Why do some hospitals and doctors charge far more than others for exactly the same routine procedure?
Anderson was responding to a reporter’s question about huge disparities in how much insurers in North Carolina pay different hospitals. The answer is simple, he says: large brand-name providers such as Duke have the market clout to insist that insurance companies pay them top dollar. If they don’t, these marquee hospitals won’t join the insurer’s network, and potential customers will choose another health plan. Because they have market power, Duke and UNC Chapel Hill are able to raise prices every year: “Duke by 6 percent, UNC by 5 percent,” Raleigh’s Newsobserver reports.
Some hospitals are forced to hike charges just to stay afloat. Not Duke. In 2011 this non-profit medical center reported an operating profit of $190 million, or 8 percent. Investment income pushes profits to $542 million.
An audit of UNC Hospitals reveals “a total profit of $133 million, or 12.3 percent. . . They’ve made their money largely from employer-sponsored health insurance . . . often inflating prices on drugs and procedures – sometimes to three, four or 10 times over costs,” a team of Newsobserver reporters led by Joseph Neff explains.
Over the past decade, Duke’s revenue has risen faster than the cost of treating patients – and much faster than inflation: “Duke saw its total patient revenue rise 100 percent from 2000 to 2010” while “its costs rose 83 percent. The average revenue from each inpatient t more than doubled over that time, rising at more than three times the rate of inflation.”
“Unlike insurance companies, which are easy to dislike, hospitals are easy to love,” Neff et.al. note “They save lives every day, while providing care for people who can’t afford it.” Thus “in the national debate over health reform, soaring costs and insurance premiums have drawn attention. But one trend driving costs – the growing market power of hospitals – has gone largely unnoticed.”
Over time, they add, North Carolina’s brand-name hospitals have “solidified their market power by stashing billions of dollars for future purchases. Duke, for example, has reserves of $1.5 billion. In Charlotte, Carolinas HealthCare System has banked more than $2 billion.” By contrast, institutions that lack market power don’t fare as well: “About a third of North Carolina hospitals – most of them small and rural – reported losing money in 2010.”
Often these are the hospitals that are providing a public service by caring for Medicaid patients. In August, Massachusetts issued a report on health care spending trends which noted that “Hospitals serving a higher proportion of publicly covered patients lack market leverage in negotiating with private payers. This results in lower private-payer prices for those hospitals, compared to hospitals with a greater share of private payer patients.” Thus, rich hospitals become richer, and poor hospitals that serve low-income patients become poorer.
When Insurers Pay More, They’re Reimbursing for “Reputation”
In 2010, when the Center for Studying Health System Change (HSC) analyzed 12.2 million claims paid by health plans in 100 metropolitan areas, it found eye-popping variations in what different providers fetch, not just across markets but in a given market. In Los Angeles, for example, private insurers paid some hospitals less than Medicare allows for inpatient care, while others received 184 percent of Medicare rates.
One might assume that better-paid hospitals were seeing sicker patients, or providing better care. But “Medicare rates adjust for the severity of a patient’s illness,” HSC’s Paul Ginsberg points out. As for the notion that insurers were paying for quality, until very recently, few for-profit insures even attempted to compare the quality of care that different providers offered. How, then, could they be paying a premium for better outcomes? Moreover, as Ginsberg observes, “it is unlikely costs associated with differences in quality . . . would be as large as the differences in payment rates.”
Research just published in Health Affairs confirms “essentially no correlation” between price and quality. In this study the researchers began by rating the quality of care offered by 250,000 physicians nationwide. Then they zeroed in on doctors who ranked in the top 25%, and looked at what insurers paid them. At this point, the yardsticks that we have to measure quality are rudimentary, but it’s fair to assume that the physicians in the top quartile all provide “good” to “very good” care.
Nevertheless, reimbursements for specific major medical procedures varied by as much as 250%. While some doctors in this elite group were paid $6,150 for an uncomplicated vaginal delivery, others commanded $12,090. The price for decompression of a herniated disc ranged from $7230 to $17,680.
This study also controlled for disease severity or complexity as well as differences in costs in different geographic areas. Yet when doctors treated common chronic conditions, payments varied 15-fold. Meanwhile, researchers found that doctors who met efficiency benchmarks actually charged 15% less than others, suggesting that, under reform, there is plenty of room to lower costs while improving care.
Annual rankings in U.S. News & World Report give some hospitals a reputation for better quality. How do they win a top spot on this list? Sometimes, just by charging more. Ironically, higher prices are are a plus for how the public perceives a medical center: most people just assume that more expensive care must be better. Few realize that market leverage, rather than quality, determines how much insurers will pay. (Appearances also count: marbled lobbies, waterfalls and expensive art make an impression.)
Yet when treating patients, the most prestigious hospitals don’t necessarily follow “best practices.” Just this month, when the Joint Commission issued a list of 620 “top-performing hospitals” (representing roughly 18% of the nation’s accredited institutions) some of the nation’s best-known academic medical centers did not turn up on the winners’ list.. (Johns Hopkins and Mass General, for instance, did not make the cut. In fairness, it should be noted that Duke did.)
Granted, the benchmarks the Commission used to grade performance didn’t try to evaluate “outcomes.” (As I explain in the post below on “Market Competition” outcomes evaluation is an infant science. We’re still exploring what a “good outcome” means.)
Instead the Commission focused on “process:” Did someone remember to give an aspirin to the heart attack patient? Did they provide anti-stroke medications to a stroke patiens at discharge?” Ultimately, we would like to grade providers on both outcomes and process. But for the time being, these performance markers tell us something mportant about a hospital’s attention to vital details. Unlike U.S. News & World Report, the Commission’s report goes beyond an institution’s “perceived reputation” to look at medical evidence. (Hat tip to Kent Bottles, M.D. )
Doctors themselves acknowledge the importance of these markers. Six or seven years ago, when a study at Duke revealed it failed to meet “best practice” standards in a number of areas (forgetting to give elderly pneumonia patients a vaccine to protect against another bout of the disease, for example), most physicians at Duke were unaware of the holes in their routine. If asked, they would have said, “Of course, we always give the vaccine.”
When they saw their record, they were flabbergasted. Dr. Robert Califf, a professor of medicine at Duke told me “It’s like the Elisabeth Kubler-Ross stages of grief. First you’re in shock, then, denial, and then you gradually come to terms with what needs to be done.”
This migiht be one reason why Duke is now making the Joint Commission’s list. Performance evaluations have their limits. But if an instituion takes them seriously, they can serve as a valuable wake-up call.
The Big Picture
North Carolina is hardly unique. Across the nation, hospitals have been consolidating, and when they do, they flex their market muscles. Few insurers are big enough to stand up to them. “What you’re seeing is increasing market power on the part of the hospitals and increasing leverage in negotiation with the payers,” says Dr. Kevin Schulman, who teaches medicine and business at Duke
Medicare is the one payer that has maintained its market clout. Because of its size, even brand-name providers don’t have the market leverage to command premium prices from Washington. No hospital could keep its doors open without Medicare patients. And despite troubling rumors that physicians will stop accepting Medicare, the vast majority need older patients to keep their appointment books full. This explains why roughly 90 percent of doctors continue to accept new Medicare patients.
Many argue that Medicare under-pays hospitals. This, they say, is why providers must charge private insurers more.
Without question, in many cases Medicare does pay less than what it costs a hospital or doctor to treat a particular patient. Moreover, there are serious variations in how well Medicare reimburses in different parts of the country.
Nevertheless global data (which provides a snapshot of average reimbursements nationwide) reveals that, overall, Medicare pays hospitals between 93% and 97% of what it costs them to provide care, while private insurance pays between 115% and 125% of those costs.
“Even that crude data suggests that private insurers are paying hospitals far more than they need to make up for underpayment by Medicare,” notes Dr. Pat S in a memorable HealthBeat guest-post on hospital costs and Medicare payments.
“Examine the payments to individual hospitals in more detail, and you discover that many hospitals actually make a profit on most Medicare patients,” he adds. Even the American Hospital Association acknowledges that “42% of hospitals make a profit on Medicare,”
“In the remaining hospitals,” he writes, “most Medicare patients are profitable. Losses on Medicare patients are related to a minority who need much more care than average because of longer stays, more complications, and underlying health problems.” ( Sometimes those complications are related to preventable errors. If the hospital focused on patient safety, it might not lose money on some of these patients.) “Since the profits on most Medicare patients are small,” Pat S. adds, “large losses on this small number of outliers can drive overall payments below costs.”
In a later HealthBeat post, I analyzed a 2010 Medicare Payment Commission (MedPAC) report on hospital profits which reveals that, in 2008 , thirty-seven percent of hospitals enjoyed positive profit margins while caring for Medicare patients– and 2008 was the toughest year hospitals had seen in fourteen years.
Ultimately, MedPac’s in-depth analysis of Medicare payments and hospital profits over a period of time suggests that when hospitals are under some financial pressure, and are forced to become more efficient, they can, in fact, make money on seniors. After adjusting for difference in patient mix, wages, outliers (extremely ill patients), the costs of teaching, and the effect of low-income Medicare patients, researchers discovered that when private insurers cut reimbursements, and hospitals are forced to tigthen their belts, many wind up making money on Medicare cases.
Ironically the hospitals that lose money on Medicare patients tend to be those that are enjoying profit margins of 5 percent –or more–when treating privately insured patients. (For a non-profit a 5% margin offers a comfortable cushion).
That hospitals tend to be less efficient when private insurers are paying them generously shouldn’t come as a surprise. Like most of us, hospitals spend lavishly when plenty of money is available. When money is tight, they are much more likely to focus on improving systems with an eye to cutting waste and co-ordinating care.
This is why the Affordable Care Act purposefully puts hospitals under some financial pressure by shaving annual increases in Medicare payments by one percent a year over ten years. The goal is to give hospitals time to figure out how re-design core processes such as scheduling elective surgeres in ways that will lead to safer, better care.
When Powerful Hospitals Acquire Physicians, Doctors’ Fees Soar–Though This May Change
It’s not just marquee hospitals that charge more. Large specialty practices with a presence in the community enjoy market leverage.
And when physicians are employed by hospitals, the Wall Street Journal reports that those institutions use their market heft to lift doctors’ fees by as much 30 or 40 percent. The “bounce” can be even greater, notes the Incidental Economist: “Blue Shield of California said that after one group of physicians based in Burlingame, Calif., came under the umbrella of the powerful Sutter Healthsystem in 2010, its rates for services increased about 140%. The insurer said it saw a jump of approximately 95% after a Santa Monica, Calif., group became part of the UCLA Health System in January 2011.”
But under Obamacare, “rewards for physician acquisitions, based on the pay differential between independent doctors and hospital systems, are likely to vanish,” writes WSJ columnist Anna Wilde Mathews. She quotes Kenneth Paulus, chief executive of Minnesota’s Allina Health: “That ship has sailed.” Under the ACA, he suggests hospitals won’t be jacking up their physicians’ fees because, ultimately, few will be reimbursed fee-for service. Instead, many physicians and hospitals will be paid a lump sum for managing the health of an entire patient population.
The Next Wave of Reform: Massachusetts. Addresses Variations in Provider Pricing
Today, some payers are beginning to take on what Nancy Turnbull, associate dean at the Harvard School of Public Health, calls “the third rail of payment reform– unwarranted disparities” in providers’ prices that have been “well-documented in recent years by the Massachusetts Attorney General’s office.” Those AG reports made it clear that elite providers were driving heatlh care spending.
When it comes to universal coverage, Massachusetts is six years ahead of the rest of the country. Today 98.1 percent of the state’s adults and 99.8 percent of its children have health insurance. But the cost of medical care is soaring, in part because Massachusetts is home to so many powerful hospitals and doctors. In 2010 and again in 2011, the state’s Attorney General (AG) issued sharply-worded reports charging that the state’s insurers are not reimbursing for “value” but instead are responding to “market leverage.”
The Commonwealth is continuing to take a hard look at what providers are charging. Last month Massachusetts issued a report showing that increases in reimbursements to providers explain about half of the growth in outpatient payments from 2007 to 2008, and virtually all of the growth from 2008 to 2009 when spending per patient rose by13%. Over those two years, spending on physicians and other professional services jumped by 21 percent.
Insurers’ outlays rose in part because patients were using more services, but the report notes, “higher prices explained 77 percent of the growth in spending from 2007 to 2008, and 88 percent of the increase from 2008 to 2009.” (Critics who believe that Obamacare will lead to increased use of medical services that we simply can’t afford should take note. In Massachusetts, increased utilization has not been the major factor driving health care inflation.)
Legislators Send a Warning to Providers Who “Abuse Their Market Power”
Responding to levitating costs, last month Massachusetts became the first state in the nation to pass legislation that aims to cap overall healthcare spending so that it grows no faster than the state’s economy. The target for 2013 is just 3.6 percent. (Nationwide, economists are predicting annual increases of 6.5% over the next few years. )
The law also creates an independent Health Policy Commission that is charged with monitoring provider organizations with revenues of $25 million or more. If they are exceeding the targets they will be required to “submit plans for corrective action.” More importantly, the Commission may refer cases to the attorney general if commissioners determine that an organization “has abused its market power.” The Commission will not be funded by the state legislature, protecting it from the wrath of lobbyists.
But the new law did not go nearly as far as many wished. In 2011 Massachusetts’ House Majority Leader introduced legislation that divided the state into four geographic regions and would have limited provider payment rates to the eightieth percentile of current rates in each region.In other words,p roviders on the top step of a five-step reimbursement ladder would have had to accept lower payments. ( Though do doubt some adjustments would have been made for teaching hospitals they do have extra costs.) No surprise, the Majority Leader’s idea never made it into the legislation passed in August.
.A House proposal for a “luxury tax” on high-cost providers that was supported by the governor and the Attorney General also was not included in the final bill. Clearly, politicians are not eager to grab what Nancy Turnbull has called “the third rail of reform.”
Nevertheless, last month, the state’s final report on rising health care costs acknowledged that these proposals “illustrate the tension between providers receiving higher payments and those receiving much less for similar services. . . this issue has clearly not been laid to rest.”
On HealthAffairs.com, Turnbull offers what I view as the best summary of the bill Massachusetts passed last month: “After a two-year gestation period for its payment reform and cost control bill, the Massachusetts legislature finally delivered…an exoskeleton. Time will tell whether the law will be transformed . . . into an effective cost control creature with strong and vital organ systems. Some of the essential DNA is there but the challenges ahead are formidable. However, regardless of whether Massachusetts is ultimately successful at ‘cracking the code’ on cost control, as Governor Deval Patrick and others hope, the state is going to learn a lot over the next few years, much of which will no doubt be useful to other states.”
Massachusetts may be leading health care reform, but when it comes to doing something about unwarranted disparities in fees, Los Angeles has gotten a jump on Boston. Last week, L.A. began sending letters to citiy employees telling them that doctors affiliated with two of the city’s marquee hospital–Cedars-Sinai and UCLA— will no longer be covered under Anthem’s Select health plans, effective Jan. 1.
About 27,000 city workers and their families are enrolled in Anthem. An additional 32,000 city employees and family members who are insured by Kaiser Permanente will not be affected, and most Los Angeles police officers, firefighters and retirees are covered by separate contracts. (It’s worth noting that although Cedars-Sinai and UCLA are viewed as “hospitals to the stars,” neither appeared on the Joint Commission’s list of “Top Perfomer’s” list. By contrast, Kaiser Permanente in Los Angeles did make the cut, along with many other Kaiser medical centers in California. )
The move will save $7.6 million in annual premiums. Officials at Cedars-Sinai and UCLA protested, arguing that their higher prices are warranted because they do world-class medical research and offer cutting-edge treatments in areas such asr cancer or organ transplants that benefit the entire community.
But too often, brand-name hospitals charge Gold Coast rates for low-tech procedures such as low-risk vaginal deliveries “Purchasers are sending a signal that certain prices are just unaffordable,” David Lansky, chief executive of the Pacific Business Group on Health, which represents large companies such as Walt Disney Co. told the Los Angeles Times. “We want great teaching and medical research institutions to survive. Whether that should happen by charging everyone in society a higher rate for routine services is more debatable.” [m]y emphasis
The L.A. Times story ends by asking whether city employees will “raise Cain” over losing their doctors. In the near future, I will be writing about solutions that patients might find more palatable While some call for a “single-payer” system, others endorse “all payer” systems that have worked well, both in Maryland and in Germany.