List of Hospital Rates Offers Little Comfort; Prices in Ads Differ From What Plans Pay

By GUY BOULTON

Each year, typically in December or May, hospitals run newspaper advertisements announcing their price increases for the coming year and listing a sampling of their prices.

The ads, required by state law, are largely an anachronism a meaningless one at that.

The rate increases and the prices in the ads generally have no relationship to what private and government health plans pay or, for that matter, which hospitals have the best prices.

“They don’t mean anything,” says Clark Slipher, a consulting actuary with Milliman Inc.

Part of Slipher’s job is to track health care costs. He doesn’t even look at the ads. He instead describes them as a throwback to a time when nurses wore white hats.

But the advertisements indirectly show one of the quirks of the health care system: Getting an accurate gauge of what a hospital charges can be difficult and often impossible.

The lack of so-called price transparency is considered one of the obstacles to making the health care system more efficient and to slowing the rise in costs.

The prices in the recent ads are for “charges,” the hospital equivalent of list price. Almost no one pays “charges.” Government health plans, such as Medicaid and Medicare, dictate what they will pay. And health plans negotiate discounts that vary from one plan to another.

Those negotiated prices are confidential and can differ wildly from charges.

For this reason, Warren Greenberg, a health care economist at George Washington University, describes hospital charges as “spurious” numbers.

“The real number is the actual cost,” says Greenberg, author of “The Health Care Marketplace.”

A remnant of regulation

Since the late 1980s, hospitals have been required to publish in a local newspaper their average price increase whenever they raise their “charges,” or list prices, more than the rate of inflation.

The law is a vestige of when hospital rates were regulated and before health maintenance organizations and other forms of managed care dominated the market. The ads typically are published before the end of the health care system’s fiscal year, such as Dec. 31 or June 30.

“What we are looking at here is an artifact,” says George Quinn, senior vice president of the Wisconsin Hospital Association.

The state also requires the hospitals to publish their charges for specific services, such as the room rate.

That rate is as meaningless as the list price because the real cost of a hospital stay depends on the services provided, from the cost of an aspirin to the cost of open heart surgery.

“It really doesn’t tell you anything that is useful if you were actually admitted to an ICU (intensive care unit),” says Charles Dreher, the chief financial officer of Columbia St. Mary’s.

In addition, the annual price increases in the ads often have no real connection to the prices negotiated with health plans.

Hospitals and health plans typically negotiate long-term contracts that allow prices to be increased by a set amount each year, Dreher says.

Some contracts may have negotiated rates that are a set percentage of a hospital’s charges. But Dreher estimates that less than half the contracts are structured that way, and even those may have a limit on how much a hospital can raise rates in a given year.

There are some exceptions.

The majority of the negotiated contracts at Children’s Hospital, for instance, are pegged to the hospital’s charges, says Mark Rakowski, the hospital’s director of managed care.

“That’s really the starting point when looking at payment,” he says.

What this means is that when Children’s Hospital raises its charges, its negotiated rates also increase.

But Children’s Hospital the area’s only pediatric hospital also has considerably more negotiating power than other hospitals. Every health plan must include the hospital in its network.

“They are in a different position than anybody else in the city,” Dreher says.

For most hospitals, charges are meaningless. But they still can cause considerable confusion.

That could be seen in the recent congressional hearings in Oak Creek on health care prices in southeast Wisconsin. The hearings were held by the House Ways and Means Subcommittee on Health.

Throughout the hearing, Reps. Paul Ryan (R-Wis.) and Nancy Johnson (R-Conn.), the subcommittee’s chairwoman, repeatedly had to ask witnesses if they were referring to actual prices or charges.

But the hearings made clear that prices can vary wildly from one hospital to the next. Richard Blomquist, a health care consultant who testified at the hearings, cited the example of an appendectomy that could cost $4,751 to $12,450, depending on the hospital.

The Wisconsin Hospital Association publishes hospital charges on its Web site and provides the average discount for the hospital.

But the average discount doesn’t give any indication what a specific health plan pays or what a gall bladder operation or a hip replacement actually costs.

Yet even if hospital prices were public, making sense of them might be impossible for the typical person.

Paying for labor

A so-called charge master the list of hospital prices can include tens of thousands of items. And Dreher says every hospital has a different philosophy on its pricing and how it allocates costs.

For example, labor accounts for more than 50% of a hospital’s costs. That and other expenses must be recouped in the price of various supplies and services. It explains why a hospital may charge $10 for a bandage that costs $2 at a drugstore.

“It’s not the bandage,” Dreher says. “It’s the person putting the bandage on.”

Further, price is just one component in actual costs. One hospital could have lower prices. But if its doctors regularly order unneeded tests, or the hospital has a higher rate of complications, its actual costs could be higher than those of its competitors.

For that reason, four of the state’s largest managed care companies recently agreed to pool their data on health insurance claims to determine which doctors and hospitals consistently provide quality care at the lowest cost.

The four companies are part of the Wisconsin Health Information Organization, a new group that also includes employer groups, hospitals and doctors.

Knowing which health care systems, hospitals and doctors are the most efficient is the ultimate goal. That matters more than individual price. But it can’t be determined without knowing price.

That’s why many business leaders whose companies pay for the bulk of the health care for people under 65 have made price transparency a bit of a cause.

Copyright 2005, Journal Sentinel Inc. All rights reserved. (Note: This notice does not apply to those news items already copyrighted and received through wire services or other media.)