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Published in The Journal Record
July 31, 2019
Some things are true 100% of the time. The sun rises in the East every day and the square root of 49 is always seven.
Some things, while they appear to be true, may have interesting nuances making us question their infallibility. One is that if consumers know the pricing of goods or services, they will be more aggressive and critical buyers.
The president just signed an executive order requiring a new level of price transparency in medical and hospital care. Who could argue with such a move? Clearly, this will have a salient effect on consumers making selections for their personal or family care.
There is one quirk in this otherwise rosy scenario. People rarely pay published prices. Every hospital negotiates with every insurance company for a discount off their published pricing. The discount amount generally depends on the leverage an insurance company has, meaning how many patients can they direct to any one facility or provider. The more patients a hospital gets from insurance company A as opposed to insurance company B, the greater the discount company A can negotiate. It’s volume pricing pure and simple. It’s very similar to what Wal-Mart does every day. Even those with no insurance almost never pay retail pricing. Hospitals generally discount heavily or, in some cases, completely write off the cost for indigent patients.
Let’s be clear. I’m not defending the system, just stating the obvious. This pattern of volume discounting has grown up over the years. Because of its complexity it can lead to confusion on the part of consumers, and employers who may be providing health insurance.
So, while all of us applaud the president’s decision, the impact on consumers may be significantly overstated. Small rural hospitals with low patient volumes have little leverage in negotiations with insurance companies; therefore, they may be paid less for similar services. Small surgery centers specializing in low cost, high margin, low acuity surgeries tend to be very aggressive on their pricing. A tonsillectomy done at a surgery center can appear to be significantly more price advantageous than one done at a large complex hospital.
One of many questions one must ask is, if something goes terribly wrong at a free-standing surgery center, what happens to the patient? As you might guess, an ambulance is called, and the patient gets transferred to a sophisticated hospital for their recovery.
Perhaps in health care the sun doesn’t always rise in the East.