Healthcare Business News
Hospital cost disparities

Growing scrutiny

Variance in hospital charges raises questions

By Rich Daly and Rachel Landen
Posted: May 11, 2013 - 12:01 am ET

Last week's public unveiling of CMS' charges and reimbursements data for about 3,000 hospitals across the country painted an unflattering portrait of the dramatic and sometimes mystifying variation between hospitals treating similar patients in similar markets.

While much of the variation was easily explained by hospital officials, some of it was not.

The massive data dump, sprawled across 160,000 lines in a single Excel spreadsheet, contained the average charges submitted by hospitals for the 100 most prevalent diagnostic related groups. Those charges—based on hospitals' chargemaster fee-for-service rates—in almost all cases far exceeded the average payments for the same admissions. They revealed wide disparities in charged rates, ranging in some cases to 20 to 40 times their peers in other cities or sometimes across town.

The actual CMS payments, which reflected the inpatient prospective payment system's DRG rate adjusted for case severity, teaching, disproportionate share and other factors, reflected a smaller yet still wide disparity. Keck Hospital of USC in Los Angeles, for instance, submitted bills to Medicare at an average undiscounted price of $123,885 for major joint surgery. The CMS reimbursed the hospital only $19,369 on average for the operation.

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Across town at Foothill Presbyterian Hospital, Medicare paid an average of $15,804 for the procedure after receiving an undiscounted charge of $59,416. In other words, though the basic charge at Keck was more than twice as high as at Foothill, its actual reimbursement was only 23% more. “Keck Hospital accepts patients that other hospitals do not, including patients who need revision surgery,” Keck officials said in a written statement. “These cases take longer to complete and may involve lengthy hospital stays.”

The stark differences in charges put hospital officials on the defensive, and most contacted by Modern Healthcare refused to discuss the frequently wide differences in both what Medicare pays and what hospitals in the same markets charge. Carol Farron, community development director at Lodi (Calif.) Memorial Hospital, called it “a convoluted system with no logical solution.”

“It's such a complicated issue, and I think the problem is there's a difference between charges and costs, and that's driven by the federal government,” Farron said.

For their part, federal officials took aim at the yawning gap between their DRG payment rates and the charges submitted by the nation's hospitals. “These rates can vary massively in ways that cannot be easily explained,” HHS Secretary Kathleen Sebelius said in a call with reporters.

Overall, the 100 DRGs reflected $66.7 billion in payments for 7 million discharges or 60% of Medicare's IPPS discharges in fiscal 2011.

Hospital officials were quick to point out that the vast majority of patients never see or pay the undiscounted rates. Private insurers negotiate steep discounts based on their ability to drive patient volume to hospitals. The newly revealed data showed Medicare paying rates that were usually a third or less of the charged rates. And Medicaid pays the lowest rates of all.

But that doesn't mean the chargemaster rates have no impact. People without insurance used to be charged the undiscounted rates, although that practice was ended by the Patient Protection and Affordable Care Act. They now must be charged an average of the hospital's three lowest rates. Insurers whose patients require out-of-network care in another city can sometimes be charged the undiscounted rate as can foreigners coming to the U.S. for treatment.

And none of that explains the vast differences in the top rates, which are unique to each hospital. Their specific costs are added to the charge for each procedure, according to hospital advocates and former hospital officials. For instance, some hospitals not only add in their teaching, uncompensated care and capital costs to each procedure, they offset losses from some procedures with higher profit margins on others.

At Centinela Hospital Medical Center in Inglewood, Calif., where the undiscounted price for a major joint replacement was $220,881, spokesman Steven Brand said the high charge was due to the hospital's treatment of a “higher risk, more senior population.” Such explanations have met with skepticism from federal healthcare officials, who said it defied logic to suggest such huge charges could be due to any hospital cost or the quality of care provided.

“To date, we have not heard any logical reason why there is a 20 times and 40 times variation in chargemaster prices” compared to Medicare payments, Jonathan Blum, director of Medicare for the CMS, said in a call with reporters.

Actual cost data not included

The Obama administration inexplicably didn't release the actual cost data that hospitals submit in their annual cost reports, which show items such as the cost of labor, materials and suppliers and capital investment. Those costs are the basis for its annual updates to the DRG payments.

The cost data are critical, hospital experts said, because the difference between charges and costs is key to understanding whether hospitals are inflating their prices without reason. A CMS spokesman did not respond to questions about whether the agency plans to release a similar compilation of hospital costs for the same procedures.

For years, hospitals have argued that the actual DRG payments are well below their actual cost of providing service. The Medicare Payment Advisory Commission pegged the overall shortfall between Medicare's payments and hospitals' costs in 2011 at 5.8%. Hospitals were projected to lose about 6% per Medicare patient through 2013. Those losses, combined with the even greater financial losses associated with Medicaid patients, add to overall procedure costs, hospital advocates said.

Still, publication of the charges is certain to draw close scrutiny from insurers and competing hospitals. Some experts said it could lead to a compression of charged rates since competitive pressures may encourage the lower-priced hospitals to raise rates while embarrassing the higher-priced hospitals into lowering rates.

The newly published data echo previous research on prices charged to private insurers between regions and within the same market. For instance, a 2010 study by the Center for Studying Health System Change found average inpatient hospital rates charged to four private insurers in eight markets “varied widely” between hospitals. The differences in hospital charges also exceeded Medicare rates by up to 500%. The chargemaster-based prices released last week similarly exceeded Medicare rates but by even wider margins—up to 4,000%.

MedPAC “has found that hospitals with substantial negotiating leverage can allow unit costs to rise because they can obtain higher private insurance rates to offset negative Medicare margins that result from their high costs,” the authors noted.

Health policy experts acknowledged that most patients never face charges near those listed in the CMS database because insurers and Medicare either negotiate or set much lower rates with providers. Among patients who could be impacted are the uninsured, patients with high-deductible policies and people seeking care out of network.

Hospital advocates downplayed the impact of chargemaster-based prices on those groups by highlighting legal protections. Those included the healthcare reform law requirement that hospitals implement a written financial assistance policy and that not-for-profit hospitals limit charges for qualifying patients to amounts billed to insured patients.

“So there really aren't very many people who get billed full charges and even fewer of those even pay,” Caroline Steinberg, vice president for health trends analysis at the American Hospital Association, said in an interview.

The impact of undiscounted prices on people with high-deductible policies has concerned officials at safety net hospitals, said Beth Feldpush, senior vice president for policy and advocacy at the National Association of Public Hospitals and Health Systems. Many such facilities have modified their charity-care programs to cover all of the patient's costs short of the deductible to reduce instances of patients receiving large bills they cannot pay.

The potential impact on hospitals

Some experts see a variety of ways the data release could impact hospitals.

Even as hospital advocates have dismissed the pre-discount charges as merely an artifact of an era before Medicare set fees by statute, some hospitals pored over the data to see what their rivals were charging for services, according to healthcare consultants. Moreover, some still begin their price negotiations with insurers on those charges, while others use a percentage of Medicare fees.

“They may think they could gain some advantage,” Dan Nickelson, a former lobbyist for the Cleveland Clinic, said in an interview. That facility negotiated insurance rates based on Medicare payments, he said.

Federal officials said the public release of the hospital charges may help drive down prices negotiated with private insurers—and the related consumer costs—especially among those hospitals that negotiate based on their chargemaster prices.

“We understand that some private insurers base their payments based upon the charges, so to the extent that these practices can be highlighted that will hopefully lower premiums for those who have private insurance,” Blum of the CMS said.

Publication of the disparate pricing data could spur a legislative push for more price transparency in healthcare. One such bill, the Health Care Price Transparency Promotion Act, sponsored by Rep. Michael Burgess (R-Texas), would require states to collect and release the patient share of costs charged by hospitals and other providers.

Another possible outcome of the CMS release of the hospital charge information is that it could spur a push for uniform pricing, according to some policy experts. But Peter Ubel, professor of business and medicine at Duke University, said in an interview, that he doubted the Obama administration would take on any such push as it continues to focus on the complex rollout of the healthcare overhaul. “Given the likely pushback, that's something I don't see happening until the next administration,” Ubel said.

Follow Rich Daly on Twitter: @MHrdaly

Follow Rachel Landen on Twitter: @MHrlanden

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