Hospital charges are out of control. Will transparency help?

Last year, the Department of Health and Human Services (HHS) announced that they were finalizing a rule to “require hospitals to provide patients with clear, accessible information about their ‘standard charges’ for the items and services they provide.” Under the rule, hospitals will have to provide their standard charges in both machine-readable and consumer-friendly formats. Hospitals will also have to make public the rates they negotiate with insurers and the prices for patients that pay in cash.

To nobody’s surprise, some hospitals objected to this rule, and even sued to try and prevent the rule from going into effect. But it seems like these tactics have not stopped the progress of the new regulation, which will begin January 1, 2021.

Why are hospital prices so contentious? Hospital care makes up 33% of total health care expenditures in the US (about $1 trillion!) so the prices that hospitals charge greatly impact overall health care spending. And the amount hospitals charge keeps going up.

According to a new report from National Nurses United, the largest nurses union in the US, the ratios hospitals charge compared to what it costs hospitals to provide care has exploded in the past few decades. In 1999, hospitals charged twice the cost of health care services on average; in 2018, hospitals charged more than four times the cost of care.

The amount that hospitals charge insurers (what are known as “standard charges”) are rarely what patients actually pay. When hospitals charge insurers, insurers negotiate a lower price, and then may pass on some of the costs to patients (depending on the insurance policy). However, charges still matter because:

1. Standard charges are a baseline for the negotiations that happen between hospitals and insurers. Broadly speaking, higher baseline, higher final price. (Hospital prices have grown substantially in the past decade, along with charges.)
2. Increasing hospital charges also increases hospital revenue— for every unit increase in the hospital cost-to-charge ratio, hospital revenue per patient discharge increases by $64.
3. Patients who are out-of-network (whether they know it or not) often have to pay the full non-discounted price.
4. Patients who are uninsured also may have to pay full price on the inflated hospital charges. Even low-income uninsured patients, who should qualify for financial assistance, may not qualify at some hospitals, or may not be notified before they are billed (or even sued).

To sum up, increasing charges is one way hospitals can easily bump up their revenue, at the expense mostly of uninsured and out-of-network patients (many of whom can least afford it). And hospitals in areas with greater Black and Hispanic populations have greater emergency department markup ratios as well, increasing the cost burden on communities of color.

Can transparency help ameliorate the pattern of increasing hospital charges and prices? It’s not a panacea, but there are hints it could help. Here’s why: There is an extreme amount of variation in how much hospitals charge, in relation to their actual cost of care. The National Nurses United report found that the 100 hospitals with the highest cost-to-charge ratios charged 12-18 times their cost of care in 2018. Those with the lowest ratios charged the same as their cost of care, no markup.

What’s different about hospitals that charge more? Unsurprisingly, they tend to be for-profit hospitals. Ninety-five of the top 100 hospitals with highest charge ratios in the NNU report were for-profit operated. More than half of these hospitals were part of the HCA Healthcare system, a large for-profit system (which ranked poorly in civic leadership and value on the Lown Index.) Conversely, the best hospitals for avoiding overcharging were all part of the NYC Health + Hospitals system, New York City’s public system of hospitals (which received outstanding civic leadership and value grades on the Index).

The variation in charges shows how transparency may help: If patients and policymakers could see side-by-side how much hospitals are marking up prices, they might be inspired to hold overchargers accountable for their profiteering.