Stricter chargemaster regulations needed to rein in healthcare pricing

Price transparency has dogged hospitals and health systems for years, and while the public scrutiny of how charges are set comes and goes, real-world implications tax patients on a daily basis. Take the case of a family in Southern California. After a three-hour visit to the emergency room, a young girl left with a headache and a $4,875 bill.

The family was charged three times the fair and customary price for a CT scan-about $2,000-to see if the girl's fall caused head trauma, said Lisa Berry Blackstock, a patient advocate the family hired to negotiate a lower fee. The family's high-deductible health plan meant they had to cover the entire cost.

The root of the problem? The chargemaster, Blackstock said. Many states don't regulate the itemized lists of procedure charges, which has led to increasing healthcare costs and drastic variations in procedure prices. Hospitals typically have free rein to set procedure prices with the understanding that payers will meet them somewhere in the middle.

With payers and consumer advocates calling for greater price transparency though, chargemasters have come under increased scrutiny during the past few years. The issue gained broader public awareness in 2014 with the publication of Steven Brill's Bitter Pill, an expose on the nation's healthcare system.

“There are no boundaries to what they can and can't do. I think it's terrifying,” Blackstock said, adding that one of her clients was charged $1,174 for an antibiotic.

Hospitals use the documents-which are kept in relative secrecy-to negotiate with third-party payers and generate revenue, often at the expense of the uninsured and out-of-network patients, researchers and experts said.

“A viral upward pressure on chargemasters has led to higher healthcare costs across the board,” said George Nation, professor of law and business at Lehigh University. “These list prices do have an impact-hospitals have every incentive to keep raising them and no incentive not to.”

Chargemaster prices have been steadily climbing, with some more than doubling in the past decade. While hospitals don't typically receive the full list price in the chargemaster, the uninsured and out-of-network patients are generally charged the full amount. Those prices have little bearing on the actual cost or quality of the procedure, according to a recent Health Affairs study.

Publishing charge-to-cost ratios, capping charges on the uninsured and structuring charges around Medicare's diagnosis-related groups would rein in costs, economists and healthcare experts said.

“The problem of surprise bills from the chargemaster is even more pernicious,” said Barak Richman, a law professor at Duke University School of Law. “It's almost akin to stealing-stealing for the purpose of obtaining leverage for subsequent negotiations.”

When health insurance became even more common due to the enactment of Medicare and Medicaid in 1965, insurers generally reimbursed hospitals based on the cost plus a 10% supplement for administrative work, Nation said.

By the early 1990s, government insurers tightened their reimbursements through their own case-based system using DRGs. Meanwhile, private insurers were paying hospitals lower negotiated discounted rates. Hospitals tried to make up the difference by raising chargemaster rates, resulting in an increasing gap between charges and prices paid by most insurers.

When Medicare and Medicaid reimbursements didn't cover the entire cost of a procedure, costs were shifted, said Joe Fifer, CEO of the Healthcare Financial Management Association.

“A hospital cannot operate in a break-even environment; they have to make money,” Fifer said. “That comes from the cost-shift into the commercial payer environment, where some contracts are tied to a percentage of the chargemaster.”

As chargemaster prices rise, higher reimbursements follow. An additional dollar in list prices for hospital procedures translated to a 15-cent increase in payment from private insurers, the Health Affairs study said.

Certain not-for-profit hospitals would use higher chargemasters to artificially inflate their charity care, healthcare experts said. The Internal Revenue Service tried to thwart that practice in 2008 when it required hospitals to calculate charitable and uncompensated care at cost. Yet some providers still game the system, experts said, and providers could likely find ways to circumvent direct government intervention.

Some healthcare executives have been told not to share chargemasters with other hospitals because it could lead to antitrust issues and collusion, former healthcare executives said. Part of the problem is that the chargemasters are not a reflection of the free market, Richman said.

“Chargemasters rise to increase reimbursement rates and Medicare payments as well, and there is no meaningful market check to counteract it,” he said. “And yes, the uninsured are injured deeply, but ultimately so are the insured because the chargemaster prices are leveraged to force insurers into more-expensive contracts.”

For the insured, higher charges are used to threaten plans with excessive out-of-network charges for ER patients if the plan doesn't agree to higher in-network prices, said Glenn Melnick, an economist at University of Southern California's Schaeffer Center for Health Policy & Economics. Regulations limiting what hospitals can collect from the uninsured and out-of-network patients, possibly structured around government reimbursement levels, would limit the ability of hospitals to manipulate chargemasters to raise prices, he said.

“These charge amounts are often more a reflection of the level of competition rather than any measure of value,” said Suzanne Delbanco, executive director of Catalyst for Payment Reform, adding that barriers to entry into the healthcare market should be eliminated to create competition.

Ideally, providers would compete against each other to provide outcomes at the best price, said David Lansky, CEO of the Pacific Business Group on Health, a not-for-profit that helps businesses manage healthcare costs. Medicare and other payers are utilizing alternative payment models to push the broader reimbursement conversation toward value rather than individual unit prices, he said.

A handful of states have enacted legislation that prohibits providers from charging patients for the gap between chargemaster prices and a payer's reimbursement. California's Hospital Fair Pricing Act went into effect in 2007, which capped what hospitals can collect from low-income, uninsured patients at the Medicare reimbursement level.

Healthcare systems in Maryland are paid the same amount by all government and private insurers as regulated by a state commission. West Virginia regulates hospitals' chargemasters to limit prices. Many states have also enacted laws that aim to increase transparency, which can be effective as long as the information is understandable through bundled payments rather than itemized charges, Fifer said. The HFMA in 2014 issued a report on price transparency which, among other things, called on hospitals to provide price information that clearly tells patients “what services are and are not included in their estimates, and offer other relevant information, such as quality and safety data, where available.”

Disseminating charge-to-cost ratios would better inform consumers, and direct regulatory intervention could work when it comes to the uninsured or out-of-network patients, experts said.

Hospitals should be required to price their services based on Medicare DRG codes, publish the average amount accepted from private insurers and charge no more than 115% of that average to the uninsured or out-of-network patient, Nation said.

Whether the government needs to take more control or health systems need to provide more information to consumers, something needs to change-the system is broken, he said.

“We're at a pivotal point because the numbers have gotten so high,” Nation said. “It's daunting.”