Medical Robbery

A sad story came on the radio last night about a couple who fell on hard times during the Recession. With the family income down, they decided to drop their health insurance. With precision bad timing, the wife started developing debilitating headaches. Persisting for some time, her husband convinced her to get them checked out in order to rule out anything really serious. So she underwent a series of diagnostic tests at a hospital. They ruled out anything other than migraines and was billed some $20,000 for services rendered. That's $20,000 they didn't have.

The crux of the story is that creditors can now garnish wages for all sorts of reasons. What used to be a means of collection restricted to child support, fines, and the like, can now be employed for consumer debt. So the collectors for the hospital began to garnish the lady's wages. For someone already having trouble make ends meet, this was a rude surprise. Presumably at the rate of a few hundred dollars a month, these garnishments will continue for years: America's broken healthcare market is breaking individuals.

The story made me wonder if collectors are preparing garnishment of my own wages for my son's emergency room bills. They have been eerily quiet, with no response to my protest over the level of charges. Maybe their greetings are going to show up in my paycheck.

Medical Robbery

Previous posts have described the pernicious effects of having no transparency in medical pricing: no one knows what a procedure or service is going to cost. The patient is at the mercy of the billing clerk. Comparison shopping becomes impossible. Price gouging can hide behind a curtain.

A few states have made faint efforts to correct this situation. Some have passed laws requiring the creation of a public website where consumers can consult the prices for different services. However, follow-up and implementation has been pathetic. An organization called the Healthcare Incentives Improvement Institute has done a methodical comparison of efforts at transparency by different states. Following an explicit methodology, it gives each state a grade on transparency. The results in this year's report gives an A to no state, a B to only Maine and Massachusetts, a C to Colorado, Vermont, and Virginia, and an F to every other state! New Hampshire had the distinction of going from an A last year to an F this year because the website it developed to report medical pricing mysteriously ceased to function.

True healthcare reform will have occurred in this country when no state gets anything below a C. Until that happens all we can do is funnel more money from other purposes toward healthcare and fight over who will get how much of that money. But those other purposes, the other items in both personal and government budgets, cannot keep feeding the medical beast forever. The data in the last posting should convince us of that. The data in this posting should convince us our representatives are not taking the problem seriously (yet).

Medical Robbery


It's been quite a while since I've posted anything here, travel and other writing keeping me busy elsewhere. Also, there is nothing to report in my battle over my son's emergency room billing. The providers have been eerily quiet; I keep waiting for the other shoe to drop, perhaps with a mean-sounding demand from a collection agency. Or maybe they're already busy trying to notch down my credit score. For indeed protesting against the cost of a healthcare service can end up in higher costs in other areas such as getting a loan.

Today I wanted to touch on the future, distant to me but perhaps not to younger readers. The Congressional Budget Office (CBO) is a non-partisan research arm of Congress whose job is, among other things, to provide forecasts of government spending assuming no changes in current law. A study released by them earlier this year forecast the future role of healthcare in total government spending. As a basis, they report that for the period 1974-2013 healthcare was on average about 25% of all other government spending besides Social Security. However, under current law by 2038 healthcare will be 113% of all other government spending beyond Social Security. That is, healthcare will cost more than national defense, infrastructure, justice, diplomacy, and every other activity of government combined! This vast and impossible increase is due to a combination of factors such as the aging of the population, but fully 40% of the total increase can be blamed on the rising costs for services.

So rising medical costs not only threaten our individual budgets but that of the nation as a whole.  We can venture to say that these rising costs can come to threat even our own national security. Therefore we know that healthcare is never going to get to a point that it will swallow more spending that the rest of government combined. The only question is whether the current generation with the reins of power will do something about the problem. If it doesn't the generation that follows will have no choice but to address it, albeit at a much larger cost to the nation. The first option is one of the motivators for writing this blog.

Medical Robbery

So what about Obamacare?

Unfortunately this has become a litmus test issue from which people derive their political identification and affiliation. Wild claims and counterclaims have gone on now for years along with judicial procedures going all the way to the Supreme Court. And more cases are on their way.

Among those claims and counterclaims there has been very little said about the main topic of this blog, the cost of American healthcare. Yet one of the most potent criticisms that can be laid against Obamacare is precisely that it does very little about medical costs. Instead it has focused on widening the access to health services to the previously uninsured which numbered in the tens of millions of people. So it is really health insurance reform rather than a bona fide reform of the healthcare system. The same market-destroying shenanigans of hospitals and pharmaceuticals can continue under Obamacare as they did before. 

Obamacare increases access to healthcare services in two major ways: by not letting insurance companies deny coverage because of current or prior illness and by offering subsidies to lower wage earners in order to make insurance more affordable.  But by not seriously addressing the pricing problem, it is just changing the pockets hospitals and pharmaceuticals get to pick. Instead of patients' pockets, they get their collective claws in those of the general taxpayer and of healthy individuals. Healthy, usually younger individuals will be forced to pay premiums to cover the scandalous prices the sick incur and the taxpayer will cover the scandalous prices the poor under Medicaid run up. But in the end the system remains broken and unsustainable, for the reasons we have stated in prior posts.

Having said that, Obamacare does deal with pricing in three small ways. One, it forces hospitals that receive federal funds to make the charge master public. If anything this provision will force hospitals to explain their fees to the media and the public. Of course, they will plead indigent care, PPO discounts, and a variety of other excuses that can be dressed up real nicely. Two, hospitals that call themselves "non-profit" and are thus free of federal taxation, will not be able to bill charge master rates to private patients. They will have to offer them the same "discount" they offer insurance companies. Unfortunately--and for unknown reasons--four years after passage of the law, regulations for implementing these two provisions have not yet been issued.  

The government is also moving toward a "bundled payment" system for Medicare patients. Since Medicare pays rates much lower than what hospitals charge everybody else, the hospitals get back by piling on the services they provide, often to the dying. A bundled payment is one sum for a given procedure, say a knee replacement. If the doctors and hospitals do everything right and efficiently, the payment can be generous. But if things don't go right, say a readmission becomes necessary, the hospital gets to charge no more, unlike at present. This may lead to better and lower cost medicine, if it ever becomes general practice. As stated in a prior post, some surgical centers are already using a "bundled" or an "all inclusive" payment.

The key question to both supporters and opponents of Obamacare is, how do you propose to keep medical costs down? Without a good answer to that question, the controversy becomes mere political theater.

Medical Robbery

So, like hospitals and prescription drugs, are American doctors overpriced as well? The answer seems to be yes and no.

There are indications that the number of doctors are kept artificially low so as to keep competition at bay. This is clear in medical schools who don't accept many an otherwise qualified student, not even counting qualified foreign students. The OECD statistics show that whereas there are 3.2 doctors per 1,000 people on average in rich countries, in the United States there are only 2.5. As we've said before, we'd need to have some 230,000 more doctors in the country just to come up with that rich country average. One would think that with that many more doctors, their fees would go down.

But things are not so simple. Doctor's pay varies tremendously by type of medicine practiced and even within the same type of practice. Uwe Reinhardt, a health economist at Princeton, reports that whereas the median income for a family doctor is $219,000, a neurosurgeon's median income is $656,000--almost three times as much. But the range for a family doctor is between $175,000 and $317,000 and for a neurosurgeon from $492,000 to over $1,000,000. So it is possible for a doctor within a given specialty to make twice as much as another.

You might say, these are all pretty high salaries compared to what regular people make. But folks who qualify for medical school don't belong in the average labor pool either. To be fair, they need to be compared to other high earners. In this sense American doctors don't seem to be overpaid in relation to doctors in other countries. In a study by David Cutler, another health economist cited in Forbes, looked at doctor's pay in relation to other high earners. General practitioners earned 92% of wages by other American high earners while specialists earned 137%. But specialists earn higher wages in all countries, not just the US. Looking at a group of 13 rich countries Cutler calculated that American specialists earned 94% of the average of specialists in the country group in relation to high earners in each country. General practitioners earned 98%. So by this measure, American doctors are paid just about average of what they should be earning.

I can cite other data, but the general gist is that doctors' wages are higher than what would prevail in a free market where every qualified individual could get a medical degree. But doctors' wages aren't patently out of line like hospital and prescription costs seem to be by any reasonable measure.

Maybe I'm now brave enough and start tackling Obamacare. Coming soon.

Medical Robbery

Well, the bill from the hospital finally showed up. So off goes a letter to them:

The bill in reference pertains to services provided to my son for dehydration on April 10. The entire bill amounts to $3,051 but excludes physician’s and pathologist’s services which were billed separately.

Considering the simple services provided, this billing is unreasonable and even scandalous! How can administering two bags of saline solution cost over $3,000? On what basis are your billed charges determined? I have priced the total bill to Medicare, and that sum is only $371.77 plus a co-pay of $74.35 for a total of $446.12. How do you justify charging me 684% of the Medicare rate?

I am prepared to pay for the services my son received, but I also expect to be billed a reasonable and fair amount. I don’t think six to seven times what a Medicare patient would pay is either reasonable or fair, nor would most citizens of this country. I respectfully request that you reconsider this amount.

Our previous discussions have brought up costs for hospitals and prescription drugs. But are doctors in the United States also overpaid? That's the discussion for the next installment.

Medical Robbery

Well, my son's billing issues started arriving. The way doctors and hospitals frequently work is that they hire billing agencies to take care of all invoicing issues. They also hire collection agencies to collect on unpaid invoices. Their large profit margins allow for all this downstream outsourcing.

In June I received a bill from Alcoa Billing Center in Tennessee for my son's ER doctor's services in Georgia. Despite the foreknown uselessness of doing so, I wrote a letter to the billing center:

  

I am in receipt of your invoice_____ for $992.00. This was for an emergency room consultation with Dr. ____ on April 10 when my son was dehydrated. He reports that he saw the doctor for maybe a minute.

I find this billing egregious, especially in light of the fact that the Medicare reimbursement rate for the diagnosis code (99285) is in the neighborhood of $175. On what basis or justification do I have to pay over four times as much as a Medicare patient receiving the very same services from Dr. _____? This is patently unfair. I know of no other instance where a professional would charge one customer at a rate four times the other.

I know Alcoa Billing Center is precisely that, just a billing service, but I request that this matter be referred back to Dr. _____ for review. I request that either the billed amount be readjusted or that an explanation be offered as to why it is fair and appropriate in light of the Medicare reimbursement rate.

Their response, as expected, was to simply send another bill for $992. I will send the same letter again, this time in a certified envelope to see if it gets someone's attention. Eventually I plan to offer them 150% of Medicare which I've had an outside party estimate to be $249.03.

Meantime I've gotten no bills from the hospital. I wondered why it was taking so long until my son got a call from a collection agency. Apparently invoices had already been sent but to another address, perhaps his school address. The school he's already graduated from. 

Medical Robbery

A clear example of the brokenness of the medical system is the case of a hip replacement for an employee where I work. The total bill after the "discount" amounted to some $80,000. The same surgery by the Surgery Center of Oklahoma would have cost $19,400, all-inclusive. How can the same procedure cost four times in one place over the other? How can they get away with it? If the Surgery Center of Oklahoma is making a satisfactory profit, how much profit is the local hospital making (albeit it is officially "non-profit")? Reasons (as stated before):

1. Lack of competition. Where I work there is only one hospital. On the other hand, Oklahoma is one of the few places where no "certificate of need" needs to be approved before a medical unit can be constructed.

2. Lack of transparency. No one knew how much the local hospital would charge. The Surgery Center of Oklahoma publishes their price list on their website.

3. Compliant insurance companies. Companies make a profit as a percent of premium. Higher payouts mean higher premiums. Although they may nickel and dime a certain procedure in order to increase the profit percentage, their total profit will largely depend on the total premium collected which ultimately depends on what medical providers charge. If providers suddenly slashed their charges, insurance profitability would decrease. My eyes opened wide when I heard a former insurance company actuary explain this to me. Health insurance companies like healthy people in the same way funeral homes like people who never die.

Some hospitals often explain that their charges are high because of all the indigent care they provide. This is often a ruse, but not totally. A topic for a future installment.

Medical Robbery

Scandalous pricing in American healthcare doesn't stop with hospital services. The practices of American pharmaceutical companies have become newsworthy. For example, there have been frequent news items about Americans making long treks to Canada just to get prescriptions filled. Then American politicians--at whose behest we can only guess--take up time in Congress to warn about the questionable safety of imported drugs. Even from Canada. Even from the same American manufacturers! That America is out of kilter in comparison with the rest of the world shows up both in the big picture and small picture data. The OECD reports that American per capita expenditures in 2011 for prescription medicines was $995. The rich country average is $497.  Either we're getting sicker or we're getting prescribed more often or we're paying double for the prescriptions. I would lean toward the latter.

Looking at the small picture, two drugs figure among the top costs in the health plan I manage: Crestor and Nexium. They both happen to be heavily advertised in television and other media. Our monthly cost for Crestor is $141. For Nexium it is $194. I had a friend in Spain check the local prices for these very same drugs: $34 for Crestor and $32 for Nexium! How can that be?

Pharmaceutical companies have to negotiate prices with governments that run national health plans. One would think that AstraZeneca (maker of Crestor) and Pfizer (maker of Nexium) would be still be making a profit with the prices they have negotiated in Spain. But since they don't have to negotiate with the American government (even though it runs a national health plan called Medicare), they can charge as they will--as we can see, several times what they charge in Spain.

Pharmaceutical companies are often heard saying that they have to reap sufficient profit off their few winners in order to pay for research and development in new effective medicines. However, if their average world price is sufficient only by jacking up American prices in relation to everywhere else, they are in effect forcing American patients to subsidize those in other countries. But whether those high prices are indeed needed in order to pay for R&D is questionable. Pfizer spends 13% of its revenues in R&D, but 28% in sales and marketing. Johnson and Johnson, another large American pharmaceutical spends 12% of revenues in R&D but 31% in sales and marketing. Frequently among pharmaceutical companies, sales and marketing expenses are a multiple of research and development costs. Those TV ads don't come cheap.

A lot of that pharmaceutical research is now occurring for the treatment of specific conditions with specialty drugs. Some are already out in the marketplace. One round of a drug called Incivek for the treatment hepatitis C cost our health plan $56,000. The rationale offered for such an egregious price is that it is still cheaper than doing a liver transplant! As more and more of these specialty drugs, health plans are going to have to wrestle with whether they are going to cover them, and if they do, who will be able to afford premiums to pay for them.

Medical Robbery

The medical robbery we have been talking about starts with something called the "charge master." This is the price list that hospitals come up with for every service and procedure that they perform. Each one of these has a code number and a price is attached to that code number. How they come up with those prices--such as $2,000 just for walking into an emergency room as they did my son, only hospitals seem to know. Different hospitals come up with starkly different prices for the same codes, even in the same city. And different patients also get very different prices, especially if they are Medicare patients. What this tells me is that the actual cost of delivering the service has little to do with the charge for the service. Since hospitals do little to explain their prices, my guiding principle is that they will charge whatever they think they can get away with.

The lack of transparency doesn't end here though. Hospitals rarely collect all the fees that appear on the charge master. That's because there are usually "preferred provider networks" or PPO's between the hospital and whoever pays the bill. The rationale is that these networks, because they have many members, can squeeze out discounts from the hospitals. They get volume pricing, so to speak. These PPO's make a fine living two ways. One is that they charge whoever wants to join their network. But most importantly, they get to share in the "savings" they negotiate with the hospital. But what that share is only the hospital and PPO knows.

If we applied medical rules to buying a car, here is how it works. You need basic transportation, so you buy a Chevy. You sign a bunch of paperwork (basically agreeing to be financially responsible for all services rendered) and you get to take it home, but you don't get to find out what the cost is until later. A few weeks following you find out that the dealer charged $100,000 for the car (according to their list price). But because you were smart enough to be in a buyer's club that gets discounts from the dealer, you get to pay "only" $80,000. You don't get to find out the dealer "only" gets $75,000 of that. The difference of $5,000 goes to the PPO who got you that nice "discount." Meantime, the very same day you were at the very same dealership a government office bought the very same type car. But it only had to pay $20,000. Meantime, you can't know that another Chevy dealership down the road had the car for a list price of $60,000.

Clearly, if the car market worked like this, you would say it's broken. But it is precisely how the medical market works, and some folks are doing fabulously well from it. Some even make money from getting "discounts" from fantasy prices that have no basis on costs or the paying ability of the people using the services.

In a future installment we'll get into doctors' fees, prescription drugs, and testing.

Medical Robbery

In a previous post I used life expectancy and infant mortality figures to show that the price gouging is not getting us better healthcare. A survey of eleven advanced countries by the Commonwealth Fund, besides corroborating the high costs of American healthcare in comparison to other rich countries, shows that the level of service in America leaves something to be desired. Among its findings the US ranked:

• second worst in getting a same-day or next-day appointment
• third worst in having to wait six or more days for an appointment
• third worst on hearing back on the same day after calling a doctor
• the worst in making arrangements for after-hours service with a doctor or nurse
• the worst in having to use the emergency room in the past two years
• the worst in being able to email the doctor's practice with questions
• the worst on spending for health insurance administration
• the worst in the number of respondents indicating the system worked well

Perhaps some of this poor service is explained by the fact that in the OECD (the club of advanced countries referred to before) there are on average 3.2 physicians per 1,000 people. In the US there are only 2.5. To hit average we would need over 230,000 more doctors in the country.

Medical Robbery

The rampant price gouging in the medical industry has terrible impacts on the economy as a whole. The OECD, club of mostly rich countries, estimates that the United States dedicates nearly 18% of its economy to healthcare. The average for the OECD as a whole is just a bit above 9%. That is, on average we're spending double on medical services compared to the other rich countries. In money terms this is about $1.3 trillion dollars per year! That's over a trillion dollars that could go to education, roads, investments or other productive uses. But because it's not there for those productive uses, the economy finds it more difficult to grow. Year after year this dead weight on the economy gets heavier and heavier, ironically making it more and more unhealthy.

But are we getting any good results for all that extra money spent on healthcare? Not by two generalized measures of medical well being: life expectancy at birth and infant mortality. For the OECD as a whole life expectancy at birth is 80.1 years. For the US it's only 78.7. Infant mortality for the OECD is 4.1 per 100,000 births. For the US it's 6.1. In the big scheme of things we're simply not getting value for our medical money.

Translated to the individual level, the price gouging results in depressing wages and in mushrooming personal debt. Average premiums for group insurance among US employers is running around $6,000 for single coverage and $16,000 for family coverage, of which the employer pays $5,000 and $12,000 respectively. So an employee with a family costs an employer $1,000 per month even before the employee gets to take the first dollar home! With this burden it is easy to see that an employer may have a hard time giving generous raises and why many opt out of offering health insurance altogether. Seen another way, if we were dedicating the same proportion of the economy to medical costs as the average OECD country (about half of what we are), that employee could be getting an $8,000 raise (half of $16,000). We should take this into account the next time we think "health insurance" is paying our medical bill.

But we know that even when we have health insurance, it doesn't pay for everything. Injury or disease can still cost a family thousands of dollars. As can childbirth. This spot on ABC World News yesterday tells the story of a $50,000 bill for childbirth. So we should perhaps not be surprised that NPR's Science Friday reports that over 60% of personal bankruptcies in this country are precipitated by medical bills. Or that the Kaiser Family Foundation reports that 32% of non-elderly adults are having difficulties in paying medical bills.

I've explained in a previous post that a lack of competition and of transparency make this price gouging possible. Before explaining how all unsustainable this is, I'd like to step back and offer some reasons why such lack of competition and transparency can persist in an American economy that is overall pretty competitive and transparent. That'll be a subject for the next post.

Medical Robbery

You may ask, if your local grocery store can't get away with price gouging, how can your local hospital do so? Economists will tell you that in a private market prices get established by demand and supply. If you don't like the price of eggs at one supermarket, you can go to another and check out the prices there. But if you're sick or injured, you're not going to bargain with a hospital before you're admitted; your bargaining power is zero. So your demand for eggs is totally different from your demand for health services. On the supply side, the hospital also has some great advantages that the grocery store doesn't have, unfair advantages that make the whole market system break down.

If a grocery store is making a killing, somebody is going to get the notion of putting up another store like it not too far away. However in the case of hospitals in most states an entrepreneur needs to get a "certificate of need" if he wants to get a permit for opening a facility not far away from another one already there. The entities that issue these certificates tend to be uncannily aligned with the hospital already present. The result is that potential competition is throttled. We're not likely to see hospitals vying for business across the street from one another like gas stations do.

The other trick that hospitals get away with is a total lack of transparency. There is usually no way of knowing what price they will charge for which service until long after the fact. With a supermarket analogy, it's like going to the meat counter, seeing no prices, grabbing a steak, going through the checkout line without a receipt, and sometime later in the month you get a statement saying the steak cost you $500.

Most any economist will tell you that without transparency and competition markets can't work well. Suppliers can charge as they please, especially for an essential service customers are hard pressed to do without. Moreover, there is no incentive to improve efficiency or quality because the cost of waste can be simply passed on to the customer. And bad outcomes can hide behind a veil of secrecy.

In the case of my son the attending physician, without any apparent shame, charged $1,240 for a few seconds' (not minutes') worth of consultation. Even if she had spent an entire hour to exclusive attention for my son, $1,240 would still be a an hourly fee even the most expert professionals in other fields would love to get away with. But it's common in the opaque, uncompetitive world of medical services.

This broken market for medical services impacts not only individuals, but the nation as a whole. Some sad details will follow in the next installment.

Medical Robbery

This blog is about an "industry" that affects just about all of us. In our modern society almost everyone has been to a doctor or hospital at one time or another. Sometimes the visits are for minor conditions, sometimes for life-threatening ones. But in either case we seldom ask what it's going to cost. And if we did, whoever is providing the service will have no idea. All that billing stuff is done elsewhere by someone else. At the time of the visit all the the office people want to know is if you have "insurance" and if you have a "co-pay," a usually small, fixed amount you pay per visit.

The quality of the medical service you receive may be good, bad or indifferent. The fact that doesn't change is that unless you have Medicare, the bill will be astronomical. And you'll find out about it only long after you've left the medical facility. When you open the envelope, you'll feel like a victim of a medical robbery. You may feel better in that "insurance" will pay all or a major portion of it. But as we shall see in a future post, that really just ain't so.

What prompts me to begin this blog is my son's visit to an emergency room for severe dehydration last April. They gave him two bags of saline solution in an IV, and the bill came out to be over $4,000. As an economist and as someone who manages a company's health plan, I see that this case, although relatively small, is nonetheless a clear example of how broken the American medical system is. It is slowly seeping the life out of the American economy while it continues on a path that is ultimately unsustainable.

In the course of this blog I plan to update on what happens as I refuse to pay the different emergency room bills my son accrued, asking the service providers to give some justification for what is commonly referred to as price gouging. As I do, I also plan to explain how this gouging becomes possible to begin with and what its effects are on individuals and on the economy as a whole. I hope you find the blog interesting and informative.