What’s wrong with our Health Care? / Reading TIME’s “Why medical bills are killing us” – Analysis (Part I)

I’ve just finished reading the Special Report Why Medical Bills are Killing Us by Steven Brill, which was published recently in TIME Magazine. Mr. Brill, the founder of Court TV and American Lawyer, and the CEO of Journalism Online, worked on this story for seven months. The huge report is 40 pages long. It is unusual for a magazine like TIME to spend so much time on one subject, even if the subject is as important as Health Care. Maybe for the first time the intricate details of how health care operates became transparent for people outside of the small circle of health care economists. I found the report so revealing and so well documented that I decided to share the gist of it with you, our readers. After all, many of you either never read it, or just briefly glanced through it.

The report is based on multiple case studies; some of them are horrific and quite unbelievable (but everything is real!). Because of lack of space, only the main ideas will be presented in this article. For more details, read the full report.

Health Care: Routine Care, Unforgettable Bills

Brill begins by reformulating the major issue of the ongoing health care debate. Rather than asking “Who should pay the bills?” he is much more interested in “Why exactly are the bills so high?” (All instances of bold and underlined words are mine –LMAdmin)

“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?”

In the USA, according to Brill, people spend more on health care than the next 10 biggest spenders combined. Our health care expenses are almost 20% of our gross domestic product – more than twice compared with other developed countries. And “results our health care system produces are no better and often worse than the outcomes in those countries.”

In order to understand why we spend so much, Brill choose the only possible way: Dissect the real bills and “just follow the money”.

Chargemaster

Every hospital has a Chargemaster, which is a hospital internal price list. If you think that there is a process or rationale in those prices – think again. According to Brill’s research it is just a highly inflated list of prices without any basis in reality. The examples below are taken from the report to illustrate this conclusion.

Procedure Chargemaster Medicare
Troponin Test $199.50 $13.94
CBC (Complete Blood Count) $157.61 $11.02
Stress Test using CT $7,997.54 $554

 

As you can see, the differences between the Chargemaster prices and what Medicare paid is dramatic – up to 10-15 times more in many instances. In addition, the level of Medicare reimbursement seems to be much closer to reality. Medicare collects data on all types of treatments and tests that hospitals deliver. Medicare reimburses hospitals not only for direct costs but also for multiple indirect costs. The original Chargemaster bill sent to Medicare is irrelevant – Medicare pays according to its own price structure based on its research.

The insurance companies’ discount is not as steep as Medicare’s. Insurers with the most customers have the most leverage and will try to negotiate prices 30-50% above Medicare rates. But because of hospital consolidation (by buying doctors’ practices), most insurance companies do not have strong leverage, and they negotiate 50-60% down from the Chargemaster price rather than up from the Medicare price.

In the worst position are people who don’t qualify for Medicaid and don’t have insurance; or those who have the insurance but exceed the coverage limits. They are asked to pay exorbitant Chargemaster list prices. For these people, those prices are real.

Consider another example from the story of Steve H., who spent a day in a hospital. During his stay a Meditronic simulator had been surgically implanted in his back. The bill was for $49,237.00. The wholesale list price for simulator is $19,000, but hospital probably paid 5-15% less than that. Even assuming $19,000, this is more than $30,000 profit – a profit margin of more than 150%. According to Brill, “hospitals routinely seem to charge 2.5 times what these expensive implantable devices cost them, which produces that 150% profit margin.”

When Nonprofits are the most Profitable

No matter how steep the Medicare or insurance company 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.” According to a survey cited in the Report:

“There are 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.”

Nonprofits don’t have any shareholders. So, what they do with all their 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.”

How Advanced Technology made Medical Care More Expensive?

According to Brill, there are two reasons:

  1. “It appears to encourage more procedures and treatment by making them easier and more convenient”.
  2. “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.”

There is also another rationale for using expensive procedure and equipment – concern about 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.“

What is the most profitable?

Brill identifies several wildly profitable areas:

Outpatient Care

It seems that the switch from Inpatient Care (when the patient spends several days in the hospital) to Outpatient Care (when everything is done in one day) is a sure way to cut costs. By 2010, the average number of days spent in inpatient care has significantly decreased, and outpatient care increased dramatically. The result, however, was not savings but an increase in expenses.

“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 non-emergency 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.”

Labs

In-house hospital labs are vital profit centers. Cutting out the outside companies like Quest accounts for about 60% of all testing revenue. “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… 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.”

Prescription Drugs

By law Medicare pays hospitals 6% above what is known as “average sales price”, which is the average price that drug manufacturers sell the drugs to hospitals. But Congress has no control of what drug makers charge; they are free to set their own prices. “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 normal explanation for this price difference is R&D expenses. But Brill shows, using pharmaceutical company Grifols as an example, that “Grifols made a 32.3% net operating profit after all its R&D expenses — as well as sales, management and other expenses”. He suggests that:

“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.”

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