Semro column: The price of health care is the problem
When we think of health-care costs we think of insurance premiums, deductibles and co-pays. But we rarely consider what drives those costs, specifically the price of health care itself and how those prices get set.
Many people say that we can fix our health care system by relying on free-market principles. Well, one of the most basic free-market principles is to let consumers know the price of something before they buy it. In 2016, 56 percent of all Americans (almost 180 million people) got their health care through the large and small group health insurance markets. For these Americans, prices are set by the hospital/care provider and reimbursement rates are negotiated between the provider and the insurance company. Since these negotiations are “proprietary,” those prices are “trade secrets.” You don’t get to see them. Other hospitals, insurance plans, policy-makers and elected officials don’t get to look at them. Prices can be set to whatever the market will bear for the most essential of services.
The 31.5 million Americans who are uninsured (up from 28 million since the start of the Trump Administration) don’t get to see prices either. And worse yet, they’ll pay the highest prices of all because no one negotiates for them.
So, what does this “black box” pricing system lead to?
In May of 2012 a study was published in the Archives of Internal Medicine entitled “Health Care as a Market Good: Appendicitis as a Case Study.” The researchers looked at 19,368 cases of “uncomplicated appendicitis treatment” for one year in the state of California. Uncomplicated appendicitis treatment is a routine appendectomy performed on someone between the ages of 18 and 59 that had a successful outcome, hospitalization of less than 4 days and a normal discharge to home.
The cost for this routine surgery ranged from $1,529 in a county hospital to $182,955 in a private for-profit hospital. No, that wasn’t a typo. More importantly, the median cost for uncomplicated appendicitis treatment was $33,611. The median cost was 2,800 percent higher than the lowest cost for the same procedure.
Even in Fresno County, which had the smallest price variation, the difference between the lowest and highest cost for this surgery was over $46,000. Across California, county hospital charges were 37 percent lower than nonprofit hospitals and for-profit hospital charges were 16 percent higher than nonprofit hospitals.
According to the study, a third of this variation in charges was “unexplained.”
So what about Colorado? The Colorado Hospital Association (CHA) authors an annual report on hospital charges and average lengths of stay. The report in 2012 was the last one where the CHA unambiguously provided details on the average charge by hospital for what they call a “minor severity procedure.” A minor severity procedure is defined as one with minimum complications or secondary diagnoses.
In 2012, the average cost of a minor severity appendectomy (which is as close as we can get to the “uncomplicated” treatment defined in the previous study) could vary from $16,892 at Delta County Hospital to $42,564 at Sky Ridge Medical Center in Littleton. That’s a difference of $25,672 and a price variation of 152 percent. Average prices for other hospitals on the Western Slope ranged from $19,564 at St. Mary’s in Grand Junction to $23,946 at Aspen Valley and $26,637 at Valley View Hospital, here in Glenwood.
In 2012, prices for minor severity hip replacement surgery varied from $22,941 at Delta County Hospital to $53,241 at Valley View to the highest price of $90,238, once again at Sky Ridge Medical Center. If you needed minor severity knee replacement surgery, it would have cost $33,476 less at Aspen Valley Hospital in Aspen than it would have cost at Sky Ridge in Littleton.
With all this in mind, it might not be surprising that according to the 2017 Colorado Health Market Review Report, Sky Ridge Medical Center had the second highest profit margin of any hospital in the Denver metro area. Sky Ridge had an annual of income of $173.8 million and a profit margin of 40.8 percent in 2016. That’s second only to Swedish Medical Center which had a profit margin of 44.1 percent.
In terms of profit, the only Denver hospital on the losing end was Denver Health, which sees the largest number of uninsured and Medicaid patients in the state. Denver Health saw an operating loss of $6.5 million and a negative profit margin of 1.3 percent.
If health-care providers can charge any price for an essential service, be accountable only to the insurance company they negotiate their reimbursement rates with and if they can keep those prices secret, costs will continue to grow. The high prices and the extreme cost variations that exist between hospitals need to be explained and in some cases even justified. Until this black box is pried opened that isn’t likely to happen.
Bob Semro of Glenwood Springs is a former health policy analyst for the Bell Policy Center, and a legislative and senior advocate.