In 2013, several college students called 102 hospitals to see how much a hip replacement would cost for their fictitious grandma without insurance. Not getting many price requests, most hospitals were not sure how to respond. When the students finally got the information, the disparity was massive. The price ranged from $11,000 to $125, 000.
In another study, researchers found appendectomies ranged from $1529 to $182,955. As for the emergency room, a study revealed that a visit for a headache could cost anywhere up to $17,421 but as little as $15. A sprained ankle? $4 to $24,110.
You can see below how patient charges vary for four of the top ten emergency room diagnoses:
Trying to figure out some consistency, researchers found what one Harvard professor called, “…a total mess.” Not only did the prices at nearby hospitals with similar quality, demand and supply differ from each other but inside the same hospital, prices for the same procedures varied. It seemed to all depend on whether the payer was government or an insurance company, a foreigner coming to the U.S. for care or an uninsured individual.
Where are we going? To why we need real prices.
How to Price Medical Procedures
One of several U.S. medical centers that has begun to calculate its real prices, the University of Utah Health Care has discovered that it’s not easy. You have to input a doctor’s time, staff time, equipment use, lab tests, drugs, cost per minute in the emergency room (82 cents), for orthopedic surgery ($12) and for surgical intensive care ($1.43).
The list is endless–so far Utah Health Care has uploaded 200 million rows of costs. But it has already improved their decision-making. At Utah, they related cost and outcome and wound up spending where it counted more. As a result, in one surgical program, costs fell by 30 percent because they decreased patient complications.
Our Bottom Line: Prices
Think gasoline for a moment. Hearing a gallon of gasoline was $1.50 you would drive more; $4.50 a gallon sends the signal to drive less.
With our medical system though, neither the supply nor the demand side knows real prices. You might be thinking that prices cannot send signals when we are dealing with our health. But Utah did get some better outcomes once it knew the prices of all it had to purchase.
And as economists, we know we are always dealing with scarcity. Distributed more efficiently because of real prices, the limited land, labor and capital in our medical system can help more of us receive care that cannot be “priceless.”