The average Medicare payment for a knee replacement at a South Florida medical center in 2012 ranged from a low of $9,700 at Holy Cross Hospital in Fort Lauderdale to a high of $24,000 at Jackson Memorial Hospital in Miami — even though Holy Cross’s average charge of $63,000 was about $2,000 higher than Jackson’s.
Private commercial insurers do not publish their payments like Medicare does, but healthcare experts say the prices they pay hospitals for the same procedure can vary just as much — and the reason often depends on more than just the hospital where the knee replacement was performed.
For most insured Americans, the reasons for such variance in healthcare prices also can include the medical condition of the patient, complications that may arise, physicians’ fees, market competition, and even who’s paying for the procedure and how.
That’s a lot of moving parts for anyone to nail down a firm price, said Frank Sacco, chief executive of Memorial Healthcare System, the public hospital network for South Broward County.
“Healthcare pricing,’’ he said, “is probably the most complex, convoluted pricing of anything that I’ve ever seen in my life.’’
One way to begin unraveling the twisted threads of healthcare pricing is to understand the difference between charge and price. Every hospital establishes a list of charges or so-called “charge masters’’ for medical services, but almost no one pays those rates.
Charges include a hospital’s costs for all services provided to a patient plus a variety of factors unique to each hospital, said Karen Godfrey, corporate vice president of revenue management for Baptist Health South Florida, the largest hospital system in the region.
Some hospitals may have higher costs due to high-intensity services, such as organ transplants, trauma centers and neonatal intensive care units. Or they may have higher mission-related expenses, such as teaching, medical research or caring for the uninsured.
“That may sound simple and straightforward,’’ Godfrey said. “It’s not. If you come in for emergency services, since we don’t know what’s wrong with you, we don’t ultimately know what the charges are going to be.’’
What the hospital collects in payment is the price, and that can range depending on the payer.
For government payers, such as Medicare and Medicaid, prices are publicly available and the rates are set, with provisions made for so-called “outlier” patients whose conditions are especially complex or severe. Typically, Medicare and Medicaid pay less than a hospital’s actual cost to provide care.
So hospitals recoup their operating losses, plus a small margin, in their contracted prices with commercial insurers, Sacco said.
When insurers and hospitals meet behind closed doors to negotiate payment rates, insurers are trading market reach and patient volumes for discounts on hospitals’ rates. Hospitals are leveraging their range of services, quality ratings — and size.
Pat Geraghty, president of Florida Blue, the state’s oldest and largest health insurance company, agreed that a hospital system’s geographic reach can be “critical” in negotiations, but said quality and customer satisfaction may matter more.
“It really matters will the service be redone because it wasn’t done as well in one setting versus another setting,’’ he said. “It really does matter that if it could be done outpatient as opposed to inpatient that we use that setting, or if someone’s disease state could be managed from home as opposed to in any setting.’’
Geraghty said healthcare payments are moving in the direction of packaged prices for episodes of care, and arrangements that hold providers more accountable for healthy patient outcomes if they want to earn higher rates.
“If the patient’s condition worsens and requires more care,’’ Geraghty said, “then the provider takes the loss financially. But if the provider manages the patient’s care efficiently, then he gets to keep the savings.’’
Right now, most hospitals are paid a daily rate or a fee per service or diagnosis group.
Advocates for payment reform argue that under the fee-for-service system, hospitals and other providers have an incentive to over-treat because they're reimbursed by procedure.
But when consumers know the prices for some services across all providers, they’re more likely to comparison shop — according to a recent study published in the journal Health Affairs that found publishing MRI prices led to lower patient costs and reduced price variation.