Why the Prices Charged by Hospital for Inpatient Care Are Irrelevant

A favorite party game for many of us is to discuss the prices charged by hospitals for our inpatient stays. This is a variant of the apocryphal story of the $40 aspirin. Although somewhat amusing and a good way to keep your guests amused, the prices charged by hospitals are so removed from reality that Elvis sightings might be a better focus for the conversation.

The reasoning behind this statement is established in a podcast interview of Steve Lipstein, CEO of the BJC HealthCare System in St. Louis, by Russ Roberts, the host of Econtalk.The podcast conversation (see: Lipstein on Hospitals) is the most lucid one I have ever heard about the economics of healthcare, due, no doubt, to the high intelligence of both the interviewer and interviewee. Here are the reasons enunciated during the interview why inpatient prices are so fanciful and thus irrelevant:

• A large but variable percentage of inpatient fees are covered by Medicare and Medicaid. The hospital payment schedule to hospitals is established by these governmental bodies themselves and is frequently less than the cost of the care.
• Managed care entities and insurance companies negotiate variable discounts with health systems that are applied against the hospital fee schedules; hospitals keep raising their rates to compensate for the money-losing Medicare/Medicaid patients to achieve, ideally, a 3% operating surplus.
• Other key factors also come into play to account for the spiraling cost of care such as the fact that the patients, the recipients of care, have few incentives to shop for lower cost services or limit the use of expensive procedures. For teaching hospitals, the lower productivity of faculty and inexperienced house officers also needs to be factored into the reimbursement mix.

The conclusion reached by Mr. Lipstein was that, first, the entire healthcare reimbursement system is broken and needs reform. To say that the prices charged for hospital services are independent of market forces and irrelevant is another way of saying that the system is badly broken. Another conclusion is that politicians and bureaucrats probably can't be trusted to reform the system. Most politicians inherently think short-term (i.e., the next election) and want to posture for the voters on evening news and C-SPAN.

If you are an individual who is forced to pay out-of-pocket for hospital services for lack of health insurance, you will be charged the "irrelevant" prices described above unless you negotiate with the hospital to pay the same discounted rates as the private insurance companies. If you are not up to this task, there are strategies for achieving this same goal (see: 10 ways to save on health care costs).

:: Update on 1/23/2009 @ 8:45 a.m.

See: How Do Hospitals Get Paid? A Primer

Comments

[Ajit Alles]

We are to blame for the healthcare mess because we elect politicians and heed their short term messages at election time. We spend an estimated third of our nationwide healthcare budget on billing. If we had a single payer system with one set of billing rules we would immediately cut costs and would also force uniform costs across the sytem with a single relevant price. One can only hope, but I think the system won't get fixed until it breaks and faces extinction like the auto dinosaurs.