Spending for services at hospitals is a large portion of total US health care spending, 42% of all costs for privately paid services. The prices hospitals charge can vary widely by payer. The Medicare and Medicaid programs set what they pay through regulation, within boundaries set by Congress. This is in essence a political process, as hospitals and other providers have large lobbying groups and make substantial political contributions, and they constantly push Congress and the regulators to increase reimbursement. For private health plans, what is paid is negotiated, usually on an annual basis. That negotiation is a balance of relative leverage. Most areas have few hospital systems and they tend to be quite large, therefore have substantial market power. Most areas also may have few health plans, who also have market power. So you get pretty intense negotiations, although often the health plans take the line of least resistance and agree to large payment increases, knowing that they will pass those increases on to their customers, employers and individuals, in premiums.
Hospitals routinely claim that Medicare and Medicaid don’t reimburse them at a level that covers the cost of providing services. Research suggests this is not true, but there isn’t much of a profit margin in government program reimbursement. Private health plans claim that hospitals shift costs from government programs onto them. This is probably not technically true if government payments cover costs, but it is almost certain that hospitals try to get payments from private health plans that are high enough to generate profits across all a hospital’s business. Since most hospitals in the US are non-profit, when those hospitals engage in these practices, it is outrageous on its face. Prices vary not just between payer types, but across and within geographic markets and to different health plans in the same market.
A new report looks solely at the differences in what hospitals are paid by Medicare and what they charge private health plans. Hospitals have been forced to disclose contracted rates for several years, so better data is now available. The authors find that in every state, what private health plans pay hospitals is far above what Medicare pays them for the same services, even after patient factor adjustment, and in many situations is 2 or 3 times more than Medicare pays. In fact, on average a private health plan paid 250% of Medicare reimbursement for the same service. It is literally insane.
The difference can’t be explained by different levels of Medicare and Medicaid patients at hospitals. It is largely explained by hospital market power. Employers and consumers are getting ripped off by hospitals, it is just that simple. You pay more in premiums and cost sharing because of these practices. And what do hospitals, especially non-profit hospitals, do with all the extra money? They pay outlandish executive compensation. The waste money on marketing and advertising. They erect fancy buildings. So when you read that hospitals have financial issues, it is because they waste money left and right, not because they aren’t paid enough. I think we could save hundreds of billions every year by cracking down on abusive so-called non-profit hospitals.
The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry. Mr. Roche is available to assist health care companies through consulting arrangements through Roche Consulting, LLC and may be reached at 
Apple Podcasts
Google Podcasts
Spotify
Overcast
PocketCasts
Radio Public
Stitcher
Anchor
RSS - Posts
I often wonder how this can be legal – different charge rates for the same services. I know from my own claims there was quite a difference between the insurance negotiated amount and actual charge rates from the medical institutions. I am not sure if anybody pays the actual charge rate. When I was still working my company required ethics training and if one had a moral compass, it was all simple common sense. Some of the training was quite interesting though. The one training session involved giving volume discounts. The training was based on a law passed in the early nineties to protect small stores from the big box stores. I am aware the work around companies used to by-pass the law but to openly have different charge rates to different groups just seems a little murky.
I think this analysis is mistaken. It is my understanding that hospitals have very high fixed costs. So they could make a large “profit” on every service offered (in the sense of the fee exceeding the marginal cost of the service) and still lose money overall.
Consider a retailer who marks up every item by 10% over what he pays for it. So he makes a profit on each item he sells. But he will lose money if the markup is not sufficient to cover his fixed costs, such as rent, salaries, and utilities.
When fixed costs are very high, charges detach from the marginal cost. An extreme example is airlines. The cost of flying a near empty plane is not much different from a full plane. So you might have paid three times as much for a ticket as the person sitting next to you. Without that, airlines would go out of business.
actually that isn’t right, hospitals don’t do marginal pricing for their business. It is all largely driven off Medicare rates, and Medicare explicitly includes a cost of capital factor in the payments. Airlines do dynamic pricing, they can charge different rates for different people. For the same person with the same disease, hospitals get paid the same by Medicare, Medicaid and every other payer. There is no variable, marginal or other pricing. it is all set in advance