Price Discrimination

Patients may think the charges posted to their bill represent what is paid to the provider. Charges tend to be the highest price anyone might reasonably be expected to pay. All prominent group buyers in health care demand and receive negotiated discounts, often 40% to 60%. These negotiated prices represent price discrimination against those payers (individual or group) who exert less bargaining power. Discounting occurs widely, including physician office visits, specialists' procedural fees, hospital days, and prescription and generic drugs.

Under the Robinson-Patman Act of 1934, price discrimination among competing customers is illegal per se, except on the basis of differences in costs of servicing those competing customers. However, individuals receiving personal services are not considered to be in competition with each other. Airlines and hotels offer differing rates to customers using the same flight or identical rooms, based on the willingness of customers to pay. Health care providers rarely adopt such pricing policies, called yield management, based on the timing of demand and the perishable capacity available, because it also requires prior reservations, something that is not appropriate for the acute care portion of health care. Furthermore, it is unlikely to be socially acceptable. Provider–payer price negotiations tend to take place annually based on historical and projected annual patient volumes and utilization.

When health insurance became widespread during and after World War II, some providers agreed to bill on the basis of costs rather than list prices. As price competition intensified, providers, especially hospitals, raised their charges to cover the amount that costs exceeded revenues. Other customers, especially indemnity insurers, made up the difference, a practice that became known as cost shifting. Gradually, all third-party purchasers have demanded the opportunity to negotiate or dictate rates, reducing the discrimination against large corporate buyers, but increasing discrimination against others, especial individual payers. The only way to avoid price discrimination would be to have a single payer with community rating for underwriting and rate-setting purposes. So long as health plans compete against one another to service individual employers, it is likely that one group or another will experience some form of price discrimination. What vendors lose on the apples, they have to make up on the oranges.