Healthcare Isn't A Free Market, It's A Giant Economic Scam

from the destroying-us-all dept

Not long ago, someone I know who had no medical insurance, but who had some serious medical issues, ended up in the hospital for a few weeks. Some procedures needed to be done, but nothing that most people would consider too “drastic.” Eventually, the bills showed up, and they were in the range of half a million dollars, for someone who did not have anything close to that. You hear stories about crazy medical bills, but what very few people realize is that the reality of hospital bills can often be orders of magnitude more crazy than what most people expect. Just last week, a friend of mine posted the following image to Facebook, noting that when his normal medical insurance billing statement has room for seven digits (i.e., millions of dollars) something is clearly screwed up.

A few years back, the folks at Planet Money tried to dig in and demystify some of the secrets of medical bills, but that only scratched the surface.

Stephen Brill has a very long, but absolutely gripping, detailed analysis of the insanity of medical billing for Time Magazine. It’s a truly astounding piece, that hopefully will open many people’s eyes. It will take a while, but find some time to read it, just to get a sense of how totally screwed up the entire system is. I’ve been working on some other stories about some really sketchy activity on the pharmaceutical side of things, but this article really shines a light on the disgusting underbelly of the healthcare system. As Brill notes, so much of the debate about healthcare is really focused on “but who will pay for these things.” But what it tends to ignore is why are the prices absolutely insane.

When medical care becomes a matter of life and death, the money demanded by the health care ecosystem reaches a wholly different order of magnitude, churning out reams of bills to people who can’t focus on them, let alone pay them. Soon after he was diagnosed with lung cancer in January 2011, a patient whom I will call Steven D. and his wife Alice knew that they were only buying time. The crushing question was, How much is time really worth? As Alice, who makes about $40,000 a year running a child-care center in her home, explained, “[Steven] kept saying he wanted every last minute he could get, no matter what. But I had to be thinking about the cost and how all this debt would leave me and my daughter.” By the time Steven D. died at his home in Northern California the following November, he had lived for an additional 11 months. And Alice had collected bills totaling $902,452. The family’s first bill — for $348,000 — which arrived when Steven got home from the Seton Medical Center in Daly City, Calif., was full of all the usual chargemaster profit grabs: $18 each for 88 diabetes-test strips that Amazon sells in boxes of 50 for $27.85; $24 each for 19 niacin pills that are sold in drugstores for about a nickel apiece. There were also four boxes of sterile gauze pads for $77 each. None of that was considered part of what was provided in return for Seton’s facility charge for the intensive-care unit for two days at $13,225 a day, 12 days in the critical unit at $7,315 a day and one day in a standard room (all of which totaled $120,116 over 15 days). There was also $20,886 for CT scans and $24,251 for lab work. Alice responded to my question about the obvious overcharges on the bill for items like the diabetes-test strips or the gauze pads much as Mrs. Lincoln, according to the famous joke, might have had she been asked what she thought of the play. “Are you kidding?” she said. “I’m dealing with a husband who had just been told he has Stage IV cancer. That’s all I can focus on … You think I looked at the items on the bills? I just looked at the total.”

If we want a real fix to the mounting costs of healthcare (which are a massive drain on the economy), we need to start there. Unfortunately, those who are making out like bandits from this system have tremendous political clout, and they have no interest in letting the easy money go away.

Throughout the piece, Brill repeatedly discusses the “chargemaster,” which is basically the internal price list at every hospital, which has no basis in reality whatsoever, but which the poorest patients, and those without insurance, or with limited insurance, are often hit over the head with. Throughout the article, Brill details over and over and over again how hospital administrators and spokespeople all refused to address the chargemaster at all, constantly blowing it off as no big deal, because so few people actually pay the list price. But they completely ignore a bunch of points, including that some patients are charged upfront for these things, and no one is ever told that the prices are negotiable, even though they all are.

What you see is a system where supposedly “non-profit” and “charitable” institutions are raking in massive profits — while still begging the public for donations, and suggesting that any effort to reign in costs would put people at risk by cutting back on necessary hospital services. At times, these statements are so obviously bullshit, that it’s really sickening.

In December, when the New York Times ran a story about how a deficit deal might threaten hospital payments, Steven Safyer, chief executive of Montefiore Medical Center, a large nonprofit hospital system in the Bronx, complained, “There is no such thing as a cut to a provider that isn’t a cut to a beneficiary … This is not crying wolf.”

Actually, Safyer seems to be crying wolf to the tune of about $196.8 million, according to the hospital’s latest publicly available tax return. That was his hospital’s operating profit, according to its 2010 return. With $2.586 billion in revenue — of which 99.4% came from patient bills and 0.6% from fundraising events and other charitable contributions — Safyer’s business is more than six times as large as that of the Bronx’s most famous enterprise, the New York Yankees. Surely, without cutting services to beneficiaries, Safyer could cut what have to be some of the Bronx’s better non-Yankee salaries: his own, which was $4,065,000, or those of his chief financial officer ($3,243,000), his executive vice president ($2,220,000) or the head of his dental department ($1,798,000).

Sometimes these stories make you wonder if some of these “charitable” organizations deserve to be called charities at all:

Mercy Hospital is owned by an organization under the umbrella of the Catholic Church called Sisters of Mercy. Its mission, as described in its latest filing with the IRS as a tax-exempt charity, is “to carry out the healing ministry of Jesus by promoting health and wellness.”…. The overall chain had $4.28 billion in revenue that year. Its hospital in Springfield, Mo. (pop. 160,660), had $880.7 million in revenue and an operating profit of $319 million, according to its federal filing. The incomes of the parent company’s executives appear on other IRS filings covering various interlocking Mercy nonprofit corporate entities. Mercy president and CEO Lynn Britton made $1,930,000, and an executive vice president, Myra Aubuchon, was paid $3.7 million, according to the Mercy filing. In all, seven Mercy Health executives were paid more than $1 million each. A note at the end of an Ernst & Young audit that is attached to Mercy’s IRS filing reported that the chain provided charity care worth 3.2% of its revenue in the previous year. However, the auditors state that the value of that care is based on the charges on all the bills, not the actual cost to Mercy of providing those services — in other words, the chargemaster value. Assuming that Mercy’s actual costs are a tenth of these chargemaster values — they’re probably less — all of this charity care actually cost Mercy about three-tenths of 1% of its revenue, or about $13 million out of $4.28 billion.

While I actually think it’s a bit of a cheap shot to repeatedly show CEO salaries, the real issue is how these hospitals can ratchet up the prices with no basis in reality, simply because they know they can do so. Even if they recognize most people don’t pay those fees, they still send such bills out there, which creates a tremendous amount of stress.

The stories of obvious overcharging fill the piece and demonstrate a key point in all of this. For all the talk about “free market” healthcare, nothing in our healthcare system is anything resembling a free market. You have truly “captive” customers with almost no price elasticity, combined with a system whereby it’s rare for the buyers to actually be the ones “paying.” If you were to design the most fucked up economic experiment ever, this might be it. And you can see the results.

Steve H.’s bill for his day at Mercy contained all the usual and customary overcharges. One item was “MARKER SKIN REG TIP RULER” for $3. That’s the marking pen, presumably reusable, that marked the place on Steve H.’s back where the incision was to go. Six lines down, there was “STRAP OR TABLE 8X27 IN” for $31. That’s the strap used to hold Steve H. onto the operating table. Just below that was “BLNKT WARM UPPER BDY 42268” for $32. That’s a blanket used to keep surgery patients warm. It is, of course, reusable, and it’s available new on eBay for $13. Four lines down there’s “GOWN SURG ULTRA XLG 95121” for $39, which is the gown the surgeon wore. Thirty of them can be bought online for $180. Neither Medicare nor any large insurance company would pay a hospital separately for those straps or the surgeon’s gown; that’s all supposed to come with the facility fee paid to the hospital, which in this case was $6,289.

Or how about this one:

His bill — which included not only the aggressively marked-up charge of $13,702 for the Rituxan cancer drug but also the usual array of chargemaster fees for basics like generic Tylenol, blood tests and simple supplies — had one item not found on any other bill I examined: MD Anderson’s charge of $7 each for “ALCOHOL PREP PAD.” This is a little square of cotton used to apply alcohol to an injection. A box of 200 can be bought online for $1.91.

The article is chock full of these kinds of stories. They’re not anomalies, nor are they extreme outlier cases. They happen quite frequently. It’s standard operating procedure. And, contrary to what most people think, these things don’t just apply to those who are without insurance. While insurance may protect against some of these situations, often people discover that their insurance doesn’t cover nearly as much as they expected (in part because they never think that bills could possibly be so high. And, while some hospitals are more open to forgiving massive debt for those who are poor, when those who thought they were comfortably in the middle class suddenly realize they may owe hundreds of thousands of dollars unexpectedly, the hospitals are a lot less sympathetic.

Not surprisingly, nearly every hospital that Brill tried to speak to about all this refused to talk about it. Sometimes they gave completely bogus excuses, such as claiming that it’s “against the law” to discuss why they charge massive markups on basic items:

Wright said the hospital’s lawyers had decided that discussing Steve H.’s bill would violate the federal HIPAA law protecting the privacy of patient medical records. I pointed out that I wanted to ask questions only about the hospital’s charges for standard items — such as surgical gowns, basic blood tests, blanket warmers and even medical devices — that had nothing to do with individual patients. “Everything is particular to an individual patient’s needs,” she replied. Even a surgical gown? “Yes, even a surgical gown. We cannot discuss this with you. It’s against the law.” She declined to put me in touch with the hospital’s lawyers to discuss their legal analysis.

In one case where he finally got an administrator to speak about the chargemaster rates, the answers were astounding, and either completely mendacious or disconnected from reality (I’m not sure which one is scarier).

“We think the chargemaster is totally fair,” says William Gedge, senior vice president of payer relations at Yale New Haven Health System. “It’s fair because everyone gets the same bill. Even Medicare gets exactly the same charges that this patient got. Of course, we will have different arrangements for how Medicare or an insurance company will not pay some of the charges or discount the charges, but everyone starts from the same place.” Asked how the chargemaster charge for an item like the troponin test was calculated, Gedge said he “didn’t know exactly” but would try to find out. He subsequently reported back that “it’s an historical charge, which takes into account all of our costs for running the hospital.”

It’s fair because we charge absolutely everyone insane amounts that have no basis in reality, and which we mark up ridiculously — and then we offer discounts to many, but certainly not all patients. This answer is bullshit. Not everyone starts from the same place, but even if we grant that ridiculous claim, having everyone start at insane prices doesn’t make it fair. It still makes it a giant scam.

And, of course, the hospitals know they’re getting away with all sorts of crap here. Even when they’re talking about things like Medicare, where the government is the “buyer,” the situation is crazy. While the hospitals, pharma companies and others complain that government supported healthcare artificially deflates revenue and limits their ability to provide patient care, the article goes into a fair bit of detail about how that’s hogwash, and the hospitals (and doctors) are massively profiting off of the taxpayer — sometimes in completely cynical ways.

“One of the benefits attending physicians get from many hospitals is the opportunity to cruise the halls and go into a Medicare patient’s room and rack up a few dollars,” says a doctor who has worked at several hospitals across the country. “In some places it’s a Monday-morning tradition. You go see the people who came in over the weekend. There’s always an ostensible reason, but there’s also a lot of abuse.”

If you know even the slightest bit about basic economics, the deeper you look at this system, the more and more you realize how insane it is. Nearly every single incentive is skewed, often dangerously so. The system is more or less designed to be abused, while making it increasingly difficult for people to get reasonable care. I’d argue that it may be worse than if you asked a bunch of economists to design the worst possible system of incentives.

And we’re more or less stuck with it. For all the debate and the fight over reform, the reform package we got really did next to nothing to address any of these kinds of underlying issues. And this has nothing to do with silly claims of whether or not it’s “socialist”. The entire healthcare system, before and after the recent health reform, does not resemble anything even remotely close to a free market system. And, while there are some who argue that healthcare itself shouldn’t be subjected to free market forces, but rather towards what provides the best care, it’s not like the system is designed to match up with that belief either.

The system is completely broken. In researching other aspects of the system, I’d already come to the conclusion that it should be scrapped entirely, with something completely different put in its place, but this article just helps take that belief to another level. And, the scary thing is that the chances of that happening are basically zero. We’re stuck with this system, in part because the economic incentives are screwed up so much that it’s ripe for widespread abuse. And when you have so many billions of dollars flowing, with a small group of folks profiting massively from that, there’s simply no chance they’ll allow for any real changes.

And, the really scary thing is that the bits I’ve talked about here really only scratch the surface of Brill’s overall article. And, his article really only touches on one part of the problem. It is a key part of the problem, but it’s still just one part. And each of the other parts tend to look equally insane when you start digging deeper. We are in the middle of the most horrifying economic experiment ever constructed with our healthcare system, and it’s only impacting almost everyone’s lives. Oh yeah, and there’s no real interest in taking on the actual problems.

Filed Under: billing, charities, economics, free market, healthcare, hospitals, non-profits