Time’s Brill Persuasive but “Bitter Pill” Misdiagnoses Health Care Ills

By Joanne Conroy, MD

The Feb. 20 Time magazine article by Steve Brill highlights the very real challenges people have navigating our health system. Specifically, it highlights individuals who have no health insurance or inadequate insurance coverage. One of the primary questions the author poses is, “Why are our prices so high?”

Uwe Reinhardt wrote a great 2006 article in Health Affairs about how hospitals set prices and how they are paid. For many years, we lived in an alternate universe where chargemasters were developed to itemize those hospital services and goods and to assign prices. Insurers soon started negotiating steep discounts on hospital charges, and chargemasters rarely reflected what hospitals were actually paid for services. In the 1980’s, we developed Diagnosis-Related Groups (DRGs), which bundled the costs of services for inpatient care for Medicare. DRGs were originally calibrated on the relative costliness of cases and were updated regularly for changes in technology, practice, and market forces. However, the alternative universe of the chargemaster marched on, updated for inflation and changes in practice.

The challenge highlighted in the article is this: As insurance policies become increasingly consumer-directed, our system becomes treacherous, posing great financial risk to patients. Patients with a high deductible, or those who face co-insurance payments for inpatient care or out-of network care, enter the alternate universe of the chargemaster. Suddenly those prices, essentially irrelevant to those with traditional insurance, really matter.

Brill demonizes the chargemaster, hospital CEOs, and health care industry growth in general. He has compelling anecdotes. Many of those stories helped sell the Affordable Care Act to the American public. We wanted to ensure that people did not get “bad insurance” that would only increase their risk for medical bankruptcy. But as compelling as Brill’s stories are, and as persuasive, they ignore much of our publicly available information.

The Chargemaster

Let’s agree that any system would be preferable to the opaque chaos of charges we currently have. Insurance companies are as reluctant to reveal their proprietary negotiated prices with providers as hospitals are to revamp their 20,000 to 40,000-item chargemasters.

Who created that monster? In 2005, MEdPAC commissioned Allen Dobson and the Lewin Group to conduct a “Study of Hospital Charge Setting Practices.” They concluded that those practices are a “balance of competing objectives of balancing budgets, remaining competitive, complying with health care and regulatory standards, and continuing to offer needed services to the community.”

In hospitals, most of the attention on chargemasters tends to focus on newly added procedures, devices and drugs, rather than recalculating charges for existing services. Disparities between charges and costs have grown over time because many existing charges were set before hospitals had the tools to more thoroughly break down and examine costs. Mark-ups tend to vary by service line, with high-cost items receiving a lower mark-up than low-cost items. The fact that charges are often not closely tied to costs implies the current Medicare payment systems may not be closely tied to resource utilization.

CEO Salaries, Margins, and the Growth of Health Care

Brill selectively chose compensation figures that included severance and retirement. CEO compensation is publicly available, market-driven, and reflective of the complexity and the size of these organizations, many of which employ tens of thousands of people.

Hospital margins are tracked on many public websites. Large teaching hospitals’ operating margins generally are 1.5 percent less than those for non-teaching hospitals. Nationally, hospital margins have returned to their 2008 levels of 7 percent. Moody’s Investors Service reported in January that its outlook for U.S. not-for-profit hospitals will remain negative in 2013. This reflects the impact of the recession on patient volumes, heightened pressure from employers and all levels of government to lower the cost of health care services, and significant changes ahead for how hospitals are paid.

Controlling costs and demand for health care services is a responsibility of both providers and patients. We need a commitment to develop new ways of evaluating cost and setting prices. Not only will this need to include economic, regulatory, and market-driven considerations but should be anchored in principles that incentivize healthy communities, reward prevention, and increase patient engagement.

We will have to make some hard choices: we have built a care system that we can’t afford to grow anymore. The choice will not be who will pay, but what treatments are unnecessary and what we can do individually and collectively to prevent illness. We need to make sure that people understand their coverage choices so they are not financially vulnerable.  Rebasing chargemasters and moving resources out of the health system will not get us there. We need to create transparency and engage both patients and practitioners in the process.

Dr  Joanne Conroy MD —Joanne Conroy, MD, is Chief Health Care Officer at the Association of American Medical Colleges. She can be reached at jconroy@aamc.org.

7 thoughts on “Time’s Brill Persuasive but “Bitter Pill” Misdiagnoses Health Care Ills

  1. “Brill selectively chose compensation figures that included severance and retirement. CEO compensation is publicly available, market-driven, and reflective of the complexity and the size of these organizations, many of which employ tens of thousands of people.”

    The President of the United States is paid $400k per year. And, yeah, to be fair, he gets free housing and many other perks.

    But, the scope of duties and responsibilities of hospital, Pharma, or AHIP member CEOs are microscopic by comparison.

    UnitedHealthGroup CEO recent 5-yr comp? ~$170 million


    Is he really “worth” 90-100x the President? In terms of value to patients?
    “anchored in principles that incentivize healthy communities, reward prevention, and increase patient engagement.”

    I could not agree more. I can’t wait to see all the personal health wearable biometrics apps at HIMSS13 next week. I’m wearing the Jawbone UP app on my wrist, and want to get other metrics on-demand.

  2. By ignoring history, we suffer the fruits of our ignorance. Almost 50 years ago, when Medicare became law hospitals were supposed to be reimbursed for the COSTS of care of Medicare beneficiaries. Within a year of Medicare’s implementation, hospitals, read American Hospital Association and others, realized they did not have (possibly did not want to have) cost data to support their claims for reimbursement. Shortly thereafter, the industry and Medicare reached a compromise in the form of the charge-based “Ratio of Medicare Charges to All Charges to Costs” (RCCC), This formula allocated “costs,” however they might be defined and justified by an institution, between Medicare beneficiaries and other adult patients in the institution. All subsequent efforts, by Medicare and others, to control costs have begun with the same fictional house of cards and resulted in another partially-baked “solution.” This dance will continue.

    My personal experience with a very large public teaching hospital in 1967-68 is illuminating. Costs of patient care per day were reckoned and publicly reported for 1966 as $28.64 in 1966. A number arrived at by dividing the annual appropriation by the number of patient days for that year. As is seen easily, more patient days would result in a lower cost per day and fewer (or a larger appropriation) would result in a higher cost per day. Fiction, anyone? There was no recognition of the historic and replacement costs of the 1,500 bed facility, no inventory of equipment or furnishings, and no interest in changing to a more businesslike approach to finding, understanding, and managing the institution’s costs. A $28.64 cost per day in 1966 is no less fictional than a $2, 3, 5, 10, or more thousand cost per day is in 2012. Both are wrong because there is no supporting factual foundation.

    Brill’s article covered a lot of ground and it is easy to understand why some hackles have been raised and defensive behavior is on display. Medicare beneficiaries ought to take umbrage at the facts, pointed out by Brill, that the Congressional leaders and members who keep harping on “entitlements” are at the same time “entitling” the pharmaceutical and medical device industries by barring Medicare from negotiating prices with them as the Veterans Administration has been doing for years. There are a few hundred billions of Medicare dollars that could easily be saved.

  3. Great article, but Brill missed two points, both important.
    1. Medicare markup over actual healthcare deilvered is indeed much lower than that of private insurers, but no due to CEO compensation or profiteering by insurers – or “inefficient ” administration. It is built in to the system that insurers, to stay competitivem ust get to lowest possible cost – the famous “invisisble hand” will drove them there. And where is that: when cost of denying treatments equals the treatment costs it saves. Total cost increases for either a lower or a higher denial cost. Hence the armies of denials clerks – because the lowest total cost results when the markup over treatment cost is 45%, compared to 3-5% for Medicare. Obamacare limits this markup to 25%, and the insurers can’t do it, are fighting it, had to mail checks out to policyholders last year for overpayment. This is a very potent argument for single payer that has nothing to do with greed, profiteering, or inefficiency. It’s in the nature of healthcare, and the only way to eliminate it is to eliminate private insurance from the system.

    2. He missed an important point about the high cost of malpractice insurance. If you face medical bankruptcy due the kinds of bills he cites, you will start turning over rocks to find the key to avoiding it. One way to pay an unpayable bill is to win a malpractice suit, so you file it. When people don’t have unpayable medical bills, malpractice suits drop dramatically. And so does the need to practice “defensive medicine”. Another good argument for single payer: it will dramatically lower costs imoised by malpractice suits.

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