May 12, 2013

Why do hospital costs vary so widely?

Industry leaders try to answer that question after last week’s release of new data, but they caution that ‘almost nobody pays those prices.’

By Jessica Hall jhall@pressherald.com
Staff Writer

Consumers gained access for the first time to the rates charged by hospitals for the most common inpatient procedures, but for the average patient the data won't matter.

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SOME EXAMPLES

The lowest and highest hospital charges for three procedures:

MAJOR JOINT REPLACEMENT

The Aroostook Medical Center, Presque Isle: $55,425

Cary Medical Center, Caribou: $22,870

RESPIRATORY INFECTIONS
WITH MAJOR COMPLICATIONS

The Aroostook Medical Center: $62,029

Mercy Hospital, Portland: $20,496

CHRONIC OBSTRUCTIVE
PULMONARY DISEASE

Inland Hospital, Waterville: $18,978

Central Maine Medical Center, Lewiston: $8,720

The Maine Hospital Association estimated that fewer than 5 percent of Maine hospital patients would get bills reflecting sticker prices, which are known in the industry as "chargemaster rates." The bulk of patients get coverage through private insurance or through government programs, or qualify for free care from hospitals, the hospital association said.

The release of data from the Centers for Medicare and Medicaid Services, made public for the first time last week, listed the amounts 3,300 U.S. hospitals charged for the 100 most common inpatient procedures. The figures showed the average price charged by each hospital, as well as the lower amount actually paid by Medicare, the government program for the eldery.

"It was packaged as being helpful for consumers. But hospital prices are really the sticker price on a car. No one pays that price. It's misleading and not helpful," said Alwyn Cassil, director of public affairs for the Center for Studying Health System Change in Washington, D.C. "Some people may think if there's higher charges, that there's quality there, but there's no direct correlation."

The data showed wide swings in hospital charges in Maine and across the country.

For a major joint replacement, The Aroostook Medical Center in Presque Isle charged $55,425, above the national average and more than twice the amount charged, $22,870, by Cary Medical Center, which is just 15 miles away in Caribou. Simple pneumonia costs $20,058 to treat at York Hospital, but only $5,402 at Northern Maine Medical Center in Fort Kent.

Nationally, the range of prices was even more extreme. Average inpatient charges for a joint replacement ranged from a low of $5,300 at a hospital in Ada, Okla., to a high of $223,000 at a hospital in Monterey Park, Calif.

"It's interesting but quite irrelevant to almost anyone," said Maine Hospital Association President Steve Michaud. "People understandably get frustrated when they see the variation, but almost nobody pays those prices."

Medicare itself also doesn't pay those rates. For example, Medicare doles out just $16,342 to The Aroostook Medical Center for a major joint replacement -- far below the hospital's $55,425 charge.

But why the wide variation in hospital prices?

"They vary that widely because they can," Cassil said. "The issue isn't just that they vary so much but also that the prices are so high in absolute terms. This gets down to why you have an $80 aspirin."

Hospitals charge more for some services to offset losses in other departments or services. Hospitals, for example, can't bill for nursing labor or the cost of teaching new doctors. Some services, such as a burn unit, may not generate revenues but have high costs. For hospitals with small patient volumes, there are also fewer people to spread the costs across. So a small rural hospital that does a dozen joint replacements a year might have higher average costs than an urban hospital that does hundreds, Michaud said.

Bruce Sandstrom, vice president and chief financial officer at The Aroostook Medical Center, said having a small patient population means that even a few severe cases can trigger big swings in average charges.

Looking at one area -- respiratory infections involving major complications -- Aroostook charged $62,029, compared with a low of $28,443 at Eastern Maine Medical Center in Bangor.

Sandstrom said Aroostook had 12 cases of respiratory infection in 2011 that had wide variations in their lengths of stay. One case involved a patient who was hospitalized for 29 days at a cost of $147,000. Excluding the five longest cases, Aroostook's average cost to treat respiratory infections would have fallen to $35,000, he said.

As a rural hospital, Aroostook has a high population of government-covered patients. Medicare and MaineCare pay lower rates than many hospital costs.

"What hospitals do in order to make up the low cost paid by the government is cost-shift to other payers," Sandstrom said.

Aroostook also provides some services that lose money, such as dialysis services and a hospital-based ambulance service for 16 communities, Sandstrom said.

"We have to charge in other areas to subsidize the money-losing areas," Sandstrom said.

Mer Doucette, chief financial officer of Eastern Maine Medical Center, said he agreed that it must be maddening for the average consumer to see a wide range of charges for the same procedures or hear that hospitals charge higher prices for one service to offset losses in another.

"On the surface, it looks outrageous," said Doucette, who emphasized that hospital pricing policies are complex and hard to explain.

Overall, Eastern Maine Medical Center sets its prices to maintain a 3 percent profit margin, Doucette said. That compares with profit margins as high as 10 percent or 20 percent at for-profit hospitals.

"Individual hospitals set individual prices and they were set years ago. They get bumped up every year," Doucette said. "There is no industry standard that if you get something for $1, you charge $3 for it. There is no standard pricing regulation."

Within each category of the 100 most common procedures, a range of issues plays into pricing, such as the severity of sickness of the patient, the length of time in the hospital, the amount of free care provided at that hospital, the percentage of government-covered patients at the center and the labor rates for that market, Doucette said.

Since hospitals get paid lower rates from government programs such as Medicare and MaineCare, they offset that by charging higher rates to insurers and private-pay customers.

"This is very old news. The hospital chargemaster rates and the real payments have been disconnected since the 1960s," sad Phil Kalin, president and chief executive for the Center for Improving Value in Health Care in Colorado. "But transparency is good for all the different stakeholders. Sunlight's a great disinfectant."

Joe Ditre, executive director for Consumers for Affordable Health Care, said patients might not understand all the variables that affect hospital pricing, but they will get the general idea.

"Consumers and small businesses can start demanding some lowering of prices," Ditre said. "You're not going to negotiate prices when you're in an emergency room or on a gurney, but for consumers with high-deductible plans, they might now try to ask for better rates."

Nancy Morris, communications director for the Maine Health Management Coalition, said the data on hospital charges are a first step to more consumer power.

"A taboo has been broken, so now more and more health care data may follow," Morris said. "But cost is a very poor indicator of the safeness and effectiveness of health care. Price is one thing, but quality is another."

The Medicare database also has limited information on the top 100 procedures for the population served by Medicare, which is generally over 65 years. Services such as maternity and neonatal care, for example, are not included.

Morris urged consumers to check multiple databases on quality statistics when weighing where to get procedures. She suggested www.leapfroggroup.org; www.getbettermaine.org; www.hospitalcompare.hhs.gov and www.whynotthebest.org.

"There is more information out there about what Target sells than the information you can get about care for your newborn or care for your parents," Morris said.

Even savvy consumers who examine prices and quality data may not have much choice in where they get care. Often, patients go where their doctor has hospital privileges.

That is beginning to change, though. Patients are starting to shop around or look for ways to lower their co-payments by going to certain doctors in their networks, Sandstrom said.

Plus, payment systems are changing to compensate hospitals based on a patient's health outcome rather than a fee for each service provided.

"The whole delivery model is changing," Sandstrom said. "We're providing care to keep people healthier and away from emergency departments. It's in the very early stages of change, but we're getting there."

Jessica Hall can be contacted at 791-6316 or at:

jhall@pressherald.com

 

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