Hospitals Often Charge Uninsured People the Highest Prices, New Data Show

Cash payers are often charged more than insurance companies for the same service by the same hospital, according to a WSJ analysis of previously confidential data 

By Melanie Evans, Anna Wilde Mathews and Tom McGinty of The WSJ.

There might not be anything wrong here (like something sinister or unethical). The WSJ did not talk to any health care economists. I have no expertise on this but there were a couple of things I noticed.

Excerpts from the article:

"The reasons for high cash prices are complex and, even to many healthcare experts, baffling.

Hospitals typically have a sticker price, often called the “chargemaster” price, that can be the starting point for negotiations with insurers. Discounts off that sticker price tend to be steeper for those that bring large volumes of patients. Insurance plans offered under government programs like Medicare and Medicaid get even lower rates, tied to prices mandated by federal and state agencies.

The cash prices for patients who must pay for their own care can be equal to the sticker prices or sometimes represent a percentage lopped off that top rate. Sometimes, those cash rates are also applied to people who have some form of insurance but get a service that the insurance doesn’t cover.

Will Fox, who advises hospitals on pricing as an actuary with Milliman Inc., says hospitals often keep cash prices above the rates negotiated by big insurers.

“They don’t want to give away too much of a discount because they really want the best discounts to go to these larger volume negotiated insured rates,” he said. “Somebody walking off the street, we’ll give you a 20% discount, but we’re going to give our favorite customer, who sends us millions or even billions of dollars in business, we’re going to give them a much bigger discount.”

Yale New Haven Health offers cash prices that represent a discount off sticker rates, but it keeps them above all of the prices negotiated by insurers, says Pat McCabe, the system’s senior vice president of finance. “We didn’t want there to be that tension, for an insurer to look at that data and say, ‘you’re providing better rates to uninsured patients than you are to our insureds, how do we justify that to our members and/or employer partners?’”"

If insurers bring in a large number of customers, that might help hospitals attain economies of scale which means average cost falls as quantity produced increases. The large cost of the hospital is spread over more patients. So it makes sense that hospitals would give this incentive to insurers.

Then it also says that insurers would worry if people paying cash got the same incentive. This would reduce the incentive for people to buy insurance. The insurers' customers might say "why are we buying these policies if we could get the discount without them?"

Also, the article discusses discounts that some cash patients get based on their income. This means that they are charging people different prices, what economists call price discrimination.

Firms will make more money if they charge different prices to groups of consumers with different elasticities of demand (the related post linked below shows how this works). Customers with higher elasticities will pay lower prices.

Price elasticity of demand just tells us how much quantity demanded will change in response to a change in price. 

There is some information below about how price discrimination work and what determines price elasticity of demand. But it tells us that when people spend more of their budget on something, they have a higher price elasticity of demand. Since the lower income people will spend more of their budget on hospital bills than others, they have a higher elasticity. Firms will charge such people lower prices (and doing so increases their profits-again, see the related post linked below to see how this works). So, as the article discusses, the hospitals offer some discounts based on income.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount). The more elastic the demand, the greater the change in quantity demanded for a given change in price.

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

Determinants of price elasticity of demand

1. Share of the budget going to a good

If this is low, then price elasticity of demand is low or inelastic. For example, if you only buy one box of cooking salt a year and the price doubles from $1 to $2, you will probably still buy that one box because this spending makes up a very small share of your budget.

If this is high, then price elasticity of demand is high or elastic. But if the price of cars doubles, you will probably buy fewer cars since that takes up a much larger share of your budget.

2. Adjustment time.

In the short-run price elasticity of demand is low or inelastic. For example, if the price of gas doubles, you will probably only reduce your quantity purchased slightly because you still need to get to school and work.

In the long-run price elasticity of demand is high or elastic. In the long-run, when you have more time to adjust to the higher gas prices, you can shop around and buy a car with better mileage, move closer to your job, get into a car pool or find a bus route. So your quantity purchased of gas will decrease more than in the short-run.

3. Number of close substitutes.

If there are few substitutes for a good, then price elasticity of demand is low or inelastic. For example, if there is a drug you need to take (or something like insulin for diabetics), there will be few substitutes. So if the price increases, your quantity purchased will not change much because you must buy this drug.

If there are many substitutes for a good, then price elasticity of demand is high or elastic. For example, if the price of potato chips increases, your decrease in quantity purchased will be great because there are many substitutes for potato chips. You can get nachos, pretzels, corn chips, etc. instead.

Related post

Price discrimination and profit