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Is the price right?

By David Palmer

In a 1992 presidential debate, President George Bush famously admitted that he did not know the price of a gallon of milk. Most Americans can probably tell the price of a gallon of milk, but most Americans probably cannot tell you the actual price of a hospital visit.

Because the majority of Americans are insured, the cost of a visit to the doctor is typically paid, at least in part, by the insurance company. The shadows that hide the price of medical care have allowed costs to grow like a fungus. The problem is not only that hospital-visit prices are not controlled by a traditional market, but also that the prices are hidden from customers, who often have no reasonable alternative.  It’s time we shed a little light on the price of health care and trimmed the lurking costs.

Take, for example, the gallon of milk. If the price of milk suddenly jumped to $20, most people would probably stop buying milk (or protest in outrage.) But what if someone in your family needed the calcium in milk to survive? And what if you didn’t find out about the jump in price until after you had already bought it?

In his February exposé in Time Magazine, “Bitter Pill: Why Medical Bills are Killing Us,” Steven Brill broke the story of outrageous hidden medical prices. First, there is the “charge master.” The charge master is a big, inflated, price list for every hospital, listing everything from surgical procedures to gauze pads. Every hospital has its own charge master, with its own prices, and hospitals and insurance companies use charge masters to negotiate prices for medical care. At each hospital Brill contacted, officials told him to ignore the charge master prices, saying that they didn’t matter because they are just “starting points.” The problem is: they do matter. Charge master pricing is an unfair and artificially inflated starting point.

Even though insurance companies often negotiate deep discounts from charge master prices, such high starting prices result in very low direct consumer savings. It’s like going shopping on Black Friday: prices are marked up simply so the store can mark them down again. If the charge master did reflect actual cost, hospitals would be constantly losing money on insurance company discounts.

Patients without health insurance are even more vulnerable to the charge master’s distorted prices. These unfortunate patients are charged the full “starting point” price. Thus, the heaviest burden of these inflated prices for medical care falls on those who can least afford it: the uninsured.

The charge master system means the pricing of each procedure and service fluctuates with the whim of the hospital. For example, as the Washington Post reports, Maryland has the lowest average price ($23,044) for a certain procedure involving a ventilator. In California, the average price for the same procedure is a staggering $120,888. This price discrepancy between states demonstrates that, from one hospital to the next, the same procedure can span a cost difference of over $100,000.

In 2010, hospitals enjoyed record profits, earning over $52.9 billion dollars, with many CEOs earning millions. Something needs to be done to rein this in. Although hospital administrators correctly point out that hospitals’ average net revenue was only 7.2 percent, a 7.2 percent net revenue stream, for an industry dominated by non-profits (nearly 60 percent of all community hospitals are non-profit, and another 21 percent are local government owned), seems absurdly high.

It is important to note that high costs to patients do not lie solely with hospitals. Device and drug manufactures also have enormous power in the Unites States to set prices. Unlike in most other developed countries that have price controls for drugs and devices, there are virtually no restrictions on the prices these companies can charge hospitals for their products. The products then get marked up even further on their way to the patient. The U.S. system is not the only option. For example, drug manufacturers in Europe, where prices are heavily regulated by their respective governments, still make money while government regulations curb profit levels that gouge unsuspecting and powerless patients.

High medical costs also stem from drugs and devices sold directly to patients. Medicare, by law, is not allowed to bargain with drug manufacturers, which means that pharmaceutical companies only have to reckon with individual insurance companies. These insurance companies have far less leverage to bargain for lower prices than Medicare would.

There are several ways we can go about fixing these high costs. One is to inform patients about health-care prices. The California Public Employees Retirement System (Calpers) implemented a system called reference pricing to inform patients about prices, with astonishing effects.

Essentially, Calpers set a price limit for hip or knee replacement operations. Patients then had to decide which hospital to use and compare the costs of the procedure. Immediately, some hospitals began charging less than the Calpers-set price limit, while pricier hospitals lost patients until they too dropped prices. After two years, Calpers found that the price for hip and knee replacements for their program dropped by more than 26 percent, and estimated that the program, implemented for just two procedures, had saved the insurance fund $6 million dollars.

But reference pricing on its own won’t completely curb high medical costs. Price referencing can make a difference for certain procedures, but when a patient’s life is in danger, price comparisons will make little difference. Companies and providers can and will continue to take advantage of vulnerable patients.

The creation of a single-payer health care system would create an entity with power to negotiate prices with health-care providers and drug manufacturers to curb the high costs of health care. Otherwise, regulation is needed to curb drug and device prices, provide Medicare with the power to more effectively negotiate prices with the medical industry, and impose a culture of transparency about patients’ health care costs.

It’s time we knew as much about our health as we do about our milk.

David Palmer is a health care fellow in Public Citizen’s Congress Watch division.