Redditor “badengineer” gives a compelling and clear explanation of what’s going on with wildly-fluctuating hospital charges. Not a lot of mainstream folks read Reddit, so I thought this was worth cross-posting over here.

I work for a top tier academic medical center as a corporate strategist, so I’m at least aware of how the various hospitals in my state are doing, how pricing works and what the market dynamics are. There are a few things that should be pointed out….

First, you’re right. The charge rate certainly doesn’t correlate to quality metrics.

The charge rate listed in the data (available as an 11MB excel file at CMS.gov) has nothing to do with anything. It’s not a real price. It doesn’t correlate to the price anyone pays except for the extremely rare millionaire who doesn’t have insurance. Medicare doesn’t pay it, 95% of uninsured people can’t pay it, insurance companies don’t pay it.

It’s primarily a negotiating trick, with some accounting tricks thrown in for good measure.

People need to understand how pricing works, because it’s the cancer at the heart of healthcare.

At any given hospital, there are a hundred different prices for any given procedure. Medicare and Medicaid pay all hospitals the same amount for Procedure X. Most hospitals lose 20% (or more) on that Medicare price and make it up on the private companies.

Every single private health insurance company pays a different price, very often 150% of what Medicare is paying. Each plan negotiates prices all on its own, in secret. They have no idea what other insurance companies pay. It’s in no one’s interest to share that price. It hurts hospitals’ future negotiations if their lowest negotiated price is public and it hurts payers negotiations if it gets out that they overpay some hospitals.

The hospital says “X costs us $50K, Y costs $60K, $Z costs $20K.”

The insurance company they’re negotiating with says “we normally pay $25K, $35K and $9K for those procedures. How about we give you 50% of your charge rate?”

The hospital says “OK”.

As a result, at a single hospital there can literally be 100 plans paying different prices for your gall bladder removal. Multiply that by 3,000 hospitals in the country. There are maybe 3,000,000 different prices for that surgery out there. All completely secret. You can imagine how that might create problems.

So basically, this charge rate is nothing more than a bit of insight into a hospital’s chosen negotiating tactics. They either price high and discount a lot, or price low and discount a little.

Uninsured people are screwed no matter what. If you’re uninsured and land in the hospital, you’re likely going bankrupt. It’s almost irrelevant whether it’s a $200K bill or a $100K bill. You’re going bankrupt. You might think this pricing was designed to extract money from that uninsured population, but hospitals get so little money from them that most don’t think about trying to squeeze them more using this charge rate. A vast majority of that care is just written off.

If the charge rate doesn’t correlate to real prices, it definitely doesn’t correlate to quality. There’s very often an inverse relationship between cost and quality to begin with. Medical errors are expensive and the places that reduce them save a ton of cash in lawsuits, readmissions (in cases where they’re penalized for them), etc. For example, we’re an awesome hospital you’ve heard of, but some organ transplants cost 35% less at the best-of-the-best place, because they do it so frickin’ well. That’s real cost. Not fake charge book cost. Usually, the better the care, the cheaper it is.

The odd thing about this story is that it isn’t new. Dartmouth Health Atlas has been publishing similar data for decades. It’s great to see it being covered, because it’s insane and a clear symptom of a deeper problem, but I was surprised to see it on the front page of the Times.

And every time I write something about this, I have to add: neither insurance companies nor hospitals are (on the whole) getting particularly rich off of this. As crazy as it sounds, this is not the result of unusual greed or a morally corrupt industry. It’s a historical artifact more than anything. Non-profit hospitals (which is almost all of them) earn an average of 2.5% operating margin and that’s shrinking. I dunno about for-profit hospitals, but they’re still not raking it in like people think they are. Health insurance plans earn more like 3.5% on average. If you chart the most profitable sectors of the economy, that puts them pretty far down the list. Drug companies, in comparison, are deep into double digit margins.

Of course, that’s relatively small profit on a truly mind-boggling amount of money (17% of the american economy) so it has a gigantic effect. It also tends to concentrate a lot of pain on people who can’t afford to pay it.

Anyway, that low profit margin gets at why no one breaks out and tries to be more transparent. A tiny downtick in your reimbursement rates will sink you. As our contracting guy says, last time our main payer got slightly miffed and decided to throw some business across town, we laid off 500 people the next year.

This is just how the system works. It’s not a conspiracy. It’s a perfect example of how a a bad system forces a bunch of rational actors to do absolutely batshit crazy things. Everyone could stand to earn and do a lot more if things were rationalized and we did away with this system of invisible prices. That’s the tragedy of the commons for you.

All hospitals and insurers are forced to play this game. Whether that’s a big 100-facility for-profit chain, a gigantic charity-oriented catholic system, an academic research center or your community hospital. This is how money moves in the system. Any real fix stands to hurt so many players that it’s pretty unlikely we’ll see change from a political standpoint. I’m kind of hoping the whole thing just collapses under it’s own weight and something better can arise from the ashes.

The system seems beyond fixing to me, but for the sake of our conscience we must continue looking for solutions, because what we have now is an immoral cesspool.

The Old Wolf has spoken.