Hospital Pricing Strategies

CNN and Time Magazine discovered how hospital charges mounted for one family. Nurses pricked the patient’s finger for a glucose test 190 times. At $39 a pop that totaled $7,410. A breathing ventilator generated 32 separate bills, totaling $65,600. There were separate charges for the IV tube and for asking for a urine bottle.

A box of tissues is a “mucus recovery system.” A teddy bear is a “cough suppression device” and can cost between $128 and $200.

Remember those little white cups fast food restaurants give you for free to put ketchup in? In fact there are restaurants giving them away for free in the lobby areas of many hospitals. In the hospital room, however, these are billed as “oral administration fees” and for one patient they totaled $5,000.

How could things be different? They already are different. Show me a market where there is no BlueCross, no Medicare and no employer paying the bills and you very likely have found a health care market that works very well, as I point out in my recent book “Priceless: Curing the Healthcare Crisis.”

All over the country, retail establishments are offering primary care services to cash-paying patients. Because these services arose outside of the third-party payment system, their prices are free market prices. Walk-in clinics, doc-in-the-box clinics, and freestanding emergency care clinics post prices and usually deliver high quality care.

Cosmetic surgery is rarely covered by insurance. Because providers know their patients must pay out of pocket and are price-sensitive, patients can typically (1) find a package price in advance covering all services and facilities, (2) compare prices prior to surgery, and (3) pay a price that has been falling over time in real terms—despite a huge increase in volume and considerable technical innovation (which is blamed for increasing costs for every other type of surgery).

In the market for LASIK surgery, patients face package prices covering all aspects of the procedure. As with cosmetic surgery, whenever there is price transparency and price competition, the cost tends to be controlled. From 1999 (when eye doctors began performing LASIK in volume) through 2011, the real price of conventional LASIK fell about one-fourth.

Medical services for cash-paying patients have popped up in numerous market niches where third-party payment has left needs unmet. It is surprising how often providers of these services offer the very quality enhancements that critics complain are missing in traditional medical care.

Bottom line: Markets in medical care can work and work well—especially when third-party payers are not involved.

[Cross-posted at Psychology Today]