Remedies for an epidemic of medical provider price gouging.

AuthorWeissman, Steven I.

Transparency is viewed as a self-evident good in Western society. The disinfectant quality of transparency is the essential ingredient to cure our healthcare system. Brandeis made his famous statement in a 1913 Harper's Weekly article: "Sunlight is said to be the best of disinfectants; electric light the most efficient policeman." (1) Hospital and laboratory prices are cloaked in secrecy. Insurers and hospitals include gag provisions, requiring the parties to maintain hospital pricing as a trade secret. (2) This article addresses the gaping absence of consumer protection with respect to these medical providers.

Hospital "list prices" are referred to in the industry as "charge master" prices. In Florida, charge master prices are three to four times the amounts negotiated as reasonable charges with insurers. As hereafter discussed, provider contracts stating that a patient agrees to pay charge master prices are overridden and controlled under Florida law by a reasonableness requirement.

Understanding healthcare pricing is a prerequisite to discussion of the Florida law and the proposed consumer protections considered below.

Healthcare Pricing

In 2008, the Center for American Progress reported that "America's economy is buckling under a broken healthcare system" and that healthcare spending in the U.S. had reached $7,900 per person. (3) By 2013, healthcare spending in the U.S. had grown to $9,255 per person and accounted for 17.4 percent of the nation's gross domestic product. (4) The majority of U.S. personal bankruptcies are due to medical expenses, despite the fact that 77.9 percent of those bankruptcy filers were insured. (5) In 1985, total household food and beverage costs were roughly the same as total health expenditures; but, by 2012, health expenditures grew to 2.3 times food and beverage expenditures. (6) In 1964, housing and utility costs were triple household healthcare costs; by 2012, healthcare costs roughly matched housing and utility costs. (7)

Healthcare pricing is generally determined by how much can be extracted from the patient on a case-by-case basis. Ask any hospital, lab, or physician the cost of any procedure or treatment and the response invariably is: "What insurance do you have?" Since the enactment of the Patient Protection and Affordable Care Act (ACA also known as "Obamacare"), (8) debate has mistakenly focused on the cost of insurance as if it is synonymous with healthcare costs. The cost of insurance is merely a function of underlying medical costs. Sky high hospital, physician, and lab costs necessarily result in sky-high insurance premiums. Ironically, the more medical costs and premiums rise, the more the ACA allows insurers to profit. (9)

List prices (think car MSRP sticker prices) are billed only for the small minority of services performed when no insurance is involved. (10) In the healthcare industry, list prices are phony, having no relationship to either costs or value. This fact has been widely reported in national media, reflecting public disgust and frustration with the system:

* The Wall Street Journal--"Many hospital executives dismiss those list prices--also known as charge master prices--as meaningless and misleading, since few patients ever pay them." (11)

* Huffington Post: "Medical providers set their prices in ways that seem arbitrary, with little oversight and practically no market incentive to reduce them, because almost no one actually pays the official rates." (12)

* The New York Times--"There is little science to how hospitals determine the prices they print on hospital bills. 'Charge master prices are basically arbitrary, not connected to underlying costs or market prices ... [hospitals] can set them at any level they want. There are no market constraints.'" (13)

* CBS News--"Those prices represent what hospitals charge payers before discounts, which is often several times higher than what they actually get paid. The only people who pay the charge master price are the uninsured." (14)

* Time Magazine:

The charge master, I learned, is every hospital's internal price list. Decades ago it was a document the size of a phone book; now it's a massive computer file, thousands of items long, maintained by every hospital.... I quickly found that although every hospital has a charge master, officials treat it as if it were an eccentric uncle living in the attic. Whenever I asked, they deflected all conversation away from it. They even argued that it is irrelevant. (15)

The Medicare program recently released detailed studies regarding hospital list charges, comparing them to Medicare allowed amounts throughout the U.S. (16) These studies are relevant in billing disputes, which, in Florida, boil down to the factual issue of reasonableness (discussed below). (17)

Florida is home to 20 of the nation's 50 highest priced hospitals with "[m]arkups of ... 9.2-12.6 times the Medicare-allowable costs." (18) A recent review of these statistics was published with the alarming title Florida Is the Nation's Capital for Hospitals That Price Gouge Patients. (19)

On average, commercial insurers pay hospitals 1.6 times Medicare rates. (20) When Florida hospitals charge 9.2 to 12.6 times Medicare reimbursement rates, that equates to 5.75 to 7.9 times more than their reasonable rates as negotiated with commercial health insurers. For example, for services having a Medicare reimbursement rate of $9,460, a hospital would bill a commercial insurer 1.6 times that amount or $15,000. If the bill is not covered by any insurance, the $15,000 amount would jump to between $87,032 and $119,196, billed directly to the hospital patient.

Average charge master pricing at Florida hospitals is a minimum of 500 percent of Medicare allowable amounts (which amounts to roughly three to four times more than hospitals negotiate as reasonable rates with commercial health insurers). The chart below illustrates typical Medicare allowable rates verses average Florida hospital charge master rates. (21)

List charges for clinical laboratory tests (such as blood and urine), whether performed at a hospital or independent lab, follow an even more extreme list pricing pattern than general hospital charges. Laboratory list prices are rarely published and there are no current industry-wide studies analyzing costs and charges. A comprehensive statewide study of hospital lab charges was, however, done in California. As The Washington Post reported: (22) "The researchers weren't able to do a national analysis because the data are so difficult to find, and many states and hospitals don't make their charges publicly accessible. But the results ... would likely be similar across the rest of the country."

Researchers at the University of California analyzed prices at 160 to 180 California hospitals in 2011 for 10 common blood tests and found wild variations:

The median charge for a basic metabolic panel, which measures sodium, potassium and glucose levels, among other indicators, was $214. But hospitals charged from $35 to $7,303, depending on the facility.... The biggest range involved charges for a lipid panel, a test that measures cholesterol and triglycerides, a type of fat (lipid), in the blood. The median charge was $220, but costs ranged from a minimum of $10 to a maximum of $10,169. Yes, more than $10,000 for a blood test that doctors typically order to check the cholesterol levels of older adults. (23)

Quest Diagnostics is a publicly traded commercial lab whose website states that it "[s]erves about half of the physicians and hospitals in the U.S." (24) In California, a whistleblower lawsuit was filed against Quest in 2005, alleging it gave illegal kickbacks to doctors, hospitals, and clinics in the form of discounted or free testing in order to induce them to refer Medicaid patients to Quest. (California's Medicaid program is known as Medi-Cal). Medicaid rates are so profitable Quest apparently paid kickbacks to obtain the business and settled the lawsuit by agreeing to pay $241 million to the State of California. (25) An overcharge cited as an example in the settlement announcement is that "Quest charged Medi-Cal $8.59 to perform a complete blood count test, while it charged some of its other customers $1.43." Theranos, a startup lab for self-pay patients currently operating in Walgreens locations in Arizona and California is offering the same test directly to consumers for $5.35. (26) For comparison, as far as list price billing to an uninsured person, one of the few independent labs posting list prices online states that its list price for the same test is $131. (27)

A recent study by the Department of Health and Human Services compared Medicare allowable prices for lab charges to the negotiated prices paid for 20 high-volume and/or high-expense lab tests by other health insurers. (28) According to this study, the prices paid by Medicare are not paltry, but may in fact be above fair market value: "Medicare could have saved $910 million, or 38 percent, on these lab tests if it had paid providers at the lowest established rate in each geographic area." (29)

Diagnosis Avg. Charge Total...

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