Why Location Dictates the Cost of Your Health Procedure

Why Location Dictates the Cost of Your Health Procedure

May 06 2015

The cost for the same health procedure can vary by more than 400 percent. The driving force behind that variation? Location.

According to the Healthcare Bluebook, an ACL knee surgery in Grand Rapids can cost anywhere between $6,498 and $23,098. And in Detroit, a gall bladder removal can range from $3,683 to $16,509.

And the good news is, the more health care consumers become price-conscious, the quicker the gap in price will close.

Does the difference in price mean the most expensive option will result in the best care? The simple answer is no. In a study published in the Annals of Internal Medicine, research found there is no clear relationship between the cost and quality of health care. Furthermore, the United States is far and away the world leader in medical spending, even though numerous studies have concluded that American’s do not get better care.

Begin at the Beginning

To understand the wide range of prices in health care, it’s important to know how prices are set in the first place. Prices are determined on a hospital-by-hospital basis as each hospital has different expenses it needs to account for. It begins when the hospital creates a chargemaster – a master file built within hospital information systems that contain a list of billable items, such as hospital services, medical procedures, equipment, drugs and supplies. No two chargemasters are the same, but that is because no two facilities have the exact same medical machinery, equipment or medicines. Or more simply, the type of aspirin one hospital uses can be slightly more expensive than another brand of aspirin used at the hospital down the street. All of these factors influence the pricing model that the hospital outlines and operates against.

The Chargemaster

The disparity in prices between facilities widens, however, when the list pricing in these chargemasters is increased on an annual basis to account for inflation. Hospitals do not follow a common procedure for when and how these lists get updated. In fact, some hospitals may raise every price in the list by the same percentage once a year, while others may update prices for particular items by different percentages annually. Sometimes the updates to prices take place more than once a year.

Facility Fees

Another reason for cost differences for the same procedure is facility fees. Hospitals and large health systems tend to charge more than private physician offices to cover overhead costs and operational expenses that a private practice doesn’t incur.

There aren’t clear regulations on price. And since pricing is set at the health provider level, some facilities set prices lower to be more competitive in the market place. Or, the demand for their hospital or practice is high enough that they can raise prices without it deterring patients, resulting in an increased profit margin for their facility.

What can you do?

Shop around, just as you would with any other major purchase. Of course this only applies if its a non-emergency situation. With a move toward price transparency in health care, more insurance companies and practices are choosing to reveal their prices. A tool that helps pull back the curtain on costs is Healthcare Bluebook, which gives the “fair” price for a specific procedure in specific region. That price is calculated from a nationwide database of medical payment data, sorted by zipcode. If you go back to the example of the gall bladder removal in Detroit, the lowest price you’ll pay is $3,682 and the highest is $16,509. The fair price? $5,887.

The moral of the story is that prices are set at a provider level without any consideration of quality metrics. They are set based on differences in expenses, equipment, and other factors, as well as the more arbitrary measures that the provider deems acceptable such as volume, demand or an increase in profits.Therefore, it is in your best interest to always ask about price and to shop around whenever you are heading to the doctor for a routine procedure. You could save thousands in the long run. And the good news is, the more health care consumers become price-conscious, the quicker the gap in price will close.

 

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