Study finds only limited correlation between hospital 'chargemasters' and insurer payments

List prices for hospital procedures might reflect strategic business decisions, but they are not strongly correlated with the quality of care provided, according to a study published Monday in Health Affairs,.

Hospital "chargemasters"—or the prices that a hospital lists for a given procedure—do not represent the actual amount that an insurance company or uninsured patient would pay for a procedure. List prices vary widely across hospitals and, on average, are set more than three times what hospitals ultimately are paid for providing care. According to study authors Michael Batty, an economist at the Federal Reserve Board, and Benedic Ippolito, an economist at the American Enterprise Institute, hospitals often set the list prices high in an effort to gain leverage when negotiating with third party payers.

Some observers argue that high list prices can pose a heavy burden on uninsured patients and, increasingly, are contributing to surprise medical bills among insured patients who are treated by an out-of-network provider.

But, to date, the authors note that "it has been difficult to understand the role that list prices play in health care," in part "because hospitals are reluctant to reveal how they set list prices, and because information on confidentially negotiated payments is limited."

Study details

For the study, Batty and Ippolito examined information from different data sets to examine list price variation, as well as the effect they have on payments and quality of care.   

To measure list price variation, the researchers used 2014 inpatient Medicare Provider Utilization and Payment Data that included 3,230 U.S. hospitals. The Medicare data showed the average amount hospitals billed to the program and the subsequent payment for each hospital-diagnosis-related group observation.

To measure how list prices varied among different types of hospitals, the researchers used data from the Nationwide Inpatient Sample (NIS) database from the Healthcare Cost and Utilization Project of the Agency for Healthcare Research and Quality. The data spanned 2,496 U.S. hospitals from 2007 to 2011.

To study how list prices affected payments, the researchers analyzed payment figures collected by California's Office of Statewide Health Planning and Development between 2002 and 2013.

Findings

Overall, the researchers found a positive relationship between higher prices and higher payments, though in some instances the relationship was casual. Specifically, the researchers found that, between 2002 and 2013, an additional dollar in list prices for a service was associated with an additional 15 cents in payment from private insurers.

However, the researchers found the higher prices did not correlate to higher quality of care and varied significantly among hospitals. For instance, they found the 25- and 75-percentile list prices for hip replacement surgery, which was the most common procedure examined, varied from $39,100 to $71,600.

The researchers also observed that large, for-profit, urban hospitals generally had higher list prices than smaller, independent, not-for-profit hospitals in rural areas.

Researchers say Calif. could be national model

The researchers noted that many states are trying to address the problem of surprise medical bills, and suggest California's Fair Pricing Act, implemented in 2006, could serve as a national model.

The California law limited the amount hospitals could charge uninsured patients with household incomes under 350 percent of the federal poverty level.

Before the law took effect, the researchers observed that an additional dollar in list price was associated with about a 20 cent increase in payments from uninsured patients. The researchers found that the law's implementation eliminated that difference, but higher payments for privately insured patients remain.

Discussion

Ippolito said the research underscores how lucrative privately insured patients have become for hospitals when compared with patients covered by government health programs. "Overall, Medicare and Medicaid margins have been very flat for the last 10 years. But the margins hospitals are getting from private insurers have really exploded," he said, adding, "Privately insured patients have become more and more valuable over time."

George Nation, a professor of law and business at Lehigh University, said a free market could help control prices. "I don't like government control but the market is broken here. You either have to have the government take more control or add more transparency to give the consumers more choice and allow the markets to function. There is a lot of money at stake," Nation said.

Hospital industry officials defended the higher list prices, saying they can help hospitals bargain with insurers.

Jan Emerson-Shea, a vice president at the California Hospital Association, said, "Hospitals push up prices by a dollar, but you're not getting that dollar. It becomes a negotiating tactic," adding, "The cost of delivering care continues to go up, too" (Kacik, Modern Healthcare, 4/3; Terhune, Kaiser Health News, 4/3; Haefner, Becker's Hospital CFO, 4/4).

Get our 22 strategies for improving margin management

 Get our 22 strategies for improving margin management

Hospital margins are under intense pressure as the health care industry undergoes permanent structural changes, and slashing costs just isn't enough to adapt. A new margin management strategy is critical to achieving a sustainable financial position.

We've organized the 22 strategies for containing cost growth, maximizing revenue capture, and identifying new sources of growth to help you prioritize what to do first, based on immediacy and breadth of impact.

DOWNLOAD THE INFOGRAPHIC


Next in the Daily Briefing

How New York-Presbyterian is 'teaming up' with the Bee Gees to save lives

Read now