How Obamacare will largely eliminate price variations

If you have been paying attention to US healthcare policy debates lately, you know that hospitals have a price problem. Walk across the street from one hospital to a competitor hospital, and you could easily find yourself facing a $30,000 increase in your medical bills. At one extreme for instance recent information shows that replacing your hip with a surgical implant might cost anywhere from $5000 to more than $200,000, depending upon which hospital you go to for your procedure.

The good news is this: Obamacare will largely eliminate these price variations, by increasing the proportion of Americans with health insurance, thereby leading our insurance providers to negotiate more reasonable prices from hospitals.

Not sure that anything good can come out of Obamacare? Let’s look a bit more closely at the recent hoo-hah about hospital pricing.

Many people were introduced to the insanity of hospital pricing by Steve Brill, in his wonderful Time Magazine article. In that article, Brill highlighted the almost arbitrary nature of how hospitals price everything from a dose of Tylenol to a cardiac bypass operation. He introduced many people to the concept of the hospital “charge master” – essentially, a list that each hospital puts together of its services and their corresponding prices. (Before the Time Magazine article, I wrote about a phenomenon from behavioral economics that influences the way these prices are set. Go here if you’re interested in seeing that.)

Brill’s article focused primarily on two types of patients:

1. Those without health insurance, who are therefore forced to pay whatever the hospital decides to charge them, or default on their bills, or desperately negotiate some kind of settlement.

2. People who decide to receive healthcare that is not covered by their insurance, such as the patient he opened up his article with who chose to go to M.D. Anderson Cancer Center only to find out they wouldn’t take his insurance, so he paid out-of-pocket.

Brill focused on these two categories for good reason: these are the only people who receive hospital bills that reflect the charge master prices. That $200,000 hip replacement? No one with any kind of respectable health insurance plan would pay that price, and neither would their insurance company. Instead, insurance companies negotiate prices with hospitals. And they are not simply going to accept whatever price hospitals include on their master charge. They are going to negotiate prices that are consistent with other hospitals in the region, with the relative price determined by things like the market share and procedure the hospital, etc.

When the Obamacare individual mandate goes into effect, as well as the insurance exchanges and insurance subsidies for low-income people, the charge master insanity will become moot for most Americans. By encouraging people to buy health insurance, the law will protect people from the strange whims of those people in hospitals to set prices.

Indeed, all the publicity about hospital pricing should be a strong incentive for people to go buy health insurance. Some people are debating whether the penalty for refusing to buy health insurance is large enough to incentivize people. But how about fear of a $200,000 hip replacement? Or the anxiety that has to be provoked by the thought of an emergency appendectomy costing more than $80,000? That ought to be a huge incentive to buy health insurance, because such insurance is the best way a person has of preventing hospitals from overcharging them for their services. It’s a way of bringing a semblance of rationality to hospital pricing.

That does not mean that the charge master craziness will go away entirely once Obamacare is up and running. Some people will still choose not to buy health insurance, and they will be at the mercy of hospitals. Undocumented immigrants, too, won’t get any protections from Obamacare, because they are not allowed to receive subsidies under that law. But for the vast, vast majority of people living in the United States, the difference in prices across hospitals will be dramatically reduced because now they will be receiving private health insurance, or healthcare coverage through Medicaid or Medicare, and those third-party payers will negotiate on their behalf.

Whether you love Obamacare or hate it, you ought to understand it. And to date, most people have not come to understand this important fact about Obamacare: It protects people from $200,000 hip replacements.

Peter Ubel is a physician and behavioral scientist who blogs at his self-titled site, Peter Ubel and can be reached on Twitter @PeterUbel.  He is the author of Critical Decisions: How You and Your Doctor Can Make the Right Medical Choices Together.

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