Few laws limit hospital prices, transparency lacking
Aside from Maryland's hospital rate regulation law and California's Hospital Fair Pricing Act, no state, federal or local law limits what hospitals can charge their patients. Hospitals are free to set their own prices, and each hospital does so in a complex document called the "chargemaster."
California does require hospitals to publicly disclose their prices, but a 2009 study by the Rand Corporation found that "[u]ninsured patients in California are unable to successfully obtain information about the cost of medical care at hospitals despite recent state legislation intended to improve price transparency."
California law requires each hospital must submit a copy of its chargemaster, and a list of average charges for 25 common outpatient procedures, to the state oversight agency (OSHPD), which publishes them online. You can find any California hospital's chargemaster here.
It is well established that chargemaster prices are inflated, vary widely from hospital to hospital, and often have no relation to the actual cost of providing care.
Insurers, whether public or private, do not pay chargemaster rates. Instead, they negotiate discount rates with each hospital. They are able to do this because they have market power: they can direct patients away from hospitals that charge too much.
Self-pay patients, on the other hand, are usually charged the full, inflated chargemaster price for hospital care, and have no leverage to negotiate a discount.
More resources on hospital pricing:
- California HealthCare Foundation: Price Check: The Mystery of Hospital Pricing
Uwe Reinhardt, New York Times: How Do Hospitals Get Paid? A Primer, 1/23/09
National Bureau of Economic Research: A Bargain at Twice the Price? California Hospital Prices in the New Millennium, 7/09
Two-thirds of the hospitals in California are non-profit, which means that they pay no property tax and no corporate income tax and get a discount on their unemployment insurance taxes, while contributions to them are tax deductible.
In exchange for these tax benefits, the IRS requires nonprofit hospitals to be organized and operated exclusively for charitable purposes. For many hospitals that means providing care to uninsured and underinsured patients at no cost or at a lower cost than they would normally charge. However, the IRS gives hospitals a lot of flexibility in defining what counts as a charitable expense, and in calculating how much they spend. For example, some hospitals count bad debt as a charitable expense, while others count things like health classes and libraries.
As a result, the amount of free and discounted care provided by non-profit hospitals varies widely and, in many cases, amounts to significantly less than the value of the tax benefits they receive. In California, one study found that some nonprofit hospitals spend less than 1 percent of net patient revenue on charity care.
Greater public disclosure can help. In 2001, San Francisco enacted a Charity Care Reporting Ordinance that requires hospitals to report the amount of charity care they provide, in a standard format to permit comparisons between hospitals. The ordinance provides a clear definition of charity care as care provided "without expectation of reimbursement," requires all hospitals to calculate charity care in the same way, and lists the dollar value of all the hospitals' tax benefits next to the dollar value of charity care provided. The City's Annual Charity Care Reports are posted online here.
A report in 2006 found that the San Francisco ordinance had helped increase the amount of charity care provided by hospitals in San Francisco, simply by shining a light on their practices. The ordinance has also helped to:
- Maintain strong taxpayer support for the county hospital, San Francisco General Hospital, which provides the majority of charity care in the county; and,
- Make it possible for San Francisco to enact its innovative health access program, Healthy San Francisco, by quantifying the cost to local taxpayers of health care provided to uninsured employees of local businesses that did not provide health coverage.
In 2008, the IRS began to require nonprofit hospitals to report quantifiable data on the amount of charity care and other community benefits that they provide.
In California, the State Board of Equalization, which oversees state taxation, agreed in April 2009 to collect data on charity care spending by nonprofit hospitals, and to revisit the issue of a minimum standard for charity care later once that data has been collected and analyzed.
The Affordable Care Act of 2010 added new requirements non-profit hospitals must meet as a condition of their federal tax exempt status. Those requirements are summarized here.
More resources on charity care:
- Community Catalyst: Hospital Accountability Project
Health Access: Notes and News About Nonprofit Hospitals
Insured patients are increasingly being billed by doctors when the patient's insurer refuses to pay as much as the doctor wants. This practice is known as "balance billing," and unfairly puts the consumer in the middle of a billing dispute between the health insurer and the doctor. Patients who do not pay these bills are often aggressively pursued or sent to collections.
In October 2008, the Department of Managed Health Care established rules to restrict balance billing for emergency services. These rules protect consumers with coverage through HMOs, Blue Cross PPOs and Blue Shield PPOs against billing disputes between out-of-network emergency doctors and their insurance companies.
Consumers with coverage through PPOs sold by companies other than Blue Cross and Blue Shield, or other kinds of health benefits such as high-deductible plans and limited benefit plans, are not protected by the DMHC rules.
In January 2009, the California Supreme Court unanimously upheld the DMHC rules and outlawed balance billing for HMO patients receiving Emergency Room care. In the decision, Justice Ming Chin wrote, "Billing disputes over emergency medical care must be resolved solely between emergency room doctors, who are entitled to a reasonable payment for their services, and the HMO, which is obligated to make that payment."
Health Access and other IOU partners support the 2008 DMHC rules and new efforts to further prohibit this practice for consumers not covered by the California Supreme Court ruling.
More resources on balance billing:
- California HealthCare Foundation: "Unexpected Charges: What States Are Doing about Balance Billing" 4/09
- Wall Street Journal, "Balance Billing Nixed by California Supreme Court" 1/9/09
- Business Week, "Medical Bills You Shouldn't Pay" 8/28/08