Why are hospital prices crazy?

Sarah Kliff of Vox has an interesting article looking at hospital pricing.  She provides examples of $629 for a Band-Aid in an emergency department to over $3,000 to look at a bruised finger.

Part of these high costs are not just physician time and treatment materials but a facility fee.  The facility fee is basically the cost of keeping the emergency department open in terms of overhead, lighting, the availability of high-tech equipment, etc.  This cost is often spread across all visits.  However, the facility fee cost can range from $500 to $3000 according to the article.  Is this cost reasonable?

“I see both sides,” says Renee Hsia, a professor at University of California San Francisco who studies emergency billing and helped me analyze that bill. “I think there are going to be facility charges regardless of the actual service that will always be part of ER care. But where this father has a reasonable point is that when you look at the cost of the Band-Aid and the proportional overhead, it just feels really crazy.”

Clearly if hospitals were setting prices for consumers, the cost for a $600 Band-Aid would be problematic in a market setting.  However, because there is less competition for emergency room business–patients often have to go to the closest facility–the market may not work well.  Additionally, hospitals are not pricing for patients but their primary customers–insurance companies.  Prices are often set strategically to maximize reimbursement from health plans.

As more cost sharing is shifted to patients through high-deductible health plans, however, patients are being exposed to more of these pricing irregularities.  For a health plan, any pricing anomaly for one patient is not a problem if prices are unreasonably lower for other patients.  Further, health plans don’t plan the sticker price but rather a negotiated lower rate.  Thus, there is a further disconnect between health plan and patient prices.

I can’t tell you if hospital prices for specific services are too high or too low as providing health care services is expensive.  If more cost sharing is moved towards patients, however, additional pricing transparency is needed to insure that patients know what to expect financially when they need health care services.

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