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Blog Post

Charges (mostly) don't matter

June 9, 2015

    Dan Diamond, Executive Editor

    "Extreme Markup: The Fifty US Hospitals With The Highest Charge-To-Cost Ratios," a Health Affairs study reported on Monday.

    Cue the extreme headlines.

    (You can see our own summary in the Daily Briefing.)

    There's just one question most coverage failed to ask.

    Do hospitals' mythical prices matter?

    "Not in general," says Martin Gaynor.

    Gaynor's a health economist and professor at Carnegie Mellon, but has special perspective here: Between 2013 and 2014, he ran the FTC's Bureau of Economics. He's one of the nation's most respected voices on studying health care inefficiency and competition. He's known for scrutinizing hospitals, not blindly defending them.

    Yet Gaynor (as well as other noted economists) think the fuss over hospital charges is overblown.

    "These are made-up numbers," Harvard professor Amitabh Chandra posted on Twitter. The "kind of rubbish that an industry that doesn't know its costs but wants handouts would rely on."

    Why should we discount these numbers? Because hospital "prices" are wildly inflated, loose bargaining tools used by providers as they negotiate over what they actually get paid. And researchers say there's no clear correlation between hospitals' charges and costs, either.

    "A higher list price does not help in negotiations," Chandra pointed out to me. "By [that] logic, hospitals would pick list-prices of infinity."

    (You can see more on the difference between hospital charges and hospital costs in this primer.)

    "Charges do not represent what the overwhelming majority of people with insurance" pay, Gaynor elaborated by email.

    Gaynor acknowledged that charge data is useful in some settings:

    • Perspective on of out-of-network billing
    • Some sense for the prices faced by the uninsured (although the uninsured increasingly pay just a fraction of these prices)
    • Medicare outlier payments

    But ultimately, hospitals' list prices are just one symptom of America's broken health system—not the cause.

    "We do want hospital prices to be reined in, but that requires anti-trust enforcement, more competition between hospitals [as well as] between plans, and better negotiations," Chandra said.

    And after years of fussing about inflated prices, we don't really need more outrage over hospitals' markups, the economists suggested.

    "What we really need are data on actual transaction prices paid by private insurers," Gaynor added. 

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