Charges Vary Widely From Hospital to Hospital: FAQ

May 31, 2013 -- Major joint replacement surgery costs $128,000 at a hospital in San Francisco and $59,000 at one in Chicago. Post-heart attack care ranges from $34,000 in a Little Rock facility to $81,000 in a Miami hospital.

The wide variation in pricing among U.S. hospitals became public when the federal government recently released prices charged by more than 3,000 hospitals. The Department of Health and Human Services (HHS) said it released the data to fulfill a mandate of the Affordable Care Act to bring more transparency to hospital pricing practices.

Yet, do these numbers really help people save money and make more informed health care choices?

WebMD went to a health care economist, the American Hospital Association (AHA), and the HHS for answers. 

What does the information on hospital pricing show?

The HHS data shows the prices hospitals in different markets charged in 2011 for the 100 most common inpatient services for Medicare patients. It also shows what the government paid to the hospitals for those services. The numbers are rarely the same.

Medicare sets a fixed payment rate for the overall type of service or treatment, such as joint replacement surgery, as opposed to the number of times a doctor sees a patient or the number of procedures a patient receives during one hospital stay. This is known as paying by episode. The rate it pays varies by hospital. Things affecting that rate include the number of low-income or sicker people the hospital serves and whether the hospital is an educational teaching facility.

Why is there such a big cost difference for the same services?

Hospital rates are based on a number of factors, according to the American Hospital Association, including:

Scope of services providedWhether the hospital serves a large portion of poorer and sicker patientsCommunity reputation of the hospital

The difference in costs between one hospital and another is a "byproduct" of the marketplace, says the AHA.

Caroline Steinberg, the AHA's vice president of trends analysis, believes the focus should shift from pricing to what hospitals actually collect for their services. Medicare and private insurer payments to hospitals are typically far lower than the stated cost. Medicare sets the rate of reimbursement, even though it adjusts the rates according to factors like the number of poorer people the hospital serves, Steinberg says.

But economist William Custer, PhD, director of health services research at the Institute of Health Administration at Georgia State University, says these factors can't explain the cost variations. 

"Hospitals have historically set prices based on their own methodology. One hospital can set prices three times greater than another; there's no real pattern," says Custer. "If we had a healthy health services market, you would expect those prices to be much closer aligned."

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