Hospital chargemaster rates linked to higher payments, but not higher quality care

The list prices for hospital procedures and tests aren’t “inconsequential,” according to economists, and can be associated with higher payments from insurers and patients.

The study, written by economists Michael Batty of the Federal Reserve Board and Benedic Ippolito of the American Enterprise Institute, was published in the April edition of Health Affairs. Using data from 2002 to 2014—much of it from California—they found an additional dollar in the price set by the hospital chargemaster was associated with an extra 15 cents in payments from a commercially-insured patient.

“The evidence presented in this article suggests that list prices have broader implications than is often suggested,” Batty and Ippolito wrote.

In particular, the researchers said, the chargemaster rates have the greater financial impact on the uninsured and patients most at risk of receiving care from an out-of-network physician.

For the uninsured, the causal relationship between list prices and hospital revenue was illustrated by examining what patients paid before and after California’s 2006 Hospital Fair Pricing Act. The law capped what hospitals could collect from most uninsured patients at the Medicare price for the same service. Before that law went into effect, a dollar increase in the list price could be associated with a 20 cent increase in what an uninsured patient paid, but after 2007, that association disappeared.

The impact of high list prices for out-of-network care is harder to quantify. The researchers suggested hospital chargemasters significantly increase prices to gain greater leverage in negotiations with insurers which want to avoid exposing their customers to “surprise” balance billing.

“This may be particularly attractive for hospitals in more competitive areas, where the potential for patients to seek care out of network is likely higher,” Batty and Ippolito wrote.

They also found key differences in the markup of prices for services in comparison to true operating costs. In one example, the researchers said a large, for-profit, urban hospital which was part of a chain had list price markups 360 percent higher than a smaller, independent, nonprofit hospital in a rural area.

One relationship the researchers couldn’t establish was higher prices meant higher quality care. Batty and Ippolito looked into whether hospitals with higher chargemaster rates performed better on 30-day readmissions, and found no improvement in quality at the more expensive hospitals across all payer types.

“The chargemaster could convey information to patients who are willing to pay more for higher-quality care. However, because we did not observe a systematic relationship between price and quality, it is unlikely that the chargemaster is being or could be used by patients in this manner,” Batty and Ippolito wrote.

“Particularly for the people who remain uninsured and for insured patients facing the potential for surprise balance billing, chargemaster prices can play a pivotal role in the financial consequences of hospital care.”