The Case Against Emergency Rooms Driving the Cost of Healthcare

This past Wednesday, September 5th, Dr. Glenn Melnick–a professor of public policy at USC– published an opinion essay in the New York Times framing an argument that sought to pinpoint one of the many sources of rising healthcare costs. In his article, Dr. Melnick attributed an outsized role of emergency rooms as a major factor driving the rapid growth in healthcare expenditures. This blog entry, although a deviation from typical publications you’ll likely see on this blog, seeks to present data to assess the merits and demerits of Dr. Melnick’s argument. The blog post will unfold by first providing a synopsis of Dr. Melnick’s central arguments, then present macroeconomic data on the growth of healthcare relative to GDP, before diving into a brief history of Emergency Rooms economic viability and position in the healthcare marketplace before making a final judgment on Dr. Melnick’s case.


In a health system that often overlooks the role of and protections for patient consumers, Emergency Care is one of the few treatment platforms mandated by law to account for all patients and their ensuing care. These conditions– while intended to serve as a protection of last resort for patients– can have unexpected economic outcomes and widespread effects within healthcare systems. In Melnick’s argument, legislative measures have yielded a dynamic in which significant pricing power is shifted away from payors, namely insurance firms– directly to emergency rooms and their operators. This pricing power has naturally led to out of control costs, with the expenditures shifted on both insurance providers and individuals receiving care, he says. Melnick takes issue with one particularly state legislative mandate, which requires insurance companies to provide coverage for its members in the nearest geographic emergency room despite its status as an in or out of network provider. The legislative is intuitive; where emergency care is concerned, patients should prioritize expediency over costs. However, its implications are such that it adds impetus for insurance companies to make accommodations and eagerly add emergency rooms into their networks. These conditions are certain to provide some haphazard and un-predicted pricing dynamics– perhaps to the detriment of patients and insurance firms alike– but require a more thorough investigation prior to judgment.

For starters, the interplay of factors and variables in healthcare is exceptionally complicated. In the past decade alone, factors outside of state legislative efforts have overwhelmingly shifted conditions in the marketplace that are especially pertinent to emergency room and inpatient care. Between the affordable care act, medicare and medicaid expansion, an aging population and a growing economy, the costs of emergency care were certain to rise. In fact, so much of Melnick’s argument requires delineating the difference between the growth rate of healthcare in its entirety relative to emergency care. One universal truth specific to the American healthcare system is that costs are going up across the board and have been doing so for a considerable time.

Timeframe Healthcare Growth Rate US GDP Growth Rate Healthcare vs. GDP Differential
1990-2007 7.3 2.9755 4.3245
2008-2016 4.2 1.312 2.888
2017-2026 (estimated) 5.5 NA NA


The above graph is a collection of healthcare growth data compiled of a forecast report of National Health Expenditure Projections and US World Bank GDP Growth data. When taken together, they tell a convincing story that point to decades of drastically expanding healthcare and healthcare’s growth in significance as a share of total GDP. With stagnant real wages and an estimation that places healthcare at an approximated 20 percent of GDP in the coming years, health expenditures have absorbed an increasingly large share of paychecks. The remaining question, however, remains unanswered: what is causing decades of growth?


Who Has Been Paying for Visits to the Emergency Room:


Figure 4. Trends in primary payer among all ED visits for patients aged 18-44 years, 2006-2015

Worth noting, at all ages, those with private insurance have comprised a smaller portion of those presenting to and admitting into Emergency rooms over the past 10 years. Moreover, the share of the uninsured population– the most expensive for emergency rooms to treat– has substantially declined. In reflecting on the above data, pulled from the Healthcare Cost and Utilization Project Statistical Brief #238 (see link below), private insurance, at best, represents less than a third of payors in EDs. Highly regulated, both Medicare and Medicaid impose strict price guidelines for reimbursement and are not subject to the same negotiating patterns Melnick expressed concern about. For Melnick’s argument to hold true, ⅓ of the share of visitors to Emergency Rooms would not only have to massively re-orient the costs but serve as a leading factor in Healthcare’s growth.

Have an Inordinate Amount of Insured Visitors been Showing up in ERs:

Figure 1. Rate of ED visits, per 100,000 population by age group, 2006-2015

Fortunately, we have data that reflects the growth rate in ER visits by payor type. Again, we do not see sufficient data to make Melnick’s case. In a 10 year span, insured members have been accessing ERs at growing rates. However, a computed 8.7% growth rate over a span of 10 years hardly would count for an appreciable difference in macro healthcare sector expenditure growth.

Billed Fees:

The piece of outstanding data that provides the most support for Dr. Melnick’s argument is a growing trend of inflating billed fees among Emergency Rooms across the United States. Where healthcare providers do not have a pre-arranged contract, they bill a fee of their choosing– very much akin to a sticker price. Where it gets difficult to find data, is the true rate payors actually reimburse hospitals and emergency room for their charges. Inasmuch as Dr. Melnick is correct and pricing power has shifted in many states more in the direction of emergency rooms relative to private payors, the transformation is not complete and has many unanswered questions. This pricing dynamic is explored in length in a report by the National Academy of Social Insurance called “Addressing Pricing Power in Healthcare Markets: Principles & Policy Options to Strengthen and Shape Markets.”  Dr. Melnick presents pertinent data in assessing California’s quickly increasing billed rate among Emergency Room operators, consistent with a pattern of shifting pricing power. Yet, a series of unanswered questions still linger but remain vital to understanding the forces at play. For starters, what share of ED visits governed by private payors are uncontracted (i.e. the hospital is out of network with the insurance provider)? Where rates are not agreed upon, how much do insurance traditionally pay relative to their members under contract for identical services? And, most importantly, what is the real effective costs of these visits to insurance payors? While insurance payors may get obscene out of network bills, the ultimate reimbursement rate is at their discretion, not the hospitals.

Ultimately, Melnick is not entirely wrong. Hospital consolidation and legislative efforts to make care emergency care more accessible have served to create local de facto monopolies and shift pricing power towards hospitals. Nevertheless, insurance providers traditionally find innovative mechanisms of tethering reimbursement rates to metrics to control costs. They can affix reimbursements by crafting policy guidelines to reimburse for out of network services along medicare rates, use standards such as Usual & Customary in pricing claims, to mention a few. All in all, it seems difficult to make the assumption that emergency rooms alone are a primary source of healthcare costs. In a system as complicated as that of US healthcare, systematic factors often play particularly large roles in determining expenditures than single categories of providers. The fact that both hospital systems, health insurance firms and pharmaceuticals companies operate in a fractured space with misaligned incentives will ultimately continue to fuel rising costs and increased consolidation– sometimes at the expense of patients.



Further reading:

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