| Statement of Glenn Melnick, Ph.D., Director, Center for Health Financing, Policy and Management,
University of Southern California, School of Policy, Planning and Development,
Los Angeles, California
Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means March 09, 2004 Hospital Pricing and the Uninsured
I will first discuss powerful trends in hospital pricing
that I am afraid will worsen the problem of the uninsured in America and stifle
the market for HSAs. I will then present a set of recommendations designed to
limit the negative effects of these trends.
Hospital pricing as currently practiced negatively impacts the uninsured
We have witnessed a very significant and rapid increase in
hospital list prices over the past 8 years in the US.
Hospital Pricing Terminology and Practices
To better understand hospital pricing, some terminology is
required. Hospitals have two sets of prices: list prices and net prices.
Hospital list prices (more commonly referred to as gross
charges) are a standard set of prices established by hospitals each year
(generally) for all their services. The list price is more or less equivalent
to the “rack rate” that hotels display for their rooms. All patients are
charged the same list price for the same service.
However, very few patients actually pay the list price (see
Exhibit 1). Insurance companies and other third party payors generally have
contracts with hospitals, either directly or indirectly through rented provider
networks, which allow them to pay a discounted price that is significantly below
the list price. Uninsured patients (referred to in most hospital accounting
systems as self-pay) are charged the list price and then depending on the
individual hospital’s pricing policy, may be offered a discount. The actual
amount a hospital receives from the patient will be based on this discounted
price less any portion of the bill that turns out to be un-collectible.
Hospital pricing strategies are driven by a complex mix
of differing payment schemes and contracting arrangements as well as market
forces.
With the advent of selective contracting and the growth of
managed care in the US, the practice of negotiating discounts with hospitals has
become widespread. In this environment the gap between list and net prices has
widened. Contracting, combined with market forces, largely drives hospital net
prices. Consequently, most insurers, policymakers, and researchers have focused
on net prices. However, there are a number of factors that have kept hospital
list prices important in overall hospital pricing and which have contributed to
the rapid run-up in list prices. These factors include:
- Not all third party payors have contracts with all providers (i.e., Some
third parties pay list prices or charges).
- Many third party contracts include payment formulae where the discount is
applied to list prices (or charges).
- Many third party contracts (including Medicare) have stop-loss provisions
that pay on the basis of list prices (charges) above a certain threshold.
- In many cases the stop loss threshold is based on list prices (charges).
- Not all insured patients are covered by a third party at every hospital (e.g,
for out-of-network use)
- Some patients have no insurance coverage (self-pay patients) and do not
have access to negotiated discounted prices at any hospital
Since most hospitals can increase their net revenue (from
private insurers, Medicare, and workers comp plans) by raising their list
prices, there is a strong incentive to keep increasing list prices. Indeed,
data show that list prices have increased rapidly and substantially in recent
years.
The following data provide a picture of what has happened
to hospital list prices in recent years:
- Hospitals have increased their list prices much faster than their costs
have gone up and much faster than their net prices (see Exhibits 2 and 3 for
California data and Exhibit 4 for national data).
- The difference between hospital list prices and costs varies
substantially from state to state across the US (see Exhibit 5).
- The difference between hospital list prices and net prices varies
substantially across hospitals within the same state (data can be obtained from
the author)
An indirect and largely unintended effect of these trends
is that they have created hardship for uninsured patients – the hospital prices
they face are increasing more than for any other group.
Not only do the uninsured
pay for all their care out-of-pocket, but they face higher fees for the same
procedure than the insured since they do not benefit from the bargaining clout
of an insurance company. In the current environment, self-pay patients are much
more likely to be asked to pay the list price than insured patients. An example
of this is illustrated by the data previously presented in Exhibit 1. This
exhibit compares the average list price for an appendectomy in California
hospitals in 2002 with the amount actually paid based on the insurance status of
the patient. Uninsured patients who do not qualify as indigent (according to
each hospital’s criteria) pay far more than patients who have insurance
coverage.
Hospital list prices will continue to rise faster than
costs and net prices, further exacerbating the hardship on the uninsured.
With continuing managed care push back by hospitals, we
will see more hospitals terminating their capitated contracts with third party
payers. This will move more hospital volume into fee-for-service contracts that
generally include list prices in the payment formulae, either in terms of
discounts from list price or as part of stop-loss provisions. This will
increase the reward to hospitals gained by raising their list prices. Under
this scenario, the uninsured will continue to face higher price increases than
insured patients.
In some cases,
hospitals do discount from list prices for self-pay patients. However, this
policy may not be uniformly applied to all self-pay patients within a hospital
and discounts vary substantially across hospitals and across the country.
The practice of granting discounts to self-pay patients is
ad hoc at best. It varies both across hospitals and within hospitals. As a
result, the net price that an uninsured patient pays for hospital care depends
not only upon his ability to pay, but also upon his level of education,
negotiation skills, where he lives, the hospital he is admitted to, and which if
any collection agency is retained by the hospital.
One reason for the wide variation in pricing services for
self-pay patients is that hospitals have not really focused on developing an
analytical capacity for retail pricing. List prices have grown very quickly and
so have only recently become an important element of pricing to hospitals.
Moreover, most hospitals do not have the necessary data
systems that allow them to accurately calculate how much they charge or receive
from the self-pay population. Self-pay patients often start out in and are
billed to a third party payor category and then end up as self-pay. Often the
charge is not reclassified while any payments would be credited to the self-pay
category. This could understate gross charges to self-pay patients and make it
appear that hospitals are collecting a higher percentage of gross charges to
self-pay patients than is the case.
Furthermore, the lack of a rational and transparent
pricing system for self-pay patients may hinder development and adoption of the
health savings account (HSA) reforms.
Individuals choosing an HSA as their primary insurance mechanism may face the
same rapidly increasing list prices that the uninsured face since they will be
seeking care with their own funds. Moreover, the nascent state of analytical
pricing models in hospitals and the absence of management tools that I’ve
already noted could hinder the development and growth of the
retail market envisioned under health
savings accounts.
Recommendations
- Form a national Task Force to study current patterns and
practices of pricing to the uninsured.
- Charge the Task Force to:
- Develop guidelines for policies and procedures
regarding pricing and payment options for the uninsured.
- Mandate hospital reporting of both the policies for
discounting charges to self-pay patients and the procedures used to ensure
that all patients are aware of the discounted payment options.
- Mandate that hospitals annually report their actual
experience vis-à-vis the uninsured in terms of charges, discounts and
collections.
Rationale
Through mandated public disclosure and media attention,
social pressure will be brought to bear on hospitals to develop fair and
reasonable pricing policies for the uninsured in their communities. As a first
step in easing access for the uninsured, hospitals should be required to develop
explicit policies and procedures for discounting list prices or charges to
self-pay patients. Ideally, the discounting schedule would be a sliding scale
based on income.
These policies and procedures should be included in all
mailings to patients. When patients receive their first bill, it should clearly
state that they may not be required to pay the charge listed. Rather, it should
inform them that they are eligible to apply for a reduced fee under the
hospitals’ discounting program based on specific guidelines.
These policies and procedures should also be posted at the
hospital registration area and should be reported to state health departments or
other relevant agencies so that the public and media have easy access to this
information.
In addition to developing and publicizing policies for
charging the uninsured, hospitals should be required to report their experience
each year in terms of how the uninsured were billed and the final disposition of
their bills. The annual reporting could be incorporated into the recent CMS
rule requiring hospitals to report uncompensated care on the Medicare cost
report form. Explicit policies and better reporting could serve to moderate the
negative and arbitrary effects of rising hospital charges until we have a more
systematic solution to covering the uninsured in the United States.
Glenn Melnick
Dr. Melnick is
Professor and Blue Cross of California Chair in Health Care Finance at the
University of Southern California (USC).
Dr. Melnick has worked
extensively in the area of health care insurance and health care market
competition. Dr. Melnick’s research has focused on the areas of pricing of
hospital services, health insurance and health care markets and he has numerous
publications in the scientific literature, including journals such as Health
Economics, JAMA, Health Affairs and many others. He is
frequently called upon to provide expert advice to the Federal Trade Commission,
States’ Attorneys General and others. His editorials have appeared in the
Wall Street Journal and the Los Angeles Times.
In addition to his work in the
US, Professor Melnick works in Pacific Rim countries (including China, Taiwan,
and Indonesia) providing technical assistance and training to assist countries
in the development of formal health insurance systems and social programs. Dr.
Melnick is also the Director of USC’s International Public Policy and Management
Program (IPPAM). gmelnick@usc.edu
| 
