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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  • Michael Judge

    I’m not so sure that it will have much impact on price variations for substitute services even with insurance (maybe on the magnitude, but not on the effect itself). Once you have insurance, that is far from a guarantee that out-of-pocket costs cannot still vary wildly for the same procedure between facilities. From my view, the only way to eliminate price variations are to have full price transparency (like at the Surgery Center of Oklahoma: http://surgerycenterok.com/pricing.php) or to have a monopsony like Medicare use price controls (which has an unintended consequence of creating shortages).

  • Kaonwarb

    Agreed with Michael that this doesn’t reflect the reality that out-of-pocket charges vary wildly, even between comparable care within the same geographical area with the exact same insurance. Speaking from experience, I’ve seen over 3x variation for out-of-pocket costs, for example,uncomplicated vaginal delivery.

  • southerndoc1

    “by increasing the proportion of Americans with health insurance, thereby leading our insurance providers to negotiate more reasonable prices from hospitals”
    Won’t this be more than off-set by negotiating power gained by hospitals as they morph into mega ACOs?

    • Mengles

      Don’t bring facts into this discussion. They don’t penetrate the ivory tower utopia.

    • Disqus_37216b4O

      Adding 17 million people to the Medicaid rolls is going to force MD Anderson and Mayo to lower their prices……. somehow.

  • M.K. Caloundra

    I agree with Michael Judge below. See the piece in Reason Mag online
    from yesterday called “The U.S. Health Care System Doesn’t Need Price Controls. It Needs Price Signals”. It discusses both Steven Brill’s
    piece in TIME Magazine, and this last weekend’s Elisabeth Rosenthal piece in the NYT, and touches on the Bangor Daily News’ recent story of Dr. Michael Ciampi.

    “Customers who generally pay all or most of the cost themselves, and providers who, knowing that, compete for customer business based on price, service-type, and quality. Unfortunately, that’s not what the vast
    majority of the medical market—if you can really call it a market at
    all—actually looks like.

    “Real prices, and real price signals, can lead to price reductions, because suddenly the price matters—to the seller, who wants to find a buyer, and to the buyer, who wants to get value for her money. The state experience with price setting, on the other hand, suggests that it leads to bureaucratic bloat and incumbent favoritism. And the federal experience with price setting systems for Medicare leaves much to be desired. In other words, price controls aren’t the solution. If anything, they’re the problem.”

    There’s more at the link (google the title), including examples of some of the medical services which actually HAVE gone down in price.

  • http://onhealthtech.blogspot.com Margalit Gur-Arie

    So all those “bronze” policies on the exchanges will have no network restrictions and will be covering all hospitals in the country including M.D. Anderson Cancer Center, and all insured people with all levels of insurance coverage will be able to go to M.D. Anderson, and Mayo anytime they want to and get any care they want to get….
    Nice…..

    • Guest

      MD Anderson and Mayo Clinic will now be the same price as Podunk Community Hospital, and all insurance will cover everything everywhere. See also, “pigs”, “fly”.

      • PCPMD

        Also, by decree, they’ll maintain the same level of quality, innovation and professional excellence that made them internationally recognized – all on a shoe-string budget. Because everyone deserves Mayo Clinic healthcare at McDonald’s prices.

        • Guest

          I would like a Mercedes Convertible, but can only afford a Kia Rio. I’m pretty sure that’s not fair :-(

          • PCPMD

            We can pass a law for that!

          • Guest

            ObamaCar!

    • Elvish

      Every patient has the right to seek the best health care and should get such care.

      Besides, these centres don`t usually take any patient; not every cancer needs to be treated at such centres.

      However, it would be nice if every medically qualified cancer patient can get their treatment at MD Anderson or Sloan Kettering.

      • http://onhealthtech.blogspot.com Margalit Gur-Arie

        Agreed, but I suspect we need a different kind of “reform” to accomplish that.

      • Disqus_37216b4O

        “Every patient has the right to seek the best health care and should get such care.”

        Paid for by whom?

        • Elvish

          We`ll manage, the same way we managed to pay for two wars and Wall Street bail out.

          At least this time, it will be something beneficial to the welfare of the people.

          Just reallocate !

          • PCPMD

            We didn’t pay for them – we billed them to our children and grandchildren. Have a better solution?

          • Elvish

            Yeah, instead of paying a a government employee to eavesdrop on a 70 yr old lady or a 12 years old kid chatting online or talking on the phone, spend that money to provide healthcare for them.

            Perhaps this way we will be able to provide healthcare for those who were let go by their doctors of 20 yrs just because medicare stopped paying the doctors as much as it used to do !!

            You didn`t speak up when you billed your children for the 2008 collapse bail out and two wars, but when it comes healthcare, y`all are fiscally conservative.

            What a shame !

          • PCPMD

            LOL – love the assumptions you’re making about me. I despised the previous administration for its extravagant waste, infringement of individual liberties, unjustified wars, and wasteful spending – and I despise the current one for many of the same reasons. I don’t think either party really represents fiscal responsibility, individual liberty and small government. They just disagree on what to waste your tax money on, which special interest group to cater to, and which liberties to infringe.

          • Elvish

            I think I`ve misspoke, I did not mean you in particular. We all are in this together.
            I apologise.

          • PCPMD

            No offense taken. However, i still maintain that what you’re asking for is un-affordable. (I don’t consider going further into debt to pay for an unsustainable system the same as affording something. To afford a program, you need to be able to pay for it here and now)

          • Guest

            Borrowing money so you can give away Free Stuff is never a good idea. You should only give away money that you actually have.

          • Suzi Q 38

            I agree. My adult children think I am a moderate Republican. They say that I am not even a Republican. I am so annoyed by that.
            I think that less government and taxes for all is best.

    • sphenoid

      It’s no secret that hospitals approve or deny insurance contracts based on price. If an insurer has a low payment rate, a hospital will drop coverage as part of “good business” sense. This isn’t something new.

      The risk here is loss of market share. If a large insurer in the region has poor payment then the hospital administration has a tough decision, for if they refuse to take some insurance plans those patients (and money) will flow elsewhere.

      Large centers such as Mayo and M.D. Anderson have a huge amount of grant money coming in to fund their research projects, which also helps maintain/update the building, new equipment, etc. We cannot expect these centers or any other hospital to accept every insurance contract. There is a high likelihood, however, that there will a large enough cohort buying insurance from exchanges to assure hospital acceptance.

  • Noni

    I don’t see the connection at all. Requiring citizens to obtain health “insurance” will force hospitals to charge more fairly? Uh, no.

    Hospitals will still charge whatever they want, maybe more to recoup losses from all the additional bureaucracy they have to deal with and losing money when they don’t get paid for performance. Insurance and the government will pay hospitals what they are willing to pay. Hospitals will still go after the patient for the balance.

    The uninsured will still be stuck with outrageous bills that have no roots in reality.

    I’m hoping I’m wrong here.

    • sphenoid

      The chargemaster prices only affect patients who are paying out of pocket because they either don’t have insurance or are having a procedure that isn’t covered on their plan. With all of the additional opportunities to become covered in 2014 (Medicaid expansion in some states, exchanges, insurance co-ops, tax subsidies), more people will be financially protected by insurance company contracts with hospitals. The uninsured percentage right now across the country is ~17%, who knows what it will be like a few years from now.

      I agree that the uninsured may still be saddled with high prices, but that is a different issue that 2010 healthcare reform, big enough as it was, did not tackle. Perhaps in the future we can expect change here.

      • Disqus_37216b4O

        You still don’t explain “How Obamacare Will Largely Eliminate Price Variations”.

  • EE Smith

    “How Obamacare will largely eliminate price variations”

    I’m sorry, maybe I’m thick, but I don’t get it. Treatment for, say, pancreatic cancer, will be the same price everywhere in the country, whether you choose to go to MD Anderson or anywhere else, because “everyone” will mandated to have “insurance”?

    Huh?

    • Guest

      Hush. Questioning any claims made about Obamacare is raaaaacist.

  • Guest

    “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.”

    Unless your insurance doesn’t cover hip replacements. Like if your employer only offers you a “skinny” insurance plan that provides you with minimum coverage like preventive care but little else, including benefits to help cover surgery, X-rays or prenatal care, let alone hospitalization*. Then you’re SOL. You’re still going to pay whatever the hospital asks you to pay, it’s just going to be harder to shop around because Obamacare does nothing to improve price transparency.

    *see “Employers Eye Bare-Bones Health Plans Under New Law”, May 20, 2013, WSJ

    • buzzkillerjsmith

      $200,00 hip replacements, if they are real, are immoral. It is the measure of the perversion of our profession. We should all be ashamed.

      • Tim873

        If there were price transparency, no one would buy a $200,000 hip replacement when they could get one for far less down the street.

        Obamacare does nothing to tackle the issue of price transparency.

  • Anthony D

    I wish all the people who think its going to work or is working actually read the terms of the bill. It is not going to work. It has already cost many jobs. Look at the big chains…Taco Bell…Papa Johns….Home Depot…they had mass layoffs and or cut a large portion of their work forces hours so they are not full time employees that way they don’t have to pay their Health Insurance. ObamaCare is costing our country so much money and it hasn’t even taken full effect…..

    I suggest everyone watch CNN…people with existing insurance thought they wouldn’t be affected by ObamaCare are in for a rude awakening. On 6/1/2013 CNN had an hour long segment about it…..Obama lied to us folks….If your current insurance doesn’t meet his standards you will be forced to purchase new Health Insurance. So if you have the basic minimum your about to screwed. He is a wolf in sheep clothing….but before you just say its gonna work do the research and read the entire bill. Our country is in serious trouble. The United States that we
    grew up in…that we have known and loved our entire lives is dying but we are cattle and are at a point in time that we are afraid of standing up and saying enough is enough.

    The days were your kids will have better lives than you are gone. Look around there are households where parents their kids and their grand kids are living together. 5 to 10 years ago it wasn’t like that. You grew up got a job got married lived on your own and started a family. Now people are living 5-8 people per
    house cause thats the only way to afford it. And ObamaCare is only gonna take more money out of the pockets of the people who are already strapped. It will get worse.

  • doc99

    Dr. Ubel illustrates the insidious toxicity of chronic Kool Aid abuse.

    • Guest

      Obamacare give us all the Free Kool Aid & Birth Control Pills we can eat.

  • Tim873

    Speaking of all the wonderful things Obamacare’s going to do, remember when it was going to lower our health insurance premiums?

    “If you already have health insurance, the only thing that will change
    for you under this plan is the amount of money you will spend on
    premiums. That will be less.” –Obama, May 2007

    http: //www.buzzfeed. com/andrewkaczynski/flashback-obama-promised-lower-health-care-insurance-premium

    During the 2008 campaign Obama argued at least 15 times premiums would go down, saying for a family the average drop would be $2500.

    https: //www. youtube. com/watch?v=_o65vMUk5so

    Good times, good times.

    • Rusty Shackleford

      Math is hard. Who knew more of something would cost more?!

  • buzzkillerjsmith

    Dr. U is a doc and a behavioral scientist, but he does not seem to be familiar with elementary economics.

    The current and coming HC markets can be modeled as a combination of oligopoly (few sellers) and oligopsony (few buyers). The sellers of medical services are doctors, hospitals, the coming ACOs, etc. The buyers would mainly be health insurance companies and the government. Econ 102 or 103 teaches that in this situation the price and quantity equilibrium is unclear because it depends on the relative strength of the players.

    I suspect the relative strength would be different in different markets. Next case.

  • Rusty Shackleford

    t would also help if people could actually see what each hospital is charging. Like if hospital B charges way less for a certain surgery than hospitals A and C, then people will want to go to hospital b and then more than likely hospitals a and c will have to adjusts their rates

  • Molly_Rn

    Have you been paying attention? There is actual data that proves that the insurance companies are lowering their premiums to customers and being quite competitive in states that are actively using the Affordable Care Act (can we use the real name not the Republican name callilng one? let’s be grownups please.)

    • lissmth

      Have you seen the Forbes report on California rates? In no way are they falling.

      • Molly_Rn

        They are much less than predicted and even those in favor of the Affordable Care Act are surprised at how well it is working out.

        • Guest

          That’s why even Obama’s most ardent supporters, the unions, are asking for Obamacare waivers?

          • Disqus_37216b4O

            Even the members of Congress who voted to inflict Obamacare on the rest of us want nothing to do with it themselves.

    • M.K. Caloundra

      “There is actual data that proves that the insurance companies are lowering their premiums to customers”

      No, in most cases they are not. Premiums are actually skyrocketing in most cases.

      • Guest

        “In some markets,” said Aetna’s CEO, Mark Bertolini, insurance premiums could increase “as high as 100 percent. And we’ve done all that math. We’ve shared it with all the regulators. We’ve shared it with all the people in Washington that need to see it. And I think it’s a big concern.” Privately and publicly, most of Bertolini’s peers at UnitedHealth, WellPoint, Humana, and Cigna have said the same thing.

        ——————————————————–

        Cite: Forbes Magazine, 3/22/2013

    • zv

      Check your tax bill for the next year!

      • Molly_Rn

        Do you think when poor people in dispairation go to the ED now we aren’t paying for it?

        • zv

          you seem to live in the fantasy that insuring “the desperate” over their entire life is somehow going to reduce costs for the system. Illegal aliens flooding the system are a significant source of the “ED” problem in many areas. Obamacare is a lie – and you seem to be entering the stages of grief over its inevitable collapse – discard the denial and work on a solution – not a stupid political trick like ACA

          • Molly_Rn

            You are totally off target.

          • zv

            back up your statements with facts – or accept reality.

          • Molly_Rn

            You have demonstrated no facts just your opinion.

          • zv

            see the forbes article on California insurance rates. See the insurance premium for your employer. Mine’s have gone through the roof. You say Obamacare is better than what we have now or plausible alternatives – it behooves you to prove it, not me.

          • Molly_Rn

            My insurance is Medicare and it is great and the price is right! Medicare for everyone.

          • zv

            And now we know that you live in the rare air of the government dole – you probably are entitled to it – but in case you haven’t heard (or are in denial) Omamacare raids Medicare to pay for it. You may be dead by the time bankruptcy comes – but don’t condemn the rest of us to it. You should thank me – last week I helped pay for your Medicare- forced right out of my paycheck – you are getting exponentially more out of it than you put in!:)

          • Molly_Rn

            I am not on the dole. I have paid for it, having maxed out and paid the highest amount for it since it started. I also pay a higher rate since I still am employed full time and pay in just like you do in addition. I wouldn’t thank you for anything. The Republicans are the ones who screwed up this healthcare act. They are the greedy bastards who don’t give a damn about anyone but themselves and their masters ( the 1%).

          • zv

            your a nut – so you get Medicare, pay for it twice, expect to live another x number of years, get the “highest level of care” and you think you somehow get your “fair share” – facts escape you. First of all Medicare is expensive and getting more so. It’s been drained by ACA. The average Medicare enrollee will get multiple times more in benefits than they pay in (unless they are the 1%). You will probably be dead before the real bankruptcy crisis comes- so what the hell for the rest of us! – why are you mad at the Republicans- Obama is in charge of everything and he lied (and people die). You are what’s wrong with the system – you think its free or cheap when it isn’t. Look at Germany or Singapore – these are models of change – public private partnerships – not the monstrous affront to democracy that is ACA

          • Guest

            “The Republicans are the ones who screwed up this healthcare act.”

            ?????

            Obama had a super-majority of Democrats in Congress for his first two years. And he still has a majority of Democrats in the Senate till 2014. Obamacare is a purely Democrat baby.

          • Molly_Rn

            Republican filibuster….

          • Guest

            What Obamacare provisions did Obama and his Democrats try to pass that the Republicans prevented from passing via filibuster?

          • Tim873

            “The 1%” tend to be Democrats, not Republicans.

          • Molly_Rn

            The Koch brothers are laughing so hard they fell down on a pile of their money. If you believe that you would believe anything. They are Republicans with a few exceptions.

          • Guest

            “Warren Buffet, George Soros, Bill Gates, Michael Bloomberg, were unavailable for comment”. LOL.

            The super-rich overwhelmingly support Obama. FACT. See the recent book by David Callahan, co-founder of the left-leaning think tank Demos, titled “Fortunes of Change: The Rise of the Liberal Rich and the Remaking of America”.

          • Suzi Q 38

            My PCP said that Medicare was good.
            I did not know that.
            I am 57…I have got a few more years……

          • Molly_Rn

            Yes, Medicare is quite good and we are quite happy with it.

          • Tim873

            “Medicare for everyone”? We cannot afford to have an entire country on the dole.

          • Molly_Rn

            We are not on the dole having paid the taxes as did our employer. It is as if you put the money into an investment and instead of being paid out money you get healthcare. If everyone, except those who have too little money, paid into a fund and then received medicare it would be far cheaper than the current private system. Private health insurance takes at least 30% off the top for their overhead and to pay their CEO millions of dollars a year. Medicare has a 1% overhead (as allocated by law.) Do you prefer paying 30 cents out of every dollar you spend on private health insurance to their overhead and millionaire CEO’s?

          • kwilson

            That article was not comparing apples to apples. If you premiums have gone up, check out the exchange in October. Sounds like you need a new IC. This is the last year IC can raise their rates without good reason. At the end of the year you might get a refund if 80-85% was not used on health care. The ACA is not fully implemented yet. New systems take time to work.

          • zv

            So you want me to leave the healthcare insurance I have (against Obama’s promise) and check out a fictional “exchange” after my rate and that of my employer goes up 35-45% (the opposite was promised) in the run up to Obamacare because once govt price controls set in we’re going to get some sort of refund? Really? So it’s ok for rates to skyrocket now because once we’re “fully implemented” rates won’t go up ever again? Can you point to the place in the law where a “refund” is promised? And you also don’t figure in the taxes/penalties assoc. w/ Obamacare – the whole system is a lie and a farce – but most of us deserve it because the majority elected our professor in chief. This is type of math is what passes for logical when hippies get real power…

          • J. Miller

            You have provided fewer facts than ZV has. All you’ve provided in the way of cold hard facts is anecdotal evidence of a Leftist cable-tv chat show host’s opinion.

            Bill Maher’s opinion is still just an opinion.

    • Tim873

      Could you please provide links to all of this “actual data that proves that the insurance companies are lowering their premiums to customers”?

      Thank you.

      • Molly_Rn

        Was on Bill Maher two weeks ago and you can Google it (but remember right wing sources will not tell you the truth such as Faux News.)

        • J. Miller

          Bill Maher is a partisan political cable-tv chat show host and comedian. You’re not seriously citing him as your objective quantitative proof that “insurance companies are lowering their premiums to customers”? Where are the facts and figures?

    • Disqus_37216b4O

      The author of this piece is obviously a huge Obama fanboi and he uses the term “Obamacare” more than half a dozen times in this short article alone, including in the title.

      I expect that even the most ardent Democrats have grown weary of all the snickering in the background when they call it “the Affordable Care Act”, when its primary effect so far has been to raise peoples’ health insurance costs.

      • Molly_Rn

        Couldn’t disagree with you more, Mr. Grumpy. Some day we will finally get universal healthcare for all just like the Swedes and wonder what took so long.