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.