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Hospital Pricing Behavior and Patient Financial Risk

When a family member is seriously ill, we all expect that the benefits of modern medicine will be available to provide the finest care possible. Yet, the cracks in our fragmented health care financing system are jeopardizing the health and financial security of millions of Americans. Hospitals play a pivotal role in making care accessible to those who cannot pay, but they also need to be financially viable. It is especially important to scrutinize hospital financing and pricing practices in the current environment. Hospital costs are accelerating. At the same time, 71 million Americans are experiencing problems paying medical bills or are paying off accrued medical debt. Access to care among the uninsured and underserved in this country is threatened, and pricing practices at selected hospitals are placing vulnerable patients at financial risk. We need major reforms to improve the performance of the health care sector.
  • Hospital Pricing Behavior
    • Nonprofit hospitals charge patients less than for-profit hospitals (including effective net prices after discounts).
    • Nonprofit hospitals admit more uninsured patients and provide more uncompensated care than for-profit hospitals.
    • Prices bear little relationship to the actual cost of care. Some specialized services, such as burn units and neonatal intensive care are "money losers"; others, such as cardiac surgery and radiological imaging services, are highly profitable.
    • Pricing, uncompensated care, and bill collection practices vary widely across nonprofit hospitals. The burden of caring for patients who cannot pay is unevenly borne; academic health center hospitals provide more uncompensated care than community hospitals.
    • The financial stability of hospitals varies widely. Some are in serious financial difficulty, others are on the margin, and others are doing well. Hospitals in the best position are not of the best quality or the most efficient, while those doing the worst are largely shouldering a disproportionate share of charity care.
  • The Market for Hospital Services Is Different
    • Hospital care is not like consuming other goods and services.
      • Key differences include lack of information, limited choice, complexity and life-critical importance of health care treatment decisions, physicians' decision-making role, and the need for insurance to protect financial security.
    • Trying to make the market work by shifting costs to patients will inflict greater financial burdens on the sickest and most vulnerable people. Doing so does not lead to better decisions about seeking "appropriate" or "inappropriate" care and will not solve the fundamental problems of access, quality, and efficiency in the health care system.
  • Consumer-Driven Health Care
    • High deductibles, cost-sharing tiering, or premium-tiering are unlikely to be effective in improving health system performance. They run the risk of increasing financial burdens on the most vulnerable patients.
    • Tiering, or varying cost-sharing according to hospitals' quality and efficiency, requires detailed information on cost and quality at the hospital or diagnostic level. For the most part, these data are not systematically available. Even were such data available and accurate, this presumes that very ill hospitalized patients are able to evaluate cost and quality tradeoffs, have a wide range of options about where to go when hospitalized, and are able to make cost-conscious choices. Furthermore, the administrative costs of such a system would be high.
  • International Experience
    • The United States has much higher hospital costs than any other country. The cost per day is three times the OECD median country cost per day, and cost per capita is twice the OECD median country.
    • Other countries have a greater role for government in establishing hospital budgets or payment rates. They have also done more to rationalize care through disease management, cost-effectiveness reviews of drugs and procedures, and regional hospital authorities, and have much lower administrative costs because they have one system of payment.
    • The Commonwealth Fund 2003 International Health Policy Survey of hospital CEOs in five countries found that:
      • The United State is the only country where respondents cited the cost of indigent care and care for the uninsured as major problems.
      • U.S. hospitals are more concerned about stand-alone diagnostic or treatment centers and about freestanding ambulatory care centers that "cream" profitable patients.
      • U.S. hospital CEOs are less open to public reporting of quality information than CEOs in other countries.
      • Hospital CEOs in all countries would make it a high priority to invest in information technology if resources became available to do so.
  • Historical Perspective on How We Got Where We Are
    • Hospital costs grew at a slower rate during the Nixon Economic Stabilization Program, legislative consideration of the Carter hospital cost-containment bill, enactment of the Medicare DRG payment system, and, during the mid-1990s, under the threat of health reform and expansion of managed care.
    • Hospital costs grew most rapidly during periods when prices were determined by health care providers rather than purchasers.
    • All-payer strategies, especially those by selected states in the 1970s and 1980s, were effective in slowing cost increases, ensuring access to care, and improving equitable payment across patients and insurance sources.
    • The basic lesson from these experiences is that government leadership matters. When government establishes a payment framework for purchasers-whether Medicare, Medicaid, or employer health plans-and uses that collective purchasing power to obtain better prices from providers, the rise in hospital costs is slowed, there is greater equity, and there is better access to care for the uninsured.
    • Large purchasers such as Medicare, national managed care plans, and large employers can also obtain good deals on their own, but they are less effective both in controlling overall cost increases and in ensuring equitable payment and access.
  • Achieving a High-Performance Health Care System
    • Given the resurgence in health care costs, the increasing numbers of uninsured, abundant evidence that the quality of care is not what we could have and have a right to expect, and the fact that administrative costs are now the fastest rising component of health care expenditures, it is time to consider a leadership role for the federal government in promoting efficiency and quality in the health care system.
    • The greatest promise for improving the performance of the health care sector lies in:
      • Public information on quality and longitudinal efficiency (i.e., total cost of care over an episode of illness) of all health care providers.
      • Private and public insurance incentive payments that reward hospitals and other providers demonstrating superior quality and efficiency. Purchasers are in a far better position to promote better quality and efficiency than are individual patients.
      • Limits or bands on how much prices can vary depending on payer source. Net charges to uninsured American patients should not be higher than discounted charges to insured patients.
      • Preserving and strengthening a predominantly nonprofit hospital and health care sector. It would be reckless to undo tax preferences for nonprofit hospitals, given that they are a major source of uncompensated care and community benefit. Such hospitals may reasonably be asked not to charge uninsured patients more, to work out feasible repayment plans, and not to employ unreasonable collection tactics.
      • Investing in the capacity to adopt modern information technology and systems to ensure safe care. It might be useful to consider a new "Hill-Burton" act-perhaps one that, in exchange for a new charitable patient care obligation, provides grants and loan capital funds for investment in information technology and systems to ensure patient safety.
      • A system of automatic and affordable health insurance coverage for all.
  • Publication Details



    Hospital Pricing Behavior and Patient Financial Risk, Testimony before Committee on Ways and Means, Karen Davis, Ph.D., The Commonwealth Fund, June 22, 2004