Is it even possible to estimate the cost of a health procedure?

Is it even possible to estimate the cost of a health procedure?
By Joanne Rodrigues
The best way to stay out of medical debt is to be able to anticipate your healthcare costs ahead of time. However, hospital prices are complicated, convoluted and inaccessible.

Why does it have to be so difficult for a patient to make an informed decision about healthcare? Because to make an informed decision, a patient must know the cost of a procedure before agreeing which is next to impossible with our current pricing system.

The best way to stay out of medical debt is to be able to anticipate your healthcare costs ahead of time. However, hospital prices are complicated, convoluted and inaccessible. The short answer is no, you’ll probably never be able to estimate to the dollar the price of a complex health procedure. No one can easily tell you (because of the complexity of the system and the number of different prices for different payers). Hospitals who would be best able to do so, have a vested interest in keeping that information from you.

The current pricing system allows for de-facto price discrimination among consumers. What is price discrimination? It essentially means that one hospital can charge different prices to different consumers for the same service. It also allows hospitals themselves to take advantage of information asymmetries between the consumer and the hospital and between the consumer and the insurer. Basically, if you don’t know the prices, then the hospital can charge different people different prices based on health provider, income and sometimes even zipcode of residence, and they do (often gloriously so, see the blog post “Why crowdsourcing hospital prices will never work?”), even though it costs the same to provide that service to different customers.

Imagine that you went to a restaurant. When you sit down, the waiter brought you some food. After you finished eating, you got a bill for $1000. Your neighbor who ordered the same meal received a bill for $2500, and the person next to him received a bill for $120. You would not be pleased. In fact, you’d probably report the business to the Better Business Bureau (BBB), dispute your bill and write a horrendous review. Well, this is exactly what’s happening today at hospitals with prices being charged for services.

De-Facto Price Discrimination

Hospitals gain from not disclosing their prices. For some hospital services, they even have a captive audience for certain procedures. If you are hurt, it’s very difficult to compare prices. The worst part of the system currently is that even if you are not hurt, it’s difficult to compare prices for services.

How to fight price discrimination

To combat pricing discrimination, you must understand the lowest prices paid. The Medicare reimbursement price is the lower bound. It’s possible to pay less than the Medicare reimbursement price, but highly uncommon. This means that most prices that people pay are between the list price (which is the Chargemaster or the price hospital list for a procedure) and medicare reimbursement rates (or the price Medicare reimburses hospitals for Medicare patients), even with insurance.

Back to our restaurant example, suppose we know that someone paid $120 for our restaurant meal. Then, we can go back to the restaurant and ask them to refund anything we paid above $120. This could work if there are enough of us or if we have some regulatory power that can ban restaurants from discriminating.

But the problem with price discrimination is that even if we know the cheapest price, we cannot pay the cheapest price unless:

  1. There are regulations in place that prevent price discrimination.

  2. Competition can lower prices when everyone knows the lowest price. Many hospital systems are buying up competitors for the reason. Monopolies in a geographic area can have full price setting power. This simply means that if there is only one hospital in your area that offers a heart bypass surgery and you need a heart bypass surgery to live, then you have to pay whatever price they charge. For price discrimination to go away, new competitors need to come up that can offer the service at a lower price to consumers. For instance, under my health plan, a doctor’s visit costs approximately $220 per visit. The startup Heal offers doctor’s visits to all customers at $159. We, then, decided to use Heal instead. Competition can force providers to lower their prices.

  3. We can sell the service to others. Let’s say I could pay $50 for an “X-ray of the Abdomen” as a Medicare patient. I know the privately insured patient would pay $350 for the same procedure. Then, if I could sell an ‘Xray of the Abdomen’ to another patient, then price discrimination would break down. This is a really wonky idea, but shows you why price discrimination will not work in a truly free market system.

This analysis shows us why price discrimination is best combated by preventing hospitals from price setting and becoming monopolies in certain geographic regions. Both of these things are becoming more pervasive over time.

Still, we can become informed consumers. When we know the lowest prices, we can at least shop around with a target price in mind, instead of blindly accepting the price we are billed later. While we have taken a large step in the right direction, knowing the lowest prices is not a full solution to the problem of hospital price transparency.