Sorting Out the Meaning of Hospital Pricing Disparities

May 21, 2013, 12:57 PM, Posted by

Head Shot of Susan Dentzer Susan Dentzer: Toward a Healthier America

What does U.S. health care have in common with an exotic international bazaar? The prices at either one are almost never posted, whether for a heart bypass operation or an antique rug. And the final price will almost certainly have little to do with the seller’s opening bid.

The nature of the U.S. medical bazaar was laid out earlier this month when the Centers for Medicare and Medicaid Services (CMS) released the prices billed to Medicare by more than 3,300 hospitals for 100 of the most common conditions or procedures. Not only was there wide variation in what hospitals charged, but there was also considerable variation in what Medicare actually paid—even though  hospital payment rates have been set prospectively, based on nearly 800 so-called diagnosis related groups (DRGs) for 30 years.


  • Across the nation, average hospital charges for major knee or other joint replacement varied from $16,200 to $142,291—or by a factor of almost nine (see map, below).
  • Hospitals in the same community charged markedly different rates for the same condition—for example, from $21,000 to $46,000 for hospitalization for heart failure in Denver.
  • Medicare’s actual payments to hospitals were also variable, although to a smaller degree than charges. Medicare paid hospitals on average $45,800 for DRG number 870, a severe case of sepsis. But East Alabama Medical Center in Opelika, Ala., was paid an average of $33,133 for that DRG, while University of Texas Southwestern Medical Center in Dallas got $77,389.

To explore the significance of the confusing and conflicting data, the Robert Wood Johnson Foundation-funded Changes in Health Care Financing and Organization project held a webinar on May 15.

Presenters were Niall Brennan, director of the office of information products and data analytics at CMS; Suzanne Delbanco, executive director of Catalyst for Payment Reform; and Uwe Reinhardt, professor of political economy at Princeton University.

Their answe­­­r as to whether these hospital charges matter? Yes, no, and sometimes, maybe.

Brennan took on assertions that the charge data is meaningless because Medicare rarely if ever pays those charges. In fact, said Brennan, some aspects of the Medicare hospital payment formula are still linked to historical charges from the days before the current prospective payment system was adopted. To determine the exact relationship between today’s charges and Medicare payments, there would need to be a careful analysis of each charge for a given DRG and the actual payment made.

Brennan noted that what CMS pays different institutions is influenced by a variety of factors—including wage differences from one area to another, or whether an institution is an academic medical center that receives additional Medicare payments to help support its teaching programs. He also pointed out that the Medicare Payment Advisory Commission, or MedPAC, had repeatedly looked at what Medicare pays hospitals, and determined that, overall, payments were “appropriate” in spite of the fact that hospital charges are rising rapidly, such that Medicare is paying an ever-shrinking share of these charges over time.

Delbanco noted that Medicare’s payment rates also influence private insurers’ payments to hospitals, which can vary widely as well. Her organization funded a 2010 study by the Center for Studying Health System Change that showed that private insurers’ payments to hospitals can be as high as five times what Medicare pays for inpatient services. The fundamental lesson, she said, is that all payers should move toward more rational systems that tie payments more closely to patient outcomes.

Delbanco and Reinhardt agreed that more states should follow the example of Massachusetts, and require mandatory reporting of hospital charges and reimbursement rates to increase price and quality transparency. Reinhardt and the other webinar participants also agreed that, for one group of unfortunate people, Medicare hospital charges can matter: the nation’s uninsured. “There are some patients who are charged these [prices] and sued and hounded for them” by hospitals, Reinhardt said. As more Americans become insured under the Affordable Care Act some of that burden will be alleviated. But Reinhardt argued that states should go further to protect the uninsured, limiting maximum hospital charges on residents lacking coverage to what Medicare pays plus 15 percent.

All participants agreed with Brennan that this data release was a new “conversation starter” as the nation continues to grapple with the costs of health care. “We want people to ask why and how [prices are set, and] to talk with hospitals, and hopefully get to a place where some of these pricing structures make more sense.”

This post is part of a series of commentaries: Susan Dentzer: Toward a Healthy America.

Joint Replacement Map for May 2103 Dentzer Blog post.