A Clear Solution: Cutting Healthcare Costs with Price Transparency

In 2015, Malcolm Bird accidentally cut his one-year-old daughter’s finger with a nail clipper and brought her to the local emergency room to make sure that the cut wasn’t serious. At the hospital, a doctor washed the wound with water and placed a band-aid on it and promptly sent the father and daughter home after just 20 minutes. However, a week later, Bird received a bill for the visit totaling $629.

As it turns out, it’s not hard to find dozens of stories like this in news outlets across the country. Connie Peterson was charged nearly $26,000 for a 45-minute stay at a hospital-owned outpatient center in Iowa. In 2013, a California hospital charged Deepika Singh more than $2,200 for three stitches. A large part of the exaggerated cost of medical services in American hospitals is due to hospital facility fees. These fees are used to pay for overhead costs that freestanding medical practices do not have to pay, like the cost of staffing a 24-hour emergency room, and they can range from around $25 to hundreds of dollars per visit. This means that patients end up paying two separate bills — one for the procedure, and another for seeing a doctor and using the building. So, while Malcolm Bird was only charged $7 for a band-aid, he had to pay an additional $622 for seeing a doctor employed by the hospital and visiting the emergency room.

Few people argue in favor of eliminating the fee completely — the cost of maintaining a hospital and offering 24-hour emergency care is enormous, and facility fees are a logical way to provide consistent revenue. However, a lack of transparency about facility fees and a drastic increase in the number of practices that are allowed to charge them places a serious burden on both patients and taxpayers.

One controversial aspect of hospital pricing is the ability of freestanding medical offices owned by hospitals to charge facility fees. In practice, this means that patients can end up paying hundreds of dollars more for a procedure done in an office, depending on whether the building is owned by a hospital or an individual. The hospital industry has been capitalizing on this rule — in the past decade, hospitals have been buying up freestanding practices and converting them to outpatient facilities or keeping the private physicians on payroll, which allows them to charge facility fees for any procedures done in those offices to bring in extra revenue. It’s becoming increasingly difficult to avoid these types of offices: The Medicare Payment Advisory Commission (MedPAC) reported that the percentage of doctors employed independently, or not by hospitals, fell from 57% in 2000 to 36% in 2013, while the number of doctors working for hospitals or hospital-owned practices has steadily risen. At the same time, many hospitals refer patients exclusively to offices that are owned by the hospital, which prevents patients from shopping around for the highest value.

Though most states have laws mandating some form of price disclosure, many states don’t offer useable resources and easy-to-understand information that would help patients make rational decisions about which provider to use.

This trend seriously impacts the cost of Medicare, as well as the cost to the patient. The same 2013 MedPAC report found that Medicare paid $188 for an EKG at a private physician’s office. At a hospital outpatient facility, Medicare was required to pay two separate bills for the same exact procedure: $62 for the procedure itself plus a $390.49 facility fee, adding up to a total of $452.89. In both of these cases, patients were required to pay the remaining 20 percent of the bill not covered by Medicare, meaning that they paid around $100 more in the hospital-associated office.

Although Congress has attempted to cut Medicare costs by cutting back the fees charged by medical services provided in hospital-owned offices, they have run up against serious resistance from the hospital industry and its allies. The service employees union argued in a 2012 ad in The Washington Post that reducing facility fees would force hospital-owned clinics and offices in rural areas to close, cutting off many people’s already limited access to primary health care. But even a simpler policy solution, such as a consistent federal law regarding transparency about the cost of facility fees, could go a long way toward easing the burden on patients and promoting competition to lower costs for both hospital-associated offices and freestanding practices.

Research has shown that cost transparency can lead to a decrease in the use of hospital-based facilities and overall cost reduction due to increased competition: One study from 2013 created a cost transparency program in which hospitals were required to inform patients about the price of MRI scans at different providers in the area, and allowed patients the opportunity to choose where to go. Patients who were able to choose a provider paid 18.7 percent less than patients in a similar geographic area without the transparency program. Additionally, the study found that the price variation between hospital-associated and non-hospital providers decreased by 30 percent in the area with the transparency program, suggesting that competition leads to higher value for the patient. And in a country where most bankruptcies are the result of high medical bills, allowing patients to make an informed decision about where to receive medical services could save families from financial ruin.

However, there are currently no federal laws requiring hospitals to disclose the cost of facility fees or inform patients that they could avoid paying the extra fees at a private medical provider. Though most states have laws mandating some form of price disclosure, many states don’t offer useable resources and easy-to-understand information that would help patients make rational decisions about which provider to use. In 2015, The Catalyst for Payment Reform and Health Care Incentives Improvements Institute released a report which examined transparency laws and accessibility of price information in all fifty states, and found that only seven states mandate an all-payer claims database (APCD) with meaningful information about the price that consumers will actually have to pay out of pocket, and publish it on a user-friendly website.

Most of the rhetoric about health care policy revolves around making sure that people have coverage; however, in the current system, even people with full health insurance are vulnerable to debilitating medical debts. The average deductible for an insurance plan increased by 67 percent between 2010 and 2015, which means that people must pay more money out of pocket before their insurance will start covering medical expenses. As a result, medical bills are taking up a larger portion of people’s incomes than ever before and surprise charges are having a larger impact on patients, insured or not. In order to design a health care system that makes sense, legislators need to take action to combat inconsistent and opaque pricing for medical expenses. Although price transparency isn’t a panacea for the problem of excessive facility fees, it is a necessary first step towards allowing people to choose lower cost and higher value services.

 

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