The value in price transparency

The controversy surrounding hospital pricing resurfaced last week after the CMS released hospital charges and payments for the top 100 diagnosis-related groups. The data revealed a wide disparity between DRG payments made to different hospitals in the same regions or states. It also showed a wide disparity between submitted charges and average payments, which received much less attention.

It's the second time in recent months that the issue has made headlines in the popular press. In March, Time magazine ran a 26,000-word cover story, “Bitter pill: Why medical bills are killing us.” Writer Steven Brill focused most on the exorbitant prices that hospitals nominally charge without shedding much light on the disparity between charges and payments.

Inside the industry, it's no secret that the charges hospitals send to Medicare have almost nothing to do with eventual reimbursements. The CMS pays no attention to the bills submitted to its fee-for-service program, which still covers about 75% of beneficiaries. The agency makes a preset DRG payment—usually a third or less of the submitted charges—and adjusts for factors such as the severity of the condition, whether the institution is a teaching hospital and whether it treats a disproportionate share of the uninsured.

The submitted charges also have nothing to do with what hospitals get paid from Medicaid, which is run by individual states and generally pays the lowest rates. Nor do they reflect the payments received from private insurers, which usually negotiate steep discounts from published charges based on the promise of delivering a high volume of patients from the covered lives they represent within a hospital's service territory.

The rap against the so-called chargemaster rates was that they wound up hitting those who were least able to afford them. When uninsured people landed on a hospital's doorstep and received emergency or much-needed care, they often received eye-popping bills that they ignored at their own peril. Many got hounded by aggressive collection agencies or filed for bankruptcy.

Reform, in theory at least, reduced that as a public policy issue. Even if people remain uninsured next year either by choice or because their state has refused to expand Medicaid, the not-for-profit hospitals that contain more than three-quarters of all hospital beds in the U.S. are now required to offer charity care and financial assistance to maintain their tax exemption, and they must base their charges for the uninsured on an average of their three lowest negotiated insurance rates.

But those realities shouldn't subtract from the importance of the public disclosure of the huge pricing disparities between hospital charges within the same state or region or between states and regions. There's a lot to learn from the new transparency in hospital pricing.

In Florida, for instance, why does the Mayo Clinic in Jacksonville charge Medicare $49,538 on average for a permanent cardiac pacemaker implant while South Miami Hospital charges $122,838? While the difference between those charges and what the CMS actually pays is much less (Mayo received on average $16,800 in 2011 compared to South Miami's $25,630), there clearly is something at work besides severity of illness or special payments when two facilities—both with stellar reputations for quality—have such different charges and collections.

As the payment and healthcare delivery systems move toward capitated payments, narrow networks and accountable care, such disparities are going to matter more and more. Pricing transparency has been touted as a boon to consumer-driven medicine. But it's more likely that the new transparency will force more hospitals and delivery systems to look inward at why they are so out of line with their competitors. If they don't, they can be certain that insurers—both public and private—will.

Merrill Goozner, Editor

Follow Merrill Goozner on Twitter: @MHgoozner