Price Discrimination in Health Care

1 January 2017

However, efficiency and fairness demand that new ways should be found to avoid price discrimination in health care in order to ensure patients equal access to care and economic justice. Uninsured or self-pay patients should not be charged rates significantly higher than those with Medicare, Medicaid, or insurance. Prices for health care should also be more transparent to allow patients to accurately shop for best prices and values in health care.

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Imagine a system in which you go to the grocery store and are told that the price you must pay for your groceries is dependent on whether you have a job, and if you have a job the price is dependent on where you work. If you are work for a certain employer the price you will pay is near wholesale, for another retail, another twenty to thirty percent more, and if self-employed or unemployed you must pay a price three to four times higher for these groceries. Unfortunately this is the way our current health system works.

Most hospitals charge those without insurance three to four times the price of that paid by those with insurance or government coverage such as Medicare or Medicaid. New ways should be found to avoid price discrimination in health care in order to ensure patients equal access to care and economic justice. Uninsured or self-pay patients should not be charged rates significantly higher than those with Medicare, Medicaid, or insurance. Prices for health care should also be more transparent to allow patients to accurately shop for best prices and values in health care.

Price discrimination Price discrimination is the practice of charging different customers different prices for the same product or service. While price discrimination is not necessarily unethical, the price should have commensurate value for the price charged. If this condition is met price discrimination is not necessarily wrong. It can be considered ethical for one to be given a better deal than another. However, if it is used to take advantage of those with a special need or the ignorance of customers it may be unethical.

Under the Robinson-Patman Act 1936 it is unlawful when it substantially lessons competition or tends to create a monopoly. This has been cited in numerous lawsuits against hospitals and HMO’s. Because an uninsured person has limited resources to contest hospital rates class action attorneys have tried to obtain class action status for clients with limited success (Anderson, 2007). Many industries and firms utilize price discrimination because it can have a huge impact on company profits.

It is much easier today because of improvements in technology to separate patients by demographic information to maximize the amount they are willing or able to pay (Elegido, 2009). Price discrimination is an attempt to get each consumer to pay for the product the highest price he is willing to pay. Price discrimination is common in industries that have high fixed costs and low marginal costs. Setting prices at the level of marginal costs would make it difficult to recover original investment costs. In order for price discrimination to occur there are several conditions that must exist.

The producer must have information about what the maximum price of each group of consumers are or have reliable indicators of such. This information is obtained through prices for services set by government diagnosis related groupings for payment that set a near minimum price. The hospital then establishes a charge-master file that is several times more for each item. This may be updated several times a year and is not published for the public. There must not be significant competition from rival firms. For any consumers there are not multiple options for hospital care resulting in limited competition that might lesson cost. Arbitrage must not be possible. The buyer cannot resell the product for a higher price to others (Elegido, 2009). The uninsured or self-pay patient In a study published as a Web Exclusive by the journal Health Affairs, it was determined that approximately half of U. S. bankruptcies, were reportedly attributable to illness or medical bills (Anderson, 2007). It is estimated that three-fourths of these individuals were covered by insurance when they got sick.

However, skimpier policies, rising health care costs, and the cancellation of coverage when illness results in job loss have increased the financial risk for those with insurance as well as the uninsured. When patients lose their insurance due to inability to work they become vulnerable to higher self-pay prices. While there are many uninsured that are unable or won’t pay their bills, hospitals pursue those that don’t pay with aggressive collections activities. Price discrimination in health care Hospitals do not charge every patient the same price.

Uninsured and self-pay patients are often charged two and one half to four times as much for the same care as those covered by insurance or government plans such as Medicare or Medicaid. This gap has grown substantially since the mid 1980’s (Anderson, 2007). Patients that are uninsured or self-pay are often presented with bills that reflect full charges derived from the hospital’s charge-master file. There are five categories of patients that routinely receive undiscounted bills based on charge-master files created by each hospital.

These include those that are international visitors, those that are uninsured, people covered by automobile insurers, people covered by workman’s compensation plans, and those covered by health plans that are lacking contracts with the hospital such as individuals that utilize health care savings accounts or are out of network. Equals should be treated equally in order to satisfy justice and should appropriately balance the gains of trade between buyer and seller with neither side having disproportionate power over the other (Tiemstra, 2006). If prices are directly related to costs and equal for all, the allocation of resources will be more efficient. The ratio of charges to costs measures the relationship between actual charges for services and Medicare allowable charges. In 2004 this ratio for U. S. hospitals was 3. 7 meaning that for every $100 in Medicare charges the average charge was $307. There is considerable variation in hospital charges depending on the type of hospital and the setting, rural or urban. The gross to net revenues overall averaged 2. 57 meaning that collected from all payers, for each $100 collected the initial charge was $257.

Since 1984 the charge to cost ratio has increased from 1. 35 to 3. 07 and the gross to net revenues from 1. 25 to 2. 57 in 2004 (Anderson, 2007). Hospital charges have increased faster than costs. Increased charges have not been shown to significantly increase revenues however because as charges rise insurers negotiate for larger discounts and only self-pay patients are expected to pay these higher charges (Anderson, 2007). In Pennsylvania, hospitals collect only about one fourth of what they charge. These discounts are reflected on explanation of benefits forms from insurers.

The only ones expected to pay the full charges are often those least able to pay them (Miller, 2012). There is evidence that discounts and price discrimination are making health care less affordable because fixed prices, discounts, and variable reimbursement systems distort normal marketplace competition. Patients and business are the losers as hospitals and health plans try to get bigger to “win” price negotiation. Insurance is discounted from the standard billed charge, Medicare and Medicaid pay flat rates and those without medical insurance pay the highest charges.

When money spent is from somewhere else such as insurance or government coverage there is no incentive for hospitals or patients to control costs and may result in unnecessary medical costs for unneeded tests and procedures when insurance deductibles are met (Lilly, 2011). Cost shifting Cost shift policies in hospitals have resulted in shifting of costs to private patients due to inadequate payments from state and federal government plans such as Medicare and Medicaid. Cost shifting is also use to cover bad debts of unpaid hospital bills.

Cost shifting acts like a tax on the costs of private pay patients. The burden of cost shifting falls on non-Medicare and non-Medicaid households in proportion to the sum of their out of pocket expenses and hospital premiums. The government does not assume costs of serving people that are ineligible for government programs but that are unable to pay their bills. They also do not cover common costs for research and teaching. Private pay patients subsidize public program beneficiaries through cost shifting.

Because Medicare and Medicaid patients utilize socially valuable resources these costs must be borne by society. These costs may be covered implicitly through cost shifting by price discrimination or explicitly when government taxes are used to finance the full cost (Meyer & Johnson, 1983). Hospitals obtain what revenues they can from insurers and those over whom they have little control such as Medicare and Medicaid. They then demand as much as possible from those over whom they have the most leverage. Over fifty percent of health care costs are paid by state and federal governments.

This system results in lower incentives to be more efficient and contain costs. Charges for self-pay and uninsured patients are inflated to compensate for discounts given to insurers and low reimbursement rates of Medicare and Medicaid. Public program beneficiaries are subsidized by private pay patients (Lilly, 2011). Recommendations The commercial health industry has called for equitable payment rules for all patients including mandatory rate setting or doing away with rates by diagnosis and cost shifting in favor of transparency and the same rate no matter the payer source.

One regulatory approach might be to have the government regulate prices so hospitals cannot charge more based on their type of insurance coverage. Maryland has done this and their hospital costs are lower than other states. However the regulation of prices removes incentives for hospitals to look for innovations to deliver care in a more cost effective way. Another option would be to establish maximum rates that can be charged to all payers for medical care. This may be set by the hospital voluntarily, be set by legislation, or have the rate determined by courts.

A single rate would also decrease administrative and collection costs associated with multiple charge rates by payer type. Price transparency has been suggested as a tool to allow patients to comparison shop. Hospitals may increase transparency by limiting the price that can be charged above the Medicare rate. Hospitals could advertise their charge as being a certain percentage above the Medicare rate for comparison. Another approach would be systemic changes that let hospitals charge patients any price but all must be charged the same and prices must be made public.

Instead of being restricted to in-network providers, patients could go anywhere but be able to make choices based on quality of care and pricing. Greater transparency in pricing and an ability to make informed decisions based on quality of care and price may allow patients to choose those hospitals that give quality care at lower costs. Transparency in pricing would encourage people to economize on the use of routine health services. These changes would make consumers more aware of and accountable for health decisions based on choice, limits, and patient responsibility (Miller, 2012).

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