The best points from Time’s cover story on medical costs

by Rob Cullen on February 26, 2013 - 5:31 PM

A while back, in a post looking at why hospital sticker prices are so high, we noted that the obvious related question– why are medical costs so high?– was way too complicated for a single blog post. Turns out we were right. This week’s Time magazine has an article from Steven Brill– it’s one of the best articles we’ve seen on the subject, but at 36 pages it’s not a quick read. We definitely recommend checking out the whole thing, but for those who don’t have time to get through all 26,000 words, here are ten key points.   

1. We spend a lot of money on healthcare

Ok, probably not a huge surprise to readers of this blog, but the numbers are still pretty shocking:

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.

2. Nonprofit hospitals act like for-profits

The average operating profit for nonprofit hospitals is 11.7%, even when those that lose money are included. That’s even more than for-profits:

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.

Nonprofit hospitals also don’t provide all that much charity care. They claim to provide $39.3 billion in care for the poor, but that figure is calculated on the basis of  chargemaster prices [hospital sticker 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.

3. Every hospital has a chargemaster

The chargemaster is a hospital’s list of sticker prices for every service it provides. According to Brill, hospital officials tried to avoid even discussing it, and how these prices are determined is a mystery:

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.

4. Chargemaster prices are ridiculous, yet many people are asked to pay them

A comparison of patient charges for medical supplies to the actual cost of these items shows just how crazy chargemaster list prices are. One patient was charged $18 each for Accu-chek diabetes test strips; Amazon sells boxes of 50 for $27, or 55 cents each. Another patient was charged $1.50 for one pill of generic Tylenol; again, you can buy a hundred pills online for that price.

Another way to see how much patients are being gouged is by looking at Medicare. According to Brill:

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.

In one of many examples, a patient who Brill calls Janet S. was charged $157.61 for a complete blood count (CBC); Medicare would pay only $11.02 for a CBC at the same hospital. She was also charged $199.50 for something called a troponin test; Medicare would have paid $13.94.

Hospitals claim that the chargemaster rates are irrelevant (“Very few people actually pay those rates,” said one official), but tens of millions of patients who either have no insurance, or whose insurance does not apply because they’ve hit annual or lifetime coverage limits, do pay them. Brill writes:

“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.”

5. Even insurers are at the mercy of the chargemaster

Insurers try to negotiate prices 30% to 50% above the Medicare rates rather than discounts off the “sky-high” chargemaster rates. But as hospitals consolidate, insurers are losing leverage:

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.

6. Patients are getting screwed on outpatient care…

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.

Where does that profit come from? The McKinsey study offers some clues. For example, a typical piece of equipment will pay for itself in one year if it carries out just 10 to 15 procedures a day. As Brill writes:

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.

By the way, not only do hospitals have a huge financial incentive to order unnecessary tests, there’s a legal incentive too:

“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.”

And on medical devices…

Brill details the story of “Steve H” who was charged $86,000 for outpatient surgery to put a stimulator in his back. Of that, $49,000 was the charge for the device itself, which sells wholesale for less than $19,000. The hospital made $30,000 selling it to Steve H., a profit margin of more than 150%– and this type of mark-up is typical:

To the extent that I found any consistency among hospital chargemaster practices, this is one of them: hospitals routinely seem to charge 2 1⁄2 times what these expensive implantable devices cost them, which produces that 150% profit margin.

And on lab tests…

Brill writes:

Cutting the over-ordering and overpricing could easily take $25 billion out of [our $70 billion lab test] bill. Much of that over-ordering 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.”

And on prescription drugs…

In one example from the article, a patient needed a cancer-fighting drug called Rituxan. According to the manufacturer, Biogen Idec-Genetech, the cost of producing and shipping its products is 10% of what it sells them for. The hospital then marks price up even more:

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.

And it’s not just uninsured patients getting gouged. Even Medicare overpays for drugs, thanks to Congress, which has prohibited the program from negotiating prices with drugmakers. Instead, Medicare simply has to determine that average sales price and add 6% to it.

All this means we spend much more on prescription drugs than any other country:

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.

7. If you’re stuck with outrageous hospital bills, call a medical billing advocate

Many of the patients in the article hired medical billing advocates, experts who can make sense of medical bills and negotiate with hospitals:

 “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 [...]

“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.”

8. Some good news: Medicare gets reasonable prices from providers

Hospital finance people say Medicare actually gets too good a deal, and that they’re losing as much as 10% on Medicare patients, but that number doesn’t seem to hold up. To see why, says Jonathan Blum, the deputy administrator of Medicare, just look at Florida:

“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 … “

Hospital financial reports also seems to indicate that Medicare’s rates are on the mark:

According to [Stamford] 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.

9. It’s also much more efficient than private insurers

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.

10.We should think about expanding it

Obamacare should help keep patients from getting gouged by chargemaster prices somewhat. These charges are usually paid by those who don’t have insurance or who have gone over their coverage limits; the Affordable Care Act bans annual and lifetime limits and provides subsidies to help people purchase private insurance.

The downside, though, is that it will cost taxpayers and consumers much more than simply expanding Medicare:

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 would lower the overall cost per beneficiary to Medicare and help cut its deficit still more, because younger members are likelier to be healthier.

In other words…

[It's] not a liberal argument for protecting entitlements while the deficit balloons. It’s just a matter of hardheaded arithmetic.

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