Study examines surgical price tags, finds massive markups

Hospitals mark prices up to 17.5 times the costs

Hospitals frequently charge more than 17.5 times the cost for surgical care, but facilities with the highest price markups tend to have worse care quality, the study showed.

Researchers from the University of California investigated institutional markup ratios across 1,960 U.S. hospitals for four major elective operations: abdominal aortic aneurysm repair, colectomy, coronary artery bypass grafting and hip replacement. Patients undergoing the operations were at least 18 years old and had data in the 2022 Nationwide Readmissions Database.

They identified 3.0 as the median hospital price markup ratio, which researchers said represents the difference between what the hospital billed for a care episode and the actual costs incurred for it. However, about 40% of the hospitals charged more than four times the cost of inpatient hospitalizations, and 10% charged more than eight times, according to the study.

High-markup hospitals, as researchers called them, were more often for-profit centers located in metropolitan areas. The study also found that care at such hospitals was associated with significantly higher morbidity, with patients encountering a more than 30% relative increase in the risk for postoperative complications.

Hospitals with the greatest price markups for surgical care are not only linked to lower quality of care, but also value of care, researchers pointed out.

Inpatient operative spending exceeds $500 billion annually, prompting recent efforts to regulate and curb excessive spending. Yet, just two states -- Maryland and West Virginia -- already regulate hospital pricing.

Additionally, only nonprofit hospitals face pricing limitations under the Affordable Care Act, which regulates the charges that these facilities can impose on uninsured and out-of-network patients. Notably, nearly three-quarters of high markup hospitals were private and investor-owned, the study showed. These hospitals also had a median markup of 6.3, roughly double the national average.

Healthcare industry experts have argued that pricing markups on hospital chargemasters are necessary for profitability and may represent cost-shifting in which hospitals charge more to cover the differences in actual costs and low reimbursements from some payers. But researchers said their study challenges these assumptions, as evidenced by significant variation in price markups for surgical care.

Hospital markup ratios varied from 0.5 to 17.5 across all the facilities studied. Hospitals in the top decile for cost-to-charge ratio also marked up their costs by a median of about eight times. Further, researchers did not observe a significant difference in the proportion of Medicare patients between high markup hospitals and other facilities.

"Indeed, national regulation is needed not only to reduce unnecessary cost burdens on the health system, but also because treatment at high-markup centers appears to be associated with unnecessarily high morbidity," researchers wrote in the study.

The "invisible drivers in the for-profit sector"

Three industry experts from the College of Medicine at the State University of New York said the study shows the "truth behind hospital markups" in a JAMA Surgery commentary article. The authors are Sherene E. Sharath, PhD, MPH; Panos Kougias, MD, MSc; and retired physician David H. Berger, MD, MHCM.

They specifically point to the for-profit hospital sector, arguing that private equity's increasing reach into hospital care is a potential key driver.

"When private equity enters health care, quality paradigms shift substantially, inevitably redirecting focus toward financial returns," they wrote. "This focus can supersede the commitment to adequate resources and patient-centered care, both of which are essential to true quality. Furthermore, private equity’s short-term profit model of aggressive returns through cost cutting and asset sales can undermine the overarching goal of long-term sustainability in individual health."

These financial decisions have serious implications for patients and their outcomes, with the study underscoring "the broader implications of health care quality’s invisible drivers in the for-profit sector," the commentary stated.

The authors called for transparent financial reporting and rigorous oversight of ownership changes in addition to legal safeguards to protect patients from low-value care.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.