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Should the Government Regulate Medical Costs?

When most people get sick, one of the last things on their mind is finding the cheapest care provider in the area. For most Americans, the primary concern is treating the ailment while financial concerns are a concern for later.  The reasons why this is so often true in the U.S. are that more than 90 percent of the population has health insurance, doctors are expected to abide by their Hippocratic oath and put the needs of their patient first, and comparison shopping in health care is almost impossible in the U.S.

While it is still a good idea to put your trust in your doctor, a new report suggests that it may not always be wise to trust their business administrator.  A new report from the Johns Hopkins School of Public Health reveals that many of the nation’s hospitals mark up their prices.  The average markup by U.S. hospitals was 340 percent of the amount charged to Medicare, but in the most egregious cases, this markup was as high as 1000 percent higher than that allowed by Medicare.

The Federal Government is Partly Responsible

How Is This Legal?

This extreme price-gouging is largely possible because the lack of transparency in the U.S. health care industry. Unlike most other industries that disclose prices up front, health care regularly bills payers only after the services have been rendered, allowing them to charge almost anything they want. Providers often charge insurers, uninsured and governmental agencies differing amounts. Partly this is due to pre-negotiated contracts, but, in many cases, hospitals will mark up prices in an effort to compensate for other financial losses.

This wide variation in costs from hospital to hospital and region to region often means that you can find the same service for thousands of dollars less in just one town over.  This chaotic pricing in the health care market is not known to the public because hospitals rarely publish their prices.

It may appear that hospitals are out to enrich themselves, but the details paint a slightly different picture.  The charges that appear on your medical bill are rarely in line with the actual cost of the service; hospitals routinely inflate these charges, in part, due to how Medicare—the second largest payer in the nation—operates.

Medicare is the national insurance program for seniors that currently covers 55 million Americans. In 2010, Medicare spent almost $523 billion to cover enrollee benefits.  The amount of money that Medicare dispenses makes it one of the biggest and most important actors in the U.S. health care market. That is why following rules dictated by Medicare is an industry standard.

Among the rules stipulated by Medicare is a prohibition against charging the agency more than any other payer.  This means that the amount that Medicare is billed is always the lowest. However, Medicare rarely pays the full amount, so the hospital may operate at a deficit.  These losses are compounded by the fact that Medicare prohibits patients being charged more than a contractually pre-set amount. In many cases, if a procedure costs more than is allowed, the hospital must eat the cost.

Because patients on Medicare or Medicaid are limited by federal rules on how much they can pay, and patients with health insurance often are subject to pre-negotiated prices, the highest prices are usually reserved for the uninsured.  This typically means that patients with the least ability to pay are charged the largest amounts.  This often results in bankruptcy, years of indebtedness or a reduction in credit scores.

How the Government Can Stop Price Gouging

The practice of charging patients without health insurance unreasonably high rates sounds unfair, but it is allowed because the federal government doesn’t regulate medical fees. Partially, this due to the philosophy among lawmakers that America is a capitalist economy, so the market should have the ultimate say on what is an acceptable business practice including how much medical services should cost.

However, health care is a unique service industry. Unlike other industries that tell you what they are going to charge you, physicians and hospitals only disclose the price after the service has been provided. In order to create a fair system for all patients, there must me some regulatory mechanism that keeps prices equitable for all consumers.

Some states have implemented regulations that limit hospital fees.  Maryland and West Virginia now have laws that limit how much hospitals can charge their patients. In Maryland, all hospitals must charge the same price for a service, and this plan has been hailed as a potential model for the rest of the nation.

How the Government Can Stop Price Gouging

The Federal Government is Partly Responsible

The federal government should move to regulate unfair business practices that target the most vulnerable in our society, but it should also act because it is partly responsible for many of health care’s most distressing problems.

At the heart of the issue with consumer pricing is the rapid rise in health care costs. Although health care prices have always risen somewhat, up until 1965, it remained consistent with the consumer price index, which is a metric of general inflation. In 1965, however, the federal government established Medicare and Medicaid, the two largest insurance programs in the nation. After that, health care prices began to grow at twice the rate of inflation.

This leap in costs was due to an increase in demand for a limited supply of health care. More people enrolled in these government sponsored insurance programs—including those following passage of the Affordable Care Act—creating a surge in demand for health care.

However, the government has done little to increase the number of medical schools or physicians in the U.S., thereby cementing a bottleneck on health care providers. In recent years, this supply of health care providers has shrunk even more as many physicians leave the field due to burnout and the government clamps down on the entry of foreign physicians. Instead of alleviating this chokehold on physician training, the government has merely subsidized consumer choices.

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