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Health Care Prices “Are Too Damn High”

February 27, 2013

If you haven’t had a chance to read Steve Brill’s excellent investigation “Bitter Pill: Why Medical Bills Are Killing Us” in Time magazine, it’s a great example of why long-form journalism is still relevant and indispensable. It gives a personal face to the perverse economic forces that have created what Brill calls “the ultimate sellers market” in the healthcare industry. Much of what he exposes is what we in the health policy field have been railing about for several years now. But the graphic way in which Brill lays out the issues leaves no question that before we talk about making wholesale cuts to government programs or rationing care to lower costs, we must fundamentally reform provider payment, confront prices and provide incentives that promote far more accountable care.

Brill’s article is very comprehensive, but there are some key points that I want to expand on. They include: 

1)    Prices for goods and services are often wildly out of line with what is actually delivered–$15 for three gauze pads, $108 for bacitracin, $9,400 for a 6-hour visit to the emergency room for a woman with a broken nose, and a $49,000 charge for a device to treat back pain. As hospital spokespeople told Brill, patients with insurance do not pay these prices because their carrier, whether private, Medicare or Medicaid, negotiates deep discounts. But as Brill points out, perversely those who are uninsured and can afford it the least are charged the highest prices. These inflated prices, which vary from hospital to hospital, are recorded in so-called “chargemasters,” proprietary price lists whose origin remains mysterious.

As Brill writes; “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.”

A new field of medical bill advocacy has even cropped up to help patients with bare-bones insurance policies—many with soon-to-be banned yearly limits on hospital and other medical costs that max out after a single trip to the ER—haggle down their bills in the face of personal bankruptcy.

2)    Many non-profit hospitals are operating a whole lot like for-profit businesses. When Brill asked a hospital executive why his facility has such exorbitant prices in their chargemaster, he was told, “We charge those rates so that when we get paid by a [wealthy] uninsured person from overseas, it allows us to serve the poor.” In reality, it is the nearly poor or struggling middle-class people with either no insurance or bare-bones plans who are most often forced to pay these inflated prices.

In fact, as I’ve written before, many non-profit hospitals are barely serving their stated mission; a footnote to the article notes that “the uncompensated care hospitals provide, either through charity programs or because of patients failing to pay their debts, amounts to approximately 5% of their total revenue for 2010.”

Meanwhile, Brill cites McKinsey data that indicate the average operating profit margin for all nonprofit hospitals is 11.7%, even when hospitals that lost money are included. Those are pretty healthy returns in this still-limping economy. As I wrote back in 2009, nonprofit hospitals are supposed to use these proceeds for what they refer to as “community benefit.” But instead of providing more care to the poor and underserved, they are investing profits into such “community benefits” as shiny new facilities aimed at attracting insured patients, new imaging equipment, research that leads to profitable new treatments and million-dollar executive salaries .

 3)    Unlike in every other industry—think computers or manufacturing—new advances in technology drive bills up, not down. Brill asks; “What is so different about the medical ecosystem that causes technology advances to drive bills up instead of down?” There are several answers to this question. First of all, new technologies like digital breast imaging equipment, titanium spine implants or robotic surgery are approved by the FDA without comparison studies to see if they offer major advances over older technology. Insurance companies agree to cover use of these new technologies and patients, convinced that something new must be better, are eager customers. Physicians and hospitals invest in these technologies and then have a big incentive to use them and recoup their costs. In little time, they are reaping profits.

Take the case of robotic surgery. According to a 2011 study by researchers at Johns Hopkins University’s School of Medicine, the use of robotics in minimally invasive gynecological, heart and prostate surgeries and other types of common procedures grew by 400 percent despite little evidence of improved outcomes. Many of the hospitals that bought the $1.5-$2 million equipment make unsubstantiated claims on their websites advertising the clinical superiority of robotic surgery, say the authors. Case in point: 33% of hospital websites that make robot claims say that the device yields better cancer outcomes, a claim that the lead Hopkins researcher calls “misleading to a vulnerable cancer population seeking out the best care.” Only 2 percent of those hospitals include a specific comparison between robotic and open or laparoscopic surgery, alternatives that cost thousands of dollars less.

What if the FDA required companies to conduct comparative effectiveness trials to show definitively that their new technology or medical device is actually safer and more effective than currently available—and far cheaper—alternatives? Wouldn’t it make more sense for physicians to receive incentives for steering patients to facilities that charge the lowest price for imaging tests? Shouldn’t they be penalized when they aggressively promote unnecessary tests or expensive procedures at facilities where they have a financial interest? These are all initiatives already being tested in new models like ACOs, bundled payments and in medical homes and under consideration for Medicare.

The idea is not to stifle innovation and shun new technology. There is no doubt that many advances have saved lives and dramatically improved outcomes for patients. But we can’t adopt these new technologies indiscriminately. Equipment manufacturers, drug companies and providers must demonstrate that their innovations have clear clinical benefits over existing tests and treatments—and are not just marketing tools to improve the bottom line of hospitals, doctors and manufacturers.

Toward the end of his article, Brill offers his lengthy prescription for “fixing” healthcare and ends up singing the praises of the much-maligned Medicare system (among other big-think solutions) while decrying the culture of high prices and profits that enrich “our labs, drug companies, medical device makers, hospital administrators and purveyors of CT scans, MRIs, canes and wheelchairs.”

When it comes to the difficulty in confronting what is by all accounts, an enormous and highly entrenched special interest group that wields power at every level of government, Brill is spot-on. Using figures from the Center for Responsive Politics, Brill writes, “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.”

And what about the Affordable Care Act? The law succeeds in extending comprehensive health coverage to millions of Americans who had none or far too little. It prohibits insurers from excluded people with pre-existing conditions, restricts co-pays for preventive care and bans annual or lifetime payout caps. But Brill’s take is that the “core problem” in healthcare is “lopsided pricing and outsize profits in a market that doesn’t work.” He concludes that because “there is little in Obamacare that addresses that core issue or jeopardizes the paydays of those thriving in that marketplace,” the legislation will do little to bend the cost curve.

My take is that Brill, like many others who are skeptical of the ACA’s ability to impact healthcare costs, is looking at the issue in a bit of a vacuum. The law itself does not directly address outrageous prices that have bankrupted and otherwise burdened many Americans. In fact, not allowing Medicare to negotiate for drug discounts or conduct competitive bidding for durable medical equipment are particularly galling omissions in the law. The ACA does not address the lobbying power of the healthcare industry and self-interested providers and it doesn’t address outsize profits in supposedly non-profit hospitals.

But really, there is a lot more to Obamacare than just expanding insurance coverage. Embedded in that bill are initiatives that promote fundamental shifts away from fee-for-service care, crackdowns on abuse and waste (including overuse of MRIs and other imaging services), and a movement toward patient-centered, coordinated care and evidence-based medicine that will eventually impact prices. The movement toward greater pricing transparency is also an important piece—for example, as part of its health care law, Massachusetts is requiring insurers to maintain toll-free numbers and consumer websites that list actual prices of provider services for all plans. This kind of transparency encourages comparison-shopping and, in theory, creates incentives for competitive pricing.

Bending the healthcare cost curve is a momentous, sometimes Sisyphean task that remains a work in process. Raising consumer awareness of—and provoking outrage over—the high prices of goods and services is an important piece in advancing reform.

 

 

 

 

 

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10 Comments
  1. The ACA tended to avoid any direct confrontation with hospitals over price gouging.

    The ACA could have expanded the California, Illinois, CT and Mn laws that already exist — like AB 774 in CA, which essentially bars a hospital from charging an uninsured patient more than Medicare.

    The ACA could have forced hospitals to accept a patient’s insurance and do no balance billing. If the insurance had a $75,000 limit or $2,000 a day, then that would be all a hospital could bill for.

    Instead the ACA will require insurers to have virtually no annual limits. Premiums will go up because no one in Washington had the courage to confront hospitals.

    The excuse probably is that the support of hospitals was needed to move forward the ACA.
    Plus, the victims of hospital price gouging are not a voting bloc, and they certainly are not campaign contributors.

    Bob Hertz, The Health Care Crusade

  2. Tom permalink

    I wonder how much it would help if hospital & physician accrediting organizations required as pattern of renewing an accreditation that the chargemaster list has to be updated, audited & benchmarked against industry & local averages? Pretty weedsy / wonky idea but it would have teeth – accreditation is bread & butter to them.

  3. Bob, I think you are right about compromises made in the ACA to gain support of various healthcare constituencies. Certainly not allowing Medicare to negotiate for lower drug prices was a way to gain support from the pharmaceutical industry. The state laws you cite are good ones and make sense for helping ease medical bankruptcy. With insurance expansion as part of the ACA, hopefully this price gouging of the uninsured will be a thing of the past.

    Tom, your idea is a good one and I’m surprised this hasn’t been suggested long before.

  4. Charlie Miles permalink

    Excellent article Naomi

  5. Naomi, the ACA will not address the price gouging of persons who are insured but with a high deductible. Some hospitals will still try to charge $1000 for a diagnostic test that costs $140 in a private lab.

    And they will get away with it until we pass a law that no one owes a nickel on a health care bill
    unless the price has been disclosed to them before the care begins. (for non-emergency care)

    For emergency care where there is no time for choice, the bill would be limited to Medicare rates.

    This has to be an ironclad federal law. Hospitals must be rebuffed in every court in the land.

  6. The Wall Street Journal commented on Brill’s article with the basic view “so what’s new?”. If you wonder why things don’t change look no further — the business community is impressed, not depressed by the findings. In fact, we should worry more industries will learn from medicine how to increase profits. Just imagine, you have a water leak in your house, you call the plumbing conglomerate, they don’t know how much it will cost, they run a scope down your toilet, replace your flapper valve, and charge you $8,000. The water continues to leak, so you just live with it.

    • Panacea permalink

      Of course. The financial sector exists to make money for shareholders, not look after the public interest.

      There were very good reasons why Adam Smith excluded health care from capitalism in Wealth of Nations.

      • Bob Hertz permalink

        Several of the worst offenders in Brill’s article were Catholic hospitals, who certainly have no corporate shareholders.

        Capitalism itself is not the enemy of health care. Walmart charges $4 a month for generic drugs.
        Vision Pro delivers eyeglasses for $200 that last over a decade.

        What is wrong with American hospitals is instead our assumption that they should be paid for by patients. This would be like requiring fire departments to collect at least $10,000 from every family that has a fire.

        Hospitals should be funded primarily as community institutions, not like luxury hotels. That is easier said than done, but it must be how we escape from the nightmare of user fees.

        Bob Hertz, The Health Care Crusade

  7. Admiring the persistence you put into your site and detailed information you present. It’s nice to come across a blog every once in a while that isn’t the same unwanted rehashed material. Excellent read! I’ve saved your site and I’m including your RSS feeds to my Google account.

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