Hospital charges are high—and largely irrelevant

I was disappointed to see headlines about high hospital charges dominating the media coverage of cost data released this month.

The headlines attracted public attention. But they may distract us from a more important discussion about why we Americans spend so much on health care but are so unhealthy.

Many factors are driving this sad reality, but high hospital charges are not chief among them.

In the real world, a hospital or doctor being paid actual charges is nearly as mythical as seeing a unicorn in Fairmount Park. Almost no one—not insured patients, not uninsured patients with low incomes, not the government, and not the overwhelming majority of commercial insurers—pays actual charge rates for hospital care.

(Please note that if you have questions about a medical bill—including whether you are being asked to pay actual charges—you should talk to your doctor or hospital right away.)

Let's look at hospitals' charges versus actual payments for an increasingly common procedure like hip replacement.

Source: HAP analysis of Pennsylvania Health Care Cost Containment Knee and Hip Replacements 2013

Pennsylvania hospitals that performed hip replacements for at least 11 Medicare patients in 2012 have two dots on this chart. The red dot represents the hospital's average charge for a hip replacement. The green dot represents what Medicare actually paid.

Charges are quite literally all over the map. But Medicare payments tell a different story. They are much, much lower and vary less. (In the interest of readability, one outlier hospital charge for $150,000 was excluded from the chart.)

In 2012, about two out of three hospitals were paid $9,000–$12,000 per hip replacement. About one in four were paid $12,000–$15,000. A handful of outliers were paid above or below these ranges.

Factors like workforce (nurses are paid more in Philadelphia than Franklin County) and whether a hospital trains residents account for some of the differences in payments. So does the community a hospital serves: socioeconomic factors can make patients more unhealthy and surgery more complex.

Hospitals are not allowed to share with each other the amounts that commercial insurers pay for hip replacements. But we do know that some insurers pay hospitals at "Medicare plus" rates (as in Medicare plus 15%, or whatever percentage the insurer and hospital have negotiated). So hip replacement payments from commercial insurers are likely to be similar to Medicare payments.

By all means, let's continue the essential conversation about how best to reduce U.S. health care spending, and, at the same time, improve our health, well-being, quality of life, and productivity.

A new report from PricewaterhouseCooopers identifies some good opportunities. These include shifting care from hospitals to community settings, "virtual" care through telemedicine and other technologies, and better management of chronic care through healthier lifestyles. (The report also notes that hospital prices have recently decreased for the first time in 16 years.)

But let's leave the distracting discussion of charges behind us.

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