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Why Do the Hospital Charges Released by Medicare Matter?

Last week the healthcare world was a buzz about the hospital charges released by the Centers for Medicare and Medicaid Services (CMS) that showed significant variation in charges not only across the country but within communities themselves.

This variation plays out right here in Memphis, as pointed out in the Commercial Appeal editorial

In a blog post on, John Branston recognizes that although these are the hospital charges, Medicare does not pay these charges and neither do Medicaid or private insurance companies. So, he asks the real question: is this a big deal? So what?

I think it is a big deal and does matter, although maybe not for the stated purpose of "shopping for care". I ask you to:

Realize that more transparency is better than less transparency. We would not even be having this discussion in such a public way if Medicare had not released the charge data. Although those on the inside knew this variation existed and that there is no relationship between charges and the cost to provide care, most “outsiders” did not know. The major Memphis-area print media outlets all covered this release, in both articles and editorials, making this issue visible to their readers and our community. Hospitals themselves were transparent in their explanations of why and how charges vary so much and got so high. The bottom line is people now know.

Don’t let the transparency conversation stop at charges. Now that you know there is no rhyme or reason to how hospitals charge for services and that most of us don’t pay these charges any way, don’t stop pushing for more information. If charges are not what we really pay, then what do we pay? Is there any more rhyme or reason to how the prices we actually pay are determined? How do these prices compare between hospital systems?

Understand that price transparency will be even more important as benefit designs change. As more people are covered under high deductible health plans, the price they pay, especially while in their deductible phase, will become much more transparent and important to them. They won’t be paying a co-pay, but will pay the full price that their health plan or self-insured employer negotiated on their behalf. They will need to know this price before they get care and will, most likely, want to compare prices among different providers as they decide where to go to get care. We must have payment systems that allow the price to be presented to people in a practical way that helps them make their own purchasing decisions.

Remember that price is only one part of the “value equation” and we need quality transparency too. We all make the price-quality evaluation every day when we buy our goods and services. There are times we are willing to pay more because we get a higher level of quality. There are other times where we buy the lowest priced product because there is no real quality difference among competitors. Consumer research shows that people respond best when health care price and quality information are presented together. This is important because many patients equate the most expensive care with the highest quality care. We know there is not a direct correlation between price and quality and, therefore, we need to provide both to people so they can make their own informed decision.

And, on a practical note, check your contracting processes to be sure you are not basing payments on charges. Methodist Healthcare's CFO admits in a Memphis Business Journal article that charges got this high in the 1980s and 1990s when contracts between providers and payors (such as health plans and self-insured employers) were based on a discount-off-charges. Most contracts have moved away from a discount-off-charges, but it lingered longer in the method used to pay for hospital-based outpatient care as well as other providers that are in the network (such as non-system hospitals, home health, DME, kidney dialysis), so check out those parts of your contracts. And, remember that you can’t compare discounts between hospital systems. Using the CA's joint replacement charges as an example, you would have to get a 39% discount at Methodist to end up paying the same as a 30% discount at Baptist. 

Medicare’s release of hospital charges has shed light on the very important issue of how we pay for care and pointed out that in many cases, how and what we pay for care is not related at all to the cost of providing that care or to the quality of care received. Now that more people know that, we need to build a ground swell of support to change how we pay for care. We need to rationalize payment methodologies and we need to have a payment system that makes the price-quality relationship explicit, paying for quality not visits or procedures.

MBGH’s 2013 Annual Conference will tackle many of these issues. Titled “Follow the Money: You Get What You Pay For” national and regional experts will  help us understand that we can’t achieve this rational payment system that is tied to quality of care unless we fundamentally change how we pay hospitals and physicians. Learn more about the conference and register here.

Posted by Cristie Travis at 10:50 AM

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