the hospital charge.) The hospital will have a Medicaid price, and a Medicare price. They will have a price they charge BlueCross, and another they charge Cigna, and yet other prices for yet other insurance companies, each price the result of company to company negotiation. And finally, they will have the charge master price – the amount they bill for people without insurance, or for people receiving the procedure outside of their insurance network, or for people paying for the procedure with workers’ compensation insurance. These charge master prices were the main focus of Steven Brills’ influential Bitter Pill essay in TIME Magazine. And as I’ve written about before, charge master prices are often arrived at capriciously. Some experts might even contend that such prices don’t matter much because so few patients, or payers, pay this full price.
But as it turns out, these prices are not completely capricious, and for-profit hospitals raise their prices for very savvy financial reasons. You see, the charge master can be a starting point, what behavioral economists call an “anchor,” for negotiations with payers. In addition, high charge master prices pad the bottom line for hospitals, whenever they serve patients who pay the full price. And there remain a large number of people in the United States who, despite the Affordable Care Act, do not have health insurance and therefore will be charged this full price.