Earlier this month at the July 18 Southern Mono Health Care District Board of Directors Meeting, former physician and now patient advocate Mike Dostrow presented sobering but unsurprising news to the Board. He reported a recent elective procedure that, in spite of his loyalty to Mammoth Hospital, he chose to have performed elsewhere. The reason: cost.

Dostrow compared the cost of his procedure, which was about $9,500 at Coast Surgical Center in Redondo Beach, to the quoted price he received at Mammoth Hospital, which was two to three times greater at about $20,000-$30,000, he said. “The cost difference is disconcerting,” Dostrow said, “and I’m concerned that perhaps I’m not the only person looking elsewhere to get an elective procedure done.”

Dostrow acknowledged some of the obvious reasons for this cost discrepancy, beginning with the dramatic difference between a free-standing surgical center like Coast Surgical Center and a 24/7 hospital in Mammoth Lakes. Mammoth Hospital CFO Melanie Van Winkle confirmed this difference, noting that Mammoth Hospital must keep staff all through the night, seven days a week, while a surgical center might be open five days a week during regular business hours. “If they don’t have patients on a given day, they can close their doors,” said Van Winkle. “I cannot.”

Van Winkle also noted that Mammoth Hospital must take all patients, whether they have insurance or not, which means the hospital sometimes eats the cost of a procedure that an uninsured patient cannot pay for. Meanwhile a surgical center “can pick and choose their patients based on insurance,” she said, ensuring reasonable compensation.

“It’s good that people can have a place to go in comparison,” said Board Treasurer Stephen Swisher, “but it’s hard to compare a surgical center with an assembly-line approach to our facility.”

To this, Dostrow added that Mammoth Hospital also deals with a greater amount of oversight, and must meet more stringent rules and regulations set forth by the state. For example, under mandate of the State of California, Mammoth Hospital must bring the oldest part of the hospital into seismic code compliance by 2030. Van Winkle said that this upgrade, which includes the replacement of the facility that is being regulated as well as the construction of a new physician and medical office building, will cost about $50 million. The number does not yet account for inflation.

Inyo County’s Northern Inyo Hospital tackled the same seismic code retrofitting requirements last year by completing a new 56,378 square foot facility in October 2012. According to Angie Aukee, Northern Inyo Hospital Director of Community Development, Marketing & Grant Writing, to date the cost of the construction of a Support Services and Imaging Center, in addition to the new two-story facility on West Line Street, is $83 million.

“All hospitals have to comply with the seismic standards by a certain date, or they close their doors,” said Aukee.

But that wasn’t the only standard Northern Inyo Hospital had to meet in 2012. In May, the hospital transitioned from traditional paper records to a computerized Electronic Medical Record (EMR) to satisfy the stipulations of the HITECH Act passed as part of the American Recovery and Reinvestment Act in 2010, Aukee said. The cost: about $5 million.

These expenses clarify the difference in prices between a 24/7 hospital like Mammoth or Northern Inyo and a surgical center, but Dostrow pointed out that cost discrepancies for basic procedures are part of a growing problem in the United States. Prices are rising to staggering heights across the country, with huge and largely unexplained discrepancies for the same procedures at different hospital facilities.

According to an extensive federal database of national healthcare costs released in May of this year, a patient who chooses the California Pacific Medical Center, Davies Campus Hospital in San Francisco for treatment of simple pneumonia and pleurisy can expect to be charged $46,233. At the Renown Regional Medical Center in Reno, the charge for the same treatment would be $26,255.

Meanwhile a May 8 Huffington Post article (“Hospital Prices No Longer Secret As New Data Reveals Bewildering System, Staggering Cost Differences”) noted an even more outrageous discrepancy for the treatment of a chronic obstructive pulmonary disease. At Bayonne Hospital Center in New Jersey, the charge is $99,690. In the Bronx, at the Lincoln Medical and Mental Health Center, the price for the same treatment is $7,044. As the article pointed out, these two facilities are less than 30 miles apart.

Dostrow’s equally troubling example, also taken from the federal database, was a hip replacement surgery. In a small town in Texas, he said, this procedure cost about $6,000. In a suburb of San Francisco, the cost was $225,000. “Granted, these are different levels of surgeons and varying infection rates and varying success rates, but it’s still an amazingly large difference,” he said.

That difference owes much to demographics, Dostrow explained. A small population usually means a smaller hospital, which means less overhead, therefore lower prices. This is not as much the case in Mammoth, where a population of about 8,000 enjoys a competitive staff and facility; however, given Mammoth Hospital receives about 40,000 visits annually, according to Van Winkle, the higher cost of procedures here than in other small California towns might not be so surprising.

Hospitals in larger cities, on the other hand, must not only potentially serve a larger population, but can also expect a wealthier population, and may raise their prices “because they know their population will pay,” Dostrow said.

Yet what hospitals charge and what they are actually paid are two very different things, Dostrow noted. When a hospital contracts with an insurance company for a procedure, that insurance company, be it Blue Cross or Medicare, negotiates a contracted price for compensating the procedure. That could be anywhere from 50%-10% of the price of the procedure, Dostrow said; in the case of Coast Surgical Center, Dostrow’s insurance company only compensated the Center about 15% the cost of his surgery. “It’s not negotiation, it’s more like bullying,” Dostrow said. “And providers, hospitals, clinics, surgical centers, really are in a position where they have no choice.”

Given this leverage, insurance companies also choose sometimes to only pay a percentage of the negotiated compensation. “Not only is there a negotiated price, but then when it comes down to it, [insurance companies] may say, ‘We’re going to give you 60% of that negotiated price,’” Dostrow said. “That happens all the time. It’s confusing, and it sounds illegal, but insurance companies rule medicine right now.”

Sometimes insurance companies even wiggle out of their responsibility to compensate healthcare providers altogether by creating byzantine requirements for surgical procedures, such that if a physician, nurse or hospital forgets to cross a ‘t’ or dot an ‘i,’ they can withhold the entire negotiated price for the procedure. “What that is resulting in is that small medical practices are going defunct, because an average provider can’t afford the three, four, five people that it takes to negotiate these circuitous rules,” Dostrow said. “Hospitals now have whole departments that do what’s called utilization review and chart review in order to be paid their negotiated price, and often a fraction of the negotiated price.”

Therefore in order to receive enough compensation to support their staff and facilities, as well as meet the demands of state and federal rules and regulations like seismic code compliance or the HITECH Act, hospitals must raise their prices. “I was fully aware of this when I came to the Board meeting,” Dostrow said. He also emphasized his confidence in the high level of service and excellent facilities offered by the hospital. Nevertheless, he said, “For Mammoth to be competitive, they better do something about [prices], because otherwise people are going to do what I did, and go elsewhere.”

While the Board had little to say in response to Dostrow’s presentation, Board Vice Chair Dr. Maria King did express “concern that the public is becoming more savvy” to other options, and may elect to have procedures done elsewhere.

Dostrow’s proposed solution to the larger problem of pricing in the U.S.: create universal pricing for hospitals, as well as universal paperwork for insurance company compensation. Without such a change, he said, the art of medicine may soon be dead. “I see this as just the tip of the iceberg,” he said. “The whole medical system is failing. In many cases we have some of the worst patient outcomes in the world; we’re 27 in infant mortality in the world, and we spend more per capita than any nation in the world on medicine. We’re failing. We’re failing miserably. And part of the reason why is because insurance companies are calling the shots. The inmates are in charge of the asylum.”