Secret Hospital "List Prices" Revealed in San Jose

A real health care market would require we have informed consumers who can make rational decisions. We have shown how some hospitals seem to be using marketing to undermine their patients' rational decision making. Meanwhile, patients are often completely in the dark about how much hospitals charge for their services.
A new California law has forced hospitals to disclose previously secret "list prices" for health care services. The San Jose Mercury News reports how hospitals in the San Jose area have wildly varying list prices for the same services:

• Comprehensive metabolic panel (blood test), $149 to $520
• One-day medical surgical stay, $1909 to $3900
• Screening mammogram, $95 to $405

At least one hospital spokesperson was frank about the lack of relationship between "list prices" and actual costs. Jan Emerson, a spokesperson for the California Hospital Association, stated "There's zero connection between costs, charges, and reimbursements. In many cases, to get $5 more from the health plans you have to raise your charges $50 or more."
The hospitals may be using inflated prices as a tool to extract more reimbursement from managed care organizations and insurance companies. These "list prices," however, are not without consequences for patients.
While insurance companies or managed care organizations usually pay just a fraction of these "list prices," the uninsured, who are often poor, may be charged the full prices, and may or may not easily obtain discounts. The article included the anecdote of an uninsured waiter who was charged a total of $43,000 by a not-for-profit hospital and his surgeon for an appendectomy. The hospital later offered him a discounted charge of $21,000, but this was still too much for him to afford. We have posted other examples of hospitals charging the uninsured their full, often stratospheric "rack rates." (Also see this post.)
The article noted that Medicare and managed care organizations often make their reimbursements functions of the "list prices," providing an inducement for hospitals to raise these prices as high as they can.
This last point is important. One would think that managed care organizations, which have been promoted primarily because of their ability to control costs, might have some idea what reasonable reimbursement might be for common health care services, regardless of how high hospitals set their "list prices." However, they seem to think they are getting a good deal if they can achieve a certain percentage discount from whatever the hospital charges, no matter how high it is. (Recall an earlier example of UnitedHealth being willing to reimburse a Tenet hospital $1275 after the hospital charged $2713 for a one-hour physical therapy evaluation session. Presumably this kind of astute bargaining is why the CEO of United Health Group got over $124 million in total compensation in 2004.)
In summary, although a true market for health care requires that consumers have complete pricing information, hospitals have traditionally kept the prices of their services secret. Furthermore, their list prices often seem wildly inflated, because managed care organizations think they are getting a good deal if they can reduce the list prices by what appears to them to be a large proportion. These organizations, who advertise themselves as rational agents of cost-control, seem clueless about how hospitals have manipulated their simplistic schemes to discount their charges.
This is another argument for physicians assuming the role of watchdogs on behalf of their patients, guarding them against the incompetence and self-interest of powerful health care organizations.