The price we pay for health care often has little connection to what it actually costs. One hospital decided to investigate.
For nearly a decade, Gundersen Health System’s hospital in La Crosse, Wis., boosted the price of knee-replacement surgery an average of 3% a year. By 2016, the average list price was more than $50,000, including the surgeon and anesthesiologist.
Yet even as administrators raised the price, they had no real idea what it cost to perform the surgery—the most common for hospitals in the U.S. outside of those related to childbirth. They set a price using a combination of educated guesswork and a canny assessment of market opportunity.
Prompted by rumblings from Medicare and private insurers over potential changes to payments, Gundersen decided to nail down the numbers. During an 18-month review, an efficiency expert trailed doctors and nurses to record every minute of activity and note instruments, resources and medicines used. The hospital tallied the time nurses spent wheeling around VCR carts, a mismatch of available postsurgery beds, unnecessarily costly bone cement and delays dispatching physical therapists to get patients moving.
The actual cost? $10,550 at most, including the physicians. The list price was five times that amount.
Competitive forces are out of whack in health care. Hospitals are often ignorant about their actual costs. Instead, they often increase prices to meet profit targets. Patients, especially those with insurance, often don’t know the price of a procedure and rarely shop around.
This dynamic is a driving force in the explosion in health-care spending in the U.S., which will soon reach close to 20% of GDP. Americans spend more per capita on health care than any other developed nation, even though they aren’t buying more health care overall. The rise in hospital prices has outpaced economywide inflation for decades. “When price isn’t tightly linked to cost, that is a sign that the market isn’t competitive,” said Harvard economist Leemore Dafny.
By Melanie Evans | The Wall Street Journal
Image Credit: Gundersen Health System