Episode of Care Cost Variation

A great deal of effort is being expended these days to pin down a “retail” or normal price that a hospital might charge for a particular procedure, so that patients can make an informed decision about which facility to use, or even try to bargain over the price.  That price identification process is difficult and equally difficult is understanding why prices for procedures vary so much among hospitals.  A study at the National Institute for Health Care Reform analyzes the issue.   (NIHCR Report)  A typical operation or stay at a hospital actually involves a multiplicity of charges for professional services, facility fees, supplies, drugs, diagnostic tests, etc., unless the hospital has agreed to a bundled charge, or the payer forces one, as in the case of most Medicare payments, for the episode of care.   The researchers looked at commercial data for common episodes of care, which they defined as the initial hospital stay and all follow-up care in the 30 days after discharge.

The initial finding was that there is substantial variation.  For knee and hip replacements, across the 36 hospitals in the study spending per episode varied by over a hundred percent, with the high-cost hospital at $37,000 and the low-cost one at $17,500.  The overwhelming factor in the variation was the difference in the cost of the initial hospital stay, associated with 81% of the variation.  On average across all types of episodes, hospital payments for the initial stay accounted for two-thirds of overall episode cost, so the variation in cost for that stay is significant.  The researchers also concluded that higher-priced hospitals tend to be high-priced across all episodes of care, although there were a minority of hospitals which may have been high-priced in one service line but not another.  The findings suggest that payers can focus on inpatient stay price levels, rather than necessarily pursuing a bundled payment strategy, and that they can focus on high-priced hospitals rather than trying to find the low-cost one for each procedure.  It may be easy to identify high-priced hospitals, but negotiating prices downward with them will be difficult given the current levels of consolidation and market power.