What you need to know about crazy hospital prices

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The huge disparities in prices charged by hospitals for the same procedures has generated a lot of debate. But the final price paid is never anywhere near the "sticker price." And while most Californians don't need to concern themselves with the list price —  because their insurance provider negotiates the actual price —  there is a small number of uninsured and underinsured people at certain income levels who do need to negotiate the best deal possible for their hospital's services. 

But trying to make sense of whacked-out hospital billing practices is nearly impossible – even for those in the know. 

Take for instance a hospital in Monterey Park charging  $253,000 to care for a patient with kidney failure, while another hospital —  just 50 miles away in Colton — charges $32,000 for the same treatment.  

How does that make any kind of sense, you ask?  Well, it doesn't.

RELATED: How much does medical care cost? A searchable database of procedures in California billed to Medicare in 2011

That's according to health care experts, such as  Dylan H. Roby,  assistant professor of Health Policy & Management and director of health Economics and Evaluation Research at the UCLA  Center for Health Policy Research.

"It represents an amount that was self-generated by a facility but is not a price paid by a commercial insurer, is not a price paid by Medicare, is not a price paid by Medicaid and it shouldn’t be a price paid by an individual just because they don’t have insurance," Roby says. 

Nevertheless, such widely varying hospital charges define hospital pricing nationwide, as evidence by data released in May by the Centers for Medicare & Medicaid Services (CMS). The agency, which reimburses  hospitals at a rate far below a hospitals listed prices, renewed a debate on hospital pricing by releasing the widely-varying prices that 3,300 hospitals nationwide list for the same 100 procedures. 

But Roby and other health policy experts contend that despite the many headlines those numbers have since generated, focusing on them only serves to confuse the national debate on health care spending.

That's because hospital pricing bears little resemblance to actual costs, in part because of complicated billing practices that began with the advent of Medicare in 1965.

The history is complex, but basically skyrocketing health care spending in the 1970s — of more than eight percent a year —  spurred Medicare to change the way it reimbursed hospitals. 

Beginning in 1983, the federal agency stopped paying  hospitals based on their listed charges and instead began paying them a fixed rate for each hospital stay. That resulted in lower reimbursements, which many experts agree prompted hospitals to make up that lost revenue, in part, by charging private insurers – and the uninsured – the often bloated rates we see today.

"Hospitals were kind of jacking up those charges to higher and higher levels to try and recoup the losses until now it’s become kind of ridiculous," says Maribeth Shannon,  Director of the California Health Care Foundation's Market and Policy Monitor program, which promotes greater transparency and accountability in California's health care system.

Shannon says while hospitals today rarely recover anything remotely resembling their inflated list prices — and they really don’t expect to — those crazy numbers, nevertheless, help their bottom line.

For instance, they allow a hospital to show larger losses to the IRS, she says. That's good for the books. And it's especially useful to nonprofit hospitals that classify the difference as "charity" bestowed upon the community, which helps them ensure their valuable tax-exempt status, she says.  

But for consumers there's little there of value. 

Wide disparity

"I think the wide disparity we see in charges is basically meaningless," says Roby. "There’s no real reason to look at it besides making sure that the uninsured or people who can't pay for hospital bills ... are not being charged the full rate."

The good news in California is that most people are not charged hospital list price. First, most Californians have either individually-purchased or employer-provided health insurance. But even the uninsured have some protection from inflating hospital pricing, thanks to the state’s Hospital Fair Pricing Act of 2006.

That law requires every hospital to offer significant discounts to uninsured and underinsured patients with incomes of up to about $40,000 a year  for an individual and about $80,000 a year for a family of four. The mandated discounts also apply to anyone else whose medical bills exceed ten percent of their income. 

But what if you’re among those who fall outside of the law’s protections? 

"If you talk to a hospital CEO they’ll say the charge is inflated by 80 percent or so," Roby says. "So a person being offered 'We’re going to discount your charge by 80 percent' is not getting a good deal, even though it looks like a discount on paper."

Roby advises you refuse to settle for anything less than a deep, deep discount.

Roby says knowing how much Medicare pays hospitals is a good place for consumers to start. Ideally, is for  insurance companies in California to provide information about what they pay hospitals.

"We just need a range and some median so people can get a guideline of what it means to actually get care at a specific hospital," he says. 

Shannon agrees and says that already more than a dozen other states are providing consumers with this information.  But, she says, that provides only half of the information consumers really need. 

"To just have price and not to have quality information that corresponds with it is dangerous," Shannon says, adding that  consumers should also have access to patient safety records and ratings by watchdog groups.

The California HealthCare Foundation provides such hospital ratings records on its website. The site also provides resources and tools to help consumers make better-informed health care decisions. 

Eventually, however,  both Shannon and Roby say they hope California consumers will have access to websites that list both quality information and cost estimates in one place, which would help consumers better determine the value of the health care they receive.  

"The first thing we have to know is what we’re paying — what are the real prices?" Shannon says. "Then  you have to know what’s the real quality that’s being provided and is it worth it?" Shannon says with sufficient information, people can make  judgement calls about their health care, like they do for all the other shopping they do.