Place the blame for high hospital prices squarely on deregulation

"That government is best which governs least" is a quote attributed to founding father Thomas Jefferson. Even if Jefferson almost certainly did not say or write those words, it has been the battle cry for what has been a 35-year U.S. experiment in dismantling government oversight and regulations.

I bring that up because a telling yet fairly obscure report by an organization called the Jayne Koskinas Ted Giovanis Foundation for Health and Policy has demonstrated what deregulation has done to hospital pricing.

The report found in 1991, the average nationwide markup for a hospital charge versus the cost of delivering the service was 72 percent. Having spent the last decade owning a retail business with my wife, I would say such a markup is actually pretty reasonable (about 105-110 percent is standard in a bricks-and-mortar retail operation).

But just 20 years later, that same markup among hospitals had zoomed to an average 343 percent. Among the most expensive hospitals, the markup rose to more than five times the cost of delivering the service.

What gives?

According to the report, the switch by Medicare to DRG pricing and the rise of managed care forced hospitals to begin pricing in a way that has "increasingly lost touch with one another as payer attention understandably fixes on the transaction price rather than charge levels."

DRGs were, in their odd way, government's hands-off solution to keeping a lid on healthcare costs. They were developed by healthcare economists at Yale University to commit hospitals to fixed prices and payments for services. The thought was that hospital management would then pressure their medical staffs to be fiscally prudent in the delivery of healthcare.

New Jersey is the nexus for much of this change. It was the first state to adopt the use of DRGs in 1980, and by 1983 pretty much all of the hospitals in the Garden State were using them. They were rolled out at facilities throughout the United States during the rest of the 1980s.

What happened, of course, is that hospital management is far more beholden to its doctors than vice versa, and thus the use of DRGs did little to keep down utilization. Instead, it pressured hospitals to keep on raising their non-Medicare prices to leverage better payments from private insurers to make up for the much lower charges set by government payers.

That brings me back to New Jersey. Its charges were actually regulated on the state level until 1992, when its hospitals, struggling with both DRGs and price caps, lobbied to roll that regulation back. In 1991, the average hospital markup of charges among New Jersey hospitals was 128 percent. By 2011, it had reached an astonishing 623 percent, the highest average markup in the nation. Some facilities in New Jersey have markups as high as 1,282 percent. That leaves patients with the double pleasure of not only being gouged but with potentially glimpsing Newark from their room windows.

By contrast is Maryland, one of the few states in the nation where hospital pricing remains closely regulated. Its average markup in 1991 was 131 percent. In 2011, it was the nation's lowest at 142 percent, and no hospital in the state had a markup higher than 177 percent. Vermont, which also regulates pricing, has an average markup of 190 percent. According to the study, no other states come even close to those figures.

Of course, the argument goes that these markups in prices really don't count, since virtually all insurers bargain charges down as part of their negotiations with network providers. But uninsured patients--we still have some 40-odd million of them--don't have that luxury. They get billed at full charges, which in most parts of the country are at least five times more than what they would have paid just 20 or so years ago. And while those patients with healthcare coverage do not pay nearly as much as the uninsured, their ever-growing deductibles and copayments are based on prices that are likely still multiples higher than what they were in the not-so-distant past.

That huge cost-to-charge gap has also enabled for-profit hospital chains such as Prime Healthcare Services--which deliberately avoids contracting with insurers--to grow at a terrific clip while often engaging in questionable billing practices. Not coincidentally, the California-based company also has been making pretty swift inroads into New Jersey as of late. And the suspicions among insurers about revealing how much they actually pay hospitals has made price transparency for consumers a much more chimerical quest than it should be.

Meanwhile, Medicare delivers services to tens of millions of Americans at a far lower cost than commercial insurers because the program's size and scope have allowed it to leverage good prices from providers.

You can say whatever you want about government overreach. However, our country is a lot cleaner now than before the Environmental Protection Agency was founded in the early 1970s. Airlines were much less of a noisome burden to patronize before they were deregulated in the late 1970s. And among the reasons we have the most expensive healthcare system in the world by far is because some 30-odd years ago much of our country made the conscious decision to butt out of how much mostly large and powerful institutions should charge their mostly captive patients.

Unfortunately, the horse has not only left the barn in this instance, but we burned down the stable just to be safe. - Ron (@FierceHealth)