My “Lies, Damned Lies, and Statistics Award—Health Care Division” goes to the Wall Street Journal. Today’s (09/14/09) six-column, page A4 article by Jane Zhang, “Maryland Reins In Hospital Costs By Setting Rates,” is accompanied by a graph labeled “Keeping Costs Down.” It shows one line of data labeled “U.S.” that shows a steep increase from about 20% in 1980 to more than 150% now, and a second line labeled “Maryland” that, over the same period, indicates a far more gradual increase from about 10% to a bit over 20%. The pictorial difference is dramatic and strongly suggests that the state’s bureaucratic controls on hospital rates have been fantastically successful in “Keeping Costs Down.” Actually, they haven’t done any such thing.

In fact, the graph is grossly mislabeled, because it tells us absolutely nothing about actual hospital costs during the past three decades in either Maryland or the U.S. What it does tell us is the ratio of hospitals’ charges to actual costs over that time—which mathematically removes any clue to the actual level of underlying costs. If I told you I now spend 10% of my annual income on food versus 15% thirty years ago, you’d still know nothing about either my income or my food costs over that period.

What the WSJ graph does show is that Maryland’s hospital charges—the prices printed on bills to patients and insurers—are much more closely related to underlying costs than are the charges of hospitals outside Maryland. That’s because Maryland, as explained in the article, has a (1) state bureaucracy that sets each hospital’s rates and (2) a state law that requires all payers to pay those rates, including, astonishingly, Medicare which has waived its normal low-ball reimbursements to treat Maryland hospitals to a $500 million annual federal windfall.

In all the other states, hospitals have long since had zero expectation of ever collecting more than about 40% of their nominal prices, because all have alternatively negotiated private reimbursement agreements with insurers that bear no relationship whatever to the prices actually appearing on the hospital’s bills. (These hospitals also have to accept artificially low Medicare and Medicaid rates over which they have no control.) It’s a lot like a wholesale club I used to belong to that posted wildly exaggerated prices on their floor merchandise, even though the presentation of my membership card at checkout always got me the real prices that were a fraction of the posted ones—but much closer to competing prices in other stores.

The real question is how the state-controlled real Maryland prices compare with the negotiated real prices of non-Maryland hospitals. Unfortunately, that information is nowhere to be found in the WSJ article. The piece does state, however, that “Maryland’s costs were 2% less than the national average.” This suggests an alternate headline: “Maryland Price-Control Bureaucrats Keep Hospital Costs at the Same National Average as All Other Hospitals.” But that one doesn’t really sing to us, does it?

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