- [Narrator] At a hospital in Modesto, California, the price
for a routine knee replacement surgery
might be about $16,000 or $53,000 or even $81,000.
How is a hospital able to charge
such an extreme range of prices for the same surgery?
The vast price differences are driven
in part by the secret rates hospitals negotiate
with health insurers, for everything
from an MRI to open-heart surgery.
- It depends on the leverage that the hospital has.
It depends on the leverage the insurer has.
Depends on sort of who's good at negotiating.
And until recently, those rates tended to be secret.
- [Narrator] But they're not so secret anymore.
Thanks to federal rules that required hospitals
to make their prices public in 2021.
Sutter Health is one of hundreds of hospital systems
now revealing their negotiated rates.
- People didn't know what their competitors were paying
and that limited, the negotiations in some ways.
- [Narrator] So, how exactly are these rates set?
Here's what goes into the secret price negotiations
between hospitals and insurance companies.
To understand how U.S. hospitals set their prices.
Let's take a look at publicly available data
from Sutter Health's Memorial Medical Center.
This chart shows the prices for billing code DRG 470
which is a routine hip or knee replacement surgery.
The different price tags depend on the insurance plan,
covering the procedure.
If you look at the lowest and most expensive rates,
you can see there's a pricing spread of more than $64,000.
Still, the data doesn't represent the full range of pricing.
The exact costs of certain insurance plans
are not available on the hospital's website.
- One takeaway has definitely been the broad range
of prices that are paid for the same service
in the same hospital.
You see this in Sutter's data, but you see it
across the board in lots of other hospitals' data.
- [Narrator] So, how do hospitals and insurance companies
come up with these numbers?
Hospitals typically have a sticker price,
often called the chargemaster rate.
This can be a starting point for negotiations
with insurance companies.
At Sutter Health Memorial, the chargemaster price
for a routine hip or knee replacement is set at $92,262
but there isn't an exact formula
for how this cost is calculated.
- A lot of factors influence chargemaster prices.
Hospitals typically will tweak them
to meet their financial targets.
The chargemaster rates are not typically really tied
to estimates of cost or value for the service provided.
Some hospitals are now trying to drill down and say, "Okay,
how much does it really cost
to do this particular procedure?"
But that's not historically been the case.
Insurers would rather have rates that are not actually tied
to the chargemaster and when they are negotiating
more successfully, they're not paying a rate
that's a discount off the chargemaster,
they're paying a rate set in some other way.
- [Narrator] Hospitals will often tweak chargemaster rates
based on their own financial targets.
Then insurers will often negotiate discounts
off these rates.
- Insurance companies tend to have more leverage
in the negotiations if they can deliver a lot of patients.
If they have a lot of market share in that area.
And also, if they're willing to design a plan
that has a limited number of hospitals
or a limited network so that the hospital knows
that its competitors are not going to be
in that plan or not as favored as they are.
And in that case, a hospital
will tend to offer a better rate.
- [Narrator] Insurers are essentially buying in bulk
using their large membership to get better deals.
Meanwhile, prestigious or large hospital systems
could have greater leverage in negotiations.
- What gives a hospital leverage or negotiating cloud
is basically being a must have system,
meaning that the insurer really needs
to have that hospital system to have a good plan
that will attract customers.
In the markets where Sutter Health has hospitals,
I think it would probably be difficult
for an insurer to create a strong network
that included no Sutter Health facilities.
They have some important facilities
and they are a powerful presence in their markets.
- [Narrator] In a statement, a spokesperson
from Sutter Health said, "It is the insurance companies
not the health systems who hold leverage
in these negotiations.
Sutter negotiates on behalf of our patients
to help ensure they can receive access to the clinicians
and facilities who can meet their healthcare needs".
Meanwhile, insurance companies have generally said
their contract negotiations with hospitals
achieve large overall savings for their members.
And comparing individual prices is not indicative
of cost-competitiveness.
The full impact of the contracts between hospitals
and insurers can be difficult to see directly
because the details of the negotiations often remain secret.
For instance, some contracts include restrictive provisions
sometimes called anti-steering clauses.
These clauses can prevent insurers from directing patients
to less expensive or better quality hospitals and doctors.
- Hospitals, when they have a lot of leverage
in a very powerful in their market,
they can sometimes win favorable contract terms
so they could get provisions in contracts that said
an insurer can't exclude their hospitals
from any of its plans, that all of its plans
must include that hospital systems, facilities.
- [Narrator] Insurance plans
offered under government programs
like Medicare and Medicaid tend to get the lowest rates
because they're tied to prices mandated
by federal and state agencies.
You can see this in the knee
and hip replacement surgery prices we showed you earlier.
- So, you'll see that all of the Medicare plans
are clustered around exactly that same number,
because it is related to what Medicare itself
pays for that service.
But then you'll see a big range of prices.
You'll see some around $53,000.
You see one as high as around $81,000.
And those are the negotiated rates
that the different insurers are paying.
- [Narrator] Because Medicaid and Medicare plans
tend to get lower rates.
Some hospitals say they need to rely
on the higher paying privately insured patients
for their revenue.
- There was a study that looked at more than 2,800 hospitals
over 10 years.
And they found that hospitals that boosted their margins
didn't cut their costs.
They actually improved their revenue by raising the rates
they charged to private insurers.
- [Narrator] A spokesperson from Sutter Health said,
"The rates paid by Medicaid and Medicare plans
generally don't cover the costs of care".
The prices, health insurance companies negotiate
affect consumers directly.
Throughout of pocket charges like deductibles
and indirectly by pushing up premiums for health coverage.
For instance, high deductible plans
can leave patients responsible
for thousands of dollars in costs
before their coverage kicks in.
Total spending on private health insurance
in the U.S. has increased by about 40% over the past decade,
according to federal figures.
- Patients who don't have any insurance at all
can sometimes be asked to pay a cash price
that is higher than what insurers pay it varies.
But some of these patients may also,
if they're low income, get financial assistance
in which case they get, discounts based on that,
or may have the whole bill forgiven.
- [Narrator] Despite the federal rules requiring hospitals
to make their prices public,
some hospitals still haven't fully revealed their rates.
On July 1st, the second phase
of the federal pricing transparency effort took effect.
Health insurers now have to reveal the prices they pay
to all healthcare providers, not just hospitals
but also doctor groups, surgery centers, and labs.
- When the federal government created these rules,
one of the ideas was to help people shop for services.
That's one question, will people look at these prices
and try to shop for care based on them?
The belief is that now
that those prices are becoming more transparent,
we'll see a narrower range of prices
because insurers and hospitals both will say, "Hey,
I see that other person's getting a better rate.
I want that rate".
And that will tend to narrow the big variation.
(light gentle music)