Secrets of Hospital Pricing Revealed

A blog about business and economics.
May 8 2013 9:07 AM

Secrets of Hospital Pricing Revealed

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Aaron Lemma receives a flu shot by Dr. Sassan Naderi

Photo by Spencer Platt/Getty Images

The Obama administration took a historic step today and publicly released a database of hospital prices that the federal government has access to thanks to government health care programs. They gave early previews of the data to the New York Times, the Washington Post, and the Huffington Post so they're ahead of the curve on parsing the details. I recommend my friend Jeffrey Young's coverage of the data. But we should all give credit where credit's due: to Time and Steven Brill who really broke this open with a huge February cover story about hospital prices.

The weird thing about Brill's piece is it didn't really reveal anything that people who focus a lot on health care didn't already know. In retrospect, that was the genius of the story. He took a murky situation that's old news to health specialists and made a big fuss about it and the news turned out to be shocking and surprising. Now the government is stepping up by flushing out the full data. That won't, on its own, solve anything. But it will make it much easier for people to make future fusses and that may change things.

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Now remember that when you hear about shocking disparities in hospital charges for different services ("At two hospitals in the Los Angeles area, the cost of the same treatment for pneumonia varies by $100,000") that's not to say that these are the prices people actually pay. The way hospital pricing works is that there's a multitiered system. The hospital starts with an official price that it tries to charge uninsured people who come in over the transom. In a rare case, that person may turn out to be flush with cash and the hospital actually fully collects. More likely the uninsured individual is faced with bills he or she can't pay, and it becomes a matter for the bill collectors and the bankruptcy process. If you're insured, then one of the major services your insurance company provides for you is acting as a bulk purchasing agent that bargains with the hospitals and forces them to accept a lower rate. And if you're covered by Medicare, then the federal government covers the bulk of your bills and does so at a rate determined by the political process and generally much lower than what private insurance would pay. Health care providers mostly put up with Medicare's stinginess because Medicare has such a large client base that it would be foolish to turn it down. Meanwhile, patients don't like it when insurance companies try to restrict their choice of providers but for insurance companies to act as credible bargainers they want the leverage provided by the ability to create an approved providers list. Conversely, when you see consolidation in the hospital market in any given area that makes it easier for hospital to drive prices up.

In political terms what's really striking about this price transparency initiative is how long it took.

In theory, George W Bush's vision for American health care was that everyone should have a high deductible insurance plan plus a tax-subsidized Health Savings Account. Then the idea was people would shop as individual consumers out of their HSA for routine care rather than relying so heavily on third party payment. People have a variety of objections to this vision, some sounder than others, but a key issue here is that it's clearly only going to work in a world of price transparency. But the Bush administration doesn't seem to me to have lifted a finger to do this and make it workable. Which I assume is because HSAs work great as a tax shelter whether or not they work as tax policy, and Bush cared deeply and profoundly about helping rich people pay less taxes and didn't care much about health policy. But if any future Republican administration ever makes consumer-driven health care work, they're going to have to build on this Obama-era transparency drive.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.