Health Care Price Bombshell

Well, now we know a little more. Or, perhaps, we just can confirm something we thought all along. Hospitals are very dangerous places for your wallet. Worse, the price you will be charged for a service appears to be almost randomly generated.

This is the message within the data released by the government today.

Medicare and Medicaid officials have access to an incredibly deep and wide database of prices charged for services from all across the country. They have now decided to make that list public. It makes for shocking reading.

The database made public contains prices for the one hundred most common services provided by hospitals and consequently billed to the government. The data includes billings from 3,337 hospitals in over 300 metropolitan areas.

It isn’t just the staggering cost of services, but is also the enormous variation of those costs. Within the thirty mile radius of the New York City metropolitan area hospitals bill anywhere between $99,690 and $7,044 for precisely the same thing – in this case treatment for a common respiratory ailment. That is an astonishing variation and cannot be defended on the basis of any kind of rational pricing scheme. And such ridiculous variation is common right across the country.

Something is very rotten in the way hospitals develop their prices. It certainly doesn’t seem to have much to do with the cost of a service.

There are a couple of thing that leap to mind immediately:

First, anyone who persists in imagining that our health care system does not need reform has to be willing to defend these hospital prices. They cannot base their defense on the supposed magic of the marketplace, because this enormous lumpiness within the pricing for identical services is exactly one of the telltale signs that the market isn’t working.

Markets depend on competition and transparency so that customers can choose the best option. Hospitals do not compete effectively – who truly chooses which hospital on the basis of comparative prices under normal circumstance let alone in an emergency? And, more to the point, how many customers have sufficient information to be able to decide whether the price they are being charged is reasonable? Hospital pricing is, apparently, disconnected from the cost of the service being provided and opaquely developed. So we have neither transparency nor effective competition.

This means that the market not only does not work, but that it cannot work. There is, and cannot be, any such thing as a market for health care in any credible sense of the word.

Hence the need for a new and different system altogether.

Second, today’s release reveals just how absurd hospitals are with respect to their customers. The only people who actually pay these random appearing prices are those most likely least able to pay them. Hospitals are knowingly driving people into bankruptcy because of their irrational pricing schemes. The uninsured constitute the largest percentage of what hospitals call “self-payers”. These are people who pay the bill they receive rather than relying on an insurance company. The prices hospitals charge appear to be more ‘opening bids’ than actual prices. Bids, that is, in an expected round of negotiations with insurance providers. So the uninsured are collateral damage in a war waged behind the scenes between sets of bureaucrats, neither of whom cares much about the actual cost of the services they are haggling over. Rather they are both trying to maximize the cash flows to their respective shareholders, with the actual cost base of healthcare being merely an elastic, and evidently minor, consideration along the way.

Real live markets, especially the ones right wing economists and politicians like to laud, don’t work that way at all.

It will be interesting to watch as hospitals scurry to defend themselves and – potentially – react to today’s news. This data delivers a blow to free market advocates. Let’s see how the ‘market’ works its magic now that there’s more information available. Prices should converge. Some might rise and others fall. My prediction is that hospitals will shuffle things to try to keep the same amount of cash flowing in. In which case change will come slowly, if at all.