The University of Minnesota Medical Center, Fairview charged $163,690 for gastrointestinal hemorrhage surgery in fiscal year 2011.

Nine miles away, the same procedure cost $19,770  — an eighth of Fairview’s sticker price — at Park Nicollet Methodist Hospital.

This gap illustrates the murky business of how hospitals decide the cost of care.

It’s standard practice for hospitals to slap essentially meaningless sticker prices on their lists of procedures — prices that patients rarely pay in full.

And Fairview touts some of the highest prices in the state, according to data released by the Centers for Medicare and Medicaid Services earlier this year. The data include charge information for 50 Minnesota hospitals.

Fairview’s prices are often triple or quadruple the cost of the state’s cheapest hospitals. It tops the list for any given procedure nearly 37 percent of the time — more than any other Minnesota hospital.

“There is large variation across hospitals for essentially the same service,” said Jean Abraham, a University health policy and management associate professor. “And this raises a really important issue: why?”

That question has no clear answer, because the true value of a procedure gets lost somewhere between the sticker price and a patient’s final medical bill.

Sticker prices serve as a starting point for hospital negotiations with insurance companies and other third parties — each of which have their own idea of what a procedure should cost.

At the end of a long road of finagling, original sticker prices are slashed, with the third party sometimes paying as little as 10 percent. Patients then pay a fraction of that negotiated price, based on their insurance plan.

Sticker prices are like a greedy child asking for too many presents on their birthday, said Steve Parente, director of the University’s Medical Industry Leadership Institute.

“The kid is like, ‘I want a pony; I want a car; I want this super game; and I want five other things,’ ” he said. “That’s pretty much what the charges are.”

But professionals agreed charges can serve as a “common language.”

“Patient care services have to be translated into something understandable by the hundreds or thousands of [payers],” said Jeff Ellison, administrative director of finance for Ohio State University Wexner Medical Center.

That common language, however, translates differently for those with high out-of-pocket costs, the uninsured, or patients with plans outside a hospital’s coverage.

For these groups, widely variant sticker prices have greater bearing on final medical bills.

“If you’re not insured and it comes to you … and you don’t want to fight it, that’s it,” Parente said. “Case closed.”

Otherwise, he said, the negotiating process can take up to a year.

At Fairview, uninsured patients receive the same discount as if they were covered by Blue Cross Blue Shield — though neither party would disclose the discount rate. Ohio State’s Wexner Medical Center offers a flat 70 percent discount on charges for its approximately 75,000 uninsured patients each year.

For any patient, medical bills are often complicated, laden with jargon and confusing prices.

Behind that veil, hospitals have the ability to charge more, said health policy professor Abraham.

“It tends to lead to very poor transparency of information,” she said. “It’s hard to know what the price of a medical system is.”

At the crossroads of quality and cost

Fairview’s charges reflect the cost of its residency programs, medical specialties and the Twin Cities’ “expensive” labor market,
Parente said.

Costs are also driven up by Fairview’s sickest patients, who have more complications and longer stays, according to Fairview’s Vice President of Revenue Management, Andy McCoy.

Experts said the cost of care generally reflects its quality.

Fairview is the state’s third-best hospital, according to the US News and World Report.

But Rochester’s Mayo Clinic ranks third in the nation and charged less than Fairview 93 percent of the time, sometimes with a procedure price difference of nearly $160,000.

To set Mayo’s yearly prices, a team of physicians, financial administrators and nurses do a line-by-line charge analysis, said Dr. Frank Nichols, medical director of Mayo’s revenue cycle operations.

This process aims to pinpoint the true cost of each procedure, and so Mayo Clinic rarely discounts much from its sticker prices,
Nichols said.

“It’s not that we don’t want to discount things,” he said.

“It’s that the insurance and payers have trusted our processes — as opposed to institutions that will have a cost of ‘x’ and a huge discount.”

Fairview reviews its charges annually, meeting with all hospital departments and analyzing payment rates to craft the final list of prices, said McCoy, vice president of finances.

McCoy declined to comment on the average markup on Fairview’s charges.

Sticker prices are intended to match expected payments from insurance companies in the coming year, he said.

In recent years, Fairview’s sticker prices have increased annually, with the exception of 2006.

Keeping academic health centers afloat

Fairview fell in the more expensive half of the eight Big Ten schools included in the data. The most expensive, on average, was Northwestern Memorial Hospital.

University of Wisconsin Health — which was ranked Wisconsin’s best hospital by US News and World Report — was consistently the least expensive in the Big Ten pack.

Of the 52 procedures for which all Big Ten hospitals provided sticker prices, UW Health offered the lowest price for 37.

Fairview was more expensive than UW Health almost 85 percent of the time.

UW Health declined to comment for this story, citing its policy not to share information on its charge-setting process and other “competitive business information.”

Being an academic health center — a hospital that includes a medical school — is an expensive business.

“We just have costs associated with research and the academic mission that a normal community hospital [doesn’t],” said Ellison, finance director for OSU Wexner.

Those costs include curriculum and faculty and, for most Big Ten academic health centers, 24/7 Level I trauma care. A hospital can provide one of three levels of trauma care; Level I has the highest volume of patients and staff.

Fairview is one of only two Big Ten hospitals without a Level I trauma center.

“The University’s hospital is an exception to that rule,” Parente said. Fairview, which lies in a metro area with five Level I trauma centers, instead operates a Level II trauma center.

Ellison said it’s difficult for academic health centers to balance additional expenses while training the next generation of caregivers.

“One of our greatest fears is we’re the ones who train doctors and nurses and professionals,” he said, “and as we look in the future … it’s going to put academic medical centers in a pretty difficult situation.”

Parente said academic health centers survive only with the aid of federal research funds and government subsidies for graduate medical education.

“It’s a valid concern,” he said. “The provision of patient care alone frequently will not cover the costs of an academic health center.”

Strides toward transparency

Over time, price-setting has become a tangled process between hospital administrators, insurance companies and patients.

Each hospital sets its prices according to individualized standards that involve “crazy math” and the assumption that patients will never pay the full cost, Parente said.

He said hospitals are forced to increase their charges in order to make up for losses.

“As time has gone on, hospitals are getting less and less of their money back,” Parente said.

Hospitals have become entrenched in the charge system — “a remnant of history,” according to OSU’s Ellison.

“Charges really are kind of an artifact of a payment system of the past,” said Barb Sheflet, director of finance for Allina Health, which owns or operates seven metro-area hospitals.

But charges are some of the only price information made publicly available. Experts agreed that health care cost transparency is one of the industry’s biggest issues.

Minnesota Hospital Association spokeswoman Wendy Burt said Centers for Medicare and Medicaid Services’ charge data is a good first step.

“Consumers are going to increasingly demand more information about what they can expect to pay,” she said.

Sheflet said she believes the health care system is headed in the right direction.

“I think we’ve come a long way in terms of transparency,” she said. “I think we have some room to go. As we all develop tools for patients … we’re taking great strides in that direction.”

Parente said hospitals know they would benefit from improved transparency but struggle to discern their own internal costs.

“Getting a more accurate accounting of their costs is really going to be vital for health institutions to thrive,” he said.

U student health benefit plan

Charges have little impact on students enrolled in the University’s Student Health Benefit Plan.

The plan covers 80 percent of eligible expenses and caps out-of-pocket costs at $3,000 per person per year. The plan costs almost $1,000 per semester.

On the Twin Cities campus, about 8,500 students are enrolled in the Student Health Benefit Plan. Another 1,500 from coordinate campuses are also enrolled.

The most popular alternate provider for students is Blue Cross, followed by HealthPartners and Medica.