The Costs of Operating under a Veil of Secrecy

As the United States strives to improve healthcare quality and curtail costs, one thing is clear: Transparent cost data is needed. As novel technologies emerge on the market, it is now standard to evaluate their incremental cost-effectiveness ratio (ICER)—the additional cost of providing a new service divided by the change in the number of life-years (or quality adjusted life-years, QALYs) the new service provides. Transcatheter aortic valve replacement (TAVR) for severe aortic stenosis is no different. When the PARTNER Trial was conceived, its forward-thinking investigators prospectively collected resource-based cost information for procedure-related expenses and hospital billing data for down-stream costs. TAVR was estimated to cost an additional $76,877/QALY compared to surgical aortic valve replacement (SAVR) in high-risk patients¹ and $61,889/QALY compared to medical management among inoperable patients²—placing it squarely in the moderately cost-effective range.³

In this issue of The Journal, McCarthy and colleagues⁴ explain how ICERs are important from a societal perspective, yet offer little insight into financial considerations facing providers and payers and influencing treatment adoption. The authors set to compare hospital marginal profits (revenue minus expenses) for TAVR versus SAVR in propensity-matched cohorts. They defined revenue as total in-patient dollars paid by Medicare (over a 1-year time horizon) and expenses as in-patient hospital costs, derived from itemized charges and Medicare cost-to-charge ratios (CCRs).

This is a reasonable approach—perhaps best possible approach given data in the public domain. Yet readers should be clear that, while median CCR costs (aggregated across institutions) are often used as proxies for resource utilization⁵, they are not the costs of providing care. Thus, estimates presented here are not synonymous with profit. Itemized CCR costs are largely fictitious, defined behind a “veil of secrecy.” They are a function of the vagaries of individual hospital cost accounting, the byproduct of decades of cost shifting and jockeying to gain an upper hand in reimbursement negotiations and to minimize tax burdens. Each hospital defines its own “chargemaster,” arbitrarily setting and updating prices for 20,000–50,000 individual billable items⁶; hospital charges for specific items vary by as much as 1,000-fold.⁷

The data presented by McCarthy and colleagues suggest that current hospital financial models favor SAVR (except where TAVR is accepted as a loss-leader). Further, and critically, the authors suggest that these differences are driven largely by the currently high cost of transcatheter devices ($30,000 versus ~$5,000 for a standard surgical valve¹) and frequent transfer penalties incurred by TAVR patients as the result of systematic shorter lengths-of-stay and more rapid transition to lower-skilled facilities.

As a society, we should incentivize—not penalize—treatments that shorten lengths-of-stay. Changes in the current reimbursement model, at least in the short run, might be necessary to accomplish this. One could hope, then, as TAVR use expands, more competitors will enter the device market, driving down costs. This, theoretically, could allow payers (Medicare), to reduce future TAVR payments, driving down the ICER without pushing providers out of the market. McCarthy and colleagues work provides us with a window into the problem. Without cost transparency, however, one can only guess at the change necessary to shift practice, improve quality, and rein in expenditures.