Unregulated Isn’t the Same as Competitive: U.S. Health Care and the Market

Posted by & filed under CGR Staff, Rochester Business Journal.

An article published in the current issue of Health Affairs reports on pricing for self-pay patients, one of the only parts of the health care business that is largely “unregulated.” The author, Gerald Anderson, reports that people who pay their own hospital bills get charged more for care than those whose bills are paid by insurance companies or have Medicare or Medicaid coverage.

That’s not a surprise, of course. We’re accustomed to bulk discounts and buying clubs—the “membership has its privileges” sort of thing. Yet the magnitude of the difference should capture your attention: on average, patients without public or private insurance pay three times the Medicare-allowable cost. Anderson doesn’t report the average for New York but in New Jersey self-pay patients are charged a whopping 4.56 times the Medicare-allowable cost. Pennsylvania is right behind with a charge-to-cost ratio of 4.33. California, Alabama and Nevada round out the rest of the top five. At the other end of the scale Wyoming and Maryland hospitals charge self-pay patients 1.85 times and 1.23 times the Medicare-allowable cost. Note: Let me suggest that “cost” is in the eye of the beholder (or, at least, the beholder’s accountant). I don’t claim here that the Medicare number is the right way to define cost—hospitals don’t think so—but I do want to call attention to the discrepancy.

The article isn’t describing a new problem, but it is getting worse. In 1984 the average ratio was 1.35.

Discriminatory pricing in health care isn’t new, either. Anderson points out, however, that price discrimination used to favor the poor, not disadvantage them. Decades ago, docs would routinely charge “what the traffic would bear”—an informal sliding scale of rates that might, albeit imperfectly, acknowledge the ability of the patient to pay the fee. (Or did this only happen on Marcus Welby, M.D.?)

But now we have Medicaid to help the very poor, Medicare for the elderly and workplace insurance for most of the remainder. Which leaves a pretty small slice of society paying their own costs without the help of an insurer—15% nationally, according to the Census Bureau.

Health Insurance Coverage for the Total Population





Other Public


United States (2005)







New York (2004-05)







Source: Bureau of the Census, Current Population Survey (reflects major revision released 3/07)

With health care costs rising much more quickly than other services or commodities, pressures to reduce cost to payers and increase revenue to providers have been intense. Private insurers negotiate their own deals with providers and Medicare simply dictates what it will pay. Medicaid combines both approaches.

Self-pay patients are on their own in an economic relationship that is anything but equal—this part of the market may be unregulated but can hardly be called “competitive.” Raising rates for self-pay patients may partly be an attempt by health care providers to make up a deficit imposed upon them by the government or more-powerful insurers or it may be part of the elaborate game that is played between providers and the big payers. Anderson’s article explores six arguments for the self-pay premium that I won’t repeat here.

What to do? Anderson proposes a number of solutions. I’m a fan of simple transparency. Let the sun shine on prices and hope that change results from the pressure of public opinion combined with whatever market discretion remains to consumers. Anderson notes that sheer number of prices used by a hospital—about 25,000—make this idea hard to put into practice. Still, the Internet gives us some hope. A company called Vimo, Inc. (www.vimo.com) claims to provide both “list price” and the commonly negotiated price for a range of procedures by hospital. If you’ve been shopping for an appendectomy (and expect to pay list price), Vimo reports that Unity Hospital is the best deal in the area—only $7,500—while Lakeside charges $11,800. The “negotiated rates” are lower for both, however. I haven’t verified whether rates published by Vimo are accurate or comparable, but they do give us a sense of what transparency might mean.

Another approach would be to peg rates for self-pay patients to the Medicare or private insurer rates. The American Hospital Association developed voluntary guidelines in 2006 recommending that patients with income between 100% and 125% of the poverty line be charged no more than the price under contract to a public or private insurer or 125% of the Medicare rate. Another option would be to follow Maryland’s example and force similar limits for all self-pay patients, not just the near poor.

The fundamental problem is that we have a health system that is partly regulated and partly market driven. Combining both approaches achieves neither competitive pricing nor pricing that most of us would consider fair.