February 14, 2011 9:51AM

Why Hospital Price Quotes Are So Often Useless

A colleague forwarded me a letter his friend received from their local hospital. The friend needs surgery. His health insurance has a very high deductible, so he figured he would do some comparison shopping. He asked the local hospital to quote him a price. Here’s how the hospital responded:

[This] hospital typically charges between $2,360.45 and $22,290.74 for this procedure or service. This is an estimate only…

Our goal is to provide you with the most informed and accurate estimate of the cost of your treatment. If circumstances result in a final bill that exceeds this estimate by more than 20%, we will work together with you to resolve the balance.

For surgical services, the price quote does not include any physicians’ charges. The surgeon and/​or anesthesiologist will bill you separately for his or her time.

That price range varies nine fold, or 11 fold if you count the additional 20 percent. Translated from Hospitalese into English, the letter essentially said:

Our hospital faces so little competitive pressure, we’re just going to blow you off.

If you do have your surgery here, don’t even think about complaining about the bill unless it exceeds $27,000.

Or even then.

The hospital noted — correctly — that “people react in their own individual way to surgery.” Those individuated reactions could easily lead to an 11‐​fold cost variation for the same procedure. That information is useful to a hospital. It is not useful to a patient who is trying to find the lowest‐​cost hospital.

One would expect hospitals (or ambulatory surgery centers) to find some way to cope with the uncertainty about costs and provide useful price information to patients. For example, hospitals could offer the same flat price for each procedure; the flat price would cover the higher costs of patients who experience complications. Or they could quote higher prices to patients who have risk factors associated with complications. While they’re at it, they could also include the physicians’ charges. In a competitive market, hospitals that didn’t do these things would lose customers to hospitals that do.

The problem is that most hospitals do not operate in a competitive market. Many states pass regulations that block entry by new hospitals. Government interventions from Medicare to the tax exclusion for employer‐​sponsored health insurance block the creation of health systems that face greater incentives to offer a single “package” price and to reduce the uncertainty associated with surgical complications. Those same interventions also encourage excessive health insurance, which reduces the share of patients who pay out of pocket for surgeries in this price range. That reduces the demand for useful price information.

Price transparency is not a problem for government, private insurance companies, or employers. They control the money, so they get all the price information they demand. If we want to give patients useful price information, we need to let patients control the money.