Price-Gouging by Doctors and Hospitals
Filed under: Cost Control, Hospital Finances, Physician Compensation
Mark A. Hall, Professor of Law and Public Health, Wake Forest University
Carl E. Schneider, Professor of Law and Internal Medicine, University of Michigan
[Ed. note: As noted above, we are very pleased to welcome Professors Mark Hall and Carl Schneider to the blog today.]
We cannot reform health care intelligently unless we understand the medical marketplace well. Debates about reform have scrutinized the health-insurance market, but they have neglected a crucially defective feature of the medical marketplace — the way doctors and hospitals charge patients when prices are not set by regulation or by negotiation with insurers.
When patients are not protected by large private or public insurers, doctors and hospitals charge them astonishingly more than patients with Medicare or managed-care insurance. Some price difference would make sense, because insurers offer providers large volume and economies of scale. But we are not talking about discounts of 10, or 20, or even 30 percent. Providers routinely double, triple, or even quadruple prices for unprotected patients. Such huge mark-ups can only be regarded as price-gouging — exploiting market power to charge prices virtually unrelated to actual cost or market value.
A comprehensive analysis of data hospitals report to Medicare shows that, on average, hospitals charge uninsured patients two-and-a-half times more than they charge insured patients and three times more than their actual costs. In some states mark-ups average four-fold.
Data for physicians’ prices are less comprehensive, but information from office management systems is disturbing. Across a range of diagnostic and invasive specialty services (echocardiography, coronary catheterization, liver biopsy, upper GI endoscopy, circumcision, flexible sigmoidoscopies, hysterectomy, appendectomy, gall bladder removal, and arthroscopic knee surgery), many physicians in 2003 charged uninsured patients roughly two to two-and-a-half times what insurers paid. Only primary care physicians appear to be staying within plausible bounds. They typically charge uninsured patients only one-third to one-half more for basic office or hospital visits than they received from insurers.
Providers defend themselves in several ways. First, they call these price differences steep discounts rather than huge mark-ups. This is almost laughable. Most providers charge “list prices” to only a small minority of patients (10-20%), so these are hardly a genuine baseline. Second, providers argue that because they often cannot collect list prices, they are on balance receiving little more than they would receive from insurers. However, when patients cannot pay inflated bills, doctors and hospitals regularly send them to collection agencies, ruining patients’ credit and bankrupting millions of them.
Third, providers blame the government by claiming that program and accounting rules require them to bill this way. But governmental agencies have declared that this is not true, and while some rules may still be irksome, rules about billing certainly do not require providers to set their prices as high as they do. Many tax-exempt (non-profit) hospitals recently wilted under scrutiny and adopted sliding-scale policies for low-income uninsured patients, but these policies do little to help insured patients who are receiving care out-of-network or uninsured patients from the broad middle class.
Insurers’ attempts to stop price gouging have failed. Some large insurers have refused to reimburse out-of-network providers for the full amounts they charge on the grounds that those amounts are not “usual, customary, and reasonable.” But New York’s Attorney General called this “consumer fraud” because patients were left owing the full bill. Courts have been little help. Consumer class-action lawsuits have attacked price gouging by non-profit hospitals, but courts have dismissed most of these cases on various technical grounds.
Government regulation has inhibited price gouging, but only for people covered by government programs. Medicare, for instance, prohibits doctors from charging Medicare patients more than about 10% over Medicare-approved rates. But inflated pricing still afflicts the uninsured and privately insured people buying care out of network. Some reformers simply advocate greater price transparency so that patients know better what to expect when seeking care without the protection of insurers. But transparency will not fix the structural dynamics of market power that allow providers to charge almost whatever they want.
To help medical markets work better, the government should cap what doctors, hospitals, and other providers may charge patients who are not protected by regulated or negotiated discounts. The details can be debated and refined, but one approach is to cap charges at, say, 150% of a normal reference rate. The reference rate could be what Medicare pays, or a weighted average of what larger private insurers normally pay across a region. Doctors with boutique practices could still charge what they wished for extra concierge services, or perhaps doctors who don’t accept any insurance should be exempted. Design features are important and tricky, but they should not keep us from setting reasonable bounds within which markets can function.