Irrational Health Care Prices

Conservatives want health care to be controlled by the market because markets are efficient. Even if you grant market efficiency as a general proposition, the economic theory to which they refer presumes that consumers are knowledgeable about their purchases.  That assumption may possibly make sense for some commodities, but in the case health care consumers have no way to evaluate the quality of medical services.  Here are some notes from a New York Times on prices and quality in hosptial treatment.

Abelson, Reed. 2007. “In Health Care, Cost Isn’t Proof of High Quality.” New York Times (14 June).

“Stark evidence that high medical payments do not necessarily buy high-quality patient care is presented in a hospital study set for release today.  In a Pennsylvania government survey of the state’s 60 hospitals that perform heart bypass surgery, the best-paid hospital received nearly $100,000, on average, for the operation while the least-paid got less than $20,000.  At both, patients had comparable lengths of stay and death rates.”

“And among the 20 hospitals serving metropolitan Philadelphia, two of the highest paid actually had higher-than-expected death rates, the survey found.  Hospitals say there are numerous reasons for some of the high payments, including the fact that a single very expensive case can push up the averages.  Still, the Pennsylvania findings support a growing national consensus that as consumers, insurers and employers pay more for care, they are not necessarily getting better care.”

“Expensive medicine may, in fact, be poor medicine.  For most consumers, the fact that there is no connection between quality and cost is one of the dirty secrets of medicine,” said Peter V. Lee, the chief executive of the Pacific Business Group on Health, a California group of employers that provide health care coverage for workers.”

“The report by the Pennsylvania Health Care Cost Containment Council, a state agency, provides a rare public glimpse of detailed information about hospital payments and patient outcomes.  And the seemingly random nature of the payments is striking.”

“Although federal Medicare payments are largely fixed, they varied somewhat among the Pennsylvania hospitals surveyed.  The far greater disparity involved commercial insurers, which must negotiate their rates hospital by hospital.”

“And the survey found that good care can go unrewarded.  One Philadelphia area hospital, Main Line Health’s Lankenau center, which performs a large number of bypass surgeries and has a high success rate, according to the survey, was paid an average of $33,549 by private insurers.  That was less than half the nearly $80,000 in average payments received by the other hospitals, with poorer track records.  “It doesn’t make sense,” said Marc P. Volavka, the executive director of the Pennsylvania Health Care Cost Containment Council.  “Certain payers are paying an awful lot for poor quality.”

““The current reimbursement paradigm is fundamentally broken,” said Dr. Ronald Paulus, an executive with Geisinger, who says there is no current financial incentive for a hospital to provide the kind of care that leads to better outcomes and lower payments.”

Pennsylvania is the first state to make such information, normally closely guarded by the hospitals and the insurers, available to everyone — including patients who may never see their hospital bills or be aware of how their hospitals compare with others in the state.”

“The council collected the payment data from the insurers and calculated averages of the payments to each hospital.  So each hospital’s average includes small numbers of extraordinarily high-cost cases, where patients may have developed complications and had lengthy hospital stays.  As a result, a hospital with a relatively low number of surgeries but a high number of costly cases, could wind up with a high average payment. In the Philadelphia area, for example, Lower Bucks Hospital says its average of nearly $100,000 paid by commercial insurers for a bypass patient was skewed by a single very expensive case.  Without that case, its average would be closer to $40,000, the hospital said.”

“In Philadelphia, heart patients have a choice among several academic medical centers.  Two, Albert Einstein and Hahnemann University, were paid nearly $80,000, on average, for treating a bypass patient.  The hospitals at the University of Pennsylvania and Thomas Jefferson University, whose patients did as well or better, were paid much less.”

“… hospitals are rewarded for providing more care, not better care.”

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