“Unconscionable.” “Outrageous.” “Indefensible.” These are just some of the tamer descriptions for the billing practices of most hospitals, and also many physicians, that have recently come to the public's attention. Earlier this year, Time magazine published an extraordinary 24,000-word exposé—the longest article it has ever published—detailing how even charitable hospitals routinely price-gouge their patients.1 With characteristic flare for telling details, journalist Steven Brill documented ten-fold markups of charges over costs at some prominent hospitals for common services like X rays and lab tests, and one-hundred-fold mark-ups on mundane supplies such as gauze pads and generic aspirin. Just as the buzz from Brill's article was abating, the Centers for Medicare & Medicaid Services released a comprehensive data set in May that galvanized local and national media across the country.
This news tsunami caught hospital managers flat-footed and tongue-tied. Typical responses conceded that hospitals’ pricing practices are based neither on actual cost structures nor rational marketplace dynamics. Instead, hospitals attempted to deflect blame by noting that hardly anyone actually pays list prices, and they characterized their indefensible pricing as a symptom of a broken system that is beyond them to fix.
There are two glaring faults in these standard defenses.