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Some health care price slashing pretty simple

Accustomed as we are to thinking of hospitals as beneficent providers of lifesaving and often charitable care, it comes as a shock to learn how many are engaging in, not to put too fine a point on it, price gouging.

As Steven Brill shows in his cover story in Time magazine, nonprofit hospitals, even more than for-profit ones, chase 12 percent profit margins with eye-popping markups on everything from cardio stress tests to gauze pads.

The United States spends more per capita on health care, almost $9,000 a year, than any other country, yet it stands in the lowest quartile for life expectancy of developed countries. There is no doubt the U.S. health care system is plagued by warped incentives, overtreatment, poor quality of care and administrative waste. Part of the value of Brill’s report is that it exposes a problem easier to understand, if not easier to solve: plain old overcharging.

The good news is that health care economists know many ways to bring prices down. To begin, make them transparent. Providers of medical care charge widely varying amounts for the same services, even within a single geographic area. Brill’s reporting on hospital price lists – called “chargemasters” – explains why this happens.

Chargemasters contain laughably high prices that hospital administrators don’t even try to justify. Yet people without insurance, or with too little insurance, often end up paying chargemaster prices. One woman was billed more than $6,500 for CT scans for which Medicare would have paid less than $1,000. Another patient was billed $24 apiece for five-cent niacin pills.

If health care payers – Medicare, Medicaid, insurance companies, public-employee health care plans – were to make public the prices they pay, then maybe fees for services, equipment, facilities and medicines would fall. They could also reveal how much their beneficiaries pay out of pocket. Aetna and the state of New Hampshire have started doing this.

It is exactly this kind of transparency that will improve the health care system. Unfortunately, many contracts between hospitals and insurers contain gag clauses prohibiting the public release of pricing information. These should be prohibited.

This was one of several recommendations made last fall in an article in the New England Journal of Medicine by a group of health care experts (including Bloomberg View columnist Peter Orszag) that address medical overcharging. Another good idea is to use competitive bidding for all medical equipment, lab tests, imaging services and other products. A requirement for Medicare to do so for some equipment reduced spending on wheelchairs alone by more than 42 percent in 2011.

State health insurance exchanges will provide still another mechanism for attacking prices. Insurance companies selling their products through these online marketplaces should be required to offer at least one “tiered” plan that would give people lower copayments in return for using providers with a record of charging reasonable prices for high-quality health care.

Another strategy against overcharging is for all insurers to bar doctors from referring patients for medical tests at facilities in which they have some financial involvement.

In a similar vein, Medicare should eliminate the conflict of interest that’s inherent in having doctor payment rates be so heavily influenced by the American Medical Association’s Relative Value Scale Update Committee – a 31-member group that is dominated by specialists, with only one seat reserved for a primary-care doctor. Medicare accepts almost nine out of 10 of this committee’s recommendations, according to a study published in Health Affairs. The committee should instead investigate how physician services are priced.

Of course, the best way to set medical prices would be the same way prices are set in any well-functioning marketplace: by what customers are willing to pay. Ideally, hospitals, clinics, doctors and all other providers would compete for patient dollars by providing the highest-quality, lowest-cost care. In the U.S. system, Medicare, Medicaid and insurance companies foot most of the bills. So it is these payers that need to keep a sharper eye on prices.