One of the reasons healthcare is such a hairball to understand -- much less reform -- is that so few of the actual workings of the system are remotely transparent. Much hospital pricing, for instance, is so deeply shrouded in layers of individually negotiated discounts, almost none of which are publicly disclosed, that many doctors and even administrators often don't know what a given medical procedure costs.
So it's always welcome to stumble across clear explanations for some of those opaque mechanisms, which is exactly what Joe Paduda over at Managed Care Matters has produced with a few recent posts on the subject of hospital charge-to-cost ratios and discounting. Simply put, hospitals have a tremendous degree of freedom in setting list prices for their services. As we've seen in the case of Carilion Health Systems, a Virginia nonprofit hospital network, it's entirely possible for a hospital to "charge" four to ten times what its closest competitors do for the same procedures. This counterintuitive strategy is only possible because big health insurers never really pay list price -- they negotiate the best discounts they can, often under the implicit threat of dropping a hospital system from their provider network. (Of course, the uninsured do pay list price in a perverse sort of double whammy.)
Joe ended up taking a closer look at Tenet Healthcare, one of the nation's largest for-profit hospital chains, which at least until recently had apparently established some of the highest list prices anywhere in the country. (The charge-to-cost ratio is the percentage difference between list price and what it actually costs the hospital to provide a given service.) According to 2004 data, one Tenet hospital had a charge-to-cost ratio of 1,092 percent!
One consequence of this strategy is that large insurers themselves may not pay all that much attention to costs so long as they've arranged a decent discount for themselves, largely because they've long been able to pass costs along in the form of higher premiums. Which, of course, fuels the insane levels of medical-cost inflation that are largely responsible for many of the healthcare system's problems here in the U.S. (Joe points out in a followup post that this has been a problem for Medicare in the past as well, although more recent changes in Medicare reimbursement have made it harder to game the system this way. He also notes that Tenet argues that it's mended its ways as well.)
Joe's point is essentially that insurers should be a whole lot smarter about this situation than they are right now. And, of course, they may not have much choice, as their ability to keep raising premiums is sharply constrained by the fact that fewer and fewer employers can afford them -- a situation likely to get a whole lot worse if we do enter a deep recession thanks to the financial crisis.
More broadly, of course, opaque pricing has several other nasty consequences, not least for folks with high-deductible health plans who aren't able to figure out in advance what their treatment will actualy cost them. It also makes it all but impossible for hospitals to compete with each other on a cost-benefit basis, since it's as hard for rivals to figure out each other's pricing strategies as it is for anyone else. There have been some recent efforts at some health systems to make their pricing a bit more transparent, but such moves are still way too few and far between to have had much impact yet.
For what it's worth, Joe thinks the downturn will accelerate efforts to reform the health-insurance market, possibly by banning medical underwriting and imposing community rating on a nationwide basis -- two moves that, at least in principle, would force insurers to compete more on cost and quality of care than on how well they can avoid covering sick people with high medical costs. He also suggests that more drastic changes to Medicare reimbursement may also be coming down the pike, although it's not clear to me what shape those reforms might take.