database. However, billed charges are a misleading indicator of the actual price of the procedure, since they are an inflated price on which provider discounts to the insurer are based. Typically, only uninsured patients are asked to pay the hospital “billed charges”. Thus, while an uninsured patient may be asked to pay a hospital over $13,000 for a hysterectomy, an insured patient’s health plan may end up paying a negotiated discounted rate of only about $4,500 for the same procedure, with the insured patient paying only their $250 deductible and a co-payment. The price for a procedure is made up of the insurer’s payments to the hospital, physician, anesthetist, and other professionals, and the patient’s co-payment. We now turn to the methodology for calculating each of these.

In order to accurately estimate the prices of our selected procedures, we relied on the Medicare provider payment datasets made publicly available by the Centers for Medicare and Medicaid Services (CMS, hereafter). For inpatient procedures, we first identified the relevant Diagnosis Related Group (DRG) code for each procedure from the DRG Expert coding manual, which also lists the national average payment Medicare makes to hospitals.<sup>23</sup> The hospital DRG payment rate varies by hospital, procedure, case complexity, and hospital resource use by the patient. For example, the national average hospital payment rate for a knee replacement (DRG 209) is $9,261, whereas it averages only $4,206 for hernia repairs (DRGs 161 and 162). For outpatient procedures, the hospital/facility fee was obtained from the Medicare Outpatient Prospective Payment System dataset. Unlike inpatient DRGs, outpatient procedures are coded and priced by Current Procedural Terminology (CPT) codes. For example, the facility fee for a toe deformity repair (CPT 29290) performed on an outpatient basis is $1,525, while that for a shoulder joint surgery (CPT 23470, 23472) averages $5,696. See appendix 2 for details on hospital/facility payments for all our selected procedures.

Physician payment rates were calculated from the Medicare physician fee schedule, which are listed by CPT code and setting (facility or physician office) for 92 different regions of the US. We used the national average across regions for each procedure in a facility setting to calculate the physician’s fees. For example, the national average physician’s fee for skin lesion removal (CPT 11426) was $238, while that for a cataract procedure (CPT 66983) was $592 (see appendices 2 and 3). Medicare payment rates to providers are lower than those paid by private insurers, and much below what is paid by the uninsured; in fact, Medicare operates _de facto_ as a large government administered PPO with a very aggressive rate structure for provider payments. In 2001, Medicare physician payment rates were 83 percent of average private rates, having risen from 64 percent in the mid 1990s (see e.g., Medicare Payment Advisory Commission, 2001).

Anesthesiology fees are calculated based on the number of base units and time units (one time unit is 15 minutes of time) for a procedure, which is then multiplied by an anesthesia conversion factor that varies by region (see Medicare Claims Processing Manual). We obtained the number of base units by anesthesia CPT code from the Medicare anesthetist fee schedule, assumed a uniform four time units for each procedure (as suggested by the

> 23 National Average Hospital Payment rate reported by the DRG Expert (2005) is calculated by multiplying the current relative weight of the DRG by the national average hospital Medicare base rate of $4,555.

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