Former U.S. Supreme Court Justice Louis D. Brandeis once said that "Sunlight is the best disinfectant." The release of charges billed by some 3,337 Medicare hospitals for 100 of the most common inpatient diagnosis related groups (DRGs) by the Centers for Medicare and Medicaid Services (CMS) on May 8, 2013, attempts to cast sunlight on the sometimes baffling and often murky world of hospital charges and fees.

The federal government has worked to foster greater price transparency in healthcare for some time. Beginning with consumer-driven healthcare under the Bush Administration, then Secretary of Health and Human Services, Michael Leavitt observed in 2006 that:

Americans know the price of almost everything they pay for, except for . . . their healthcare . . . . People deserve to know, indeed they have a right to know, what their healthcare costs . . . . Patients should also be able to see an estimate of the overall cost of the procedure, how much their insurer will pay and how much they will be expected to pay. That kind of information will allow patients to become informed consumers making informed choices.

Over the years, Congress has considered a number of legislative proposals aimed at increasing price transparency and disclosure, but all have failed to advance significantly. The Patient Protection and Affordable Care Act (PPACA), however, included a provision within the insurance reform section that requires hospitals to annually publish a list of standard charges for items and services. CMS has not published regulations defining the data to be posted. Consequently, the full scope of this provision remains uncertain.

Using travel industry parlance, the charge data released this month by CMS represents each hospital's "rack rate" as reflected on its "chargemaster" or "charge description master." A relic of the past with regard to Medicare payment principles, the hospital chargemaster lists the gross price for each service/procedure provided and item used. Hospitals readily admit that their chargemaster prices are inflated and bear little systemic relationship to amounts actually collected from patients or third party payers. Consequently, chargemasters are rarely useful for making hospital price comparisons.

Hospitals and some third party payers use the chargemaster as a beginning point for negotiating payment discounts. However, in many cases, both the hospital and third party payer are contractually prohibited from disclosing their negotiated payment rates to patients and/or posting them on the Internet. These rates would be much more useful for price comparisons. Medicare and Medicaid payments generally are based upon cost or a specific charge unrelated to a hospital's chargemaster. As a result, the only patients who may actually pay the "rack rate" for inpatient care are the uninsured, the self-pay and, on occasion, third party payers to noncontracted hospitals.

With that background, one must ask why hospitals spend tremendous amounts of time and effort to maintain a "price list" that often contains some 12,000 to 45,000 individual charge items and procedures when it is rarely used to actually price items and services. The answer lies within the Medicare program, which still requires every participating hospital to maintain a chargemaster. In contrast to the program's early years, when chargemaster data more closely correlated with payment, chargemasters are currently used by Medicare to:

  1. Allocate costs among Medicare and non-Medicare patients (although that is less relevant in a prospective payment environment);
  2. Implement the lower of cost or charges regulations that limit a hospital's payment to the lesser of its charges or its cost or a fee schedule amount;
  3. Establish a cost-to-charge ratio amount that can affect a hospital's payment for certain items and services, including outliers, new technology and transplant organ costs; and
  4. Establish a portion of disproportionate share hospital (DSH) and meaningful use payments.

Will the benefits of CMS's openness and transparency substantially alter the healthcare landscape or simply become another mile marker on the long road to reform and price transparency? The vast disparities in hospital prices revealed by CMS's data release and the parade of headlines that follow could reenergize efforts to stem the cost of healthcare through price competition rather than price controls -- although the disclosure of pricing may well have the pragmatic effect of becoming a price control. So while the casting of sunlight on healthcare pricing is welcomed, its real import is less likely for most consumers who may be more concerned with copayments and deductibles or for physicians upon whom a hospital's charges have less impact than the physician's overall relationship with the provider. Rather, it may lead to demands for disclosure of more relevant pricing data which could be used by Congress and state legislatures in the development of healthcare cost solutions. The wide-ranging charge differentials might also become a double-edged sword in Medicare payment negotiations with Congress.