7. Freedom of Information in the Hospital Marketplace

Problem: In most cities, patients cannot find out the cost of even routine procedures before entering a hospital and, at the time of discharge, they are often confronted with bills that are literally unreadable. Because they lack access to the information necessary to make price-conscious decisions, individual patients are unable to play an effective role in containing costs in the hospital marketplace.

Solution: All hospitals that receive Medicare funds should be required to negotiate preadmission prices with all patients.

Discussion: In most cities in the United States, patients cannot find out a hospital's total charge for a procedure prior to treatment. At the time of discharge, they learn there is not one price, but hundreds of line item prices for everything from a single Tylenol capsule to the hospital's admission kit. After only a few days in the hospital, a typical bill can stretch 30 feet in length.

If restaurants priced their services the way hospitals do, at the end of an evening meal customers would be charged for each time they used the salt shaker, took a pat of butter and had their water glass refilled. There would, however, be this difference: at least they could read the restaurant's bill.

About 90 percent of the items listed on a hospital bill are in principle unreadable. In only a handful of cases can the patient both recognize what service was rendered and form a judgment about whether the charge is reasonable. For example, a $30 charge for a Tylenol capsule is common but clearly outrageous, as is a $45 charge for an admissions kit, similar to the free kits airlines give passengers on international flights. In other cases, the patients might recognize the service but have no idea whether they are being overcharged.

What's a "reasonable" price for an x-ray, a complete blood count or a urinalysis? The patient who tries to find out is in for another surprise. Prices for items such as these can vary as much as five to one among hospitals within walking distance of each other, and in most cases the prices charged bear no relationship to the real cost of providing the services.

Patients who try to find out about prices prior to admission face another surprise. A single hospital can have as many as 12,000 different line item prices. For patients doing comparison shopping among the 50 hospitals in the Chicago area, there are as many as 600,000 prices to compare. To make matters worse, different hospitals frequently use different accounting systems. As a result, the definition of a service may differ from hospital to hospital in addition to the differences in the price of the service.

Although hospital administrators do not have to give patients advance noticeof their total hill, hospitals in Illinois are required to tell the state government. The following are some examples of total charges for outpatient services reported by Chicago hospitals in 1988: [29]

  • The charge for a mammogram varied from $13 to $127 – a difference of almost 10 to one.

  • The charge for a CT scan varied from $59 to $635 – a difference of more than 10 to one.

  • Tonsillectomy charges ranged from $125 to $3,365 (a 27 to 1 difference).

  • Cataract removal charges varied from $125 to $4,279 (a 34 to 1 difference)

If patients knew about these differences, they could significantly reduce their medical bills. Unfortunately, most do not.

Hospital prices today are an unfortunate remnant of the system of cost-plus hospital finance. Since 90 percent of hospital revenue came from insurers who reimbursed on the basis of costs, a hospital's line item prices were relevant only for a small fraction of the hospital's income – the 10 percent paid out-of-pocket by patients. Hospital line item prices were used in some of the more complicated cost-plus reimbursement formulas, however. This gave hospitals an incentive to artificially raise or lower prices in order to manipulate their reimbursement from third-party payers.

In a short period of time, hospital prices became artifacts rather than real prices determined by the forces of supply and demand. Why don't hospital line item prices reflect true hospital costs? Because hospital prices haven't served that purpose for decades.

We cannot possibly control spiraling health care costs in this country unless patients can make prudent buying decisions. That cannot happen unless patients are confronted with a total package price prior to admission to hospitals. Accordingly, any hospital that receives Medicare money should be required to quote preadmission prices – either per procedure or per diem – to all patients. This is a requirement to quote prices, not an attempt to create price controls. Hospitals would remain free to charge any price to any patient.