Anyone Think They Understand Hospital Pricing?

by James C. Sherlock

Having written yesterday about the newly appeals-court-certified HHS rules on hospital price transparency, I will use this opportunity to provide some real examples of the gargantuan Rubik’s cube that is hospital pricing.

I will be talking about hospital prices only, not the much lower prices of non-hospital alternatives including  ambulatory surgical centers and office-based practices for some hospital procedures.   

These examples are meant to give the reader an understanding of the enormous differences in hospital payments for identical procedures. Don’t try to make more of them than that. I won’t entertain detailed questions on individual charges because I simply don’t have the information to provide those answers.

I will use the term diagnostic-related groups (DRGs). A DRG is how government insurers and many health insurance companies bundle hospitalization costs to determine how much to pay for your hospital stay. 

So, rather than pay the hospital for each specific service and consumable it provides, these insurers pay a predetermined (government) or negotiated (private insurers and individuals) amount based on the DRG under which they were billed. They then entertain charges for services and consumables that were provided but were not included in the standard bundle. 

The diagnosis is linked to the payment, so the system offers incentives for so-called “up-coding,” but insurers spend a lot of money to police that. In two examples below I will use the MS-DRG (CMS-DRG) coding system used by Medicare.

I have picked at random MS-DRG code 216. It is defined as Cardiac valve and other major cardio-thoracic procedures with cardiac catheterization with major complicating conditions. DRG 217 is the same procedure with less severe but still complicating conditions.  

If you looked further, you would find that Medicare calculates the mean expected length of hospital stay for DRG 216 as 16 days and DRG 217 as 9.5 days and weights those against all other DRGs in calculating its rates.

The costs of DRGs are imposed on the hospitals by Medicaid (state sets rates) and Medicare/Tricare and other federal programs (federal government sets rates). All other purchasers, including Medicare Advantage, managed Medicaid, other insurance company products and private payers negotiate prices.

I have chosen Carilion Roanoke Memorial Hospital (CRMH) to show prices for DRG 216. (DRG 217 is less expensive in each case). The Carilion system is the first in Virginia to be fully compliant with the requirements for pricing transparency that went into effect Jan. 1.  

Finally, I am using only median prices (min, max and median are available) to simplify the comparison.

Carilion Roanoke Memorial Hospital – DRG 216. Same procedure, different payers.

DRG 216 (Cardiac valve and other major cardio-thoracic procedures with cardiac catheterization with Major Complicating Conditions). These represent the median prices paid over the past year. I have grouped them to show similar products, though those within each group are not exactly the same.

  • Median gross charge (chargemaster) $325,899
  • Median Discounted Cash Price – $228,129
  • MedCost (formerly VHN) Workers Comp – $293,309
  • Anthem PAR/PPO/HMO – $280,820
  • CIGNA HMO – $220,959
  • CIGNA PPO – $235,951
  • United Healthcare Non-option PPO – $201,438
  • United Healthcare Options PPO – $253,908
  • Anthem (ACA) Exchange – $252,742
  • Connecticare commercial – $228,128
  • Gateway Tier 1 Commercial – $309,604
  • Gateway Tier 2 Commercial – $260,710
  • Gateway Tier 3 Commercial – $221,611
  • VHN Link Commercial – $293,307
  • VHN Plus Commercial – $250,942
  • VHN Ultra Commercial – $202,057
  • (Sentara) Optima Health Commercial – $223,240
  • MedCost (formerly VHN) Commercial – $260,719
  • Aetna large group – $180,874
  • Aetna Employee – $173,704
  • Aetna ACO Commercial – $171,423
  • Traditional Medicaid – $127,354
  • Aetna Medicaid – $71,955
  • Anthem – Healthkeepers Plus Managed Medicaid – $69,993
  • Magellan Complete Care Medicaid – $71,955
  • Virginia Premier (SentaraOptima) Medicaid – $67,049
  • United Healthcare Medicaid – $71,955
  • Virginia Premier CCC Plus (Medicaid) (No dual eligible) – $67,049
  • (Sentara) Optima Health Managed Medicaid – $71,955
  • Virginia Premier CCC Plus Medicaid (dual eligible not enrolled) – $65,414
  • Virginia Premier CCC Plus Medicaid (also enrolled in dual eligible) – $65,414
  • Aetna Medicare Advantage – $61,348
  • Anthem Medicare Advantage – $64,415
  • Humana Medicare Advantage – $61,348
  • Magellan Complete Care Medicare Advantage – $67,483
  • United Healthcare Medicare Advantage – $61,348
  • (Sentara) Optima Health Medicare Advantage and Dual eligible – $62,575
  • Anthem Dual Medicare/Medicaid – $61,348
  • Humana Dual Medicare/Medicaid – $60,121
  • Virginia Premier CCC Plus (Medicaid) dual eligible – $61,348

Chargemaster gross charges and Self-pay discounted charges – DRG 481 – two hospitals, same procedure

Chargemaster price is the hospital-calculated gross charge price submitted to Medicare. Medicare ignores it and makes its own calculations. The rest of the prices are real money.

For this example, I chose MS-DRG 481 Hip And Femur Procedures Except Major Joint With Complicating Conditions

If you had DRG 481 done at Carilion Roanoke Memorial Hospital, the chargemaster gross charge was $70,681. The median discounted self-pay cost was $49,476.  

At Bristol Regional Medical Center, DRG 481 chargemaster gross charge was $48,773. The median discounted self-pay cost was $7,315.

So, if you were to write a check, the cost to you for that procedure on average at Carilion Roanoke Memorial would be about seven times as much as if you had it done at Bristol Regional Medical Center.

What does that mean to consumers and for public policy?

Now multiply that by all of the hospitals and all of the payers and all of the procedures and you get the idea of the complexity. That is why HHS has required each hospital to publish what it is paid for each procedure code by each payer and mandated that the information be published in machine-readable format.

That will permit online aggregators to create tools to allow consumer shopping for both hospitals and insurers. Think Expedia as an example of a travel aggregator.

As for the implications for public policy, you will notice that in Virginia, Medicare is the lowest payer. The lowest payer used to be Medicaid but the rates were raised by the General Assembly and the Governor when we passed expanded Medicaid.

Net of everything, hospitals nationwide average not quite 3% operating margins.  To show the value of the most choking of Virginia’s regional monopolies, Sentara hospitals in south Hampton Roads have averaged about 11% operating margins in recent years.   

Unwinding all of this for single payer could be done but it would be a Herculean effort. There will be hospital (and patient) casualties along the way. Trust me, you never want to go to a hospital that is losing money. The first thing that is reduced is staff.

And that is before the government settles on sets of regional prices adjusted for all of the things Medicare adjusts for in special rate cases including teaching hospitals, critical access rural hospitals, trauma centers, etc.  

Under single payer, there will be the brand new question of how much is “enough.” Interesting word, “enough”.  

The current federal Medicare bureaucracy, whose work I admire, does not have to manage to “enough.” They make a lot of calculations to balance their payments so that they pay more for what should cost more and less for what should cost less, but at the end of the day they work from a general spending budget and don’t have worry about the financial health of providers. Commercial insurance is assumed to make up for Medicare’s purposeful underpayments.  

Under the current system, hospitals fail when they can’t attract enough patients in general and enough commercial patients in particular or are just badly managed.

Single payer will require bureaucratic judgements on what equals “enough.” That will require new skillsets and new algorithms to deal with matters that are so complex that they are literally inexplicable to elected officials, to the public and perhaps to the bureaucrats themselves. They will have to rely on those new algorithms written by people who think they can make sense out of the complexity and then take years to adjust them.    

You can see above that the term “Medicare for All” misrepresents the facts of the costs of a single-payer system. By a lot.

It can be done, but if you think it will be easy, take another look above at the types and ranges of pricing that will need to be replaced. The political pressures on government pricing will increase geometrically.

Provider management will still matter to quality and operating margins, but it may not be rewarded if cost savings result in reimbursement cuts the next year. Single payer risks making good management very scarce very quickly in the hospital industry.

Good luck to us all if and when we try it. And I suspect at some point we will.