Medical costs--Incomprehensible and unsustainable

You may or may not have read Bitter Pill: Why Medical Bills are Killing Us, the cover story of the March 4, 2013, issue of Time magazine.¹ However, I am confident your hospital administrators have read the article and were furious. The gist of this lengthy monograph is that hospitals vastly overcharge for their services, supplies, drugs, imaging, labs, and devices. Unfortunately, while author Steven Brill’s arguments are emotionally charged and superficially appealing, his inferences and conclusions are based primarily on anecdotal evidence. 

Brill begins with the truly unfortunate story of a patient with non-Hodgkins lymphoma who had to pay nearly $84,000 out-of-pocket to a prominent cancer hospital to be evaluated and begin treatment. Brill notes that the same hospital charged the patient $1.50 for a single dose of acetaminophen when 100 doses can be bought for the same price on Amazon.com. Similarly, the hospital charged $283 for a chest x-ray when Medicare, based on their estimate of the test’s true cost, would pay $20. The hospital also marked up the cost of a chemotherapy agent by about 400%. Brill cites many other examples of seemingly predatory billing practices preying upon uninsured and underinsured patients. For example, a patient seen in an emergency department for chest pain (which turned out to be gastroesophageal reflux disease) was charged $199.50 for a troponin test for which Medicare would have paid $13.94; another hospital charged $18 for a diabetes test strip that retails for 55¢; and a detailed description of one patient’s outpatient procedure identified $87,000 in charges. 

The mysterious ‘chargemaster’

The sources of these extraordinary charges are hospital chargemasters, accounting tools with roots in the pre-Medicare era, when doctors and hospitals were paid for their modest charges in full. The chargemaster lists many thousands of entries for every conceivable hospital item-supplies, drugs, devices, lab tests, and imaging studies-from a gauze sponge to a PET-CT scan. Brill comments, “ . . . there seems to be no process, no rationale, behind the core document that is the basis for hundreds of billions of dollars in health care bills.”¹ He has a point, since these “charges” usually reflect arbitrary annual price increases that originated many years ago. 

The most serious problem with the chargemaster is that while it serves as a base for “negotiating” prices with insurers who ultimately pay a fraction of these charges, the “full price” is often applied to those uninsured and underinsured patients who can least afford it. Hospitals call these insurer discounts “contractual allowances.” If a hospital generates $1 million in charges on a given day, it would count itself very lucky to be paid $400,000 by insurers. However, someone without insurance may be asked to pay the entire bill. It is therefore not surprising that 62% of all personal bankruptcies filed in 2007 were due to medical expenses.²

Brill decries the use of the chargemaster and the resulting inflated hospital bills. He posits various motivations for its use including: 

• “Lavish” salaries paid to hospital administrators; he names many executives of nonprofit hospitals whose salaries exceed $2 million.

• Construction of elaborate hospital wings at a time of excess bed capacity.

• Huge profit margins for drug and device makers. 

• Congressional restrictions that keep Medicare from negotiating drug prices and some device prices.

• “Defensive medicine” practices that drive overuse of lab and imaging tests.

In short, Brill makes his case mostly using anecdotes of extreme outliers and implies that greed may be the primary motive behind excessive hospital charges.

Cost shifting: Robbing Peter to pay Paul

Brill calls into question the nonprofit status of many hospitals, since they often use less than 1% of their revenue to provide true charity care. He has a legitimate point, especially in the case of large hospitals in affluent communities. They may have few competitors, few funds dedicated to research or medical education/training, and CEOs who make more than $1 million per year. 

However, for hospitals with large indigent and Medicaid populations, and especially for academic medical centers that not only disproportionately serve such populations but also must support significantly underfunded teaching and research programs, such charges are a mechanism to transfer costs to keep an increasingly unsustainable academic model afloat. The typical medical school is now highly dependent on clinical revenue to support academic programs, and a growing portion of this revenue is derived from their associated hospital’s profit margin.³ During my career I have seen this pattern at New York University, Yale University, and Ohio State University.

Take-home message

The genesis of Brill’s article was, of course, the seeming unsustainability of overall US healthcare spending, which remains about 18% of our gross domestic product.⁴ However, the past 4 years have seen significantly reduced healthcare spending growth-in fact, the lowest growth in decades.⁵ Last year, Medicare spending per beneficiary increased only 0.4%, reducing future federal budget deficits. This sustained reduction was initially ascribed to the “Great Recession,” but spending growth continues to be suppressed even through the recent recovery. Thus, Brill’s core argument that escalating hospital charges are the cause of healthcare inflation stands on a shaky foundation.

Brill argues that Medicare payments are soundly based and fair and thus should be the basis of all hospital charges. But the federal government’s own Medicare Payment Advisory Commission admits that the overall Medicare hospital margin is a negative 5.8%.⁶ Moreover, as the American Hospital Association (AHA) points out, this deficit does not take into account costs that Medicare disallows, such as paying physicians for on-call time. For outpatient services, the underpayment is even greater, with margins below negative 10%.

Furthermore, Brill’s examples of outrageous pricing of simple items do not always hold up to careful scrutiny. For example, the AHA notes that the price of acetaminophen does not simply reflect the cost of a generic pill, but also the costs of a physician ordering it, a nurse transmitting the order, a pharmacy processing and filling it, someone physically transporting it, and a nurse administering it.⁶ Finally, all these processes are rigidly regulated by agencies that accredit hospitals-a condition of participation in the Medicare program! 

After thinking at length about Brill’s article I can only conclude that our healthcare financing system is hopelessly broken. The Affordable Care Act will increase access but not fundamentally improve our irrational medical finance model, which rests on relentlessly rising volumes of care driven by our discounted fee-for-service payment system. Until that system materially changes-until hospitals and physicians only do well when their patients do well-costs will climb. 

Our patients care about staying healthy, getting back to normal life after being sick, and being free from pain and disability. Their employers, who underwrite half of US healthcare,⁴ are concerned with how often their employees are sick, how quickly they return to work after being sick, and how much it costs to keep them healthy. Ironically, a healthcare delivery system that meets these needs by global payments and capitation will also reduce hospital costs by reducing utilization and by eliminating the need for a chargemaster. 

For academic health centers there are two other threats to sustainability. The first is the high cost of medical education and resident training. Tuition covers only a fraction of our heavily regulated medical school education enterprise.³ But current tuitions are already too high, causing record medical student debt. Ironically, proposed federal budget cuts to both undergraduate and graduate medical education funding will exacerbate the problem.  

The second threat is to National Institutes of Health (NIH) funding, which in inflation-adjusted dollars has declined nearly every year since 2003.⁷ Now we face a further 8% cut from the “sequester.” NIH funding is one of the best investments any government can make. For each dollar in NIH funding, an extra $2.11 was added to the economy in 2007.⁷ We need to fix NIH spending at 0.25% of GDP to remain competitive in biomedical science worldwide. 

These three “fixes” offer real long-term value to our patients, their employers, and the nation. Without them the madness is likely to continue, and that would truly be a bitter pill to swallow. 

References

1. Brill S. Bitter pill: Why medical bills are killing us. Time. http://www.time.com/time/magazine/article/0,9171,2136864,00.html. Published March 4, 2013. Updated March 12, 2013. Accessed March 14, 2013. 

2. McCarter J. Medical bills cause 62 percent of bankruptcies. Daily KOS. http://www.dailykos.com/story/2012/01/05/1051848/-Medical-bills-cause-62-percent-of-nbsp-bankruptcies. Published January 5, 2013. Accessed March 14, 2013.

3. Association of American Medical Colleges. Tables and graphs for fiscal year 2010. https://www.aamc.org/data/finance/2010tables/. Accessed March 14, 2013.

4. Hartman M, Martin AB, Benson J, Catlin A; National Health Expenditure Accounts Team. National health spending in 2011: Overall growth remains low, but some payers and services show signs of acceleration. Health Aff. 2013;32(1):87-99.

5. Lowrey A. Slower growth of health costs eases budget deficit. New York Times. February 11, 2013. http://www.nytimes.com/2013/02/12/us/politics/sharp-slowdown-in-us-health-care-costs.html?_r=0. Accessed March 14, 2013.

6. American Hospital Association. Setting the record straight. http://www.aha.org/presscenter/recordstraight.shtml. Published February 28, 2013. Accessed March 14, 2013.

7. American Heart Association, American Stroke Association. Protect NIH from the sequester. http://www.heart.org/idc/groups/heart-public/@wcm/@adv/documents/downloadable/ucm_444632.pdf. Accessed March 15, 2013.

Dr. Lockwood, editor in chief, is Dean of the College of Medicine and Vice President for Health Sciences at The Ohio State University, Columbus.