LIMA — What’s the difference between a joint replacement surgery at St. Rita’s Medical Center in Lima versus Grand Lake Health System in St. Marys? About $42,000 on average, according to data released this month by the federal government showing variations in how much hospitals charge.
Earlier this month, the Department of Health and Human Services released data showing more than 3,000 U.S. hospitals’ average charges to Medicare in 2011 for the top 100 most frequently billed procedures and treatments. The data show significant variation in charges from hospital to hospital, including those within the same communities.
Variation in charges
Average hospital charges for a major joint replacement, for example, ranged from a low of $5,300 at a hospital in Oklahoma to a high of $223,000 at a hospital in California, according to the data. Locally, the average joint replacement charge ranged from $71,321 at St. Rita’s to $28,874 at Grand Lake. Lima Memorial Health System charged an average of $39,974, while Van Wert County Hospital charged an average of $38,004.
Hospital officials said the averages released by Medicare don’t tell the full story about a complicated system and costs that are determined by external factors, individual cases and patient and payer mixes.
“Hospital charges are based on market competition, as well as the type of return needed to run a hospital. The return needed is based on their individual cost structures and payer mix. Each hospital negotiates with commercial payers and are paid different amounts by the commercial payers,” Lima Memorial Health System Administrative Director of Finance Stacey Deitering said. “Medicare does not pay based on hospital charges. Medicare has a fee schedule that depends on what area you live in, if you are a teaching hospital and if you treat a higher ratio of very sick or uninsured patients.”
Even within a single procedure, such as a knee or hip replacement, the services rendered and the costs for those can vary widely, said Tim Rieger, St. Rita’s chief financial officer and vice president of finances.
“When you isolate comparisons to a single DRG [case type], there are bound to be broad variation in prices just based on which services are included in that particular case type. There are other DRGs [Diagnosis Related Groups are standard formulas used for Medicare payment] where St. Rita’s is lower than the other area hospitals. It’s extremely difficult to draw accurate conclusions with a small number of case types for comparison,” Rieger said. “Each year we have an outside party that provides us with price and cost comparisons to local, regional, and national hospital benchmarks. When comparing to facilities of similar size and complexity of cases, St. Rita’s pricing compares favorably to other Ohio peers and national medians.”
Any number of things can account for cost variations, Grand Lake Health System President and CEO Kevin Harlan said, such as greater overhead, average wages, and more specialized services with costs that need to be covered.
Harlan declined to comment on other hosptials’ charges, but said Grand Lake works hard to provide quality care and keep costs down, and they’ve been awarded in the industry for it. Harlan said health consumers and patients would receive quality care at his hospital.
“Actually, the orthopedic surgeons that practice and operate in Lima also practice at my hospital,” Harlan said.
The government worked with the Robert Wood Johnson Foundation to increase transparency about what providers charge Medicare, Medicaid, insurance companies and individuals.
“Transformation of the health care delivery system cannot occur without greater price transparency,” said RWJ Foundation President and CEO Risa Lavizzo-Mourey, in a statement. “While more work likes ahead, the release of these hospital price data will allow us to shine a light on the often vast variations in hospital charges.” To see the entire database, visit http://j.mp/18h5eNA.
Billed versus paid
Because hospitals are free to charge what they wish and Medicare pays for procedures based on its own formula, the billed and paid amounts are far apart. Using the joint replacement example, no matter the hospital charge, the average payment from Medicare for three of four area hospitals was about $12,000.
Health consumers should not infer that a joint replacement costs $12,000, Harlan said.
Medicare’s first full year was 1965; by 1984, Medicare was no longer covering its own costs, said Harlan, who has more than 30 years experience in health care. It created what are called Diagnosis Related Group payments, which are derived by Medicare’s standardized formulas for similar procedures and treatments. Grand Lake receives about 80 cents on the dollar for costs from Medicare and 48 cents on the dollar for Medicaid, Harlan said, so every time the hospital treats a patient covered by those public programs, it loses money.
“That is the greatest unseen cost shift in our country’s health care. It’s why the private insurance is at the level it is,” Harlan said. “That cost is shifted to commercial insurance. I believe that if we could get Medicare to going back to at-cost payments, we’d see premiums and charges go down for everyone else.”
One indication of a system that’s not sustainable is the amount of people each day being added to Medicare: 10,000. The members of the Baby Boom generation are becoming senior citizens, at a rate of 3.6 million a year, Harlan said.
What’s more, a small percentage of patients actually pay the amount charged by hospitals. Only the very wealthy who choose to pay for health procedures out of pocket, and the 80 million working poor who aren’t covered by a government health program or private insurance receive the entire hospital bill. Private insurers also negotiate prices with hospitals, said Denny Recker, an Ottawa insurance agent with Fawcett, Lammon, Recker & Associates, and a board member of the Ohio Association of the Health Underwriters.
Those prices negotiated are typically much closer to Medicare and Medicaid fixed payments, rather than the hospitals’ charges, Recker said.
“It’s much more important for people with private insurance to make sure they’re health care providers are included in their networks,” Recker said. “Your insurance company is saving you money by negotiating the best arrangement with the hospital.”
Consumers and patients are beginning to pay more attention to this type of information and are starting to look at price comparisons, among other information when choosing providers. Price is one thing in the mix with other things such as where a physician practices, location and reputation.
“Patients do pay attention to this type of information, and more data is becoming available every day. But even with the expansion of consumer driven and high deductible health plans, patients are as likely to consider convenience, quality, safety, and their physician’s preference in their health care choices,” Rieger said. “In today’s environment, health care services are not yet a commodity that competes purely on price.”