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By Tom Cushing

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About this blog: The Raucous Caucus shares the southpaw perspectives of this Boomer on the state of the nation, the world, and, sometimes, other stuff. I enjoy crafting it to keep current, and occasionally to rant on some issue I care about deeply...  (More)

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Power to the Patients?

Uploaded: Aug 26, 2013
Astute price-fixers and monopolists know that the enemy of their larcenous instincts is transparency. If folks know what an item ought to cost, or what its price is down the street, they will usually shop for it.

As reported here in March (Brill's Bitter Pill, RC 3/15), American health care costs have run amok because that market has been virtually opaque to anyone outside the cozy lounge where PPOs and providers do their sensual dance. Wonks could measure and report that health care costs are roughly double the amount here, as compared to elsewhere in the First World -- without discernibly better outcomes, but everyone has seemed much more concerned about "who pays" than "how much." The lounge was smoky, employers (who provide most of the coverage as a benefit) dozed outside and their employees have been basically impotent – with nary a pharmaceutical fix in sight.

I'm happy to convey that several things have begun happening that are starting the clear away the fog.

First, Brill's article did astutely diagnose and publicize the condition: increasingly powerful hospitals charge outrageous "chargemaster" mark-ups to insurers, whose whopping "discounts" from those fictitious, unchallenged retail prices fail to offset the gouge. Employers, remarkably, have gone along, often passing higher premium costs on to their employees, who just grumble. Only the near-poor uninsured/uninsurables actually have to pay chargemaster rates and go bankrupt (and who really cares about them?).

Second, in May the federal Health and Human Services Department published comparative cost data that revealed both what Medicare pays and the astounding chasm between that amount and what the chargemasters bill (generally about three-times more). One example, not an exception, is a joint replacement in Oklahoma for $5,300 -- it costs fully $233,000 in Monterey Park, CA. That's Forty-Four Times as much. (Want more? Howsabout a $170 Tylenol pill? A thousand-dollar toothbrush? The abuses go on and on.)

Third, a few clinics, driven by good old-fashioned ethics or the recognition of a business opportunity to attract patients by undercutting the competition (not that hard, obviously), have actually started posting their prices. They are dramatically lower than the competition's hidden ball, and these centers have begun drawing clientele from far afield. Other patients are using the facility's posted prices and plane ticket costs to leverage better deals where they live.

Fourth, and perhaps the most exciting development to-date, employers are actually stirring out of their torpor. They have awakened to the fact that the true meaning of that salacious chargemaster bump-and-grind is that They are the ones getting, well, screwed. They are seeking alternatives that threaten to break up the wanton amusements of the PPOs and hospitals.

Some employers are ditching the PPO model, self-insuring for routine costs, with coverage for catastrophic bills. They then hire one company to negotiate cost-plus pricing, and another to challenge higher hospital bills. Providers are not staffed-up to handle such informed challenges, and against a legal standard of "reasonable and customary" charges, they have so far generally folded their hands. One company has even established a preventive care clinic on-site with the savings.

Others employers, like CalPERS, have started using "reference pricing" – announcing in advance what they will reimburse to the employee for each particular procedure. The covered worker can go anywhere for the service, but understands that s/he will pay the difference. Thus armed, employees have shopped for plan-able procedures; predictably, providers whose chargemaster prices previously exceeded $100K have agreed to CalPERS' $30,000 reference price for a hip or a knee. (I suspect it also portends a redoubling of chargemaster's worst efforts on unplanned services, like the ER. If that heart attack itself didn't do you in, one glance at the bill will surely finish the job.)

Granted, these are currently exceptional situations – 80% of insured Americans are HMO or PPO members – but it's a start. It's also good, free-market stuff, with the government providing only useful data to facilitate the process. It's good news consumers, especially for folks who were uncovered – and for issues like American competitiveness in world markets (remember those ads about the worker health care fraction of new car prices?).

Every economic market model assumes that there is "perfect information" on the part of buyers – so they can comparison-shop. What America has had of-late is really not a free market, at all, but rather a rigged system of illusory charges that has mightily benefited a few, bothered covered businesses to just-under their action thresholds, and ruined little guys who could be crushed by the power of superior information. Transparency – whatta concept!

(Please note that this health care article has been an ObamaCare-free zone. Can we maintain that record in the Comments? Stay tuned!)

Comments

Posted by Diswont Hertabyt, a resident of Danville,
on Aug 27, 2013 at 8:54 am

Here's another example of pricing abuse from yesterday's NYT: Web Link

If you are happy paying $546 for 6 liters of saltwater, I have an entire Pacific Ocean to sell you. And I'll give you a volume discount -- 50%, even!


Posted by spcwt, a resident of Danville,
on Aug 27, 2013 at 10:37 am

U.S. healthcare is ineffective and expensive largely due to Medicare and Medicaid, not greedy hospitals.

Healthcare providers must charge as they do in order to remain solvent. Medicare and Medicaid pay healthcare providers a fraction of what it costs them to treat patients. This forces healthcare providers to make up the difference, in part, by increasing the prices they charge to privately insured patients.

Thus, hospitals charge you $170 for a Tylenol, because they lose money on 50-70% of the cancer drugs they give to Medicare and Medicaid patients. Web Link They have to recover their costs somehow. This causes the price of healthcare to rise on everyone else who isn't covered by Medicare and Medicaid or other government programs.

This lack of adequate reimbursement also causes healthcare providers to perform more services, often unnecessarily, and to steer patients toward higher-priced, more lightly regulated treatments.

Costs are also passed on to the privately insured in the form of increased insurance premiums.

It's just one more example of the unintended consequences of "do-good" government gone amuck.

Tom loves the narrative of the "little guy" vs. big evil corporations. But that narrative falls flat in this instance, as 82% of U.S. hospitals are either government run or non-profit. Web Link

The price transparency he mentions might be useful in a true free-market healthcare system. But what's happening in our current system is those who are insured do not care about price, as their medical treatment is "covered by insurance" and they therefore have the false perception that "someone else" is paying for it.

If we switched to a system that was truly free-market based, where people shop around for health treatment based upon price, then healthcare providers who accept Medicare and Medicaid patients would soon go bankrupt, as customers would seek treatment from low cost service providers who don't accept unprofitable Medicare and Medicaid patients. Then, Medicare and Medicaid patients would have nowhere to go to seek medical treatment.

The Atlantic had a great article on the subject back in 2009, when Tom and the other Obamabots were caught up in cheerleading to get Obamacare enacted.Web Link

I won't discuss the disasters that await Obamacare, per Tom's request.


Posted by Tom Cushing, a resident of Alamo,
on Aug 27, 2013 at 12:59 pm

S-P: You know, I was working up one of my best McEnroe "You can't be Serious" moments, but then it hit me: you AREN'T being serious. This is one of those instances where you're working on your advocacy chops – seeing if you can comfort the credulous by making statements that appear to mean much more than they actually state. I do not know why you do it, but it happens often enough that I could believe it's a hobby, albeit a kind of perverse entertainment.

Item: "82% of hospitals are either government-run or non-profit." While that bare stat may be true on its face, to most folks 'non-profit' suggests charity. The great majority of those providers are non-profit – but non-profit does Not At All mean "not profitable."

A typical example from the Brill report in Time magazine: "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 2010 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."

As a lawyer – especially as one who (I suspect) deals in matters of taxation – you know this well. Yet you hang that stat out there like it means something. It does not.

Item: hospitals lose money on Medicare. Also untrue. While there can be fun with numbers, Medicare reimbursements are the Only cost-based approach in the market – and it is designed to be Cost-Plus, not a money-losing proposition. Per the NYT, recently, in an article by a Pulitzer winner=no slouch:

"Compare the chargemaster price to what hospital charge Medicare – a figure that is around the break-even point. Chargemaster prices are almost always at least 300% of what Medicare pays, and some are 1,000% or 2,000%. Suddenly that 50% [PPO) discount doesn't seem like such a bargain. 50% off a $1000 toothbrush is a $500 toothbrush."

As to any unreimbursed care the hospitals DO provide, even they (their trade association) say it's well-under 5% -- and they compile That number at Chargemaster rates!

As for me, sure I like little guys and I worry about them, too. But as an old Econ major, an antitrust guy and a former corporate careerist, what I REALLY like is Markets That Work. And conversely, I dislike markets that don't work – which usually means that somebody is making unearned profits – and somebody else is getting screwed. Of course here, you too are getting screwed, but apparently not screwed-enough-to-care.

Lucky you. Maybe you should take up a new hobby.


Posted by spcwt, a resident of Danville,
on Aug 27, 2013 at 2:34 pm

I never said non-profit hospitals weren't profitable. Of course they are, or should be. If they weren't, then they'd go out of business, and fewer of us would have healthcare.

Non-profit hospitals use surplus revenues, of course, for self-preservation and to achieve their goals of providing healthcare. You accuse non-profits of being driven by unethical greed. Hard to do that when they are forbidden from distributing revenue as profit or dividends.

You obviously didn't read the Washington Post and Atlantic Monthly articles I posted, which describe the struggle that doctors face trying to treat Medicare and Medicaid patients due to the fact that the government does not adequately reimburse them for their treatment costs.

Sadly, doctors are forced to regularly turn seniors and the poor away and can't treat them because they will go out of business if they did. It is a huge crisis in U.S. medical care that many people aren't aware of, apparently including you. It's only going to get worse once baby boomers retire.

All of the examples you cite about hospitals charging large mark-ups to the uninsured is a symptom of our excessive healthcare cost problems, not the cause.

As explained in The Atlantic article, the root cause to our healthcare cost crisis is the false perception that consumers have that "someone else" is paying for our healthcare, through insurance, Medicare, or otherwise. We go along with costly procedures and don't shop around because we don't have to pay for it directly. It's covered by insurance or Medicare or what have you. But we do pay, of course, collectively.

I agree with you that the lack of price transparency leads to perverse results. I am also eager to see a market-based solution. I don't know that price transparency will improve things, however, so long as insurance or Medicare, etc. is picking up the tab.


Posted by Mike, a resident of Alamo,
on Aug 27, 2013 at 5:05 pm

Spcwt, i read your your web link to the Washington Post regarding hospitals losing money on Medicare reimbursement for cancer drugs is not about that per se, it's about the effect of the sequester on how Medicare reimburses for cancer drug treatments specifically. That's not the same thing as the thrust of your post, which is that the mere existence of Medicare and Medicaid is largely the cause of high medical costs.

The fact that most hospitals are non-profit corporations means that they are still corporations. I agree that being non-profit may limit some of the short term "bottom-line" thinking that can drive a shareholder owned corporation, but non-profits still have low transparency and the incentive keep costs a litter higher to fund things like salaries, especially upper end ones.

I'm still thinking about what the Atlantic article said.


Posted by spcwt, a resident of Danville,
on Aug 28, 2013 at 3:37 pm

Mike,

According to the American Hospital Association, 60% of hospitals reported that Medicare reimbursements do not cover their out of pocket costs of treating Medicare patients. Web Link

Obviously, that's only one of many factors contributing to runaway medical costs, of course.


Posted by Tom Cushing, a resident of Alamo,
on Aug 30, 2013 at 10:44 am

The dominance of 'non-profit' facilities has another perverse effect in this price-sheltered market. Because they are restricted -- not in Making profits but in their Distribution -- these hospitals have a peculiar incentive to use that money to buy new stuff: like a new wing on the hospital and the latest in medical machinery (which may be/are often only marginally better tools, but whose use can be charged-out at Much Higher Rates).

Both those 'investments' give them incentives to feed the beast by chargemastering more; it also means that EVerybody has to have these new, new machines, whose consequent under-utilization further drives up prices that are spread over too-few procedures. It's a Little Shop of Horrors. Web Link Feed me, Seymour!

My friend and fellow blogger on the SRX site, Roz Rogoff, forwarded this link to an article in the Wall Street Journal Web Link that further demonstrates the operation of the free market, when it gets a chance. A $20,000 out-of-pocket expense for an outpatient hernia fix quickly morph'd into a $3,000 total patient cost for the precise same procedure. More than 5-times-less.

That mammoth extra cost is hidden from most insured consumers who allow the PPOs and providers to do their money shuffle. But it means that Everybody pays much more into the system – in employer contracts with the insurers, in the growing employee share of those costs, in the rising % of patient responsibility after insurance, and of course, in the personally ruinous bills borne by the uninsured (or earlier more preventive treatment not chosen because of the excess cost).

On the issue of Medicare reimbursements: they exceed some hospitals costs, and undercut others – but not by much (especially compared to the 3x-10x markups sought by the chargemasters -- do the math). They are not a massive problem that accounts for the tribulations of American healthcare. That some providers are more efficient than others should surprise no one, especially in a market grown fat on easy money. I am happy to believe that there is a substantial amount of overhead in current rates that would be foregone in a truly competitive market. It's been true in every other market that's had to become more efficient to survive.

We need to let the market work, and bring this country's bloated (2x) costs in line with the rest of the developed world. The evidence is everywhere.


Posted by Ryan James, a resident of Walnut Creek,
on Aug 30, 2013 at 11:12 am

Yawn--Obama's death panels---aka refusal to treat---will knock off seniors and other undesirables quick enough. Hitler-a rabid environmentalist too--aimed at the special need group first---yawn--history does repeat itself.


Posted by San Ramon Observer, a resident of San Ramon,
on Sep 1, 2013 at 5:25 pm

San Ramon Observer is a registered user.

Medicare patients can buy what is called Medigap Insurance to cover the difference between what Doctors bill and Medicare pays. I pay $88/mo for a Humana HMO that includes Dental and Optical plans too. That's in addition to the $105 taken out of my Social Security each month for Medicare.

When my car was T-boned at the intersection of Alcosta and Bollinger Canyon in January, my three day hospital bill came to $24,902.90 I don't know how much of that was covered by Medicare or paid into by Medicare, but Humana got a whopping 66.66% off, for a final charge of $8099.76. My out of pocket bill was $200. It's a lot easier for me to pay $200 than almost $25K. I appreciate having the opportunity to buy low-cost medical insurance to supplement my Medicare.

Now my lawyer is trying to recover my expenses and those of the insurance company from the insurance company of the kid who ran the red light and rammed by car. The ones getting all the money are the lawyers, not the Doctors or hospitals! Sorry Tom, but it's true.

Roz Rogoff


Posted by Tom Cushing, a resident of Alamo,
on Sep 1, 2013 at 6:41 pm

Hiya Roz:

To start-out with, let me share a favorite cartoon, a client's-eye commentary on the legal profession that I think you'll enjoy: Web Link

Now that said, the impact of legal-related expenses on the overall cost of health care has been the subject of many assumptions and general consensus that 'it's the lawyers' fault' for many years. It drives the so-called Tort Reform agenda.

Trouble is, like much received wisdom that Everybody Knows is True, it ain't necessarily so. No less a right-wing stalwart than the Wall Street Journal ran a study to quantify the effects of damages awards (and, on information, the costs of 'defensive medicine') -- and they came up with the startling figure of:

Less Than 5%.

From their editorial page: "several economic studies (including work by us) have found that states that have enacted malpractice reforms experienced a mere 2%-5% reduction in health-care spending compared to states that have not. This has led to a loose consensus among most economists and policy makers that defensive medicine is not an important contributor to U.S. health-care spending—and therefore that malpractice reform is not of much significance for containing costs."

Now, to their 'credit,' they went on to say that, despite the dearth of evidence, the lawyers are Still to blame -- because, well, EVerybody knows that. So, if you're looking for a whipping boy, it's the lawyers, but if you're looking to understand why American health costs are out-of-sight, look at how that market works, and for whom. (It's not the lawyers).


Posted by San Ramon Observer, a resident of San Ramon,
on Sep 3, 2013 at 3:51 pm

San Ramon Observer is a registered user.

Tom,

I can't read the writing in the cartoon. Is that Latin? I took Latin in High Schools and got a D. That's the lowest grade I've ever received. I could barely make my way through "Winnie illa Pooh."

Roz


Posted by Tom Cushing, a resident of Alamo,
on Sep 3, 2013 at 4:27 pm

Hiya Roz: I don't read Latin much, either. Point of the cartoon is that the plaintiff and defendant are on opposite ends of the cow, pulling -- while esteemed counsel is under the cow, milking it for all it's worth.

I included the cartoon as evidence that I'm sympathetic to the concern for lawyers 'churning the bill.' Pia pium!


Posted by Huh?, a resident of Danville,
on Sep 6, 2013 at 11:17 am

People blame the lawyers but as Roz' example shows it's basically a fight over who will be left holding the bill when the music stops - her insurance company or the driver's insurance company. And since medical care is so expensive it's worth the companies' investment to try to stick someone else with the bill. What's driving that isn't "the lawyers" - they're just working for the corporations, doing as their told.

If we had single payer medical care there wouldn't be anything to sue over, and all those lawyers would have to find something else to do. Food for thought.


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