Sarah Kliff at Vox highlights a great graph from a tremendous paper by Cooper, Craig, Gaynor and Van Reenan on the variation of pricing within hospitals by insurer for common, repeatable procedures.
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The story is simple. In Hospital 1, Red X and Green Triangle (two different insurers) pay about the same for an MRI while the last insurer, Blue Circles, pays significantly more for the same procedure. In Hospital 2, Red X has an even bigger discount than it did at Hospital 1 compared to the average payment while Blue Circle pays about the average price and Green Triangle pays about almost 200% more than the average price.
There is massive price variation within a hospital for almost any service.
In urban hospitals, I would be shocked if any common procedure performed by the same clinician in the same room on the same day with the same code(s) will have a string of four claims with the same exact amount collected by the hospital. Medicaid Fee for Service pays differently than Medicaid Managed Care which pays differently than CHIP which pays differently than Medicare which pays differently than Medicare Advantage which pays differently than narrow network Exchange and Commercial which pays differently than broad network Exchange and Commercial which pays differently than national rental wrap-around networks.
Price segmentation gets even more complex as soon as we throw in tiered networks, Medicaid programs from other states, integrated delivery networks that are not strict closed gardens and cash-pay only policies and a dozen other variations.
A single procedure at a large academic medical center can often have two dozen or more contracted rates which are billed at least monthly. And those rates will be determined by the relative negotiating power of the insurer and the hospital/provider group.
Going back to the fourth or fifth week of Econ 101, perfect price segmentation which means that the maximum willingness to pay of each customer is the exact price that they face is one of the highest goals of a good seller as they can extract and enjoy the entire surplus generated by the transaction.
This graph is incredible but not unexpected.
JPL
The President is suppose to release his plan to lower drug prices at two pm. If you have time, will you please put up a post highlighting the specifics.
Twitter is telling me that Novartis is going to be happy.
Dr. Ronnie James, D.O.
David – is there a low unit cost- high volume correlation? Would you expect annual net revenue for each procedure to be roughly equivalent across insurers? If I’m the hospital management, I’d expect that would be a major concern: you can only get so many tests/scans per year out of your assets, and each one erodes its effective lifespan…
satby
Unsophisticated me looks at graphs like that and sees price gouging. How is it not?
ETA: or is that the point?
Starfish
I just joined a group of mothers in tech who are mostly based in California. A lot of these moms have a lot of medical bills related to childbirth or child-related incidentals. One person was talking about how they had to use an ambulance to get to the hospital because it was not accessible in other ways for some reason. The hospital chose the ambulance service, and now they are on the hook for $10k for a 6-minute ambulance ride. This is insane.
Mathguy
That’s just crazy and wrong. Another perfect example of how screwed up our system is.
MomSense
Today explained (a Vox podcast) did a story on Kliff’s article the other day. It’s called The $5,751 ice pack. Worth a listen.
cain
David – so I just got laid off, and insurance jumps to like 3.5x the cost after June 1st. Do I just jump on obamacare? I’m worried about what happens afterwards.
David Anderson
@cain: I would look very hard at an ACA policy. Speak with either a broker or a certified assistance counselor.
Victor Matheson
Awesome! Perfect price discrimination in a blog post! My day is complete.
JC
I work at a utility. We are regulated to prevent this type of pricing. WTF. I’m interested to know if the hospitals are for profit or not for profit.
W. Kiernan
I went to the emergency room a few years back. I have insurance through my employer. A couple weeks later I got an invoice, helpfully labeled “This is not a bill,” showing the various services I got during my two hours in the hospital; the bottom line was $14,500. A few days after that I got the summary from my insurance company. Between me paying the deductible and the insurance company picking up the rest, the total payment to the hospital was $770.
This is the equivalent of going to a car dealer and saying, “I like that Corolla over there. How much is it?” and being told, “Well, it depends. It could be $18,000. Or it could be $350,000. Who knows?”