What is the cause of excess costs in health care Part 4 – Time's "Bitter Pill", CEO compensation and the Kafkaesque chargemaster

Steven Brill’s extensive piece in Time has generated a good discussion once again on why Americans pay so much more for health care than other countries, and while I agree with most of his critiques, he seems to have gotten overly hung-up on the hospital chargemaster.

Readers of this blog know I’ve also discussed reform in health care, the diverse sources of excess cost including price gouging on pharmaceuticals, defensive medicine, expensive end-of-life care, the high cost of primary care in the ER etc, and both Brill and I appear to have relied on the same sources of data in the McKinsey report. We’ve also discussed the “hidden tax” of the uninsured, as well as some signs of reform (although of note, my belief that and EMR would reduce waste has proven wrong as the software designers have designed their programs to gouge medicare on behalf of the doctor – increasing costs!).

Brill has written a piece for Time that takes a different tactic, however. Rather than starting from the data on sources of excess costs (although he does reference them), he starts with the patients’ bills and then tries to figure out where all these expenses come from. This is a creative and innovative approach to the problem, except I cringed when I read it because I knew what he was going to find before the end of the first page. Medical bills are insane.

The total cost, in advance, for Sean to get his treatment plan and initial doses of chemotherapy was $83,900.


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.

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.

This is the fascinating aspect of his article but also the tragedy. Because Brill becomes so highly focused on what hospitals charge, and the apparent horrifying mark-up of medicine, I worry that people will come away thinking that this is the cause of excess costs.

The problem Brill is describing is that the costs itemized by hospitals on their bills come from a mysterious document called the “chargemaster”. I’m pretty sure no one knows how the costs are calculated, and I know there is no rational basis for the prices on it. But as shocking as the bills that are generated by these documents are, they are largely irrelevant to the excess costs of healthcare. The chargemaster is a red herring, and despite Brill’s protestations that it is some central evil in health care expenditure, it really isn’t.

The tragic circumstances Brill describes, repeatedly, are what happens when someone who is uninsured, underinsured, or paying out of pocket for medical care experiences when they receive their bill. It is covered with charges that seem insane – because they are – and lacking the knowledge and tools to deal with these ridiculous charges, the uninsured, understandably, believe they need to pay this full, ridiculous bill. But they don’t, and shouldn’t. An uninsured person receiving one of these bills is a little like a tourist who has just been dropped in a foreign bazaar, with no understanding of the rules of the market, discounts, haggling, gouging, or any idea of what other actors in the same market are paying. The reality is that hospital bills, and many other bills in medical care are little more than an opening gambit in an irrational, and largely incomprehensible, cost war between providers and payers. Hospitals, knowing that insurers never pay a full hospital bill, and will haggle and discount charges away or pay a percentage of “chargemaster” costs, push back by artificially inflating costs – as demonstrated throughout Brill’s article. When someone who doesn’t have the power or expertise of the insurance company receives their bill (hospitals of course can’t send different bills to different kinds of customers right?) they end up paying more, or worse, think they have to actually pay the full bill, because they have fallen into this market without the tools or knowledge to navigate it.

The proof of this are the medical bill advocates Brill interviews for the article. For a fee, you can hire someone who has similar expertise as the payers to fight back, and often reduce these bills to a tiny fraction of their original amount.

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.

Brill also seems very disturbed by two consistently capitalistic elements of hospitals, high compensation of hospital CEOs and non-physician administrators, and the ability of “non-profit” hospitals to actually make a profit. The difference, is, of course, “profits” in this case go back into the hospital, hiring staff, into equipment, buildings, etc., rather than shareholders pockets so one could argue the money largely goes back into the community (disclosure – I work for a non-profit hospital). But what about CEO pay? Brill seems largely offended that they make so much, even making the suggestion at the end of the article that hospital profits be taxed at 75% (insuring no one will ever invest in them again) and that CEO pay be limited to some multiple of a lower-level employee’s salary. Sounds wonderful, except it will only work if that model is applied to CEOs across the board. Brill cites hospital CEO compensations of between 1-4 million dollars. But the average CEO salary is about 13 million dollars as of 2011. Yes CEOs are paid too much, but it’s a global problem, not just in healthcare. If anything, healthcare CEOs are payed a great deal less than their counterparts in other industries, it seems strange to single out healthcare as the one service where CEO pay is somehow more sinful than in others, especially if you want hospitals and medical centers to be able to attract talented management. So am I bothered by CEO pay? Sure, but not as much in my industry as in say, finance, where CEOs who aren’t making profit, and are hurting shareholders get rewarded with bonuses and golden parachutes. Brill seems to be upset that the industry is profitable and are CEOs are well-compensated. But this isn’t so much a source of excess costs in healthcare as it is a source of excess costs in capitalism, and I don’t anticipate that changing any time soon, nor do I think it’s ultimately a good idea to nationalize or socialize the industry to make no profit.

This is too bad, because in an extensive, lengthy documentation of the absurdity of the hospital billing scheme, and anger at CEO pay, Brill’s final recommendations hit many of the true sources of excess cost.

So how can we fix it?

Changing Our Choices
We 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.

Agreed. In particular I find the financial conflict of doctors owning labs and radiology equipment, that they then can profit from ordering tests on, is very disturbing. It’s been shown in the literature that this arrangement results in the physicians ordering more unnecessary tests, and demonstrates that it’s an unacceptable conflict of interest that only increases costs.

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.

We could save lots of money if we forbade various industries from making profit and taxed their incomes at 75%. But I don’t think this is a viable suggestion in a capitalist society, and I believe that if we did increase competition in insurance, pharmaceutical, and other healthcare markets we could decrease costs. Socialism is not the answer, although Brill makes a compelling argument for a public-option as medicare’s administration and pricing is highlighted in the article as a model of efficiency compared to the private insurers. I’d have no problem with expanding medicare as a payer. Next:

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.

While I agree outlawing the chargemaster should be considered, I’m not really sure it will work. For one, yes, it is a fiction, it’s not an actual source of excess costs like so many other problems described in the McKinsey report. And hospitals are in a bind. They can’t charge what things actually cost, because insurance companies will still try to pay less. Hospitals know what their costs are, but it’s nearly impossible to truly itemize a patient’s stay, and take into account the exact time every physician doctor and nurse spent with them versus another patient, exactly how many disposable materials were used, as well as factor in all the other costs hospitals need to balance such as covering uninsured patients (most of whom never pay their bills), profit-losing divisions of hospitals and “mission” costs, as well as having a adequate nest egg at the end of the year to ensure adequate capital to expand as needed to meet demand, buy new equipment, and hire new staff. My guess as to what the chargemaster is accomplishing (and it is just a guess), is that it’s a strategy that reliably returns a certain amount of profit on each hospitalization relative to patient utilization of specific services, while providing plausible deniability for what is ultimately overcharging the insured to subsidize the total costs of running their operation. It has to be inflated to cover all the costs of overhead, supplies, etc., that just can’t be reliably quantified, and the fact that insurance companies will only pay a fraction of the final bill. The alternative would be to “bundle” costs so that hospitalizations for specific services cost a set amount, and hospitals then have an incentive to come in under that reasonable fixed price for the service. But then, you run into the problem of penalizing the hospitals that treat needier, poorer, sicker, older populations that cost more to treat, and will have poorer outcomes, readmissions, and complications.

It’s a pickle. You want hospitals to have some measure of profitability – they provide a necessary service, employment, and pride to the community. But if you create profit incentives that put them in conflict with the community – like avoiding poorer, sicker, older patients, they won’t provide the very service for which they exist.

I don’t have a good solution to this problem. We need to own up to the costs of treating the difficult populations, rather than continuing to play the insurance shell-game. Hospitals have to treat people who are sick no matter what because of laws like EMTALA. EMTALA is an unfunded mandate, passed during the Reagan years, that doesn’t specify how hospitals shall recoup their losses when someone can’t pay, just that they have to provide care for sick people no matter what. The unwillingness to pay for the poor and the uninsured pushes even their primary care into the ER, and they present with more acute problems that earlier access to primary care could have managed more cheaply, raising the costs of their care, and foisting it on the hospitals – especially the non-profit, inner-city hospitals providing care to the most at-risk. They then have to figure out some way of spreading these costs back onto medicare and the insured and paying patients without attaching a rider to the bill that simply says, “paying for the sick and uninsured in your community — $1200” (then you actually only have to pay only $200 for this service in reality because everything is inflated). I suspect the chargemaster, in its irrational and frightening way, is accomplishing this task. It’s not pretty, but I’d love to hear suggestions to address the need of hospitals to provide universal health care without a funding source to do so.

Then Brill gets to the things which I agree the McKinsey report shows are our real sources of excess costs:

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.

We pay twice as much for our drugs as any other country, R&D is a BS excuse, and the inability of medicare to collectively bargain is anti-capitalistic and anti-market. How is it possible that in a capitalistic society a buyer isn’t allowed to bargain for bulk purchase? It’s just a wealth-redistribution scheme! And the proof is systems like the Veterans Administration, which is allowed to negotiate for lower prices, and does, typically paying about half as much for the same drugs.

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.

I think that particular conflict of interest should be banned, but one must remember again that differing CT and MRI costs are largely a reflection of which hospitals have higher “mission” costs. It’s not the CT in the suburb that costs medicare more, it’s the CT in the inner-city.

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.

Tort reform may benefit but it’s effects will take decades to see. It’s almost impossible to adequately quantitate the cost of “defensive” medicine, and how it has inculcated generations of physicians to overtest, overtreat, and overspend on patients. Even if such changes were made, the paranoia runs deep within us. I agree it’s costly, but it will take more than just removing the threat of lawsuits to generate more responsible cost-practices for physicians.

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.”

If you throw in a ban on Direct To Consumer Advertising on Drugs, implementation of CPRS or a universal record standard for the EMR (not these medicare-gauging EMRs that for-profit companies are designing), and better end-of-life planning, data, and management, I think we’d go a long way to reducing costs. Brill’s final recommendations hit the mark, but I’m concerned his obsession with the admittedly Kafkaesque chargemaster is a distraction. That’s not the true source of the excess costs. Rather I suspect it’s a way for hospitals to try to rationalize the redistribution of resources from medicare and the insured to cover their broader mission.

And one final petty complaint which as a surgeon I couldn’t resist:

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.

No! The pen is sterile! We have to mark the skin after prep – the alcohol based preps we use will wash away most markings placed before sterile preparation, and iodine preps hide them pretty well too. Complaining about a lot of potentially “reusable” items is also just not going to fly in this modern world of MRSA and nosocomial infections.

WSJ and anti-government conspiracies

Leave it to AEI writing for the WSJ editorial page to allege a grand conspiracy of the government against pharmaceutical companies. Their proof? The government wants to compare the efficacy of new drugs to older ones to make sure they’re actually better.

The reauthorization of the State Children’s Health Insurance Program (Schip), created in 1997 to cover children from lower-income families who make too much to qualify for Medicaid, is up for renewal this fall. Tucked into page 414, section 904 of the House bill is a provision to spend more than $300 million to establish a new federal “Center for Comparative Effectiveness” to conduct government-run studies of the economic considerations that go into drug choices.

The center will initially be funded through Medicare but will soon get its own “trust fund.” The aim is to arm government actuaries with data that proponents hope will provide “scientific” proof that expensive new drugs are no better than their older alternatives. The trick is to maintain just enough credibility around the conduct of these trials to justify unpopular decisions not to pay for newer medicines.

While there’s nothing inherently wrong with this sort of fiscally minded clinical research, Medicare is no ordinary payer: It dictates decisions made in the private market. So as the government begins tying its own payment decisions to the results of its own studies, there’s a great temptation to selectively interpret data and arbitrarily release results. Clearly, this obvious conflict of interest demands even more outside scrutiny and transparency than has been the usual fare when it comes to government research.

Yes, because private research is so much more transparent than studies performed by the government. Gottlieb’s example of a government hit on expensive drugs, was of all things, the Women’s Health Initiative.

More insane conspiratorial nonsense from AEI and the WSJ below the fold.
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