Inflated Hospital Costs

It isn’t just $5-a-pill aspirin. Daily room charges exceed $5,000 in some New Jersey hospitals. An appendectomy in California, including about two days in the hospital, has an average list charge of $18,000. Nationally, federal data show the median charge for treating a heart attack is more than $20,000. … In California, if you get your brakes fixed on a car, the mechanic has to give you an estimate before doing the work. That’s not true if you go in for major surgery.”

Patients in other states say they want such information.

When Karen Hamers’ teenage daughter Michele needed knee surgery, Hamers called several hospitals near her home in Vero Beach, Fla., and asked how much the surgery would cost. At the time, her family did not have health insurance. After choosing a hospital, Hamers paid the surgeon and then also paid the hospital what it said the surgery would cost: $4,200.

“Six days after surgery, we receive a letter from the hospital asking for an additional $21,000,” Hamers says. She asked for an explanation and got an itemized bill.

“It was two pages of gobbledygook,” Hamers says. “We could not understand it. They could not explain it. We showed it to our doctor, and he didn’t understand it.”

Hamers had kept a detailed log of her daughter’s 20 hours in the hospital, including a list of all the staff who cared for her and what drugs she was given. After reviewing the log and its own records, the hospital reduced its additional billing to $610.

…Hospital charges are similar to the list price on a car. Few pay the full amount because insurers negotiate discounts, and Medicare tells hospitals what it will pay. Still, some insurers do pay full charges, such as when a policyholder goes to an out-of-network hospital with whom the insurer does not have a negotiated discount. …Charges have gone up quickly in recent years and often bear little relationship to the actual cost of services. “It’s not unusual for a hospital’s billed charges in a market to increase 25% to 30% in one year,” says John Bauerlein, senior partner Milliman USA, a firm that tracks health care spending. …In 1993, charges were, on average, 159% more than costs, based on data provided to Medicare, says Glenn Melnick, professor of health care finance at the University of Southern California. [In 2003], he says, the national average charge was 211% higher than cost. In some states, those ratios are even higher. California, Florida and Nevada have some of the highest hospital charges, close to 300% higher than costs, according to his research.

The average profit margin at the nation’s hospitals is low. They were 4.4% in 2003 according to the hospital association. Professor Melnick is probably not including fixed costs and administrative costs in saying that hospital charges are more than double the actual costs and a large component of hospital fixed costs is paying for uncompensated care for under-insured patients. That is one reason the hospitals charge a fictional list price that very few patients actually pay. It is a kind of price discrimination to try to recoup those fixed costs. Uwe Reinhardt says that in 2004, “U.S. hospitals were actually paid only about 38 percent of their “charges” by patients or their insurers.” That means that the hospitals billed charges that are over two-and-a-half times greater than what they actually got paid.