Hospitals behaving Badly

Dr. Weeks’ Comment:   Hospitals behaving badly is not the problem, it is the symptom of the problem. The problem is a health care system where the customer has little  ability to hold the provider (doctor/hospital) accountable.  Doctors can murder with impunity behind the cloak of “standard of care” and hospitals can charge exorbitant fees which patients never examine in a itemized bill because “insurance will pay.”  This argument was elucidated in a prior post and the issue was first publicized on the cover of TIME earlier this year.
“…These are the $77 gauze pads, the $1,000 toothbrushes, the components that add up to the $200,000 joint replacement…”

Fixes  113 Comments

The Cure for the $1,000 Toothbrush



Here is a basic fact of health care in the United States: Doctors and hospitals know what they charge, but patients don’t know what they pay. As in any market, when one side has no information, that side loses: price secrecy is a major reason medical bills are so high. In my previous column, I wrote about the effect of this lack of transparency on the bills patients pay out of pocket.

We know about these bills, which hit us directly. What most people don’t know, because the costs are hidden, is that the same imbalance exists with insurance. The employers and employees who buy health coverage have delegated vigilance over health care costs to insurers ”” but insurers, for the most part, have gone AWOL.

Consider the story of Texas811, a company with about 200 employees based in Dallas. (They mark utility lines so people don’t damage them when they dig.)

In January 2010, the company was enrolled in a Blue Cross P.P.O., or preferred provider organization. That month, Blue Cross told Texas811 that it was planning to raise the company’s premiums by 75 percent. That was extreme. But health insurance premiums are rising three times as fast as wages, doubling since 2002. “We freaked out,” said Lee Marrs, the company’s president. They negotiated. Blue Cross agreed to lower the increase to 68 percent. “At that point it was go out of business, drop health coverage, or try something new,” Marrs said.

They tried something new.

What Texas811 did first was drop Blue Cross and its P.P.O. and become self-insured. That means that the company itself paid claims up to a certain amount, and bought an insurance policy that kicked in after that. This isn’t revolutionary – self-insurance is how it’s done for about a third of the insured work force.  After one unsatisfactory year, Texas811 signed up with GPA, a Dallas-based company that administers claims for about 230 workplaces like municipalities, school districts, retail businesses.

The difference was astounding.

Under Blue Cross’s P.P.O., the company had been paying $10,000 per visit for dialysis patients. Now it was paying $975. Other costs dropped commensurately. After the first year, the company lowered premiums by 3 percent and increased coverage, providing free vision, dental and life insurance to all its employees, including part-timers. “We saved so much money we were able to hire a third-party contractor to establish a medical clinic in our office,” said Marrs. “We provide a free primary care physician in our office to all employees and their dependents.”

What Texas811 did was become part of a nascent movement away from the P.P.O. model, one that negotiates prices up from the hospital’s cost or the lower Medicare price rather than down from the hospital’s higher one.

Eighty percent of America’s insured  ”” some 200 million people  ”” are insured through P.P.O.’s. A P.PO. assembles a network of health facilities and providers who agree to deliver care at a negotiated discount rate. P.P.O.’s were not originally a force for price secrecy, but their role changed as hospital chains began to grow. Between 2007 and 2012, there were 551 acquisitions of hospitals. Chains have merged, and hospitals buy up their competitors and physician groups.

Because they are so large, hospitals now control negotiations with P.P.O.’s. Patients want their own doctors in the network  ”” which means that hospital chains are must-haves for a P.P.O. A study of the health care market in 12 cities found that dominant hospital chains could get high prices, secrecy clauses and other contract advantages. Insurers don’t argue  ”” they need the P.P.O., and they can simply pass the higher costs along to payers in the form of premium hikes. With some insurance contracts, the more the hospital is paid, the more the insurer makes.

“Even a giant company like General Electric in any given market doesn’t have that market power,” said Kathy Hempstead, senior program officer with the Robert Wood Johnson Foundation. “Provider consolidation is very, very hard to deal with. It gives providers the opportunity to play hardball with purchasers and their agents.”

P.P.O.’s, of course, negotiate discounts  ”” the statement you get from your insurer always highlights how much was saved. Some of those discounts sound impressive: 50 percent off, sometimes more. “But nobody ever asks, ”˜discount off what?’” said Mike Dendy, the chief executive of Advanced Medical Pricing Solutions, or AMPS, an Atlanta company that reviews and renegotiates hospital bills.

P.P.O.’s negotiate their discount off the hospital’s chargemaster price. The chargemaster is like a supersonic rack rate. It’s a fantasy figure, set by the hospital alone. These are the $77 gauze pads, the $1,000 toothbrushes, the components that add up to the $200,000 joint replacement.

Compare the chargemaster price with what hospitals pay Medicare  ”” a figure that is around the break-even point. ( A recent study found that a third of community hospitals make a profit at Medicare rates.) Chargemaster prices are almost always at least 300 percent what Medicare pays a hospital, and some are 1,000 percent or 2,000 percent. Suddenly that 50 percent discount doesn’t seem like such a bargain. Fifty percent off a $1,000 toothbrush is a $500 toothbrush.

The lack of transparency with P.P.O.’s continues when the bill comes in. In general, insurance companies don’t ask for the details. They don’t challenge the prices. They just pay. Most corporations would never dream of paying invoices blindly. Yet they never look at the bills that make up their second largest cost category, after labor.

Hospital charges are by law supposed to be “reasonable and customary,” but some P.P.O. contracts have clauses that prohibit arguments about the price. “If the administrator decides to review a bill and finds a double charge for a service that is an error then they can correct that mistake,” Dendy said. (His company is hired by insurers to review some especially large PPO bills.) “But they can’t argue about what was charged for the service, regardless of how ridiculous the charge might be. Of course, they typically don’t look in the first place. Ninety-nine percent of hospital bills are paid without what any rational individual would consider reasonable documentation of the hospital’s charges.”

Hospital executives say the ban on challenging prices is justified. Joe Fifer, the chief executive of the Healthcare Financial Management Association, compared scrutinizing line items to looking at the price of a steering wheel of a car. “It’s the overall price of the procedure that’s important,” he said. “Line-item level review for ”˜reasonable and customary’ forgets the forest for the trees.”

Auditing bills isn’t difficult. Medicare does it. (“Funny that the federal government got this right before private industry,” said Dendy.) It began to do automated audits in three states in 2005, and now audits are nationwide. It has recovered hundreds of millions of dollars by catching practices like double billing. And the fear of audits has no doubt reduced Medicare fraud in general.

Seven years ago, GPA, the company hired by Texas811, began offering clients the option of getting out of P.P.O.’s, working instead with ELAP Services, a Philadelphia-area company that, like AMPS, uses a very different method of evaluating the reimbursement for hospital bills. About 100 clients now have made the shift, said Kathy Enochs, GPA’s chief operating officer. ELAP advises plans to pay a hospital its cost, plus a profit. ELAP, like AMPS, also employs doctors who do a line-by-line audit of every single bill their clients receive.

Steve Kelly, ELAP’s president, said that this strategy was rarely used by the mainstream health insurance market. Enochs said that clients usually saw a 15 to 20 percent reduction in medical spending in their first year after switching from a P.P.O.  ”” if they have a lot of hospital costs, the reduction can be much larger. After that, costs are close to flat.

Why don’t more employers choose this strategy? The most important reason is that a lack of transparency keeps businesses in the dark. Employers don’t realize that their insurance company isn’t doing audits. They know, of course, that prices are high, but they don’t realize that there’s no good reason for it. So they don’t look for other options.

There are other hurdles. Going cost-plus takes guts. Some hospitals won’t accept patients at these rates. It doesn’t happen very often  ”” Marrs said it’s happened once to a Texas811 patient, who then went to a different hospital. But employees don’t like uncertainty.

The other retaliation that patients can face is the dreaded balance bill  ”” a bill from the hospital for what the insurance company wouldn’t pay. Dendy calls this extortion: “if you don’t pay what we want, fair or not, we’ll harass the member.”

Enochs said that about 15 percent of patients get balance bills. But that doesn’t mean they have to pay them  ”” lawyers for companies like AMPS and ELAP fight the bills. Hospitals depend on the fact that very few people request or challenge bills. Once they are challenged, the hospitals normally lose, since it’s hard to argue that the charges are reasonable. Kelly said that ELAP wins “98, 99 percent of the time.” Sometimes the health plan will negotiate and pay part of a balance bill, Enochs said, but she said that so far no patient with GPA has ever had to pay.

Some employers believe they can’t persuade their work force to accept the uncertainties of a cost-plus plan. But rising health care costs are changing the equation, especially since workers are now bearing much of the costs themselves. A little uncertainty might now seem preferable to large premium increases.

Another way transparency cuts cost is through reference pricing. CalPERS, the California Public Employees’ Retirement System  ”” one of the nation’s largest buyers of health care ””  is a pioneer. It found that California hospitals charged between $15,000 and $110,000 for a hip or knee replacement  ”” the usual ridiculous spread of costs. But 46 hospitals, including some of California’s most renowned, agreed to do these operations for $30,000. CalPERS told members it would reimburse them only up to that amount. They could go anywhere ”” but they’d have to pay the difference out of pocket.

This had two effects. One was that patients began shopping around. But far more important, 40 other hospitals lowered their price. A Berkeley study found that over all, CalPERS’ spending on joint replacement dropped by 19 percent with no reduction in quality. It also found that because some of the 40 competitor hospitals had charged very high prices, the drop down to $30,000 at those hospitals was responsible for 85 percent of those savings. The government’s recent public release of hospital charges is allowing WellPoint, which was CalPERS’ insurer, to expand reference pricing to other procedures and states.

study (registration required) by Truven Health Analytics looked at another impact of more widespread price transparency. Truven looked at 300 procedures that are shoppable  ”” patients plan for them and schedule them in advance. If purchasers got care at facilities charging the median price in their local market (not the lowest price; the median price after trimming the extremes on both sides), the United States would save $36 billion a year. And that does not take into account the downward pressure on prices that transparency would create  ”” the factor that was so important to CalPERS’ savings.

Price secrecy costs corporations a lot of money. Yet one important reason that businesses don’t know what they’re paying is that they’re not looking very hard. “I was at a conference of C.F.O.’s on controlling health care cost,” said Kelly. “Not one C.F.O. at the table could identify what a day in the hospital cost. They couldn’t cost a CAT scan or an M.R.I. They had no idea of the unit cost of health care. They are under the impression that a detailed review of bills is being done, and if they leverage the largest carrier they’re going to get the best rate.

“We encourage employers to use their business instinct. Employers are very good at containing costs. Except in the area of health care, where they abdicate to insurers  ”” we’d say with disastrous results.“










Leave a Comment

Your email address will not be published. Required fields are marked *