Why do Indiana hospitals charge more in poorer communities?
Prices at hospitals vary by location but a solution can be found in all-payer rate setting, something done by other states. (Getty Images)
Indiana’s steep hospital costs – seventh highest in the nation overall – have spurred calls for urgent reform and have recently resulted in the formation of a task force to investigate the issue at the Indiana state legislature.
The high hospital costs are indeed cause for concern. But they paint an incomplete picture of the full extent of the problem. When examined at the community level, a glaring inequality emerges: hospital prices are higher in the poorest communities and, paradoxically, lower in the wealthiest communities.
The price of a brain MRI, with and without contrast, without insurance, at IU Health Paoli Hospital is $1,253.78. The median household income is $34,738 and the poverty rate is 17% in Paoli, Indiana. Contrast that with a brain MRI at IU Health Saxony Hospital in Fishers, Indiana which costs $923.35. The median household income in Fishers is $108,361 with a poverty rate of just 2.9%.
Likewise, IU Health Blackford Hospital in Hartford City charges $1,297.37 for this procedure and $832.98 at IU Health West Hospital in Avon, which has double the median income of Hartford City.
One explanation to explain this disparity is the mix of financing sources that exist for these different hospitals (private insurance, Medicaid, Medicare, and uninsured), but this does not excuse the fact that IU Health Hospitals are charging more to those communities that can least afford it.
State lawmakers should be credited for taking some initial action on addressing rising hospital prices in Indiana. HEA 1004, passed earlier this year, gives a sweeping mandate to the healthcare cost oversight task force. It also offers tax credits to small businesses that pay into health spending accounts (HSAs) and to physicians who operate independent clinics (which have prices that tend to be lower than hospital rates).
But a more aggressive approach is needed to rectify the disparity in hospital rates across the state’s poorest and wealthiest communities and lower hospital prices overall.
A proposal from Maryland
A statewide all-payer rate setting system would eliminate these local pricing anomalies by ensuring that hospitals are charging the same rate for the same service, regardless of payer or provider.
Today, Maryland is the only state to set hospital rates, but state rate setting was once much more commonplace. In the early 1970s, a little over half of the states had rate setting which led to “substantially lower” increases in hospital expenses per day and per admission in the late 70s and early 80s, according to a 2015 Urban Institute report.
If the system worked so well why did it go away?
A number of factors brought about the downfall of most states’ hospital rate-setting systems, according to the report, including the anti-regulatory political climate of the 80s, the breakup of the coalition of stakeholders that had supported these systems, the complexity of the rate-setting systems, and a poor grasp of health economics among employers who otherwise might have been in a position to oppose hospital rate increases.
Maryland has demonstrated that statewide hospital rates are not only viable in today’s economic and political climate, but also that they work. Maryland hospital costs over time have dropped from 23.6% above to 4.6% below the national average. Another contemporary example is West Virginia. The state’s authority to set statewide rates ceased in 2016, but, when the system was in place, it saw a decrease in hospital costs. Between 1985 and 2007, West Virginia’s cost per admission rates grew slower than the national average, at 5% percent a year, 0.3% below the national average. In addition, in 2005, the state had the 12th lowest markup of charges over costs.
As the Urban Institute has noted, all-payer rate-setting systems is a fairer approach that increases equity, limits excessive hospital cost growth, and reduces costs for businesses, patients, insurers, and Medicare and Medicaid. They also benefit hospitals by ensuring their financial stability regardless of where they are located or the populations that they serve.
Today, Indiana retains the unwanted distinction of being at the top of the nation for hospital costs with the poorest communities bearing the brunt of these high costs . By passing legislation to establish a hospital rate-setting system for all hospital costs, Indiana could instead join Maryland and West Virginia in becoming one of the few states to lead the way in healthcare costs reduction.
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