Philadelphia Reflections

Why Are Hospital Prices So High?

Aspirin

Cost analysts maintain it really does cost ten dollars to write a simple business letter, so maybe it's no surprise when hospitals charge ten dollars to administer an aspirin tablet.

But there's also another form of hospital overcharging. Mark-ups of prices of several hundred percents over audited costs are routine in hospital bills. These are not hidden cross-subsidies, either; they emerge on the yearly audit as multi-million dollar "losses", neatly balanced by "contractual allowances". Translated, these are discounts to insurance companies.

Why do hospitals raise prices, then turn around and discount them? Why do they overcharge, then call it a loss when they write it off?

It's an important question, because it results in confronting patients without insurance with much larger bills than the effective price to insured ones; patients who can't afford to pay are charged more than those who can.

The old-time system of hospital wards to care for people who couldn't pay have been replaced by collection departments and hospitals are very aggressive in pursuing the very people who can least afford to pay, and who are grossly overcharged in the first place.

Health savings accounts with high deductibles were conceived as a way for people to self insure but they have been thwarted by hospital overcharges. Since HSA deductibles are guaranteed, hospitals perpetuate their present largest source of loss -- unpaid deductibles. So why do hospitals continue to post abusively-high prices for patients without large-insurance-company coverage?

Until hospital officials come forward with a coherent defense of their practices, outsiders can only guess at motives. Start with the old legal approach of "Cui bono?" (Who might have a motive?) and divide the answers into those with a motive and those with the means. The line-up will then consist of hospitals, insurance companies, limited-license practitioners, and the state government. Limited licensees, acupuncturists and the like, surely must hate high-deductible health insurance because their fees mainly fall below the two or three thousand annual deductibles. Old-line health insurance companies also have plenty of motive to keep out competitors, fearing antitrust action if they get too obvious. That leaves the state government.

States have ample power over hospitals. Substantial annual payments are negotiated with hospitals for Medicaid services, charity care, and educational grants and subsidies. Tax exemptions are repeatedly challenged and re-negotiated, and overall non-profit corporations are entirely creations of the state legislature. So, unless it is a violation of federal law, the state government has the means to compel hospitals to do anything. Power, yes, but where is the incentive for states to wish for exorbitant hospital prices? Or confer monopoly status on certain insurance vendors by according them sweetheart discounts?

All current plans for "reforming" health care involve providing government-paid insurance to those without. Will the result be to permanently institutionalize the artificially-high public prices to be paid in full by the government? If so, you can well understand why hospitals support these "reforms".

So hospitals are no better than stores that mark up their prices and then loudly proclaim that they will give you a discount. 200% mark-up, 10% off; terrific.

Originally published: Wednesday, June 21, 2006; most-recently modified: Sunday, July 21, 2019