(By Steven Brill,
Time Magazine, February 20, 2013)
Routine Care, Unforgettable Bills
When Sean Recchi, a 42-year-old from Lancaster, Ohio, was told last March that he had non-Hodgkin’s lymphoma, his wife Stephanie knew she had to get him to MD Anderson Cancer Center in Houston. Stephanie’s father had been treated there 10 years earlier, and she and her family credited the doctors and nurses at MD Anderson with extending his life by at least eight years.
Because Stephanie and her husband had recently started their
own small technology business, they were unable to buy comprehensive health
insurance. For $469 a month, or about 20% of their income, they had been able
to get only a policy that covered just $2,000 per day of any hospital costs.
“We don’t take that kind of discount insurance,” said the woman at MD Anderson
when Stephanie called to make an appointment for Sean.
Stephanie was then told by a billing clerk that the
estimated cost of Sean’s visit — just to be examined for six days so a
treatment plan could be devised — would be $48,900, due in advance. Stephanie
got her mother to write her a check. “You do anything you can in a situation
like that,” she says. The Recchis flew to Houston, leaving Stephanie’s mother
to care for their two teenage children.
About a week later, Stephanie had to ask her mother for
$35,000 more so Sean could begin the treatment the doctors had decided was
urgent. His condition had worsened rapidly since he had arrived in Houston. He
was “sweating and shaking with chills and pains,” Stephanie recalls. “He had a
large mass in his chest that was … growing. He was panicked.”
Nonetheless, Sean was held for about 90 minutes in a
reception area, she says, because the hospital could not confirm that the check
had cleared. Sean was allowed to see the doctor only after he advanced MD
Anderson $7,500 from his credit card. The hospital says there was nothing
unusual about how Sean was kept waiting. According to MD Anderson
communications manager Julie Penne, “Asking for advance payment for services is
a common, if unfortunate, situation that confronts hospitals all over the
United States.”
Sean Recchi
Diagnosed with non-Hodgkin’s lymphoma at age 42. Total cost, in advance, for Sean’s treatment plan and initial doses of chemotherapy: $83,900. Charges for blood and lab tests amounted to more than $15,000; with Medicare, they would have cost a few hundred dollars. The total cost, in advance, for Sean to get his treatment plan and initial doses of chemotherapy was $83,900. Why?
The first of the 344 lines printed out across eight pages of
his hospital bill — filled with indecipherable numerical codes and acronyms —
seemed innocuous. But it set the tone for all that followed. It read, “1
ACETAMINOPHE TABS 325 MG.” The charge was only $1.50, but it was for a generic
version of a Tylenol pill. You can buy 100 of them on Amazon for $1.49 even
without a hospital’s purchasing power. Dozens of midpriced items were embedded with similarly
aggressive markups, like $283.00 for a “CHEST, PA AND LAT 71020.” That’s a
simple chest X-ray, for which MD Anderson is routinely paid $20.44 when it
treats a patient on Medicare, the government health care program for the
elderly.Diagnosed with non-Hodgkin’s lymphoma at age 42. Total cost, in advance, for Sean’s treatment plan and initial doses of chemotherapy: $83,900. Charges for blood and lab tests amounted to more than $15,000; with Medicare, they would have cost a few hundred dollars. The total cost, in advance, for Sean to get his treatment plan and initial doses of chemotherapy was $83,900. Why?
Every time a nurse drew blood, a “ROUTINE VENIPUNCTURE”
charge of $36.00 appeared, accompanied by charges of $23 to $78 for each of a
dozen or more lab analyses performed on the blood sample. In all, the charges
for blood and other lab tests done on Recchi amounted to more than $15,000. Had
Recchi been old enough for Medicare, MD Anderson would have been paid a few
hundred dollars for all those tests. By law, Medicare’s payments approximate a
hospital’s cost of providing a service, including overhead, equipment and
salaries.
On the second page of the bill, the markups got bolder.
Recchi was charged $13,702 for “1 RITUXIMAB INJ 660 MG.” That’s an injection of
660 mg of a cancer wonder drug called Rituxan. The average price paid by all
hospitals for this dose is about $4,000, but MD Anderson probably gets a volume
discount that would make its cost $3,000 to $3,500. That means the nonprofit
cancer center’s paid-in-advance markup on Recchi’s lifesaving shot would be
about 400%. When I asked MD Anderson to comment on the charges on
Recchi’s bill, the cancer center released a written statement that said in
part, “The issues related to health care finance are complex for patients,
health care providers, payers and government entities alike … MD Anderson’s
clinical billing and collection practices are similar to those of other major
hospitals and academic medical centers.”
The hospital’s hard-nosed approach pays off. Although it is
officially a nonprofit unit of the University of Texas, MD Anderson has revenue
that exceeds the cost of the world-class care it provides by so much that its
operating profit for the fiscal year 2010, the most recent annual report it
filed with the U.S. Department of Health and Human Services, was $531 million.
That’s a profit margin of 26% on revenue of $2.05 billion, an astounding result
for such a service-intensive enterprise.
The president of MD Anderson is paid like someone running a
prosperous business. Ronald DePinho’s total compensation last year was
$1,845,000. That does not count outside earnings derived from a much publicized
waiver he received from the university that, according to the Houston Chronicle,
allows him to maintain unspecified “financial ties with his three principal
pharmaceutical companies.” DePinho’s salary is nearly triple the $674,350 paid to
William Powers Jr., the president of the entire University of Texas system, of
which MD Anderson is a part. This pay structure is emblematic of American
medical economics and is reflected on campuses across the U.S., where the
president of a hospital or hospital system associated with a university — whether
it’s Texas, Stanford, Duke or Yale — is invariably paid much more than the
person in charge of the university.
I got the idea for this article when I was visiting Rice
University last year. As I was leaving the campus, which is just outside the
central business district of Houston, I noticed a group of glass skyscrapers
about a mile away lighting up the evening sky. The scene looked like Dubai. I
was looking at the Texas Medical Center, a nearly 1,300-acre, 280-building
complex of hospitals and related medical facilities, of which MD Anderson is
the lead brand name. Medicine had obviously become a huge business. In fact, of
Houston’s top 10 employers, five are hospitals, including MD Anderson with
19,000 employees; three, led by ExxonMobil with 14,000 employees, are energy
companies. How did that happen, I wondered. Where’s all that money coming from?
And where is it going? I have spent the past seven months trying to find out by
analyzing a variety of bills from hospitals like MD Anderson, doctors, drug companies
and every other player in the American health care ecosystem.
When you look behind the bills that Sean Recchi and other
patients receive, you see nothing rational — no rhyme or reason — about the
costs they faced in a marketplace they enter through no choice of their own.
The only constant is the sticker shock for the patients who are asked to pay.
Gauze Pads: $77
Charge for each of four boxes of sterile gauze pads, as itemized in a $348,000 bill following a patient’s diagnosis of lung cancer
Yet those who work in the health care industry and those who
argue over health care policy seem inured to the shock. When we debate health
care policy, we seem to jump right to the issue of who should pay the bills,
blowing past what should be the first question: Why exactly are the bills so
high? What are the reasons, good or bad, that cancer means a
half-million- or million-dollar tab? Why should a trip to the emergency room
for chest pains that turn out to be indigestion bring a bill that can exceed
the cost of a semester of college? What makes a single dose of even the most
wonderful wonder drug cost thousands of dollars? Why does simple lab work done
during a few days in a hospital cost more than a car? And what is so different
about the medical ecosystem that causes technology advances to drive bills up
instead of down? Recchi’s bill and six others examined line by line for this
article offer a closeup window into what happens when powerless buyers —
whether they are people like Recchi or big health-insurance companies — meet
sellers in what is the ultimate seller’s market.Charge for each of four boxes of sterile gauze pads, as itemized in a $348,000 bill following a patient’s diagnosis of lung cancer
The result is a uniquely American gold rush for those who
provide everything from wonder drugs to canes to high-tech implants to CT scans
to hospital bill-coding and collection services. In hundreds of small and
midsize cities across the country — from Stamford, Conn., to Marlton, N.J., to
Oklahoma City — the American health care market has transformed tax-exempt
“nonprofit” hospitals into the towns’ most profitable businesses and largest employers,
often presided over by the regions’ most richly compensated executives. And in
our largest cities, the system offers lavish paychecks even to midlevel
hospital managers, like the 14 administrators at New York City’s Memorial
Sloan-Kettering Cancer Center who are paid over $500,000 a year, including six
who make over $1 million.
Taken as a whole, these powerful institutions and the bills
they churn out dominate the nation’s economy and put demands on taxpayers to a
degree unequaled anywhere else on earth. In the U.S., people spend almost 20%
of the gross domestic product on health care, compared with about half that in
most developed countries. Yet in every measurable way, the results our health
care system produces are no better and often worse than the outcomes in those
countries.
According to one of a series of exhaustive studies done by
the McKinsey & Co. consulting firm, we spend more on health care than the
next 10 biggest spenders combined: Japan, Germany, France, China, the U.K.,
Italy, Canada, Brazil, Spain and Australia. We may be shocked at the $60
billion price tag for cleaning up after Hurricane Sandy. We spent almost that
much last week on health care. We spend more every year on artificial knees and
hips than what Hollywood collects at the box office. We spend two or three
times that much on durable medical devices like canes and wheelchairs, in part
because a heavily lobbied Congress forces Medicare to pay 25% to 75% more for
this equipment than it would cost at Walmart.
The Bureau of Labor Statistics projects that 10 of the 20
occupations that will grow the fastest in the U.S. by 2020 are related to
health care. America’s largest city may be commonly thought of as the world’s
financial-services capital, but of New York’s 18 largest private employers,
eight are hospitals and four are banks. Employing all those people in the cause
of curing the sick is, of course, not anything to be ashamed of. But the drag
on our overall economy that comes with taxpayers, employers and consumers
spending so much more than is spent in any other country for the same product
is unsustainable. Health care is eating away at our economy and our treasury.
The health care industry seems to have the will and the
means to keep it that way. According to the Center for Responsive Politics, the
pharmaceutical and health-care-product industries, combined with organizations
representing doctors, hospitals, nursing homes, health services and HMOs, have
spent $5.36 billion since 1998 on lobbying in Washington. That dwarfs the $1.53
billion spent by the defense and aerospace industries and the $1.3 billion
spent by oil and gas interests over the same period. That’s right: the
health-care-industrial complex spends more than three times what the
military-industrial complex spends in Washington.
When you crunch data compiled by McKinsey and other
researchers, the big picture looks like this: We’re likely to spend $2.8
trillion this year on health care. That $2.8 trillion is likely to be $750
billion, or 27%, more than we would spend if we spent the same per capita as
other developed countries, even after adjusting for the relatively high per
capita income in the U.S. vs. those other countries. Of the total $2.8 trillion
that will be spent on health care, about $800 billion will be paid by the
federal government through the Medicare insurance program for the disabled and
those 65 and older and the Medicaid program, which provides care for the poor.
That $800 billion, which keeps rising far faster than inflation and the gross
domestic product, is what’s driving the federal deficit. The other $2 trillion
will be paid mostly by private health-insurance companies and individuals who
have no insurance or who will pay some portion of the bills covered by their
insurance. This is what’s increasingly burdening businesses that pay for their
employees’ health insurance and forcing individuals to pay so much in
out-of-pocket expenses.
1. Here and elsewhere I define operating profit as the
hospital’s excess of revenue over expenses, plus the amount it lists on its tax
return for depreciation of assets—because depreciation is an accounting
expense, not a cash expense. John Gunn, chief operating officer of Memorial
Sloan-Kettering Cancer Center, calls this the “fairest way” of judging a
hospital’s financial performance
Breaking these trillions down into real bills going to real
patients cuts through the ideological debate over health care policy. By
dissecting the bills that people like Sean Recchi face, we can see exactly how
and why we are overspending, where the money is going and how to get it back.
We just have to follow the money.
The $21,000 Heartburn BillOne night last summer at her home near Stamford, Conn., a 64-year-old former sales clerk whom I’ll call Janice S. felt chest pains. She was taken four miles by ambulance to the emergency room at Stamford Hospital, officially a nonprofit institution. After about three hours of tests and some brief encounters with a doctor, she was told she had indigestion and sent home. That was the good news.
The bad news was the bill: $995 for the ambulance ride,
$3,000 for the doctors and $17,000 for the hospital — in sum, $21,000 for a
false alarm. Out of work for a year, Janice S. had no insurance. Among
the hospital’s charges were three “TROPONIN I” tests for $199.50 each.
According to a National Institutes of Health website, a troponin test “measures
the levels of certain proteins in the blood” whose release from the heart is a
strong indicator of a heart attack. Some labs like to have the test done at intervals,
so the fact that Janice S. got three of them is not necessarily an issue. The
price is the problem. Stamford Hospital spokesman Scott Orstad told me that the
$199.50 figure for the troponin test was taken from what he called the
hospital’s chargemaster. The chargemaster, I learned, is every hospital’s
internal price list. Decades ago it was a document the size of a phone book;
now it’s a massive computer file, thousands of items long, maintained by every
hospital.
Stamford Hospital’s chargemaster assigns prices to
everything, including Janice S.’s blood tests. It would seem to be an important
document. However, I quickly found that although every hospital has a
chargemaster, officials treat it as if it were an eccentric uncle living in the
attic. Whenever I asked, they deflected all conversation away from it. They
even argued that it is irrelevant. I soon found that they have good reason to
hope that outsiders pay no attention to the chargemaster or the process that
produces it. For there seems to be no process, no rationale, behind the core
document that is the basis for hundreds of billions of dollars in health care
bills.
Because she was 64, not 65, Janice S. was not on Medicare.
But seeing what Medicare would have paid Stamford Hospital for the troponin
test if she had been a year older shines a bright light on the role the
chargemaster plays in our national medical crisis — and helps us understand the
illegitimacy of that $199.50 charge. That’s because Medicare collects troves of
data on what every type of treatment, test and other service costs hospitals to
deliver. Medicare takes seriously the notion that nonprofit hospitals should be
paid for all their costs but actually be nonprofit after their calculation.
Thus, under the law, Medicare is supposed to reimburse hospitals for any given
service, factoring in not only direct costs but also allocated expenses such as
overhead, capital expenses, executive salaries, insurance, differences in
regional costs of living and even the education of medical students.
It turns out that Medicare would have paid Stamford $13.94
for each troponin test rather than the $199.50 Janice S. was charged. Janice S. was also charged $157.61 for a CBC — the complete
blood count that those of us who are ER aficionados remember George
Clooney ordering several times a night. Medicare pays $11.02 for a CBC in
Connecticut. Hospital finance people argue vehemently that Medicare doesn’t pay
enough and that they lose as much as 10% on an average Medicare patient. But
even if the Medicare price should be, say, 10% higher, it’s a long way from
$11.02 plus 10% to $157.61. Yes, every hospital administrator grouses about
Medicare’s payment rates — rates that are supervised by a Congress that is
heavily lobbied by the American Hospital Association, which spent $1,859,041 on
lobbyists in 2012. But an annual expense report that Stamford Hospital is
required to file with the federal Department of Health and Human Services
offers evidence that Medicare’s rates for the services Janice S. received are
on the mark. According to the hospital’s latest filing (covering 2010), its
total expenses for laboratory work (like Janice S.’s blood tests) in the 12
months covered by the report were $27.5 million. Its total charges were $293.2
million.
That means it charged about 11 times its costs. As we examine other
bills, we’ll see that like Medicare patients, the large portion of hospital
patients who have private health insurance also get discounts off the listed
chargemaster figures, assuming the hospital and insurance company have
negotiated to include the hospital in the insurer’s network of providers that
its customers can use. The insurance discounts are not nearly as steep as the
Medicare markdowns, which means that even the discounted insurance-company rates
fuel profits at these officially nonprofit hospitals. Those profits are further
boosted by payments from the tens of millions of patients who, like the
unemployed Janice S., have no insurance or whose insurance does not apply
because the patient has exceeded the coverage limits. These patients are asked
to pay the chargemaster list prices.
If you are confused by the notion that those least able to
pay are the ones singled out to pay the highest rates, welcome to the American
medical marketplace.
Test StripsPatient was charged $18 each for Accu-chek diabetes test strips. Amazon sells boxes of 50 for about $27, or 55¢ each
Pay No Attention To the Chargemaster
No hospital’s chargemaster prices are consistent with those of any other hospital, nor do they seem to be based on anything objective — like cost — that any hospital executive I spoke with was able to explain. “They were set in cement a long time ago and just keep going up almost automatically,” says one hospital chief financial officer with a shrug.
At Stamford Hospital I got the first of many brush-offs when
I asked about the chargemaster rates on Janice S.’s bill. “Those are not our
real rates,” protested hospital spokesman Orstad when I asked him to make
hospital CEO Brian Grissler available to explain Janice S.’s bill, in
particular the blood-test charges. “It’s a list we use internally in certain
cases, but most people never pay those prices. I doubt that Brian [Grissler]
has even seen the list in years. So I’m not sure why you care.” Orstad also refused to comment on any of the specifics in
Janice S.’s bill, including the seemingly inflated charges for all the lab
work. “I’ve told you I don’t think a bill like this is relevant,” he explained.
“Very few people actually pay those rates.”No hospital’s chargemaster prices are consistent with those of any other hospital, nor do they seem to be based on anything objective — like cost — that any hospital executive I spoke with was able to explain. “They were set in cement a long time ago and just keep going up almost automatically,” says one hospital chief financial officer with a shrug.
But Janice S. was asked to pay them. Moreover, the
chargemaster rates are relevant, even for those unlike her who have insurance.
Insurers with the most leverage, because they have the most customers to offer
a hospital that needs patients, will try to negotiate prices 30% to 50% above
the Medicare rates rather than discounts off the sky-high chargemaster rates.
But insurers are increasingly losing leverage because hospitals are
consolidating by buying doctors’ practices and even rival hospitals. In that
situation — in which the insurer needs the hospital more than the hospital
needs the insurer — the pricing negotiation will be over discounts that work
down from the chargemaster prices rather than up from what Medicare would pay.
Getting a 50% or even 60% discount off the chargemaster price of an item that
costs $13 and lists for $199.50 is still no bargain. “We hate to negotiate off
of the chargemaster, but we have to do it a lot now,” says Edward Wardell, a
lawyer for the giant health-insurance provider Aetna Inc. That so few consumers seem to be aware of the chargemaster
demonstrates how well the health care industry has steered the debate from why
bills are so high to who should pay them.
The expensive technology deployed on Janice S. was a bigger
factor in her bill than the lab tests. An “NM MYO REST/SPEC EJCT MOT MUL” was
billed at $7,997.54. That’s a stress test using a radioactive dye that is
tracked by an X-ray computed tomography, or CT, scan. Medicare would have paid
Stamford $554 for that test. Janice S. was charged an additional $872.44 just for the dye
used in the test. The regular stress test patients are more familiar with, in
which arteries are monitored electronically with an electrocardiograph, would
have cost far less — $1,200 even at the hospital’s chargemaster price.
(Medicare would have paid $96 for it.) And although many doctors view the
version using the CT scan as more thorough, others consider it unnecessary in
most cases.
According to Jack Lewin, a cardiologist and former CEO of
the American College of Cardiology, “It depends on the patient, of course, but
in most cases you would start with a standard stress test. We are doing too
many of these nuclear tests. It is not being used appropriately … Sometimes a
cardiogram is enough, and you don’t even need the simpler test. But it usually
makes sense to give the patient the simpler one first and then use nuclear for
a closer look if there seem to be problems.”
We don’t know the particulars of Janice S.’s condition, so
we cannot know why the doctors who treated her ordered the more expensive test.
But the incentives are clear. On the basis of market prices, Stamford probably
paid about $250,000 for the CT equipment in its operating room. It costs little
to operate, so the more it can be used and billed, the quicker the hospital
recovers its costs and begins profiting from its purchase. In addition, the
cardiologist in the emergency room gave Janice S. a separate bill for $600 to
read the test results on top of the $342 he charged for examining her.
According to a McKinsey study of the medical marketplace, a
typical piece of equipment will pay for itself in one year if it carries out
just 10 to 15 procedures a day. That’s a terrific return on capital equipment
that has an expected life span of seven to 10 years. And it means that after a
year, every scan ordered by a doctor in the Stamford Hospital emergency room
would mean pure profit, less maintenance costs, for the hospital. Plus an extra
fee for the doctor.
Another McKinsey report found that health care providers in
the U.S. conduct far more CT tests per capita than those in any other country —
71% more than in Germany, for example, where the government-run health care
system offers none of those incentives for overtesting. We also pay a lot more
for each test, even when it’s Medicare doing the paying. Medicare reimburses
hospitals and clinics an average of four times as much as Germany does for CT
scans, according to the data gathered by McKinsey.
Medicare’s reimbursement formulas for these tests are
regulated by Congress. So too are restrictions on what Medicare can do to limit
the use of CT and magnetic resonance imaging (MRI) scans when they might not be
medically necessary. Standing at the ready to make sure Congress keeps Medicare
at bay is, among other groups, the American College of Radiology, which on Nov.
14 ran a full-page ad in the Capitol Hill–centric newspaper Politico
urging Congress to pass the Diagnostic Imaging Services Access Protection Act.
It’s a bill that would block efforts by Medicare to discourage doctors from
ordering multiple CT scans on the same patient by paying them less per test to
read multiple tests of the same patient. (In fact, six of Politico’s 12
pages of ads that day were bought by medical interests urging Congress to spend
or not cut back on one of their products.)
The costs associated with high-tech tests are likely to
accelerate. McKinsey found that the more CT and MRI scanners are out there, the
more doctors use them. In 1997 there were fewer than 3,000 machines available,
and they completed an average of 3,800 scans per year. By 2006 there were more
than 10,000 in use, and they completed an average of 6,100 per year. According
to a study in the Annals of Emergency Medicine, the use of CT scans in
America’s emergency rooms “has more than quadrupled in recent decades.” As one
former emergency-room doctor puts it, “Giving out CT scans like candy in the ER
is the equivalent of putting a 90-year-old grandmother through a pat-down at
the airport: Hey, you never know.”
Selling this equipment to hospitals — which has become a key
profit center for industrial conglomerates like General Electric and Siemens —
is one of the U.S. economy’s bright spots. I recently subscribed to an online
headhunter’s listings for medical-equipment salesmen and quickly found an
opening in Connecticut that would pay a salary of $85,000 and sales commissions
of up to $95,000 more, plus a car allowance. The only requirement was that applicants
have “at least one year of experience selling some form of capital equipment.” In all, on the day I signed up for that jobs website, it
carried 186 listings for medical-equipment salespeople just in Connecticut.
2. Medical Technology’s Perverse EconomicsUnlike those of almost any other area we can think of, the dynamics of the medical marketplace seem to be such that the advance of technology has made medical care more expensive, not less. First, it appears to encourage more procedures and treatment by making them easier and more convenient. (This is especially true for procedures like arthroscopic surgery.) Second, there is little patient pushback against higher costs because it seems to (and often does) result in safer, better care and because the customer getting the treatment is either not going to pay for it or not going to know the price until after the fact.
Beyond the hospitals’ and doctors’ obvious economic
incentives to use the equipment and the manufacturers’ equally obvious
incentives to sell it, there’s a legal incentive at work. Giving Janice S. a
nuclear-imaging test instead of the lower-tech, less expensive stress test was
the safer thing to do — a belt-and-suspenders approach that would let the
hospital and doctor say they pulled out all the stops in case Janice S. died of
a heart attack after she was sent home. “We use the CT scan because it’s a great defense,” says the
CEO of another hospital not far from Stamford. “For example, if anyone has
fallen or done anything around their head — hell, if they even say the word head
— we do it to be safe. We can’t be sued for doing too much.”
His rationale speaks to the real cost issue associated with
medical-malpractice litigation. It’s not as much about the verdicts or
settlements (or considerable malpractice-insurance premiums) that hospitals and
doctors pay as it is about what they do to avoid being sued. And some no doubt
claim they are ordering more tests to avoid being sued when it is actually an
excuse for hiking profits. The most practical malpractice-reform proposals
would not limit awards for victims but would allow doctors to use what’s called
a safe-harbor defense. Under safe harbor, a defendant doctor or hospital could
argue that the care provided was within the bounds of what peers have
established as reasonable under the circumstances. The typical plaintiff
argument that doing something more, like a nuclear-imaging test, might have
saved the patient would then be less likely to prevail.
When Obamacare was being debated, Republicans pushed this
kind of commonsense malpractice-tort reform. But the stranglehold that
plaintiffs’ lawyers have traditionally had on Democrats prevailed, and neither
a safe-harbor provision nor any other malpractice reform was included.
Nonprofit ProfitmakersTo the extent that they defend the chargemaster rates at all, the defense that hospital executives offer has to do with charity. As John Gunn, chief operating officer of Sloan-Kettering, puts it, “We charge those rates so that when we get paid by a [wealthy] uninsured person from overseas, it allows us to serve the poor.”
A closer look at hospital finance suggests two holes in that
argument. First, while Sloan-Kettering does have an aggressive
financial-assistance program (something Stamford Hospital lacks), at most
hospitals it’s not a Saudi sheik but the almost poor — those who don’t
qualify for Medicaid and don’t have insurance — who are most often asked to pay
those exorbitant chargemaster prices. Second, there is the jaw-dropping
difference between those list prices and the hospitals’ costs, which enables
these ostensibly nonprofit institutions to produce high profits even after all
the discounts. True, when the discounts to Medicare and private insurers are
applied, hospitals end up being paid a lot less overall than what is itemized
on the original bills. Stamford ends up receiving about 35% of what it bills,
which is the yield for most hospitals. (Sloan-Kettering and MD Anderson, whose
great brand names make them tough negotiators with insurance companies, get
about 50%).
However, no matter how steep the discounts, the chargemaster prices
are so high and so devoid of any calculation related to cost that the result is
uniquely American: thousands of nonprofit institutions have morphed into
high-profit, high-profile businesses that have the best of both worlds. They
have become entities akin to low-risk, must-have public utilities that
nonetheless pay their operators as if they were high-risk entrepreneurs. As
with the local electric company, customers must have the product and can’t go
elsewhere to buy it. They are steered to a hospital by their insurance
companies or doctors (whose practices may have a business alliance with the
hospital or even be owned by it). Or they end up there because there isn’t any
local competition. But unlike with the electric company, no regulator caps
hospital profits.
Yet hospitals are also beloved local charities. The result is that in small towns and cities across the
country, the local nonprofit hospital may be the community’s strongest
business, typically making tens of millions of dollars a year and paying its
nondoctor administrators six or seven figures. As nonprofits, such hospitals
solicit contributions, and their annual charity dinner, a showcase for their
good works, is typically a major civic event. But charitable gifts are a minor
part of their base; Stamford Hospital raised just over 1% of its revenue from
contributions last year. Even after discounts, those $199.50 blood tests and
multithousand-dollar CT scans are what really count.
Thus, according to the latest publicly available tax return
it filed with the IRS, for the fiscal year ending September 2011, Stamford
Hospital — in a midsize city serving an unusually high 50% share of highly
discounted Medicare and Medicaid patients — managed an operating profit of $63
million on revenue actually received (after all the discounts off the
chargemaster) of $495 million. That’s a 12.7% operating profit margin, which
would be the envy of shareholders of high-service businesses across other
sectors of the economy. Its nearly half-billion dollars in revenue also makes
Stamford Hospital by far the city’s largest business serving only local
residents. In fact, the hospital’s revenue exceeded all money paid to the city
of Stamford in taxes and fees. The hospital is a bigger business than its host
city.
There is nothing special about the hospital’s fortunes. Its
operating profit margin is about the same as the average for all nonprofit
hospitals, 11.7%, even when those that lose money are included. And Stamford’s
12.7% was tallied after the hospital paid a slew of high salaries to its
management, including $744,000 to its chief financial officer and $1,860,000 to
CEO Grissler. In fact, when McKinsey, aided by a Bank of America survey,
pulled together all hospital financial reports, it found that the 2,900
nonprofit hospitals across the country, which are exempt from income taxes,
actually end up averaging higher operating profit margins than the 1,000
for-profit hospitals after the for-profits’ income-tax obligations are
deducted. In health care, being nonprofit produces more profit.
Nonetheless, hospitals like Stamford are able to use their
sympathetic nonprofit status to push their interests. As the debate over
deficit-cutting ideas related to health care has heated up, the American
Hospital Association has run daily ads on Mike Allen’s Playbook, a popular
Washington tip sheet, urging that Congress not be allowed to cut hospital
payments because that would endanger the “$39.3 billion” in care for the poor
that hospitals now provide. But that $39.3 billion figure is calculated on the
basis of chargemaster prices. Judging from the difference I saw in the bills
examined between a typical chargemaster price and what Medicare says the item
cost, this would mean that this $39.3 billion in charity care cost the
hospitals less than $3 billion to provide. That’s less than half of 1% of U.S.
hospitals’ annual revenue and includes bad debt that the hospitals did not give
away willingly in any event. Under Internal Revenue Service rules, nonprofits are not
prohibited from taking in more money than they spend. They just can’t
distribute the overage to shareholders — because they don’t have any
shareholders.
So, what do these wealthy nonprofits do with all the profit?
In a trend similar to what we’ve seen in nonprofit colleges and universities —
where there has been an arms race of sorts to use rising tuition to construct
buildings and add courses of study — the hospitals improve and expand facilities
(despite the fact that the U.S. has more hospital beds than it can fill), buy
more equipment, hire more people, offer more services, buy rival hospitals and
then raise executive salaries because their operations have gotten so much
larger. They keep the upward spiral going by marketing for more patients,
raising prices and pushing harder to collect bill payments. Only with health
care, the upward spiral is easier to sustain. Health care is seen as even more
of a necessity than higher education. And unlike in higher education, in health
care there is little price transparency — and far less competition in any given
locale even if there were transparency. Besides, a hospital is typically one of
the community’s larger employers if not the largest, so there is unlikely to be
much local complaining about its burgeoning economic fortunes.
In December, when the New York Times ran a story
about how a deficit deal might threaten hospital payments, Steven Safyer, chief
executive of Montefiore Medical Center, a large nonprofit hospital system in
the Bronx, complained, “There is no such thing as a cut to a provider that
isn’t a cut to a beneficiary … This is not crying wolf.” Actually, Safyer seems to be crying wolf to the tune of
about $196.8 million, according to the hospital’s latest publicly available tax
return. That was his hospital’s operating profit, according to its 2010 return.
With $2.586 billion in revenue — of which 99.4% came from patient bills and
0.6% from fundraising events and other charitable contributions — Safyer’s
business is more than six times as large as that of the Bronx’s most famous
enterprise, the New York Yankees. Surely, without cutting services to
beneficiaries, Safyer could cut what have to be some of the Bronx’s better
non-Yankee salaries: his own, which was $4,065,000, or those of his chief
financial officer ($3,243,000), his executive vice president ($2,220,000) or
the head of his dental department ($1,798,000).
Shocked by her bill from Stamford hospital and unable to pay
it, Janice S. found a local woman on the Internet who is part of a growing
cottage industry of people who call themselves medical-billing advocates. They
help people read and understand their bills and try to reduce them. “The
hospitals all know the bills are fiction, or at least only a place to start the
discussion, so you bargain with them,” says Katalin Goencz, a former appeals
coordinator in a hospital billing department who negotiated Janice S.’s bills
from a home office in Stamford.
Goencz is part of a trade group called the Alliance of Claim
Assistant Professionals, which has about 40 members across the country. Another
group, Medical Billing Advocates of America, has about 50 members. Each
advocate seems to handle 40 to 70 cases a year for the uninsured and those
disputing insurance claims. That would be about 5,000 patients a year out of
what must be tens of millions of Americans facing these issues — which may help
explain why 60% of the personal bankruptcy filings each year are related to
medical bills. “I can pretty much always get it down 30% to 50% simply by
saying the patient is ready to pay but will not pay $300 for a blood test or an
X-ray,” says Goencz. “They hand out blood tests and X-rays in hospitals like
bottled water, and they know it.”
After weeks of back-and-forth phone calls, for which Goencz
charged Janice S. $97 an hour, Stamford Hospital cut its bill in half. Most of
the doctors did about the same, reducing Janice S.’s overall tab from $21,000
to about $11,000. But the best the ambulance company would offer Goencz was to
let Janice S. pay off its $995 ride in $25-a-month installments. “The
ambulances never negotiate the amount,” says Goencz.
A manager at Stamford Emergency Medical Services, which
charged Janice S. $958 for the pickup plus $9.38 per mile, says that “our rates
are all set by the state on a regional basis” and that the company is
independently owned. That’s at odds with a trend toward consolidation that has
seen several private-equity firms making investments in what Wall Street analysts
have identified as an increasingly high-margin business. Overall, ambulance
revenues were more than $12 billion last year, or about 10% higher than
Hollywood’s box-office take. It’s not a great deal to pay off $1,000 for a
four-mile ambulance ride on the layaway plan or receive a 50% discount on a
$199.50 blood test that should cost $15, nor is getting half off on a $7,997.54
stress test that was probably all profit and may not have been necessary. But,
says Goencz, “I don’t go over it line by line. I just go for a deal. The
patient usually is shocked by the bill, doesn’t understand any of the language
and has bill collectors all over her by the time they call me. So they’re
grateful. Why give them heartache by telling them they still paid too much for
some test or pill?”
A Slip, a Fall And a $9,400 BillThe billing advocates aren’t always successful. just ask Emilia Gilbert, a school-bus driver who got into a fight with a hospital associated with Connecticut’s most venerable nonprofit institution, which racked up quick profits on multiple CT scans, then refused to compromise at all on its chargemaster prices. Gilbert, now 66, is still making weekly payments on the bill she got in June 2008 after she slipped and fell on her face one summer evening in the small yard behind her house in Fairfield, Conn. Her nose bleeding heavily, she was taken to the emergency room at Bridgeport Hospital.
Along with Greenwich Hospital and the Hospital of St.
Raphael in New Haven, Bridgeport Hospital is now owned by the Yale New Haven
Health System, which boasts a variety of gleaming new facilities. Although Yale
University and Yale New Haven are separate entities, Yale–New Haven Hospital is
the teaching hospital for the Yale Medical School, and university
representatives, including Yale president Richard Levin, sit on the Yale New
Haven Health System board. “I was there for maybe six hours, until midnight,” Gilbert
recalls, “and most of it was spent waiting. I saw the resident for maybe 15
minutes, but I got a lot of tests.”
In fact, Gilbert got three CT scans — of her head, her chest
and her face. The last one showed a hairline fracture of her nose. The CT bills
alone were $6,538. (Medicare would have paid about $825 for all three.) A
doctor charged $261 to read the scans. Gilbert got the same troponin blood test that Janice S. got
— the one Medicare pays $13.94 for and for which Janice S. was billed $199.50
at Stamford. Gilbert got just one. Bridgeport Hospital charged 20% more than
its downstate neighbor: $239. Also on the bill were items that neither Medicare nor any
insurance company would pay anything at all for: basic instruments and bandages
and even the tubing for an IV setup. Under Medicare regulations and the terms
of most insurance contracts, these are supposed to be part of the hospital’s
facility charge, which in this case was $908 for the emergency room.
Emilia Gilbert
Slipped and fell in June 2008 and was taken to the emergency room. She is still paying off the $9,418 bill from that hospital visit in weekly installments. Her three CT scans cost $6,538. Medicare would have paid about $825 for all three. Gilbert’s total bill was $9,418. “We think the chargemaster is totally fair,” says William Gedge, senior vice president of payer relations at Yale New Haven Health System. “It’s fair because everyone gets the same bill. Even Medicare gets exactly the same charges that this patient got. Of course, we will have different arrangements for how Medicare or an insurance company will not pay some of the charges or discount the charges, but everyone starts from the same place.” Asked how the chargemaster charge for an item like the troponin test was calculated, Gedge said he “didn’t know exactly” but would try to find out. He subsequently reported back that “it’s an historical charge, which takes into account all of our costs for running the hospital.”
Bridgeport Hospital had $420 million in revenue and an
operating profit of $52 million in 2010, the most recent year covered by its
federal financial reports. CEO Robert Trefry, who has since left his post, was
listed as having been paid $1.8 million. The CEO of the parent Yale New Haven
Health System, Marna Borgstrom, was paid $2.5 million, which is 58% more than
the $1.6 million paid to Levin, Yale University’s president.Slipped and fell in June 2008 and was taken to the emergency room. She is still paying off the $9,418 bill from that hospital visit in weekly installments. Her three CT scans cost $6,538. Medicare would have paid about $825 for all three. Gilbert’s total bill was $9,418. “We think the chargemaster is totally fair,” says William Gedge, senior vice president of payer relations at Yale New Haven Health System. “It’s fair because everyone gets the same bill. Even Medicare gets exactly the same charges that this patient got. Of course, we will have different arrangements for how Medicare or an insurance company will not pay some of the charges or discount the charges, but everyone starts from the same place.” Asked how the chargemaster charge for an item like the troponin test was calculated, Gedge said he “didn’t know exactly” but would try to find out. He subsequently reported back that “it’s an historical charge, which takes into account all of our costs for running the hospital.”
“You really can’t compare the two jobs,” says Yale–New Haven
Hospital senior vice president Vincent Petrini. “Comparing hospitals to
universities is like apples and oranges. Running a hospital organization is
much more complicated.” Actually, the four-hospital chain and the university
have about the same operating budget. And it would seem that Levin deals with
what most would consider complicated challenges in overseeing 3,900 faculty
members, corralling (and complying with the terms of) hundreds of millions of dollars
in government research grants and presiding over a $19 billion endowment, not
to mention admitting and educating 14,000 students spread across Yale College
and a variety of graduate schools, professional schools and foreign-study
outposts. And surely Levin’s responsibilities are as complicated as those of
the CEO of Yale New Haven Health’s smallest unit — the 184-bed Greenwich
Hospital, whose CEO was paid $112,000 more than Levin.
“When I got the bill, I almost had to go back to the
hospital,” Gilbert recalls. “I was hyperventilating.” Contributing to her shock
was the fact that although her employer supplied insurance from Cigna, one of
the country’s leading health insurers, Gilbert’s policy was from a Cigna
subsidiary called Starbridge that insures mostly low-wage earners. That made
Gilbert one of millions of Americans like Sean Recchi who are routinely
categorized as having health insurance but really don’t have anything
approaching meaningful coverage.
Starbridge covered Gilbert for just $2,500 per hospital
visit, leaving her on the hook for about $7,000 of a $9,400 bill. Under
Connecticut’s rules (states set their own guidelines for Medicaid, the
federal-state program for the poor), Gilbert’s $1,800 a month in earnings was
too high for her to qualify for Medicaid assistance. She was also turned down,
she says, when she requested financial assistance from the hospital. Yale New
Haven’s Gedge insists that she never applied to the hospital for aid, and
Gilbert could not supply me with copies of any applications.
In September 2009, after a series of fruitless letters and
phone calls from its bill collectors to Gilbert, the hospital sued her. Gilbert
found a medical-billing advocate, Beth Morgan, who analyzed the charges on the
bill and compared them with the discounted rates insurance companies would pay.
During two court-required mediation sessions, Bridgeport Hospital’s attorney
wouldn’t budge; his client wanted the bill paid in full, Gilbert and Morgan
recall. At the third and final mediation, Gilbert was offered a 20% discount
off the chargemaster fees if she would pay immediately, but she says she
responded that according to what Morgan told her about the bill, it was still
too much to pay. “We probably could have offered more,” Gedge acknowledges. “But
in these situations, our bill-collection attorneys only know the amount we are
saying is owed, not whether it is a chargemaster amount or an amount that is
already discounted.”
On July 11, 2011, with the school-bus driver representing
herself in Bridgeport superior court, a judge ruled that Gilbert had to pay all
but about $500 of the original charges. (He deducted the superfluous bills for
the basic equipment.) The judge put her on a payment schedule of $20 a week for
six years. For her, the chargemaster prices were all too real.
The One-Day, $87,000 Outpatient BillGetting a patient in and out of a hospital the same day seems like a logical way to cut costs. Outpatients don’t take up hospital rooms or require the expensive 24/7 observation and care that come with them. That’s why in the 1990s Medicare pushed payment formulas on hospitals that paid them for whatever ailment they were treating (with more added for documented complications), not according to the number of days the patient spent in a bed. Insurance companies also pushed incentives on hospitals to move patients out faster or not admit them for overnight stays in the first place. Meanwhile, the introduction of procedures like noninvasive laparoscopic surgery helped speed the shift from inpatient to outpatient.
By 2010, average days spent in the hospital per patient had
declined significantly, while outpatient services had increased even more
dramatically. However, the result was not the savings that reformers had
envisioned. It was just the opposite. Experts estimate that outpatient services are now packed
with so much hidden profit that about two-thirds of the $750 billion annual
U.S. overspending identified by the McKinsey research on health care comes in
payments for outpatient services. That includes work done by physicians,
laboratories and clinics (including diagnostic clinics for CT scans or blood
tests) and same-day surgeries and other hospital treatments like cancer
chemotherapy. According to a McKinsey survey, outpatient emergency-room care
averages an operating profit margin of 15% and nonemergency outpatient care
averages 35%. On the other hand, inpatient care has a margin of just 2%. Put
simply, inpatient care at nonprofit hospitals is, in fact, almost nonprofit.
Outpatient care is wildly profitable.
“An operating room has fixed costs,” explains one hospital
economist. “You get 10% or 20% more patients in there every day who you don’t
have to board overnight, and that goes straight to the bottom line.” The 2011 outpatient visit of someone I’ll call Steve H. to
Mercy Hospital in Oklahoma City illustrates those economics. Steve H. had the
kind of relatively routine care that patients might expect would be no big
deal: he spent the day at Mercy getting his aching back fixed. A blue collar worker who was in his 30s at the time and
worked at a local retail store, Steve H. had consulted a specialist at Mercy in
the summer of 2011 and was told that a stimulator would have to be surgically
implanted in his back. The good news was that with all the advances of modern
technology, the whole process could be done in a day. (The latest federal
filing shows that 63% of surgeries at Mercy were performed on outpatients.)
Steve H.’s doctor intended to use a RestoreUltra
neurostimulator manufactured by Medtronic, a Minneapolis-based company with $16
billion in annual sales that bills itself as the world’s largest stand-alone
medical-technology company. “RestoreUltra delivers spinal-cord stimulation
through one or more leads selected from a broad portfolio for greater
customization of therapy,” Medtronic’s website promises. I was not able to
interview Steve H., but according to Pat Palmer, a medical-billing specialist
based in Salem, Va., who consults for the union that provides Steve H.’s health
insurance, Steve H. didn’t ask how much the stimulator would cost because he
had $45,181 remaining on the $60,000 annual payout limit his union-sponsored
health-insurance plan imposed. “He figured, How much could a day at Mercy
cost?” Palmer says. “Five thousand? Maybe 10?”
Steve H. was about to run up against a seemingly irrelevant
footnote in millions of Americans’ insurance policies: the limit, sometimes
annual or sometimes over a lifetime, on what the insurer has to pay out for a
patient’s claims. Under Obamacare, those limits will not be allowed in most
health-insurance policies after 2013. That might help people like Steve H. but
is also one of the reasons premiums are going to skyrocket under Obamacare. Steve H.’s bill for his day at Mercy contained all the usual
and customary overcharges. One item was “MARKER SKIN REG TIP RULER” for $3.
That’s the marking pen, presumably reusable, that marked the place on Steve
H.’s back where the incision was to go. Six lines down, there was “STRAP OR
TABLE 8X27 IN” for $31. That’s the strap used to hold Steve H. onto the
operating table. Just below that was “BLNKT WARM UPPER BDY 42268” for $32.
That’s a blanket used to keep surgery patients warm. It is, of course,
reusable, and it’s available new on eBay for $13. Four lines down there’s “GOWN
SURG ULTRA XLG 95121” for $39, which is the gown the surgeon wore. Thirty of
them can be bought online for $180. Neither Medicare nor any large insurance
company would pay a hospital separately for those straps or the surgeon’s gown;
that’s all supposed to come with the facility fee paid to the hospital, which
in this case was $6,289.
In all, Steve H.’s bill for these basic medical and surgical
supplies was $7,882. On top of that was $1,837 under a category called
“Pharmacy General Classification” for items like bacitracin ($108). But that
was the least of Steve H.’s problems. The big-ticket item for Steve H.’s day at Mercy was the
Medtronic stimulator, and that’s where most of Mercy’s profit was collected
during his brief visit. The bill for that was $49,237. According to the chief financial officer of another
hospital, the wholesale list price of the Medtronic stimulator is “about
$19,000.” Because Mercy is part of a major hospital chain, it might pay 5% to
15% less than that. Even assuming Mercy paid $19,000, it would make more than
$30,000 selling it to Steve H., a profit margin of more than 150%. To the
extent that I found any consistency among hospital chargemaster practices, this
is one of them: hospitals routinely seem to charge 21⁄2 times what these
expensive implantable devices cost them, which produces that 150% profit
margin.
As Steve H. found out when he got his bill, he had exceeded
the $45,000 that was left on his insurance policy’s annual payout limit just
with the neurostimulator. And his total bill was $86,951. After his insurance
paid that first $45,000, he still owed more than $40,000, not counting doctors’
bills. (I did not see Steve H.’s doctors’ bills.)
Mercy Hospital is owned by an organization under the
umbrella of the Catholic Church called Sisters of Mercy. Its mission, as
described in its latest filing with the IRS as a tax-exempt charity, is “to
carry out the healing ministry of Jesus by promoting health and wellness.” With
a chain of 31 hospitals and 300 clinics across the Midwest, Sisters of Mercy
uses a bill-collection firm based in Topeka, Kans., called Berlin-Wheeler Inc.
Suits against Mercy patients are on file in courts across Oklahoma listing
Berlin-Wheeler as the plaintiff. According to its most recent tax return, the
Oklahoma City unit of the Sisters of Mercy hospital chain collected $337
million in revenue for the fiscal year ending June 30, 2011. It had an
operating profit of $34 million. And that was after paying 10 executives more
than $300,000 each, including $784,000 to a regional president and $438,000 to
the hospital president.
That report doesn’t cover the executives overseeing the
chain, called Mercy Health, of which Mercy in Oklahoma City is a part. The
overall chain had $4.28 billion in revenue that year. Its hospital in
Springfield, Mo. (pop. 160,660), had $880.7 million in revenue and an operating
profit of $319 million, according to its federal filing. The incomes of the
parent company’s executives appear on other IRS filings covering various interlocking
Mercy nonprofit corporate entities. Mercy president and CEO Lynn Britton made
$1,930,000, and an executive vice president, Myra Aubuchon, was paid $3.7
million, according to the Mercy filing. In all, seven Mercy Health executives
were paid more than $1 million each. A note at the end of an Ernst & Young
audit that is attached to Mercy’s IRS filing reported that the chain provided
charity care worth 3.2% of its revenue in the previous year. However, the
auditors state that the value of that care is based on the charges on all the
bills, not the actual cost to Mercy of providing those services — in other
words, the chargemaster value. Assuming that Mercy’s actual costs are a tenth
of these chargemaster values — they’re probably less — all of this charity care
actually cost Mercy about three-tenths of 1% of its revenue, or about $13
million out of $4.28 billion.
Mercy’s website lists an 18-member media team; one member,
Rachel Wright, told me that neither CEO Britton nor anyone else would be
available to answer questions about compensation, the hospital’s
bill-collecting activities through Berlin-Wheeler or Steve H.’s bill, which I
had sent her (with his name and the date of his visit to the hospital redacted
to protect his privacy). Wright said the hospital’s lawyers had decided that
discussing Steve H.’s bill would violate the federal HIPAA law protecting the
privacy of patient medical records. I pointed out that I wanted to ask
questions only about the hospital’s charges for standard items — such as surgical
gowns, basic blood tests, blanket warmers and even medical devices — that had
nothing to do with individual patients. “Everything is particular to an
individual patient’s needs,” she replied. Even a surgical gown? “Yes, even a
surgical gown. We cannot discuss this with you. It’s against the law.” She
declined to put me in touch with the hospital’s lawyers to discuss their legal
analysis.
Hiding behind a privacy statute to avoid talking about how
it prices surgeons’ gowns may be a stretch, but Mercy might have a valid legal
reason not to discuss what it paid for the Medtronic device before selling it
to Steve H. for $49,237. Pharmaceutical and medical-device companies routinely
insert clauses in their sales contracts prohibiting hospitals from sharing
information about what they pay and the discounts they receive. In January
2012, a report by the federal Government Accountability Office found that “the
lack of price transparency and the substantial variation in amounts hospitals
pay for some IMD [implantable medical devices] raise questions about whether
hospitals are achieving the best prices possible.”
A lack of price transparency was not the only potential
market inefficiency the GAO found. “Although physicians are not involved in
price negotiations, they often express strong preferences for certain
manufacturers and models of IMD,” the GAO reported. “To the extent that
physicians in the same hospitals have different preferences for IMDs, it may be
difficult for the hospital to obtain volume discounts from particular
manufacturers.”
“Doctors have no incentive to buy one kind of hip or other
implantable device as a group,” explains Ezekiel Emanuel, an oncologist and a
vice provost of the University of Pennsylvania who was a key White House
adviser when Obamacare was created. “Even in the most innocent of
circumstances, it kills the chance for market efficiencies.”
The circumstances are not always innocent. In 2008, Gregory
Demske, an assistant inspector general at the Department of Health and Human
Services, told a Senate committee that “physicians routinely receive
substantial compensation from medical-device companies through stock options,
royalty agreements, consulting agreements, research grants and fellowships.” The assistant inspector general then revealed startling
numbers about the extent of those payments: “We found that during the years
2002 through 2006, four manufacturers, which controlled almost 75% of the hip-
and knee-replacement market, paid physician consultants over $800 million under
the terms of roughly 6,500 consulting agreements.”
Other doctors, Demske noted, had stretched the conflict of
interest beyond consulting fees: “Additionally, physician ownership of
medical-device manufacturers and related businesses appears to be a growing trend
in the medical-device sector … In some cases, physicians could receive
substantial returns while contributing little to the venture beyond the ability
to generate business for the venture.” In 2010, Medtronic, along with several
other members of a medical-technology trade group, began to make the potential
conflicts transparent by posting all payments to physicians on a section of its
website called Physician Collaboration. The voluntary move came just before a
similar disclosure regulation promulgated by the Obama Administration went into
effect governing any doctor who receives funds from Medicare or the National
Institutes of Health (which would include most doctors). And the nonprofit
public-interest-journalism organization ProPublica has smartly organized data
on doctor payments on its
website. The conflicts have not been eliminated, but they are being aired,
albeit on searchable websites rather than through a requirement that doctors
disclose them to patients directly.
But conflicts that may encourage devices to be
overprescribed or that lead doctors to prescribe a more expensive one instead
of another are not the core problem in this marketplace. The more fundamental
disconnect is that there is little reason to believe that what Mercy Hospital
paid Medtronic for Steve H.’s device would have had any bearing on what the
hospital decided to charge Steve H. Why would it? He did not know the price in
advance. Besides, studies delving into the economics of the medical
marketplace consistently find that a moderately higher or lower price doesn’t
change consumer purchasing decisions much, if at all, because in health care
there is little of the price sensitivity found in conventional marketplaces, even
on the rare occasion that patients know the cost in advance. If you were in
pain or in danger of dying, would you turn down treatment at a price 5% or 20%
higher than the price you might have expected — that is, if you’d had any
informed way to know what to expect in the first place, which you didn’t?
The question of how sensitive patients will be to increased
prices for medical devices recently came up in a different context. Aware of
the huge profits being accumulated by devicemakers, Obama Administration
officials decided to recapture some of the money by imposing a 2.39% federal
excise tax on the sales of these devices as well as other medical technology
such as CT-scan equipment. The rationale was that getting back some of these
generous profits was a fair way to cover some of the cost of the subsidized,
broader insurance coverage provided by Obamacare — insurance that in some cases
will pay for more of the devices. The industry has since geared up in
Washington and is pushing legislation that would repeal the tax. Its main
argument is that a 2.39% increase in prices would so reduce sales that it would
wipe out a substantial portion of what the industry claims are the 422,000 jobs
it supports in a $136 billion industry.
That prediction of doom brought on by this small tax
contradicts the reams of studies documenting consumer price insensitivity in
the health care marketplace. It also ignores profit-margin data collected by
McKinsey that demonstrates that devicemakers have an open field in the current medical
ecosystem. A 2011 McKinsey survey for medical-industry clients reported that
devicemakers are superstar performers in a booming medical economy. Medtronic,
which performed in the middle of the group, delivered an amazing compounded
annual return of 14.95% to shareholders from 1990 to 2010. That means $100
invested in the company in 1990 was worth $1,622 20 years later. So if the
extra 2.39% would be so disruptive to the market for products like Medtronic’s
that it would kill sales, why would the industry pass it along as a price
increase to consumers? It hardly has to, given its profit margins.
Medtronic spokeswoman Donna Marquad says that for
competitive reasons, her company will not discuss sales figures or the profit
on Steve H.’s neurostimulator. But Medtronic’s October 2012 quarterly SEC
filing reported that its spine “products and therapies,” which presumably
include Steve H.’s device, “continue to gain broad surgeon acceptance” and that
its cost to make all of its products was 24.9% of what it sells them for.
That’s an unusually high gross profit margin — 75.1% — for a
company that manufactures real physical products. Apple also produces high-end,
high-tech products, and its gross margin is 40%. If the neurostimulator enjoys
that company-wide profit margin, it would mean that if Medtronic was paid
$19,000 by Mercy Hospital, Medtronic’s cost was about $4,500 and it made a
gross profit of about $14,500 before expenses for sales, overhead and
management — including CEO Omar Ishrak’s compensation, which was $25 million
for the 2012 fiscal year.
Mercy’s BargainWhen Pat Palmer, the medical-billing specialist who advises Steve H.’s union, was given the Mercy bill to deal with, she prepared a tally of about $4,000 worth of line items that she thought represented the most egregious charges, such as the surgical gown, the blanket warmer and the marking pen. She restricted her list to those she thought were plainly not allowable. “I didn’t dispute nearly all of them,” she says. “Because then they get their backs up.” The hospital quickly conceded those items. For the remaining $83,000, Palmer invoked a 40% discount off chargemaster rates that Mercy allows for smaller insurance providers like the union. That cut the bill to about $50,000, for which the insurance company owed 80%, or about $40,000. That left Steve H. with a $10,000 bill.
Sean Recchi wasn’t as fortunate. His bill — which included
not only the aggressively marked-up charge of $13,702 for the Rituxan cancer
drug but also the usual array of chargemaster fees for basics like generic
Tylenol, blood tests and simple supplies — had one item not found on any other
bill I examined: MD Anderson’s charge of $7 each for “ALCOHOL PREP PAD.” This
is a little square of cotton used to apply alcohol to an injection. A box of
200 can be bought online for $1.91.
We have seen that to the extent that most hospital
administrators defend such chargemaster rates at all, they maintain that they
are just starting points for a negotiation. But patients don’t typically know
they are in a negotiation when they enter the hospital, nor do hospitals let
them know that. And in any case, at MD Anderson, the Recchis were made to pay
every penny of the chargemaster bill up front because their insurance was
deemed inadequate. That left Penne, the hospital spokeswoman, with only this
defense for the most blatantly abusive charges for items like the alcohol
squares: “It is difficult to compare a retail store charge for a common product
with a cancer center that provides the item as part of its highly specialized
and personalized care,” she wrote in an e-mail. Yet the hospital also charges
for that “specialized and personalized” care through, among other items, its
$1,791-a-day room charge.
Before MD Anderson marked up Recchi’s Rituxan to $13,702,
the profit taking was equally aggressive, and equally routine, at the beginning
of the supply chain — at the drug company. Rituxan is a prime product of Biogen
Idec, a company with $5.5 billion in annual sales. Its CEO, George Scangos, was
paid $11,331,441 in 2011, a 20% boost over his 2010 income. Rituxan is made and
sold by Biogen Idec in partnership with Genentech, a South San Francisco–based
biotechnology pioneer. Genentech brags about Rituxan on its website, as did
Roche, Genentech’s $45 billion parent, in its latest annual report. And in an
Investor Day presentation last September, Roche CEO Severin Schwann stressed
that his company is able to keep prices and margins high because of its focus
on “medically differentiated therapies.” Rituxan, a cancer wonder drug,
certainly meets that test.
A spokesman at Genentech for the Biogen Idec–Genentech
partnership would not say what the drug cost the companies to make, but
according to its latest annual report, Biogen Idec’s cost of sales — the incremental
expense of producing and shipping each of its products compared with what it
sells them for — was only 10%. That’s lower than the incremental cost of sales
for most software companies, and the software companies usually don’t produce
anything physical or have to pay to ship anything. This would mean that Sean Recchi’s dose of Rituxan cost the
Biogen Idec–Genentech partnership as little as $300 to make, test, package and
ship to MD Anderson for $3,000 to $3,500, whereupon the hospital sold it to
Recchi for $13,702.
As 2013 began, Recchi was being treated back in Ohio because
he could not pay MD Anderson for more than his initial treatment. As for the
$13,702-a-dose Rituxan, it turns out that Biogen Idec’s partner Genentech has a
charity-access program that Recchi’s Ohio doctor told him about that enabled
him to get those treatments free. “MD Anderson never said a word to us about
the Genentech program,” says Stephanie Recchi. “They just took our money up
front.”
Genentech spokeswoman Charlotte Arnold would not disclose
how much free Rituxan had been dispensed to patients like Recchi in the past
year, saying only that Genentech has “donated $2.85 billion in free medicine to
uninsured patients in the U.S.” since 1985. That seems like a lot until the numbers
are broken down. Arnold says the $2.85 billion is based on what the drugmaker
sells the product for, not what it costs Genentech to make. On the basis of
Genentech’s historic costs and revenue since 1985, that would make the cost of
these donations less than 1% of Genentech’s sales — not something likely to
take the sizzle out of CEO Severin’s Investor Day. Nonetheless, the company provided more financial support
than MD Anderson did to Recchi, whose wife reports that he “is doing great.
He’s in remission.”
Penne of MD Anderson stressed that the hospital provides its
own financial aid to patients but that the state legislature restricts the
assistance to Texas residents. She also said MD Anderson “makes every attempt”
to inform patients of drug-company charity programs and that 50 of the
hospital’s 24,000 inpatients and outpatients, one of whom was from outside
Texas, received charitable aid for Rituxan treatments in 2012.
3. Catastrophic Illness — And the Bills to MatchWhen medical care becomes a matter of life and death, the money demanded by the health care ecosystem reaches a wholly different order of magnitude, churning out reams of bills to people who can’t focus on them, let alone pay them. Soon after he was diagnosed with lung cancer in January 2011, a patient whom I will call Steven D. and his wife Alice knew that they were only buying time. The crushing question was, How much is time really worth? As Alice, who makes about $40,000 a year running a child-care center in her home, explained, “[Steven] kept saying he wanted every last minute he could get, no matter what. But I had to be thinking about the cost and how all this debt would leave me and my daughter.” By the time Steven D. died at his home in Northern California the following November, he had lived for an additional 11 months. And Alice had collected bills totaling $902,452.
The family’s first bill — for $348,000 — which arrived when Steven got home from the Seton Medical Center in Daly City, Calif., was full of all the usual chargemaster profit grabs: $18 each for 88 diabetes-test strips that Amazon sells in boxes of 50 for $27.85; $24 each for 19 niacin pills that are sold in drugstores for about a nickel apiece. There were also four boxes of sterile gauze pads for $77 each. None of that was considered part of what was provided in return for Seton’s facility charge for the intensive-care unit for two days at $13,225 a day, 12 days in the critical unit at $7,315 a day and one day in a standard room (all of which totaled $120,116 over 15 days). There was also $20,886 for CT scans and $24,251 for lab work. Alice responded to my question about the obvious overcharges on the bill for items like the diabetes-test strips or the gauze pads much as Mrs. Lincoln, according to the famous joke, might have had she been asked what she thought of the play. “Are you kidding?” she said. “I’m dealing with a husband who had just been told he has Stage IV cancer. That’s all I can focus on … You think I looked at the items on the bills? I just looked at the total.”
Steven and Alice didn’t know that hospital billing people
consider the chargemaster to be an opening bid. That’s because no medical bill
ever says, “Give us your best offer.” The couple knew only that the bill said
they had maxed out on the $50,000 payout limit on a UnitedHealthcare policy
they had bought through a community college where Steven had briefly enrolled a
year before. “We were in shock,” Alice recalls. “We looked at the total and
couldn’t deal with it. So we just started putting all the bills in a box. We
couldn’t bear to look at them.”
The $50,000 that UnitedHealthcare paid to Seton Medical
Center was worth about $80,000 in credits because any charges covered by the
insurer were subject to the discount it had negotiated with Seton. After that
$80,000, Steven and Alice were on their own, not eligible for any more
discounts. Four months into her husband’s illness, Alice by chance got the name
of Patricia Stone, a billing advocate based in Menlo Park, Calif. Stone’s
typical clients are middle-class people having trouble with insurance claims.
Stone felt so bad for Steven and Alice — she saw the blizzard of bills Alice
was going to have to sort through — that, says Alice, she “gave us many of her
hours,” for which she usually charges $100, “for free.” Stone was soon able to
persuade Seton to write off $297,000 of its $348,000 bill. Her argument was
simple: There was no way the D.’s could pay it now or in the future, though
they would scrape together $3,000 as a show of good faith. With the couple’s
$3,000 on top of the $50,000 paid by the UnitedHealthcare insurance, that
$297,000 write-off amounted to an 85% discount. According to its latest
financial report, Seton applies so many discounts and write-offs to its
chargemaster bills that it ends up with only about 18% of the revenue it bills
for. That’s an average 82% discount, compared with an average discount of about
65% that I saw at the other hospitals whose bills were examined — except for
the MD Anderson and Sloan-Kettering cancer centers, which collect about 50% of
their chargemaster charges. Seton’s discounting practices may explain why it is
the only hospital whose bills I looked at that actually reported a small
operating loss — $5 million — on its last financial report.
Of course, had the D.’s not come across Stone, the
incomprehensible but terrifying bills would have piled up in a box, and the
Seton Medical Center bill collectors would not have been kept at bay. Robert
Issai, the CEO of the Daughters of Charity Health System, which owns and runs
Seton, refused through an e-mail from a public relations assistant to respond
to requests for a comment on any aspect of his hospital’s billing or
collections policies. Nor would he respond to repeated requests for a specific
comment on the $24 charge for niacin pills, the $18 charge for the
diabetes-test strips or the $77 charge for gauze pads. He also declined to
respond when asked, via a follow-up e-mail, if the hospital thinks that sending
patients who have just been told they are terminally ill bills that reflect
chargemaster rates that the hospital doesn’t actually expect to be paid might
unduly upset them during a particularly sensitive time.
To begin to deal with
all the other bills that kept coming after Steven’s first stay at Seton, Stone
was also able to get him into a special high-risk insurance pool set up by the
state of California. It helped but not much. The insurance premium was $1,000 a
month, quite a burden on a family whose income was maybe $3,500 a month. And it
had an annual payout limit of $75,000. The D.’s blew through that in about two
months. The bills kept piling up. Sequoia Hospital — where Steven was an
inpatient as well as an outpatient between the end of January and November
following his initial stay at Seton — weighed in with 28 bills, all at
chargemaster prices, including invoices for $99,000, $61,000 and $29,000.
Doctor-run outpatient chemotherapy clinics wanted more than $85,000. One
outside lab wanted $11,900. Stone
organized these and other bills into an elaborate spreadsheet — a ledger
documenting how catastrophic illness in America unleashes its own mini-GDP.
In July, Stone figured out that Steven and Alice should
qualify for Medicaid, which is called Medi-Cal in California. But there was a
catch: Medicaid is the joint federal-state program directed at the poor that is
often spoken of in the same breath as Medicare. Although most of the current
national debate on entitlements is focused on Medicare, when Medicaid’s
subsidiary program called Children’s Health Insurance, or CHIP, is counted,
Medicaid actually covers more people: 56.2 million compared with 50.2 million.
As Steven and Alice found out, Medicaid is also more vulnerable to cuts and
conditions that limit coverage, probably for the same reason that most politicians
and the press don’t pay the same attention to it that they do to Medicare: its
constituents are the poor. The major difference in the two programs is that
while Medicare’s rules are pretty much uniform across state lines, the states
set the key rules for Medicaid because the state finances a big portion of the
claims. According to Stone, Steven and Alice immediately ran into one of those
rules. For people even with their modest income, the D.’s would have to pay
$3,000 a month in medical bills before Medi-Cal would kick in. That amounted to
most of Alice’s monthly take-home pay.
Medi-Cal was even willing to go back five months, to
February, to cover the couple’s mountain of bills, but first they had to come
up with $15,000. “We didn’t have anything close to that,” recalls Alice. Stone then convinced Sequoia that if the hospital wanted to
see any of the Medi-Cal money necessary to pay its bills (albeit at the big
discount Medi-Cal would take), it should give Steven a “credit” for $15,000 —
in other words, write it off. Sequoia agreed to do that for most of the bills.
This was clearly a maneuver that Steven and Alice never could have navigated on
their own. Covering most of the Sequoia debt was a huge relief, but there were
still hundreds of thousands of dollars in bills left unpaid as Steven
approached his end in the fall of 2011. Meantime, the bills kept coming. “We
started talking about the cost of the chemo,” Alice recalls. “It was a source
of tension between us … Finally,” she says, “the doctor told us that the next
one scheduled might prolong his life a month, but it would be really painful.
So he gave up.”
By the one-year anniversary of Steven’s death, late last
year, Stone had made a slew of deals with his doctors, clinics and other
providers whose services Medi-Cal did not cover. Some, like Seton, were
generous. The home health care nurse ended up working for free in the final
days of Steven’s life, which were over the Thanksgiving weekend. “He was a
saint,” says Alice. “He said he was doing it to become accredited, so he didn’t
charge us.”
Others, including some of the doctors, were more hard-nosed,
insisting on full payment or offering minimal discounts. Still others had long
since sold the bills to professional debt collectors, who, by definition, are
bounty hunters. Alice and Stone were still hoping Medi-Cal would end up
covering some or most of the debt. As 2012 closed, Alice had paid out about $30,000 of her own
money (including the $3,000 to Seton) and still owed $142,000 — her losses from
the fixed poker game that she was forced to play in the worst of times with the
worst of cards. She was still getting letters and calls from bill collectors.
“I think about the $142,000 all the time. It just hangs over my head,” she said
in December. One lesson she has learned, she adds: “I’m never going to
remarry. I can’t risk the liability.”2
2. In early February, Alice told TIME that she had
recently eliminated “most of” the debt through proceeds from the sale of a
small farm in Oklahoma her husband had inherited and after further payments
from Medi-Cal and a small life-insurance policy
$132,303: The Lab-Test Cash Machine
As 2012 began, a couple I’ll call Rebecca and Scott S., both in their 50s, seemed to have carved out a comfortable semiretirement in a suburb near Dallas. Scott had successfully sold his small industrial business and was working part time advising other industrial companies. Rebecca was running a small marketing company. On March 4, Scott started having trouble breathing. By dinnertime he was gasping violently as Rebecca raced him to the emergency room at the University of Texas Southwestern Medical Center. Both Rebecca and her husband thought he was about to die, Rebecca recalls. It was not the time to think about the bills that were going to change their lives if Scott survived, and certainly not the time to imagine, much less worry about, the piles of charges for daily routine lab tests that would be incurred by any patient in the middle of a long hospital stay. Scott was in the hospital for 32 days before his pneumonia was brought under control. Rebecca recalls that “on about the fourth or fifth day, I was sitting around the hospital and bored, so I went down to the business office just to check that they had all the insurance information.” She remembered that there was, she says, “some kind of limit on it.”
As 2012 began, a couple I’ll call Rebecca and Scott S., both in their 50s, seemed to have carved out a comfortable semiretirement in a suburb near Dallas. Scott had successfully sold his small industrial business and was working part time advising other industrial companies. Rebecca was running a small marketing company. On March 4, Scott started having trouble breathing. By dinnertime he was gasping violently as Rebecca raced him to the emergency room at the University of Texas Southwestern Medical Center. Both Rebecca and her husband thought he was about to die, Rebecca recalls. It was not the time to think about the bills that were going to change their lives if Scott survived, and certainly not the time to imagine, much less worry about, the piles of charges for daily routine lab tests that would be incurred by any patient in the middle of a long hospital stay. Scott was in the hospital for 32 days before his pneumonia was brought under control. Rebecca recalls that “on about the fourth or fifth day, I was sitting around the hospital and bored, so I went down to the business office just to check that they had all the insurance information.” She remembered that there was, she says, “some kind of limit on it.”
“Even by then, the bill was over $80,000,” she recalls. “I
couldn’t believe it.” The woman in the business office matter-of-factly gave
Rebecca more bad news: Her insurance policy, from a company called Assurant
Health, had an annual payout limit of $100,000. Because of some prior claims
Assurant had processed, the S.’s were well on their way to exceeding the limit.
Just the room-and-board charge at Southwestern was $2,293 a day. And that was
before all the real charges were added. When Scott checked out, his 161-page
bill was $474,064. Scott and Rebecca were told they owed $402,955 after the
payment from their insurance policy was deducted. The top billing categories
were $73,376 for Scott’s room; $94,799 for “RESP SERVICES,” which mostly meant
supplying Scott with oxygen and testing his breathing and included multiple
charges per day of $134 for supervising oxygen inhalation, for which Medicare
would have paid $17.94; and $108,663 for “SPECIAL DRUGS,” which included mostly
not-so-special drugs such as “SODIUM CHLORIDE .9%.” That’s a standard saline
solution probably used intravenously in this case to maintain Scott’s water and
salt levels. (It is also used to wet contact lenses.) You can buy a liter of
the hospital version (bagged for intravenous use) online for $5.16. Scott was
charged $84 to $134 for dozens of these saline solutions.
Then there was the $132,303 charge for “LABORATORY,” which
included hundreds of blood and urine tests ranging from $30 to $333 each, for
which Medicare either pays nothing because it is part of the room fee or pays
$7 to $30. Hospital spokesman Russell Rian said that neither Daniel Podolsky,
Texas Southwestern Medical Center’s $1,244,000-a-year president, nor any other
executive would be available to discuss billing practices. “The law does not
allow us to talk about how we bill,” he explained. Through a friend of a
friend, Rebecca found Patricia Palmer, the same billing advocate based in
Salem, Va., who worked on Steve H.’s bill in Oklahoma City. Palmer — whose
firm, Medical Recovery Services, now includes her two adult daughters — was a
claims processor for Blue Cross Blue Shield. She got into her current business
after she was stunned by the bill her local hospital sent after one of her
daughters had to go to the emergency room after an accident. She says it
included items like the shade attached to an examining lamp. She then began
looking at bills for friends as kind of a hobby before deciding to make it a business.
The best Palmer could do was get Texas Southwestern Medical
to provide a credit that still left Scott and Rebecca owing $313,000. Palmer
claimed in a detailed appeal that there were also overcharges totaling $113,000
— not because the prices were too high but because the items she singled out
should not have been charged for at all. These included $5,890 for all of that
saline solution and $65,600 for the management of Scott’s oxygen. These items
are supposed to be part of the hospital’s general room-and-services charge, she
argued, so they should not be billed twice.
In fact, Palmer — echoing a constant and convincing refrain
I heard from billing advocates across the country — alleged that the hospital
triple-billed for some items used in Scott’s care in the intensive-care unit.
“First they charge more than $2,000 a day for the ICU, because it’s an ICU and
it has all this special equipment and personnel,” she says. “Then they charge
$1,000 for some kit used in the ICU to give someone a transfusion or oxygen …
And then they charge $50 or $100 for each tool or bandage or whatever that
there is in the kit. That’s triple billing.” Palmer and Rebecca are still
fighting, but the hospital insists that the S.’s owe the $313,000 balance. That
doesn’t include what Rebecca says were “thousands” in doctors’ bills and
$70,000 owed to a second hospital after Scott suffered a relapse. The only
offer the hospital has made so far is to cut the bill to $200,000 if it is paid
immediately, or for the full $313,000 to be paid in 24 monthly payments. “How
am I supposed to write a check right now for $200,000?” Rebecca asks. “I have
boxes full of notices from bill collectors … We can’t apply for charity,
because we’re kind of well off in terms of assets,” she adds. “We thought we
were set, but now we’re pretty much on the edge.”
Insurance That Isn’t
“People, especially relatively wealthy people, always think they have good insurance until they see they don’t,” says Palmer. “Most of my clients are middle- or upper-middle-class people with insurance.” Scott and Rebecca bought their plan from Assurant, which sells health insurance to small businesses that will pay only for limited coverage for their employees or to individuals who cannot get insurance through employers and are not eligible for Medicare or Medicaid. Assurant also sold the Recchis their plan that paid only $2,000 a day for Sean Recchi’s treatment at MD Anderson. Although the tight limits on what their policies cover are clearly spelled out in Assurant’s marketing materials and in the policy documents themselves, it seems that for its customers the appeal of having something called health insurance for a few hundred dollars a month is far more compelling than comprehending the details. “Yes, we knew there were some limits,” says Rebecca. “But when you see the limits expressed in the thousands of dollars, it looks O.K., I guess. Until you have an event.”
Millions of plans have annual payout limits, though the more
typical plans purchased by employers usually set those limits at $500,000 or
$750,000 — which can also quickly be consumed by a catastrophic illness. For
that reason, Obamacare prohibited lifetime limits on any policies sold after
the law passed and phases out all annual dollar limits by 2014. That will
protect people like Scott and Rebecca, but it will also make everyone’s
premiums dramatically higher, because insurance companies risk much more when
there is no cap on their exposure.“People, especially relatively wealthy people, always think they have good insurance until they see they don’t,” says Palmer. “Most of my clients are middle- or upper-middle-class people with insurance.” Scott and Rebecca bought their plan from Assurant, which sells health insurance to small businesses that will pay only for limited coverage for their employees or to individuals who cannot get insurance through employers and are not eligible for Medicare or Medicaid. Assurant also sold the Recchis their plan that paid only $2,000 a day for Sean Recchi’s treatment at MD Anderson. Although the tight limits on what their policies cover are clearly spelled out in Assurant’s marketing materials and in the policy documents themselves, it seems that for its customers the appeal of having something called health insurance for a few hundred dollars a month is far more compelling than comprehending the details. “Yes, we knew there were some limits,” says Rebecca. “But when you see the limits expressed in the thousands of dollars, it looks O.K., I guess. Until you have an event.”
But Obamacare does little to attack the costs that
overwhelmed Scott and Rebecca. There is nothing, for example, that addresses
what may be the most surprising sinkhole — the seemingly routine blood, urine
and other laboratory tests for which Scott was charged $132,000, or more than
$4,000 a day. By my estimates, about $70 billion will be spent in the U.S. on
about 7 billion lab tests in 2013. That’s about $223 a person for 16 tests per
person. Cutting the overordering and overpricing could easily take $25 billion
out of that bill. Much of that overordering involves patients like Scott S. who
require prolonged hospital stays. Their tests become a routine, daily cash
generator. “When you’re getting trained as a doctor,” says a physician who was
involved in framing health care policy early in the Obama Administration,
“you’re taught to order what’s called ‘morning labs.’ Every day you have a
variety of blood tests and other tests done, not because it’s necessary but
because it gives you something to talk about with the others when you go on
rounds. It’s like your version of a news hook … I bet 60% of the labs are not
necessary.”
The country’s largest lab tester is Quest Diagnostics, which
reported revenues in 2012 of $7.4 billion. Quest’s operating income in 2012 was
$1.2 billion, about 16.2% of sales. But that’s hardly the spectacular profit margin we have seen
in other sectors of the medical marketplace. The reason is that the outside
companies like Quest, which mostly pick up specimens from doctors and clinics
and deliver test results back to them, are not where the big profits are. The
real money is in health care settings that cut out the middleman — the in-house
venues, like the hospital testing lab run by Southwestern Medical that billed
Scott and Rebecca $132,000. In-house labs account for about 60% of all testing
revenue. Which means that for hospitals, they are vital profit centers. Labs
are also increasingly being maintained by doctors who, as they form group
practices with other doctors in their field, finance their own testing and
diagnostic clinics. These labs account for a rapidly growing share of the
testing revenue, and their share is growing rapidly. These in-house labs have
no selling costs, and as pricing surveys repeatedly find, they can charge more
because they have a captive consumer base in the hospitals or group practices.
They also have an incentive to order more tests because they’re the ones
profiting from the tests. The Wall Street Journal reported last April
that a study in the medical journal Health Affairs had found that doctors’
urology groups with their own labs “bill the federal Medicare program for
analyzing 72% more prostate tissue samples per biopsy while detecting fewer
cases of cancer than counterparts who send specimens to outside labs.”
If anything, the move toward in-house testing, and with it
the incentive to do more of it, is accelerating the move by doctors to
consolidate into practice groups. As one Bronx urologist explains, “The
economics of having your own lab are so alluring.” More important, hospitals
are aligning with these practice groups, in many cases even getting them to
sign noncompete clauses requiring that they steer all patients to the partner
hospital. Some hospitals are buying physicians’ practices outright; 54% of
physician practices were owned by hospitals in 2012, according to a McKinsey
survey, up from 22% 10 years before. This is primarily a move to increase the
hospitals’ leverage in negotiating with insurers. An expensive by-product is
that it brings testing into the hospitals’ high-profit labs.
4. When Taxpayers Pick Up the TabWhether it was Emilia Gilbert trying to get out from under $9,418 in bills after her slip and fall or Alice D. vowing never to marry again because of the $142,000 debt from her husband’s losing battle with cancer, we’ve seen how the medical marketplace misfires when private parties get the bills. When the taxpayers pick up the tab, most of the dynamics of the marketplace shift dramatically.
In July 2011, an 88-year-old man whom I’ll call Alan A.
collapsed from a massive heart attack at his home outside Philadelphia. He
survived, after two weeks in the intensive-care unit of the Virtua Marlton
hospital. Virtua Marlton is part of a four-hospital chain that, in its 2010
federal filing, reported paying its CEO $3,073,000 and two other executives
$1.4 million and $1.7 million from gross revenue of $633.7 million and an
operating profit of $91 million. Alan A. then spent three weeks at a nearby
convalescent-care center.
Medicare made quick work of the $268,227 in bills from the two
hospitals, paying just $43,320. Except for $100 in incidental expenses, Alan A.
paid nothing because 100% of inpatient hospital care is covered by Medicare. The ManorCare convalescent center, which Alan A. says gave
him “good care” in an “O.K. but not luxurious room,” got paid $11,982 by
Medicare for his three-week stay. That is about $571 a day for all the physical
therapy, tests and other services. As with all hospitals in nonemergency
situations, ManorCare does not have to accept Medicare patients and their
discounted rates. But it does accept them. In fact, it welcomes them and
encourages doctors to refer them. Health care providers may grouse about Medicare’s fee
schedules, but Medicare’s payments must be producing profits for ManorCare. It
is part of a for-profit chain owned by Carlyle Group, a blue-chip
private-equity firm.
About a decade ago, Alan A. was diagnosed with non-Hodgkin’s
lymphoma. He was 78, and his doctors in southern New Jersey told him there was
little they could do. Through a family friend, he got an appointment with one
of the lymphoma specialists at Sloan-Kettering. That doctor told Alan A. he was
willing to try a new chemotherapy regimen on him. The doctor warned, however,
that he hadn’t ever tried the treatment on a man of Alan A.’s age. The treatment worked. A decade later, Alan A. is still in
remission. He now travels to Sloan-Kettering every six weeks to be examined by
the doctor who saved his life and to get a transfusion of Flebogamma, a drug
that bucks up his immune system. With some minor variations each time, Sloan-Kettering’s
typical bill for each visit is the same as or similar to the $7,346 bill he
received during the summer of 2011, which included $340 for a session with the
doctor. Assuming eight visits (but only four with the doctor), that
makes the annual bill $57,408 a year to keep Alan A. alive. His actual
out-of-pocket cost for each session is a fraction of that. For that $7,346
visit, it was about $50.
In some ways, the set of transactions around Alan A.’s
Sloan-Kettering care represent the best the American medical marketplace has to
offer. First, obviously, there’s the fact that he is alive after other doctors
gave him up for dead. And then there’s the fact that Alan A., a retired chemist
of average means, was able to get care that might otherwise be reserved for the
rich but was available to him because he had the right insurance. Medicare is the core of that insurance, although Alan A. —
as do 90% of those on Medicare — has a supplemental-insurance policy that kicks
in and generally pays 90% of the 20% of costs for doctors and outpatient care
that Medicare does not cover.
Here’s how it all computes for him using that summer 2011
bill as an example. Not counting the doctor’s separate $340 bill,
Sloan-Kettering’s bill for the transfusion is about $7,006. In addition to a few hundred dollars in miscellaneous items,
the two basic Sloan-Kettering charges are $414 per hour for five hours of nurse
time for administering the Flebogamma and a $4,615 charge for the Flebogamma. According to Alan A., the nurse generally handles three or
four patients at a time. That would mean Sloan-Kettering is billing more than
$1,200 an hour for that nurse. When I asked Paul Nelson, Sloan-Kettering’s
director of financial planning, about the $414-per-hour charge, he explained
that 15% of these charges is meant to cover overhead and indirect expenses, 20%
is meant to be profit that will cover discounts for Medicare or Medicaid
patients, and 65% covers direct expenses. That would still leave the nurse’s
time being valued at about $800 an hour (65% of $1,200), again assuming that
just three patients were billed for the same hour at $414 each. Pressed on
that, Nelson conceded that the profit is higher and is meant to cover other
hospital costs like research and capital equipment.
Whatever Sloan-Kettering’s calculations may be, Medicare —
whose patients, including Alan A., are about a third of all Sloan-Kettering
patients — buys into none of that math. Its cost-based pricing formulas yield a
price of $302 for everything other than the drug, including those hourly
charges for the nurse and the miscellaneous charges. Medicare pays 80% of that,
or $241, leaving Alan A. and his private insurance company together to pay
about $60 more to Sloan-Kettering. Alan A. pays $6, and his supplemental
insurer, Aetna, pays $54. Bottom line: Sloan-Kettering gets paid $302 by Medicare for
about $2,400 worth of its chargemaster charges, and Alan A. ends up paying $6.
The Cancer Drug Profit Chain
It’s with the bill for the transfusion that the peculiar economics of American medicine take a different turn, even when Medicare is involved. We have seen that even with big discounts for insurance companies and bigger discounts for Medicare, the chargemaster prices on everything from room and board to Tylenol to CT scans are high enough to make hospital costs a leading cause of the $750 billion Americans overspend each year on health care. We’re now going to see how drug pricing is a major contributor to the way Americans overpay for medical care.
By law, Medicare has to pay hospitals 6% above what Congress
calls the drug company’s “average sales price,” which is supposedly the average
price at which the drugmaker sells the drug to hospitals and clinics. But
Congress does not control what drugmakers charge. The drug companies are free
to set their own prices. This seems fair in a free-market economy, but when the
drug is a one-of-a-kind lifesaving serum, the result is anything but fair. Applying that formula of average sales price plus the 6%
premium, Medicare cuts Sloan-Kettering’s $4,615 charge for Alan A.’s Flebogamma
to $2,123. That’s what the drugmaker tells Medicare the average sales price is
plus 6%. Medicare again pays 80% of that, and Alan A. and his insurer split the
other 20%, 10% for him and 90% for the insurer, which makes Alan A.’s cost
$42.50.It’s with the bill for the transfusion that the peculiar economics of American medicine take a different turn, even when Medicare is involved. We have seen that even with big discounts for insurance companies and bigger discounts for Medicare, the chargemaster prices on everything from room and board to Tylenol to CT scans are high enough to make hospital costs a leading cause of the $750 billion Americans overspend each year on health care. We’re now going to see how drug pricing is a major contributor to the way Americans overpay for medical care.
In practice, the average sales price does not appear to be a real average. Two other hospitals I asked reported that after taking into account rebates given by the drug company, they paid an average of $1,650 for the same dose of Flebogamma, and neither hospital had nearly the leverage in the cancer-care marketplace that Sloan-Kettering does. One doctor at Sloan-Kettering guessed that it pays $1,400. “The drug companies give the rebates so that the hospitals will make more on the drug and therefore be encouraged to dispense it,” the doctor explained. (A spokesperson for Medicare would say only that the average sales price is based “on manufacturers’ data submitted to Medicare and is meant to include rebates.”)
Nelson, the Sloan-Kettering head of financial planning, said
the price his hospital pays for Alan A.’s dose of Flebogamma is “somewhat
higher” than $1,400, but he wasn’t specific, adding that “the difference
between the cost and the charge represents the cost of running our pharmacy —
which includes overhead cost — plus a markup.”
Even assuming Sloan-Kettering’s real price for Flebogamma is “somewhat
higher” than $1,400, the hospital would be
making about 50% profit from Medicare’s $2,123
payment. So even Medicare contributes mightily to hospital profit — and
drug-company profit — when it buys drugs.
Flebogamma’s Profit Margin
The Spanish business at the beginning of the Flebogamma supply chain does even better than Sloan-Kettering. Made from human plasma, Flebogamma is a sterilized solution that is intended to boost the immune system. Sloan-Kettering buys it from either Baxter International in the U.S. or, as is more likely in Alan A.’s case, a Barcelona-based company called Grifols. In its half-year 2012 shareholders report, Grifols featured a picture of the Flebogamma plasma serum and its packaging — “produced at the Clayton facility, North Carolina,” according to the caption. Worldwide sales of all Grifols products were reported as up 15.2%, to $1.62 billion, in the first half of 2012. In the U.S. and Canada, sales were up 20.5%. “Growth in the sales … of the main plasma derivatives” was highlighted in the report, as was the fact that “the cost per liter of plasma has fallen.” (Grifols operates 150 donation centers across the U.S. where it pays plasma donors $25 apiece.)
Grifols spokesman Christopher Healey would not discuss what
it cost Grifols to produce and ship Alan A.’s dose, but he did say that the
company’s average cost to produce its bioscience products, Flebogamma included,
was approximately 55% of what it sells them for. However, a doctor familiar
with the economics of cancer-care drugs said that plasma products typically
have some of the industry’s higher profit margins. He estimated that the
Flebogamma dose for Alan A. — which Sloan-Kettering bought from Grifols for
$1,400 or $1,500 and sold to Medicare for $2,135 — “can’t cost them more than
$200 or $300 to collect, process, test and ship.”The Spanish business at the beginning of the Flebogamma supply chain does even better than Sloan-Kettering. Made from human plasma, Flebogamma is a sterilized solution that is intended to boost the immune system. Sloan-Kettering buys it from either Baxter International in the U.S. or, as is more likely in Alan A.’s case, a Barcelona-based company called Grifols. In its half-year 2012 shareholders report, Grifols featured a picture of the Flebogamma plasma serum and its packaging — “produced at the Clayton facility, North Carolina,” according to the caption. Worldwide sales of all Grifols products were reported as up 15.2%, to $1.62 billion, in the first half of 2012. In the U.S. and Canada, sales were up 20.5%. “Growth in the sales … of the main plasma derivatives” was highlighted in the report, as was the fact that “the cost per liter of plasma has fallen.” (Grifols operates 150 donation centers across the U.S. where it pays plasma donors $25 apiece.)
In Spain, as in the rest of the developed world, Grifols’
profit margins on sales are much lower than they are in the U.S., where it can
charge much higher prices. Aware of the leverage that drug companies —
especially those with unique lifesaving products — have on the market, most
developed countries regulate what drugmakers can charge, limiting them to
certain profit margins. In fact, the drugmakers’ securities filings repeatedly
warn investors of tighter price controls that could threaten their high margins
— though not in the U.S.
The difference between the regulatory environment in the
U.S. and the environment abroad is so dramatic that McKinsey & Co.
researchers reported that overall prescription-drug prices in the U.S. are “50%
higher for comparable products” than in other developed countries. Yet those
regulated profit margins outside the U.S. remain high enough that Grifols,
Baxter and other drug companies still aggressively sell their products there.
For example, 37% of Grifols’ sales come from outside North America.
More than $280 billion will be spent this year on
prescription drugs in the U.S. If we paid what other countries did for the same
products, we would save about $94 billion a year. The pharmaceutical industry’s
common explanation for the price difference is that U.S. profits subsidize the
research and development of trailblazing drugs that are developed in the U.S.
and then marketed around the world. Apart from the question of whether a
country with a health-care-spending crisis should subsidize the rest of the
developed world — not to mention the question of who signed Americans up for
that mission — there’s the fact that the companies’ math doesn’t add up.
According to securities filings of major drug companies,
their R&D expenses are generally 15% to 20% of gross revenue. In fact,
Grifols spent only 5% on R&D for the first nine months of 2012. Neither 5%
nor 20% is enough to have cut deeply into the pharmaceutical companies’ stellar
bottom-line net profits. This is not gross profit, which counts only the
cost of producing the drug, but the profit after those R&D expenses
are taken into account. Grifols made a 32.3% net operating profit after all its
R&D expenses — as well as sales, management and other expenses — were
tallied. In other words, even counting all the R&D across the entire
company, including research for drugs that did not pan out, Grifols made
healthy profits. All the numbers tell one consistent story: Regulating drug prices
the way other countries do would save tens of billions of dollars while still
offering profit margins that would keep encouraging the pharmaceutical
companies’ quest for the next great drug.
Handcuffs On Medicare
Our laws do more than prevent the government from restraining prices for drugs the way other countries do. Federal law also restricts the biggest single buyer — Medicare — from even trying to negotiate drug prices. As a perpetual gift to the pharmaceutical companies (and an acceptance of their argument that completely unrestrained prices and profit are necessary to fund the risk taking of research and development), Congress has continually prohibited the Centers for Medicare and Medicaid Services (CMS) of the Department of Health and Human Services from negotiating prices with drugmakers. Instead, Medicare simply has to determine that average sales price and add 6% to it.
Our laws do more than prevent the government from restraining prices for drugs the way other countries do. Federal law also restricts the biggest single buyer — Medicare — from even trying to negotiate drug prices. As a perpetual gift to the pharmaceutical companies (and an acceptance of their argument that completely unrestrained prices and profit are necessary to fund the risk taking of research and development), Congress has continually prohibited the Centers for Medicare and Medicaid Services (CMS) of the Department of Health and Human Services from negotiating prices with drugmakers. Instead, Medicare simply has to determine that average sales price and add 6% to it.
Similarly, when Congress passed Part D of Medicare in 2003,
giving seniors coverage for prescription drugs, Congress prohibited Medicare
from negotiating. Nor can Medicare get involved in deciding that a drug may be
a waste of money. In medical circles, this is known as the
comparative-effectiveness debate, which nearly derailed the entire Obamacare
effort in 2009. Doctors and other health care reformers behind the
comparative-effectiveness movement make a simple argument: Suppose that after
exhaustive research, cancer drug A, which costs $300 a dose, is found to be
just as effective as or more effective than drug B, which costs $3,000.
Shouldn’t the person or entity paying the bill, e.g. Medicare, be able to
decide that it will pay for drug A but not drug B? Not according to a law
passed by Congress in 2003 that requires Medicare to reimburse patients (again,
at average sales price plus 6%) for any cancer drug approved for use by the
Food and Drug Administration. Most states require insurance companies to do the
same thing.
Peter Bach, an epidemiologist at Sloan-Kettering who has
also advised several health-policy organizations, reported in a 2009 New
England Journal of Medicine article that Medicare’s spending on the
category dominated by cancer drugs ballooned from $3 billion in 1997 to $11
billion in 2004. Bach says costs have continued to increase rapidly and must
now be more than $20 billion. With that escalating bill in mind, Bach was among the policy
experts pushing for provisions in Obamacare to establish a Patient-Centered
Outcomes Research Institute to expand comparative-effectiveness research
efforts. Through painstaking research, doctors would try to determine the
comparative effectiveness not only of drugs but also of procedures like CT
scans. However, after all the provisions spelling out elaborate
research and review processes were embedded in the draft law, Congress jumped
in and added eight provisions that restrict how the research can be used. The
prime restriction: Findings shall “not be construed as mandates for practice
guidelines, coverage recommendations, payment, or policy recommendations.”
With those 14 words, the work of Bach and his colleagues was
undone. And costs remain unchecked. “Medicare could see
the research and say, Ah, this drug works better and costs the same or is even
cheaper,” says Gunn, Sloan-Kettering’s chief operating officer. “But they are
not allowed to do anything about it.” Along with another doomed provision that would have allowed
Medicare to pay a fee for doctors’ time spent counseling terminal patients on
end-of-life care (but not on euthanasia), the Obama Administration’s push for comparative
effectiveness is what brought opponents’ cries that the bill was creating
“death panels.” Washington bureaucrats would now be dictating which drugs were
worth giving to which patients and even which patients deserved to live or die,
the critics charged.
The loudest voice sounding the death-panel alarm belonged to
Betsy McCaughey, former New York State lieutenant governor and a conservative
health-policy advocate. McCaughey, who now runs a foundation called the
Committee to Reduce Infection Deaths, is still fiercely opposed to Medicare’s
making comparative-effectiveness decisions. “There is comparative-effectiveness
research being done in the medical journals all the time, which is fine,” she
says. “But it should be used by doctors to make decisions — not by the Obama
bureaucrats at Medicare to make decisions for doctors.”
Bach, the Sloan-Kettering doctor and policy wonk, has become
so frustrated with the rising cost of the drugs he uses that he and some
colleagues recently took matters into their own hands. They reported in an
October op-ed in the New York Times that they had decided on their own
that they were no longer going to dispense a colorectal-cancer drug called
Zaltrap, which cost an average of $11,063 per month for treatment. All the
research shows, they wrote, that a drug called Avastin, which cost $5,000 a
month, is just as effective. They were taking this stand, they added, because
“the typical new cancer drug coming on the market a decade ago cost about
$4,500 per month (in 2012 dollars); since 2010, the median price has been
around $10,000. Two of the new cancer drugs cost more than $35,000 each per
month of treatment. The burden of this cost is borne, increasingly, by patients
themselves — and the effects can be devastating.” The CEO of Sanofi, the company that makes Zaltrap, initially
dismissed the article by Bach and his Sloan-Kettering colleagues, saying they
had taken the price of the drug out of context because of variations in the
required dosage. But four weeks later, Sanofi cut its price in half.
Bureaucrats You Can AdmireBy the numbers, Medicare looks like a government program run amok. After President Lyndon B. Johnson signed Medicare into law in 1965, the House Ways and Means Committee predicted that the program would cost $12 billion in 1990. Its actual cost by then was $110 billion. It is likely to be nearly $600 billion this year. That’s due to the U.S.’s aging population and the popular program’s expansion to cover more services, as well as the skyrocketing costs of medical services generally. It’s also because Medicare’s hands are tied when it comes to negotiating the prices for drugs or durable medical equipment. But Medicare’s growth is not a matter of those “bureaucrats” that Betsy McCaughey complains about having gone off the rails in how they operate it. In fact, seeing the way Alan A.’s bills from Sloan-Kettering were vetted and processed is one of the more eye-opening and least discouraging aspects of a look inside the world of medical economics.
The process is fast, accurate, customer-friendly and
impressively high-tech. And it’s all done quietly by a team of nonpolitical
civil servants in close partnership with the private sector. In fact, despite
calls to privatize Medicare by creating a voucher system under which the
Medicare population would get money from the government to buy insurance from
private companies, the current Medicare system is staffed with more people
employed by private contractors (8,500) than government workers (700).
$1.5 Billion A DaySloan-Kettering sends Alan A.’s bills to medicare electronically, all elaborately coded according to Medicare’s rules. There are two basic kinds of codes for the services billed. The first is a number identifying which of the 7,000 procedures were performed by a doctor, such as examining a chest X-ray, performing a heart transplant or conducting an office consultation for a new patient (which costs more than a consultation with a continuing patient — coded differently — because it typically takes more time). If a patient presents more complicated challenges, then these basic procedures will be coded differently; for example, there are two varieties of emergency-room consultations. Adjustments are also made for variations in the cost of living where the doctor works and for other factors, like whether doctors used their own office (they’ll get paid more for that) or the hospital. A panel of doctors set up by the American Medical Association reviews the codes annually and recommends updates to Medicare. The process can get messy as the doctors fight over which procedures in which specialties take more time and expertise or are worth relatively more. Medicare typically accepts most of the panel’s recommendations.
The second kind of code is used to pay the hospital for its
services. Again, there are thousands of codes based on whether the person
checked in for brain surgery, an appendectomy or a fainting spell. To come up
with these numbers, Medicare takes the cost reports — including allocations for
everything from overhead to nursing staff to operating-room equipment — that
hospitals across the country are required to file for each type of service and
pays an amount equal to the composite average costs.
The hospital has little incentive to overstate its costs
because it’s against the law and because each hospital gets paid not on the
basis of its own claimed costs but on the basis of the average of every
hospital’s costs, with adjustments made for regional cost differences and other
local factors. Except for emergency services, no hospital has to accept
Medicare patients and these prices, but they all do. Similar codes are calculated for laboratory and diagnostic
tests like CT scans, ambulance services and, as we saw with Alan A.’s bill,
drugs dispensed. “When I tell my friends what I do here, it sounds boring,
but it’s exciting,” says Diane Kovach, who works at Medicare’s Maryland campus
and whose title is deputy director of the provider billing group. “We are
implementing a program that helps millions and millions of people, and we’re
doing it in a way that makes every one of us proud,” she adds.
Kovach, who has been at Medicare for 21 years, operates some
of the gears of a machine that reviews the more than 3 million bills that come
into Medicare every day, figures out the right payments for each and churns out
more than $1.5 billion a day in wire transfers.
Jonathan Blum‘When hospitals say they are losing money on Medicare, my reaction is that Central Florida is overflowing with Medicare patients and all those hospitals are expanding and advertising for Medicare patients,’ says Blum, deputy administrator of the Centers for Medicare and Medicaid Services. ‘Hospitals don’t lose money when they serve Medicare patients.’ The part of that process that Kovach and three colleagues, with whom I spent a morning recently, are responsible for involves overseeing the writing and vetting of thousands of instructions for coders, who are also private contractors, employed by HP, General Dynamics and other major technology companies. The codes they write are supposed to ensure that Medicare pays what it is supposed to pay and catches anything in a bill that should not be paid.
For example, hundreds of instructions for code changes were
needed to address Obamacare’s requirement that certain preventive-care visits,
such as those for colonoscopies or contraceptive services, no longer be subject
to Medicare’s usual outpatient co-pay of 20%. Adding to the complexity, the
benefit is limited to one visit per year for some services, meaning
instructions had to be written to track patient timelines for the codes
assigned to those services. When performing correctly, the codes produce “edits”
whenever a bill is submitted with something awry on it — if a doctor submits
two preventive-care colonoscopies for the same patient in the same year, for
example. Depending on the code, an edit will result in the bill’s being sent
back with questions or being rejected with an explanation. It all typically
happens without a human being reading it. “Our goal at the first stage is that
no one has to touch the bill,” says Leslie Trazzi, who focuses on instructions
and edits for doctors’ claims.
Alan A.’s bills from Sloan-Kettering are wired to a data
center in Shelbyville, Ky., run by a private company (owned by WellPoint, the
insurance company that operates under the Blue Cross and Blue Shield names in
more than a dozen states) that has the contract to process claims originating
from New York and Connecticut. Medicare is paying the company about $323
million over five years — which, as with the fees of other contractors serving
other regions, works out to an average of 84¢ per claim.
In Shelbyville, Alan A.’s status as a beneficiary is
verified, and then the bill is sent electronically to a data center in
Columbia, S.C., operated by another contractor, also a subsidiary of an
insurance company. There, the codes are checked for edits, after which Alan
A.’s Sloan-Kettering bill goes electronically to a data center in Denver, where
the payment instructions are prepared and entered into what Karen Jackson, who
supervises Medicare’s outside contractors, says is the largest accounting
ledger in the world. The whole process takes three days — and that long only
because the data is sent in batches.
There are multiple backups to make sure this ruthlessly
efficient system isn’t just ruthless. Medicare keeps track of and publicly
reports the percentage of bills processed “clean” — i.e., with no rejected
items — within 30 days. Even the speed with which the contractors answer the
widely publicized consumer phone lines is monitored and reported. The average
time to answer a call from a doctor or other provider is 57.6 seconds,
according to Medicare’s records, and the average time to answer one of the
millions of calls from patients is 2 minutes 41 seconds, down from more than
eight minutes in 2007. These times might come as a surprise to people who have
tried to call a private insurer. That monitoring process is, in turn,
backstopped by a separate ombudsman’s office, which has regional and national
layers.
Beyond that, the members of the House of Representatives and
the Senate loom as an additional 535 ombudsmen. “We get calls every day from
congressional offices about complaints that a beneficiary’s claim has been
denied,” says Jonathan Blum, the deputy administrator of CMS. As a result,
Blum’s agency has an unusually large congressional liaison staff of 52, most of
whom act as caseworkers trying to resolve these complaints. All the customer-friendliness adds up to only about 10% of
initial Medicare claims’ being denied, according to Medicare’s latest published
Composite Benchmark Metric Report. Of those initial Medicare denials,
only about 20% (2% of total claims) result in complaints or appeals, and the
decisions in only about half of those (or 1% of the total) end up being
reversed, with the claim being paid.
The astonishing efficiency, of course, raises the question
of whether Medicare is simply funneling money out the door as fast as it can.
Some fraud is inevitable — even a rate of 0.1% is enough to make headlines when
$600 billion is being spent. It’s also possible that people can game the system
without committing outright fraud. But Medicare has multiple layers of
protection against fraud that the insurance companies don’t and perhaps can’t
match because they lack Medicare’s scale.
According to Medicare’s Jackson, the contractors are
“vigorously monitored for all kinds of metrics” and required every quarter “to
do a lot of data analysis and submit review plans and error-rate-reduction
plans.” And then there are the RACs — a wholly separate group of
private “recovery audit contractors.” Established by Congress during the George
W. Bush Administration, the RACs, says one hospital administrator, “drive the
doctors and the hospitals and even the Medicare claims processors crazy.” The
RACs’ only job is to review provider bills after they have been paid by
Medicare claims processors and look for system errors, like faulty processing,
or errors in the bills as reflected in doctor or hospital medical records that
the RACs have the authority to audit.
The RACs have an incentive that any champion of the private
sector would love. They get no up-front fees but instead are paid a percentage
of the money they retrieve. They eat what they kill. According to Medicare
spokeswoman Emma Sandoe, the RAC bounty hunters retrieved $797 million in the
2011 fiscal year, for which they were paid 9% to 12.5% of what they brought in,
depending on the region where they were operating.
This process can “get quite anal,” says the doctor who
recently treated me for an ear infection. Although my doctor is on Park Avenue,
she, like 96% of all specialists, accepts Medicare patients despite the
discounted rates it pays, because, she says, “they pay quickly.” However, she
recalls getting bills from Medicare for 21¢ or 85¢ for supposed overpayments. The DHHS’s inspector general is also on the prowl to protect
the Medicare checkbook. It reported recovering $1.2 billion last year through
Medicare and Medicaid audits and investigations (though the recovered funds had
probably been doled out over several fiscal years). The inspector general’s
work is supplemented by a separate, multiagency federal health-care-fraud task
force, which brings criminal charges against fraudsters and issues regular
press releases claiming billions more in recoveries. This does not mean the system is airtight. If
anything, all that recovery activity suggests fallibility, even as it suggests
more buttoned-up operations than those run by private insurers, whose payment
systems are notoriously erratic.
Too Much Health Care?In a review of other bills of those enrolled in Medicare, a pattern of deep, deep discounting of chargemaster charges emerged that mirrored how Alan A.’s bills were shrunk down to reality. A $121,414 Stanford Hospital bill for a 90-year-old California woman who fell and broke her wrist became $16,949. A $51,445 bill for the three days an ailing 91-year-old spent getting tests and being sedated in the hospital before dying of old age became $19,242. Before Medicare went to work, the bill was chock-full of creative chargemaster charges from the California Pacific Medical Center — part of Sutter Health, a dominant nonprofit Northern California chain whose CEO made $5,241,305 in 2011.
Another pattern emerged from a look at these bills: some
seniors apparently visit doctors almost weekly or even daily, for all varieties
of ailments. Sure, as patients age they are increasingly in need of medical
care. But at least some of the time, the fact that they pay almost nothing to
spend their days in doctors’ offices must also be a factor, especially if they
have the supplemental insurance that covers most of the 20% not covered by
Medicare.
Alan A. is now 89, and the mound of bills and Medicare
statements he showed me for 2011 — when he had his heart attack and continued
his treatments at Sloan-Kettering — seemed to add up to about $350,000,
although I could not tell for sure because a few of the smaller ones may have
been duplicates. What is certain — because his insurance company tallied it for
him in a year-end statement — was that his total out-of-pocket expense was
$1,139, or less than 0.2% of his overall medical bills. Those bills included
what seemed to be 33 visits in one year to 11 doctors who had nothing to do
with his recovery from the heart attack or his cancer. In all cases, he was
routinely asked to pay almost nothing: $2.20 for a check of a sinus problem,
$1.70 for an eye exam, 33¢ to deal with a bunion. When he showed me those bills
he chuckled.
A comfortable member of the middle class, Alan A. could
easily afford the burden of higher co-pays that would encourage him to use
doctors less casually or would at least stick taxpayers with less of the bill
if he wants to get that bunion treated. AARP (formerly the American Association
of Retired Persons) and other liberal entitlement lobbies oppose these types of
changes and consistently distort the arithmetic around them. But it seems clear
that Medicare could save billions of dollars if it required that no Medicare
supplemental-insurance plan for people with certain income or asset levels
could result in their paying less than, say, 10% of a doctor’s bill until they
had paid $2,000 or $3,000 out of their pockets in total bills in a year. (The
AARP might oppose this idea for another reason: it gets royalties from
UnitedHealthcare for endorsing United’s supplemental-insurance product.)
Medicare spent more than $6.5 billion last year to pay
doctors (even at the discounted Medicare rates) for the service codes that
denote the most basic categories of office visits. By asking people like Alan
A. to pay more than a negligible share, Medicare could recoup $1 billion to $2
billion of those costs yearly.
Too Much Doctoring?
Another doctor’s bill, for which Alan A.’s share was 19¢, suggests a second apparent flaw in the system. This was one of 50 bills from 26 doctors who saw Alan A. at Virtua Marlton hospital or at the ManorCare convalescent center after his heart attack or read one of his diagnostic tests at the two facilities. “They paraded in once a day or once every other day, looked at me and poked around a bit and left,” Alan A. recalls. Other than the doctor in charge of his heart-attack recovery, “I had no idea who they were until I got these bills. But for a dollar or two, so what?”
The “so what,” of course, is that although Medicare deeply
discounted the bills, it — meaning taxpayers — still paid from $7.48 (for a
chest X-ray reading) to $164 for each encounter. “One of the benefits attending physicians get from many
hospitals is the opportunity to cruise the halls and go into a Medicare
patient’s room and rack up a few dollars,” says a doctor who has worked at
several hospitals across the country. “In some places it’s a Monday-morning
tradition. You go see the people who came in over the weekend. There’s always
an ostensible reason, but there’s also a lot of abuse.” When health care wonks focus on this kind of overdoctoring,
they complain (and write endless essays) about what they call the
fee-for-service mode, meaning that doctors mostly get paid for the time they
spend treating patients or ordering and reading tests. Alan A. didn’t care how
much time his cancer or heart doctor spent with him or how many tests he got.
He cared only that he got better.Another doctor’s bill, for which Alan A.’s share was 19¢, suggests a second apparent flaw in the system. This was one of 50 bills from 26 doctors who saw Alan A. at Virtua Marlton hospital or at the ManorCare convalescent center after his heart attack or read one of his diagnostic tests at the two facilities. “They paraded in once a day or once every other day, looked at me and poked around a bit and left,” Alan A. recalls. Other than the doctor in charge of his heart-attack recovery, “I had no idea who they were until I got these bills. But for a dollar or two, so what?”
Some private care organizations have made progress in
avoiding this overdoctoring by paying salaries to their physicians and giving
them incentives based on patient outcomes. Medicare and private insurers have
yet to find a way to do that with doctors, nor are they likely to, given the
current structure that involves hundreds of thousands of private providers
billing them for their services.
In passing Obamacare, Congress enabled Medicare to drive
efficiencies in hospital care based on the notion that good care should be
rewarded and the opposite penalized. The primary lever is a system of penalties
Obamacare imposes on hospitals for bad care — a term defined as unacceptable
rates of adverse events, such as infections or injuries during a patient’s
hospital stay or readmissions within a month after discharge. Both kinds of
adverse events are more common than you might think: 1 in 5 Medicare patients
is readmitted within 30 days, for example. One Medicare report asserts that
“Medicare spent an estimated $4.4 billion in 2009 to care for patients who had
been harmed in the hospital, and readmissions cost Medicare another $26
billion.” The anticipated savings that will be produced by the threat of these
new penalties are what has allowed the Obama Administration to claim that
Obamacare can cut hundreds of billions of dollars from Medicare over the next
10 years without shortchanging beneficiaries. “These payment penalties are
sending a shock through the system that will drive costs down,” says Blum, the
deputy administrator of the Centers for Medicare and Medicaid Services.
There are lots of other shocks Blum and his colleagues would
like to send. However, Congress won’t allow him to. Chief among them, as we
have seen, would be allowing Medicare, the world’s largest buyer of
prescription drugs, to negotiate the prices that it pays for them and to make
purchasing decisions on the basis of comparative effectiveness. But there’s
also the cane that Alan A. got after his heart attack. Medicare paid $21.97 for
it. Alan A. could have bought it on Amazon for about $12. Other than in a few
pilot regions that Congress designated in 2011 after a push by the Obama
Administration, Congress has not allowed Medicare to drive down the price of
any so-called durable medical equipment through competitive bidding.
This is more than a matter of the 124,000 canes Medicare
reports that it buys every year. It’s about mail-order diabetic supplies,
wheelchairs, home medical beds and personal oxygen supplies too. Medicare
spends about $15 billion annually for these goods. In the areas of the country where Medicare has been allowed
by Congress to conduct a competitive-bidding pilot program, the process has
produced savings of 40%. But so far, the pilot programs cover only about 3% of
the medical goods seniors typically use. Taking the program nationwide and
saving 40% of the entire $15 billion would mean saving $6 billion a year for
taxpayers.
The Way Out Of the Sinkhole“I was driving through central Florida a year or two ago,” says Medicare’s Blum. “And it seemed like every billboard I saw advertised some hospital with these big shiny buildings or showed some new wing of a hospital being constructed … So when you tell me that the hospitals say they are losing money on Medicare and shifting costs from Medicare patients to other patients, my reaction is that Central Florida is overflowing with Medicare patients and all those hospitals are expanding and advertising for Medicare patients. So you can’t tell me they’re losing money … Hospitals don’t lose money when they serve Medicare patients.”
If that’s the case, I asked, why not just extend the program
to everyone and pay for it all by charging people under 65 the kinds of
premiums they would pay to private insurance companies? “That’s not for me to
say,” Blum replied. In the debate over controlling Medicare costs, politicians
from both parties continue to suggest that Congress raise the age of
eligibility for Medicare from 65 to 67. Doing so, they argue, would save the government
tens of billions of dollars a year. So it’s worth noting another detail about
the case of Janice S., which we examined earlier. Had she felt those chest
pains and gone to the Stamford Hospital emergency room a month later, she would
have been on Medicare, because she would have just celebrated her 65th
birthday.
If covered by Medicare, Janice S.’s $21,000 bill would have
been deeply discounted and, as is standard, Medicare would have picked up 80%
of the reduced cost. The bottom line is that Janice S. would probably have
ended up paying $500 to $600 for her 20% share of her heart-attack scare. And
she would have paid only a fraction of that — maybe $100 — if, like most
Medicare beneficiaries, she had paid for supplemental insurance to cover most of
that 20%. In fact, those numbers would seem to argue for lowering the
Medicare age, not raising it — and not just from Janice S.’s standpoint but
also from the taxpayers’ side of the equation. That’s not a liberal argument
for protecting entitlements while the deficit balloons. It’s just a matter of
hardheaded arithmetic.
As currently constituted, Obamacare is going to require
people like Janice S. to get private insurance coverage and will subsidize
those who can’t afford it. But the cost of that private insurance — and
therefore those subsidies — will be much higher than if the same people were
enrolled in Medicare at an earlier age. That’s because Medicare buys health
care services at much lower rates than any insurance company. Thus the best way
both to lower the deficit and to help save money for people like Janice S.
would seem to be to bring her and other near seniors into the Medicare system
before they reach 65. They could be required to pay premiums based on their
incomes, with the poor paying low premiums and the better off paying what they
might have paid a private insurer. Those who can afford it might also be
required to pay a higher proportion of their bills — say, 25% or 30% — rather
than the 20% they’re now required to pay for outpatient bills.
Meanwhile, adding younger people like Janice S. would lower
the overall cost per beneficiary to Medicare and help cut its deficit still
more, because younger members are likelier to be healthier. From Janice S.’s standpoint, whatever premium she would pay
for this age-64 Medicare protection would still be less than what she had been
paying under the COBRA plan that she wished she could have kept after the rules
dictated that she be cut off after she lost her job. The only way this would not work is if 64-year-olds started
using health care services they didn’t need. They might be tempted to, because,
as we saw with Alan A., Medicare’s protection is so broad and supplemental
private insurance costs so little that it all but eliminates patients’ obligation
to pay the 20% of outpatient-care costs that Medicare doesn’t cover. To deal
with that, a provision could be added requiring that 64-year-olds taking
advantage of Medicare could not buy insurance freeing them from more than, say,
5% or 10% of their responsibility for the bills, with the percentage set
according to their wealth. It would be a similar, though more stringent,
provision of the kind I’ve already suggested for current Medicare beneficiaries
as a way to cut the cost of people overusing benefits.
If that logic applies to 64-year-olds, then it would seem to
apply even more readily to healthier 40-year-olds or 18-year-olds. This is the
single-payer approach favored by liberals and used by most developed countries. Then again, however much hospitals might
survive or struggle under that scenario, no doctor could hope for anything
approaching the income he or she deserves (and that will make future doctors
want to practice) if 100% of their patients yielded anything close to the low
rates Medicare pays. “If you could figure out a way to pay doctors
better and separately fund research … adequately, I could see where a
single-payer approach would be the most logical solution,” says Gunn,
Sloan-Kettering’s chief operating officer. “It would certainly be a lot more
efficient than hospitals like ours having hundreds of people sitting around
filling out dozens of different kinds of bills for dozens of insurance
companies.” Maybe, but the prospect of overhauling our system this way,
displacing all the private insurers and other infrastructure after all these
decades, isn’t likely. For there would be one group of losers — and these
losers have lots of clout. They’re the health care providers like hospitals and
CT-scan-equipment makers whose profits — embedded in the bills we have examined
— would be sacrificed. They would suffer because of the lower prices Medicare
would pay them when the patient is 64, compared with what they are able to
charge when that patient is either covered by private insurance or has no insurance
at all. That kind of systemic overhaul
not only seems unrealistic but is also packed with all kinds of risk related to
the microproblems of execution and the macro issue of giving government all
that power.
Yet while Medicare may not be a realistic systemwide model
for reform, the way Medicare works does demonstrate, by comparison, how the
overall health care market doesn’t work.
Unless you are protected by Medicare, the health care market is not a
market at all. It’s a crapshoot. People fare differently according to
circumstances they can neither control nor predict. They may have no insurance.
They may have insurance, but their employer chooses their insurance plan and it
may have a payout limit or not cover a drug or treatment they need. They may or
may not be old enough to be on Medicare or, given the different standards of
the 50 states, be poor enough to be on Medicaid. If they’re not protected by
Medicare or they’re protected only partly by private insurance with high
co-pays, they have little visibility into pricing, let alone control of it.
They have little choice of hospitals or the services they are billed for, even
if they somehow know the prices before they get billed for the services. They
have no idea what their bills mean, and those who maintain the chargemasters
couldn’t explain them if they wanted to. How much of the bills they end up
paying may depend on the generosity of the hospital or on whether they happen
to get the help of a billing advocate. They have no choice of the drugs that
they have to buy or the lab tests or CT scans that they have to get, and they
would not know what to do if they did have a choice. They are powerless buyers
in a seller’s market where the only sure thing is the profit of the sellers. Indeed, the only player in the system that
seems to have to balance countervailing interests the way market players in a
real market usually do is Medicare. It has to answer to Congress and the
taxpayers for wasting money, and it has to answer to portions of the same groups
for trying to hold on to money it shouldn’t. Hospitals, drug companies and
other suppliers, even the insurance companies, don’t have those worries.
Moreover, the only players in the private sector who seem to
operate efficiently are the private contractors working — dare I say it? —
under the government’s supervision. They’re the Medicare claims processors that
handle claims like Alan A.’s for 84¢ each. With these and all other Medicare
costs added together, Medicare’s total management, administrative and
processing expenses are about $3.8 billion for processing more than a billion
claims a year worth $550 billion. That’s an overall administrative and
management cost of about two-thirds of 1% of the amount of the claims, or less
than $3.80 per claim. According to its latest SEC filing, Aetna spent $6.9
billion on operating expenses (including claims processing, accounting, sales
and executive management) in 2012. That’s about $30 for each of the 229 million
claims Aetna processed, and it amounts to about 29% of the $23.7 billion Aetna
pays out in claims.
The real issue isn’t whether we have a single payer or
multiple payers. It’s whether whoever pays has a fair chance in a fair market.
Congress has given Medicare that power when it comes to dealing with hospitals
and doctors, and we have seen how that works to drive down the prices Medicare
pays, just as we’ve seen what happens when Congress handcuffs Medicare when it
comes to evaluating and buying drugs, medical devices and equipment. Stripping
away what is now the sellers’ overwhelming leverage in dealing with Medicare in
those areas and with private payers in all aspects of the market would inject
fairness into the market. We don’t have to scrap our system and aren’t likely
to. But we can reduce the $750 billion that we overspend on health care in the
U.S. in part by acknowledging what other countries have: because the health
care market deals in a life-or-death product, it cannot be left to its own
devices. Put simply, the bills tell us
that this is not about interfering in a free market. It’s about facing the
reality that our largest consumer product by far — one-fifth of our economy —
does not operate in a free market. So
how can we fix it?
Changing Our ChoicesWe should tighten antitrust laws related to hospitals to keep them from becoming so dominant in a region that insurance companies are helpless in negotiating prices with them. The hospitals’ continuing consolidation of both lab work and doctors’ practices is one reason that trying to cut the deficit by simply lowering the fees Medicare and Medicaid pay to hospitals will not work. It will only cause the hospitals to shift the costs to non-Medicare patients in order to maintain profits — which they will be able to do because of their increasing leverage in their markets over insurers. Insurance premiums will therefore go up — which in turn will drive the deficit back up, because the subsidies on insurance premiums that Obamacare will soon offer to those who cannot afford them will have to go up.
Similarly, we should tax hospital profits at 75% and have a
tax surcharge on all nondoctor hospital salaries that exceed, say, $750,000.
Why are high profits at hospitals regarded as a given that we have to work
around? Why shouldn’t those who are profiting the most from a market whose
costs are victimizing everyone else chip in to help? If we recouped 75% of all
hospital profits (from nonprofit as well as for-profit institutions), that
would save over $80 billion a year before counting what we would save on tests
that hospitals might not perform if their profit incentives were shaved. To be sure, this too seems unlikely to
happen. Hospitals may be the most politically powerful institution in any
congressional district. They’re usually admired as their community’s most
important charitable institution, and their influential stakeholders run the
gamut from equipment makers to drug companies to doctors to thousands of
rank-and-file employees. Then again, if every community paid more attention to
those administrator salaries, to those nonprofits’ profit margins and to
charges like $77 for gauze pads, perhaps the political balance would shift.
We should outlaw the chargemaster. Everyone involved, except a patient who gets a
bill based on one (or worse, gets sued on the basis of one), shrugs off
chargemasters as a fiction. So why not require that they be rewritten to
reflect a process that considers actual and thoroughly transparent costs? After
all, hospitals are supposed to be government-sanctioned institutions accountable
to the public. Hospitals love the chargemaster because it gives them a big
number to put in front of rich uninsured patients (typically from outside the
U.S.) or, as is more likely, to attach to lawsuits or give to bill collectors,
establishing a place from which they can negotiate settlements. It’s also a
great place from which to start negotiations with insurance companies, which
also love the chargemaster because they can then make their customers feel good
when they get an Explanation of Benefits that shows the terrific discounts
their insurance company won for them. But
for patients, the chargemasters are both the real and the metaphoric essence of
the broken market. They are anything but irrelevant. They’re the source of the
poison coursing through the health care ecosystem.
We should amend patent laws so that makers of wonder drugs
would be limited in how they can exploit the monopoly our patent laws give
them. Or we could simply set price limits or profit-margin caps on these drugs.
Why are the drug profit margins treated as another given that we have to work
around to get out of the $750 billion annual overspend, rather than a problem
to be solved? Just bringing these
overall profits down to those of the software industry would save billions of
dollars. Reducing drugmakers’ prices to what they get in other developed
countries would save over $90 billion a year. It could save Medicare — meaning
the taxpayers — more than $25 billion a year, or $250 billion over 10 years.
Depending on whether that $250 billion is compared with the Republican or
Democratic deficit-cutting proposals, that’s a third or a half of the Medicare
cuts now being talked about. Similarly,
we should tighten what Medicare pays for CT or MRI tests a lot more and even
cap what insurance companies can pay for them. This is a huge contributor to
our massive overspending on outpatient costs. And we should cap profits on lab
tests done in-house by hospitals or doctors.
Finally, we should embarrass Democrats into stopping their
fight against medical-malpractice reform and instead provide safe-harbor
defenses for doctors so they don’t have to order a CT scan whenever, as one
hospital administrator put it, someone in the emergency room says the word
head. Trial lawyers who make their bread and butter from civil suits have been
the Democrats’ biggest financial backer for decades. Republicans are right when
they argue that tort reform is overdue. Eliminating the rationale or excuse for
all the extra doctor exams, lab tests and use of CT scans and MRIs could cut
tens of billions of dollars a year while drastically cutting what hospitals and
doctors spend on malpractice insurance and pass along to patients.
Other options are more tongue in cheek, though they
illustrate the absurdity of the hole we have fallen into. We could limit
administrator salaries at hospitals to five or six times what the lowest-paid
licensed physician gets for caring for patients there. That might take care of
the self-fulfilling peer dynamic that Gunn of Sloan-Kettering cited when he
explained, “We all use the same compensation consultants.” Then again, it might
unleash a wave of salary increases for junior doctors. Or we could require drug companies to include
a prominent, plain-English notice of the gross profit margin on the packaging
of each drug, as well as the salary of the parent company’s CEO. The same would
have to be posted on the company’s website. If nothing else, it would be a good
test of embarrassment thresholds.
None of these suggestions will come as a revelation to the
policy experts who put together Obamacare or to those before them who pushed
health care reform for decades. They know what the core problem is — lopsided
pricing and outsize profits in a market that doesn’t work. Yet there is little
in Obamacare that addresses that core issue or jeopardizes the paydays of those
thriving in that marketplace. In fact, by bringing so many new customers into
that market by mandating that they get health insurance and then providing
taxpayer support to pay their insurance premiums, Obamacare enriches them.
That, of course, is why the bill was able to get through Congress.
Obamacare does some good work around the edges of the core
problem. It restricts abusive hospital-bill collecting. It forces insurers to
provide explanations of their policies in plain English. It requires a more
rigorous appeal process conducted by independent entities when insurance
coverage is denied. These are all positive changes, as is putting the insurance
umbrella over tens of millions more Americans — a historic breakthrough. But
none of it is a path to bending the health care cost curve. Indeed, while
Obamacare’s promotion of statewide insurance exchanges may help distribute
health-insurance policies to individuals now frozen out of the market, those
exchanges could raise costs, not lower them. With hospitals consolidating by
buying doctors’ practices and competing hospitals, their leverage over
insurance companies is increasing. That’s a trend that will only be accelerated
if there are more insurance companies with less market share competing in a new
exchange market trying to negotiate with a dominant hospital and its doctors.
Similarly, higher insurance premiums — much of them paid by taxpayers through
Obamacare’s subsidies for those who can’t afford insurance but now must buy it
— will certainly be the result of three of Obamacare’s best provisions: the
prohibitions on exclusions for pre-existing conditions, the restrictions on
co-pays for preventive care and the end of annual or lifetime payout caps. Put simply, with Obamacare we’ve changed the
rules related to who pays for what, but we haven’t done much to change the
prices we pay. When you follow the
money, you see the choices we’ve made, knowingly or unknowingly.
Over the past few decades, we’ve enriched the labs, drug
companies, medical device makers, hospital administrators and purveyors of CT
scans, MRIs, canes and wheelchairs. Meanwhile, we’ve squeezed the doctors who
don’t own their own clinics, don’t work as drug or device consultants or don’t
otherwise game a system that is so gameable. And of course, we’ve squeezed
everyone outside the system who gets stuck with the bills. We’ve created a secure, prosperous island in
an economy that is suffering under the weight of the riches those on the island
extract. And we’ve allowed those on the
island and their lobbyists and allies to control the debate, diverting us from
what Gerard Anderson, a health care economist at the Johns Hopkins Bloomberg
School of Public Health, says is the obvious and only issue: “All the prices
are too damn high.”
No comments:
Post a Comment