for a routine knee replacement surgery

might be about $16,000 or $53,000 or even $81,000.

How is a hospital able to charge

such an extreme range of prices for the same surgery?

The vast price differences are driven

in part by the secret rates hospitals negotiate

with health insurers, for everything

from an MRI to open-heart surgery.

- It depends on the leverage that the hospital has.

It depends on the leverage the insurer has.

Depends on sort of who's good at negotiating.

And until recently, those rates tended to be secret.

- [Narrator] But they're not so secret anymore.

Thanks to federal rules that required hospitals

to make their prices public in 2021.

Sutter Health is one of hundreds of hospital systems

now revealing their negotiated rates.

- People didn't know what their competitors were paying

and that limited, the negotiations in some ways.

- [Narrator] So, how exactly are these rates set?

Here's what goes into the secret price negotiations

between hospitals and insurance companies.

To understand how U.S. hospitals set their prices.

Let's take a look at publicly available data

from Sutter Health's Memorial Medical Center.

This chart shows the prices for billing code DRG 470

which is a routine hip or knee replacement surgery.

The different price tags depend on the insurance plan,

covering the procedure.

If you look at the lowest and most expensive rates,

you can see there's a pricing spread of more than $64,000.

Still, the data doesn't represent the full range of pricing.

The exact costs of certain insurance plans

are not available on the hospital's website.

- One takeaway has definitely been the broad range

of prices that are paid for the same service

in the same hospital.

You see this in Sutter's data, but you see it

across the board in lots of other hospitals' data.

- [Narrator] So, how do hospitals and insurance companies

come up with these numbers?

Hospitals typically have a sticker price,

often called the chargemaster rate.

This can be a starting point for negotiations

with insurance companies.

At Sutter Health Memorial, the chargemaster price

for a routine hip or knee replacement is set at $92,262

but there isn't an exact formula

for how this cost is calculated.

- A lot of factors influence chargemaster prices.

Hospitals typically will tweak them

to meet their financial targets.

The chargemaster rates are not typically really tied

to estimates of cost or value for the service provided.

Some hospitals are now trying to drill down and say, "Okay,

how much does it really cost

to do this particular procedure?"

But that's not historically been the case.

Insurers would rather have rates that are not actually tied

to the chargemaster and when they are negotiating

more successfully, they're not paying a rate

that's a discount off the chargemaster,

they're paying a rate set in some other way.

- [Narrator] Hospitals will often tweak chargemaster rates

based on their own financial targets.

Then insurers will often negotiate discounts

off these rates.

- Insurance companies tend to have more leverage

in the negotiations if they can deliver a lot of patients.

If they have a lot of market share in that area.

And also, if they're willing to design a plan

that has a limited number of hospitals

or a limited network so that the hospital knows

that its competitors are not going to be

in that plan or not as favored as they are.

And in that case, a hospital

will tend to offer a better rate.

- [Narrator] Insurers are essentially buying in bulk

using their large membership to get better deals.

Meanwhile, prestigious or large hospital systems

could have greater leverage in negotiations.

- What gives a hospital leverage or negotiating cloud

is basically being a must have system,

meaning that the insurer really needs

to have that hospital system to have a good plan

that will attract customers.

In the markets where Sutter Health has hospitals,

I think it would probably be difficult

for an insurer to create a strong network

that included no Sutter Health facilities.

They have some important facilities

and they are a powerful presence in their markets.

- [Narrator] In a statement, a spokesperson

from Sutter Health said, "It is the insurance companies

not the health systems who hold leverage

in these negotiations.

Sutter negotiates on behalf of our patients

to help ensure they can receive access to the clinicians

and facilities who can meet their healthcare needs".

Meanwhile, insurance companies have generally said

their contract negotiations with hospitals

achieve large overall savings for their members.

And comparing individual prices is not indicative

of cost-competitiveness.

The full impact of the contracts between hospitals

and insurers can be difficult to see directly

because the details of the negotiations often remain secret.

For instance, some contracts include restrictive provisions

sometimes called anti-steering clauses.

These clauses can prevent insurers from directing patients

to less expensive or better quality hospitals and doctors.

- Hospitals, when they have a lot of leverage

in a very powerful in their market,

they can sometimes win favorable contract terms

so they could get provisions in contracts that said

an insurer can't exclude their hospitals

from any of its plans, that all of its plans

must include that hospital systems, facilities.

- [Narrator] Insurance plans

offered under government programs

like Medicare and Medicaid tend to get the lowest rates

because they're tied to prices mandated

by federal and state agencies.

You can see this in the knee

and hip replacement surgery prices we showed you earlier.

- So, you'll see that all of the Medicare plans

are clustered around exactly that same number,

because it is related to what Medicare itself

pays for that service.

But then you'll see a big range of prices.

You'll see some around $53,000.

You see one as high as around $81,000.

And those are the negotiated rates

that the different insurers are paying.

- [Narrator] Because Medicaid and Medicare plans

tend to get lower rates.

Some hospitals say they need to rely

on the higher paying privately insured patients

for their revenue.

- There was a study that looked at more than 2,800 hospitals

over 10 years.

And they found that hospitals that boosted their margins

didn't cut their costs.

They actually improved their revenue by raising the rates

they charged to private insurers.

- [Narrator] A spokesperson from Sutter Health said,

"The rates paid by Medicaid and Medicare plans

generally don't cover the costs of care".

The prices, health insurance companies negotiate

affect consumers directly.

Throughout of pocket charges like deductibles

and indirectly by pushing up premiums for health coverage.

For instance, high deductible plans

can leave patients responsible

for thousands of dollars in costs

before their coverage kicks in.

Total spending on private health insurance

in the U.S. has increased by about 40% over the past decade,

according to federal figures.

- Patients who don't have any insurance at all

can sometimes be asked to pay a cash price

that is higher than what insurers pay it varies.

But some of these patients may also,

if they're low income, get financial assistance

in which case they get, discounts based on that,

or may have the whole bill forgiven.

- [Narrator] Despite the federal rules requiring hospitals

to make their prices public,

some hospitals still haven't fully revealed their rates.

On July 1st, the second phase

of the federal pricing transparency effort took effect.

Health insurers now have to reveal the prices they pay

to all healthcare providers, not just hospitals

but also doctor groups, surgery centers, and labs.

- When the federal government created these rules,

one of the ideas was to help people shop for services.

That's one question, will people look at these prices

and try to shop for care based on them?

The belief is that now

that those prices are becoming more transparent,

we'll see a narrower range of prices

because insurers and hospitals both will say, "Hey,

I see that other person's getting a better rate.

I want that rate".

And that will tend to narrow the big variation.

(light gentle music)