Summer vacation’s finally here. You’re strolling along the beach, not a care in the world when – ouch – you step on a piece of broken glass and need a few stitches at the local hospital. Such routine procedures are painless enough, but depending on where you’re treated and by whom, the real pain could occur when you’re handed the ER bill.

In some of the latest evidence on the crazy-quilt patterns of U.S. health care prices, Castlight Health found prices in Dallas TX ranging from $15 to $343 for the same cholesterol test.  What makes these price variations particularly egregious is that the highest prices are typically reserved for those least able to pay, such as the uninsured.

What’s the solution?  In the long run, we need to establish a more transparent system where consumers can choose easily based on reliable quality and price measures.  But our current measures of quality are, to put it politely, inadequate, and people with insurance are often insulated or can generally afford those higher prices.  Reference pricing, in which insurance pays only enough to reimburse providers with adequate quality and relatively lower costs, would help to restrain high prices, but distracted patients or those with strong attachments to specific doctors or hospitals could still get stung with a big bill.

Capping Payments At 125 percent Of Medicare Rates

We suggest a short-term solution: The federal Medicare program has in place a complete system of prices for every procedure and treatment.  It’s not perfect, but it is uniform across regions, with a cost-of-living adjustment that pays more in expensive cities and less in rural areas.  If every patient and every insurance company always had the option of paying 125 percent of the Medicare price for any service, we would effectively cap the worst of the price spikes.  No longer would the tourist checked out at the ER for heat stroke be clobbered with a sky-high bill.  Nor would the uninsured single mother be charged 10 times the best price for her child’s asthma care.  This is not just another government regulation, but instead a protection plan that shields consumers from excessive market power.

This number reflects a tradeoff between the desire to keep prices low and the need to allow hospitals and doctors to offset at least some of the costs of the uninsured. While some doctors are ambivalent about accepting new Medicare patients because of the low reimbursements, we think that a 25 percent premium would provide incentives to see new patients and help offset the inadequate Medicaid payments provided in many states.  Furthermore, most negotiated payments are already under the 125 percent of Medicare cap, so those payments would be entirely unaffected by this new policy.

Hospitals might worry that this new approach would put even more pressure on their bottom line, especially hospitals with safety-net or Medicaid patients.  Yet stratospheric charges to uninsured (or out-of-network insured) patients is not the way to cure the basic problem of inadequate public support for the poorest patients.  A floor that prevents Medicaid from paying much less than Medicare prices would help rationalize these less visible price distortions in the U.S. health care system.

Realigning Medicare Payments

At the same time, we should take a fresh look at what Medicare pays for both services and procedures.  Medicare’s price-setting committee is dominated by specialists who, not surprisingly, make sure that procedures performed by specialists turn a pretty profit; adding an extra 25 percent would make them even more profitable.  Realigning Medicare prices towards primary care and away from high-cost procedures would have the additional benefit of rewarding doctors who, by treating patients for preventable conditions in their office, keep them out of the hospital or the surgical suite.

The cost implications of capping payments at 125 percent of Medicare rates would be modest for hospitals in competitive markets since so many are already pricing at or below 125 percent of Medicare.  The impact would be greater in less competitive markets with higher hospital “margins” — the polite term for profits when referring to nonprofit organizations — with the greatest savings for those without health insurance.  One recent study in JAMA Internal Medicine found that approximately 32 percent of quoted prices to replace a hip for an uninsured grandmother were more than $50,000. Under our system the maximum charge would range between $12,500 and $31,250, depending on the severity of the disease — still a considerable burden, but far less likely to bankrupt Grandma.

We understand that even the 125 percent of Medicare fix would not cure all that ails the U.S. health care system.  But until a longer-term solution comes along, we believe that this first aid would provide just what the doctor ordered to stabilize the system, protect the consumer from excess charges, and begin the slow process of getting costs down.