Haggling for Health Care


Below, a guest post by Naomi Freundlich. Long-time readers will remember Naomi as the person who helped me write HealthBeat before we both left The Century Foundation in 2011. She now has her own excellent blog,  Reforming Health

In this piece, she describes what it is like to live with a high-deductible health plan and find yourself bargaining with doctors when trying to get care.

Let me add that beginning in January of 2014, comprehensive, affordable insurance will be available in the Exchanges– along with subsidies. This should mean that no one will have to sign up for a plan with a $4,000 deductible ($8,000 out of network) plus co-pays.

(Though I realize that some upper-middle-class families who earn just a little to much to qualify for a subsidy may have a hard time finding affordable insurance in the Exchanges. But so far, the pricing in states like California and Colorado is encouraging. I’ll write more about this as we find out more about how much insurance will cost in other state Exchanges) 

Nevertheless, next year some health care providers may try to charge patients more than the insurer will pay. This is called “balance billing.” In that case, patients will need to shop for physicians who accept the insurers’ reimbursement as payment in full.

My guess is that most heatlh care providers will discover that there just are not enough very wealthy patients out there (even in New York City), able and willing to pay more than either Medicare or an insurer will pay.  

by Naomi Freundlich

I’m not a big fan of bargaining and my half-hearted attempts to get a better price for a used car, garage sale find or contractor’s service have been mostly unsuccessful. There’s always that nagging feeling that the seller is laughing with delight once I’m gone, thinking, “I really pulled one over on that rube!”

And so it has come as somewhat of a shock to me that medical care has become the new garage sale, as far as haggling goes.

First we found out that hospitals have “chargemasters” that hold the list prices for everything from knee replacements to aspirin tablets, and that these prices differ wildly between hospitals; even those in the same city. We also know that insurers, both private and Medicaid and Medicare, never pay these list prices but instead bargain with hospitals to pay substantially discounted prices. The only ones not getting in on the discounts are the uninsured or under-insured people who get hit with the full list price of hospital care.

The same thing happens with doctor bills. If you’ve ever compared what your doctor bills your insurer with what your insurer actually agrees to pay, it’s clear that there is a lot of bargaining going on. If the list price of an office visit is $125, the insurer pays $60; for a $200 lab test, the insurer reimburses $70, and so on.

A recent New York Times article,  “The 2.7 Trillion Medical Bill,”  focuses on the cost of colonoscopy to help explain how health care spending can be so much higher in the U.S. than other developed countries. In the article, patient bills for their colonoscopies ranged from a hefty $6, 385 to a whopping $19,438. Meanwhile, their insurers all negotiated the price down to about $3,500. As Elizabeth Rosenthal of the Times notes, ” this is still far more than the “few hundred dollars” that a routine colonoscopy costs in Austria or Italy.

Why do we have such price inflation here in the U.S.? Our for-profit health care industry has a lot to do with it, as does the maddeningly unregulated nature of the business.  Rosenthal writes: “A major factor behind the high costs is that the United States, unique among industrialized nations, does not generally regulate or intervene in medical pricing, aside from setting payment rates for Medicare and Medicaid, the government programs for older people and the poor.”

David Blumenthal, president of the Commonwealth Fund tells the Times; “In the U.S., we like to consider health care a free market.” He adds, “But it is a very weird market, riddled with market failures.”

Now back to haggling. In the last year, my family—like many others in the nation—has been covered by a high-deductible insurance plan. Before our plan kicks in to pay for doctor bills, prescription drugs or diagnostic tests, we must meet a $4,000 in-network deductible. After that, we still have co-payments and also face an out-of-network deductible of $8,000. Now responsible for so much out-of-pocket health spending, I’m face to face with Blumenthal’s “weird market.” It’s a market where no one tells you the price of office visits beforehand, doctors have no idea how much an MRI they’ve just ordered is going to cost, and you end up paying dearly for not being an aggressive shopper.

Here is an example of this new reality. I recently had a bike accident and ended up with a deep gash between two toes. Sewing this wound up was not simple; I had waited three days to address the problem (college graduation took precedence) and the cut was in a very tricky spot. The doctor x-rayed my foot to rule out a fracture, took a swab to rule out infection, cleaned the wound, gave me numbing injections and sewed it all up very thoroughly. He bandaged the foot and gave me a surgical shoe to wear to keep my weight off my toes. Then we talked money. I told the doctor that I had “crummy insurance” with a $4,000 deductible so would be paying out of pocket for his bill. He nodded knowingly and said something to the effect of “I’ll give you a good price…”

Into the garbage went the swab that had been destined for a diagnostic lab. (Saved $175). Down went the price of the surgical shoe; (“I’ll give it to you for my cost, $25.”) Into my bag (unfilled) went the antibiotic prescription. All the supplies, the surgery (also known as stitches), the anesthetic, and two follow-up visits were bundled into a single price of $650—a bargain, I was assured. I thanked my doctor, gave the office assistant my insurance information so the charges could go toward meeting my deductible and off I limped, feeling as though I had just scored a great deal on a used car. Or had I?

With the dawn of “consumer-directed care,” patients are being asked to take an active role in seeking out medical bargains. Those of us thrown into this mess know that we are woefully unprepared for this task. My husband was prescribed an MRI-guided cortisone injection into his hip not long ago. He asked the orthopedist how much this procedure would cost and the doctor had absolutely no idea but recommended an imaging center he is affiliated with. When my husband called the center and asked how much the procedure would cost, they told him it would run about $2,000. This seemed really high (and again, it would be coming out of pocket) so he called the doctor’s office and got a referral to another imaging center from the office assistant. The price of the same procedure was just over $800. Seemed like a bargain, right?

This anecdote will no doubt warm the hearts of conservatives who sing the praises of consumer-directed care and the power of market forces to drive down prices. My take on it is that my husband and I were just lucky that we had enough knowledge about pricing and had the time to haggle. Most people don’t have the wherewithal to compare prices—they are sick and need immediate treatment, get admitted to a nearby hospital or get sent to a particular imaging center and find out later how much things costs. Prices are not listed on the wall; you can’t find them easily online and NO ONE EVER TELLS YOU HOW MUCH THINGS COST. When we do bargain or seek out cheaper providers we never really know if the deal we’ve gotten is really that great.

I’ve got to say that the idea of turning health care into a giant used car lot doesn’t hold much appeal for me. I’d much rather know that my providers are working from a standard price list—much as they do for Medicare and in virtually every other developed country. “Let’s Make A Deal” is a television program; it shouldn’t take place in a doctor’s office.

33 thoughts on “Haggling for Health Care

  1. Thanks Maggie and Naomi!

    Two points to add:

    a. John Goodman’s Health Policy Blog had a good exchange on the price of colonoscopies in the US a few days ago.

    Several writers noted that American prices are driven up by the use of full anesthesiologists plus the tendency of hospitals to pile on huge overhead costs into all their billings.

    Also note that hospitals are sometimes paid 20% of their charges, so that a $6000 charge results in a $1200 payment.

    Not much comfort if you are underinsured and get a bill for $6000 of course.

    Goodman’s blog draws some hard-right libertarians who know very little about health care, but I still find it worth reading. The blog does attract Uwe Reinhardt from time to time, and Greg Scandlen is also quite good at times.

    b. The awful trend towards high deductibles is not just the fault of profit seeking health insurers as you suggest.

    Many health plans around the world are increasing their deductibles, admittedly not to the grotesque levels we see in America.

    It is very easy for a health insurer to be swamped by large claims. It is happening right now in the PCIP high risk plan run by the federal government, and profit has nothing to do with it.

    Health plans do not have the legal ability to stop the flow of claims by not covering cancer care or heart surgery or bone diseases, where a lot of the costs are.

    So, they raise deductibles in great part to keep people away from seeing the kind of specialists who might diagnose such diseases and order a cascade of tests.

    This does not completely work, so claims costs still keep going up and their only response to raise deductibles further.

    What I am trying to say is that high deductibles are a poor solution to a real problem.

    • Bob-
      I too like Uwe Reinhardt.

      The problem with Goodman is that he has little respect for facts. For instance, in this recent post he writes: A recent study in the New England Journal of Medicine was devastating for proponents of ObamaCare’s Medicaid expansion. It finds that (as far as physical health is concerned) there is no difference between being in Medicaid and being uninsured. This undoubtedly caused considerable anguish within the Democratic chambers in Congress and among the liberal health policy community.

      “It’s hard to exaggerate what a blow this is to the people who gave us the Affordable Care Act (ObamaCare). Everything about ObamaCare—from the money we are spending to the damage being done to the labor market to the hassles the whole nation is going through—depends on one central idea: that enrolling people in Medicaid will give them access to more health care and better health.”

      What Goodman deliberately avoids mentioning is that this was a study of new Medicaid patietns who had been on Medicaid for just two years.
      These are, by definition, poor people who have had inadequate healthcare throughout most of their lives. (Many/ most have never had insurance, a family doctor, etc.)

      As children, they probably didn’t get all of the care they needed.
      What happens in the first 3 or 4 years of your life determines your health profile for the rest of your life.
      IN addition, a significant percentage of the poor smoke, drink to excess or use drugs.
      This makes it harder for them to lower their blood pressure, lower their blood sugar, and control their diabetes (the things the study looked at.)
      Finally, poor patients often are not terribly compliant– either because they didn’t understand (or forgot) what the doctor told them they should do, or becuase their lives are so chaotic that they have a hard time “getting it together.)

      Patients become more compliant as they begin to trust their doctor. Doctor patients relationships are all about trust–and that takes time. The first or second or third time the patient sees a doctor, he’s not likely to admit: ‘I drink a lot. Every night and all week-end.”

      Over time, health care will no doubt help many of these Medicaid patients but it’s not going to be an quick “cure.”

      Goodman doesn’t mention that this is a study fo people who have been getting healthcare for only two years.

      MOreover, he omits another very important fact when he writes:
      “The liberal pundits” point out that “(1) There was less depression among the Medicaid enrollees, (2) they reported they were a tiny bit happier.”

      The FACT is that their depression was cut by 30%. That’s not “a tiny bit happier.”

      Goodman is not stupid. He knows that mind and body are connected– mental health has a lot to do with physical health. If these patients are 30% less depressed, this means they have a much better chance of kicking a habit that is huring them, and a much better chance of feeling hopeful enough about life in general to want to try to manage their diabetes.

      Why are they 30% less depressed? They have a doctor–someone to talk to who appears to care for them. This suggests that the “trust” relationship is beginning to build.

      Goodman has a very clear political ideology.
      I do too. But I don’t knowingly omit pertinent facts and I don’t distort facts.

      I’m afraid Goodman does this all of the time.

      As they say: “Everyone has a right to his own opinion, but not his own facts.”

  2. There are several possible ways to address this problem.

    First, we need robust, user friendly price and quality transparency tools in the hands of both patients and referring doctors. For commercial insurance, price transparency means disclosure of actual contract reimbursement rates, not hospital chargemaster or physician list prices. Also, doctors need to incorporate sensitivity to costs as part of their job even when taxpayers or insurers are paying the bill.

    To make this happen, the confidentiality agreements that currently preclude disclosure of contract rates must be abolished by insurance regulators, or if necessary state and/or federal legislators. Developing relevant quality metrics is a more challenging issue but not an impossible one. For hospitals quality metrics need to include process which means following evidence based guidelines and protocols, outcomes, preferably risk adjusted, patient safety including minimization of infections, and patient satisfaction.

    Second, there needs to be regulated limits on how much can be charged for care delivered under emergency conditions. By definition, such care cannot be scheduled in advance and patients are in no condition or position to shop around for more cost-effective alternatives.

    Third, there should be a reasonable limit on how much the uninsured can be charged regardless of what the provider’s list price is. In New Jersey, uninsured patients with income below 500% of the federal poverty level (FPL) cannot be charged more than 115% of Medicare. Since hospitals claim that Medicare only covers 91% of their costs on average, 115% of Medicare equates to 104.7% of costs (91 x 1.15).

    Finally, last week, in a post by Sarah Kliff on The Washington Post’s Wonkblog, she noted that the CEO of Mount Sinai Hospital in Miami, FL announced that his hospital will start to disclose actual contract reimbursement rates that it receives from Aetna and the local Florida Blue Cross insurer. Presumably, he was able to obtain waivers of the confidentiality agreements to allow this. I assume the hospital contracts with other insurers as well but none of them were mentioned in the article. This could be a very significant development on the transparency front. At least I hope so.

    • Barry–

      I very much like the idea of pegging what hospitals can charge the uninsured to a percent of Medicare rates.
      I would add that, on average, Medicare does not under-pay hospitals. MedPAC shows that hospitals can make a profit on Medicare–if they are efficient.

      Our most expensive hospitals tend ot be overpaid by Medicare. (They have the political clout to demand more, and Congressmen representing the area where they are located (for instance, Manhattan) make sure they get it.

      Disclosure of actual contract rates would be useful –but the fact is that those rates have little to do with what it costs the hospital to deliver care. The rates are all about how much market clout the hospital has versus how much market clout the insurer has.

      A better fix would be the Maryland “all-payer system” under which all hospitals are paid the same fee for a particular service. (Medicare and Medicaid as well as private insurers all pay the same fee.) Those fees are adjusted if a hospital serves a disproportionate share of poor patients or seriously ill patients. And Fees are adjusted for teaching hospitals that have to have new, very expensive equipment to train their students. Research shows that over the years this has held down healht care costs in Maryland–even though it is on the East Coast (where medicine is generlaly more expensive) and has a large poor population (Baltimore) as well as teaching hospitals.

  3. Bob –

    One issue that the NYT article on colonoscopies failed to address is the difference in the cost structure between U.S. academic medical centers and community hospitals vs. similar hospitals in other developed countries. At least 60% of a hospital’s costs are for wages and benefits and there are surprisingly few economies of scale as hospitals consolidate into larger systems.

    As I understand it, roundly 5 million people work in U.S. hospitals while the total number of licensed beds is about 1 million which suggests five employees per licensed bed on average. I have no idea what the comparable number is for hospitals in other countries as I have never seen a study that attempts to make apples to apples cost comparisons. I also don’t know how much of hospital operating budgets in other countries are covered by general tax revenue or other revenue outside of the billed amount for care.

    While doctors and hospital executives in the U.S. earn more money than their counterparts abroad both in absolute dollars and as a percentage of per capita GDP, I don’t think other hospital employees, including nurses and technicians, do but I could be wrong on that. If anyone knows of good data or studies that address this issue, I would be very interested in hearing about them.

    • Barry–

      In the U.S. payments to physicians account for only 7% of total health care spending.http://theincidentaleconomist.com/wordpress/physician-fees-and-salaries-in-the-us-and-other-countries/
      (The number is as low as it is because this incldues residents’ salaries– they don’t earn very much.)
      AFter residency, as you know, U.S. physicians earn far more than physicians in other develped countires (even after adjusting for differences in cost of living and the fact that U.S. docs often have large med school loans.)

      The salaries of nurses are not nearly as inflated in the United States. In 2006 they were, on average, 1.5 times GDP, not much different from the 1.1 times GDP seen in other countries.

      But we do have higher staffing ratios (nurses per bed). (This is from AAron Carroll, who adds: “Maybe this is worth it. Maybe it is not.”http://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-%E2%80%93-health-care-workers/

      I would say it is worth it. This is from the British Medical Journal”Research confirms that features of the hospital work environment (such as better staffing ratios of patients to nurses, nurse involvement in decision making, and positive doctor-nurse relations) are associated with improved patient outcomes, including mortality and patient satisfaction.This association is probably due to the important role of nurses in the surveillance system of hospitals”

      We also know that when for-profit hospitals have tried to save money by “down-sizing” nurses, people died. (FBI investigations have shown this.)

      Finally, if you have spent time visiting a patient in the hospital (who didn’t have a private duty nurse) or have been a patient yourself, you know how busy nurses are. You don’t see them standing around and chatting–or drinking coffee.. There are busy, all of hte time, which is why relatives often have to do things like change bed sheets, bring the patient water, turn him to avoid bed sores. . .

      Certainly our hosptials could be better organized so that nurses could do a better job (we need better systems and better coordination of doctors and nurses working together as a team.) But I don’t think we want to try to economize by having fewer nurses per patients.

      Nurses are absolutely essential to patient safety.

      Finally, we also have more non-nursing staff per patient in our hospitals. Are we over-staffed in that area? I don’t know, but I would suspect that if we had reallly good HIT systems we Might need fewer people. Though of course many people are needed to tend to the IT.

      Bottom line, medicine, like education is, and always will be, labor-intensive. (Baumol’s law.) .

  4. I was first alerted to the insane state of the medical world when I read that article in Time magazine — “bitter pill” I think was the title — absolutely insane to think that some how our medical care system works like this. Outrageous.

    • Tara–

      You are right. Different hospitals charge very different rates for the same procedure.
      Basically, hospitals charge as much as they can– and if they have a “brand name reputation” they
      will charge far more, even though care may not be any better.

  5. Maggie –

    I know that doctor compensation is only 7% or so of healthcare costs. However, the decisions they make to order tests, admit patients to the hospital, refer them to specialists, prescribe drugs, consult with patients and perform procedures themselves drive nearly all healthcare spending. Their practice patterns on average may be significantly more aggressive than their overseas counterparts but I don’t know. Some of it could be money driven, in part related to the fee for service payment model and some could be defensive medicine. Some may be driven by patients who think (wrongly) that more care is better care and more expensive care is better care.

    Regarding hospital costs, I have no problem with the nurse staffing ratios. I’ve spent enough time in hospitals as both a patient and a visitor to know that they have a demanding job and are almost always busy.

    In Germany, doctor credentialing is done at the state level similar to issuing drivers licenses in the U.S. but is generally done in hospitals here. It’s possible that credentialing costs in Germany don’t even count as healthcare costs. In Switzerland, roughly one-third of hospital operating costs are funded by the cantons. That’s revenue that presumably doesn’t have to be factored into the price of services, tests and procedures performed at the hospitals.

    Just as differing definitions of a live birth can partially account for differences in infant mortality rates among countries, I’m skeptical that accounting for aggregate healthcare costs is consistent across countries. That said, the prices per service, test or procedure are significantly higher in the U.S., especially for hospital based care, both inpatient and outpatient and uncompensated care is significantly overstated as a driver of this. The Kaiser Family Foundation tells us that hospital prices are only about 6% higher than they would otherwise be because of uncompensated care. Also, illegal immigrants are mostly young and healthy and don’t use much health care except for maternity related care.

    The bottom line is that I would still like to see a good study that compares hospital costs and employees per licensed bed across developed countries. There is either a lot of inefficiency in hospitals or American get much more of their care, including outpatient services, in an expensive hospital setting than patients in other countries do.

  6. Barry–

    As Dartmouth’s Elliot Fisher points out: “Hospital stays in the U.S. are shorter than in other countries, but a lot more happens to you when you are there.”

    More tests, more procedures, more surgeries, more medications, more consultations with mutliple doctors.

    It seems clear that “fee for service” plus a general belief (by docs and patients) that more care is always better care” fuel “more care.”
    As I have said in the past, it is very difficult to know how big a role “fear of lawsuits” plays. IT’s impossible to untangle the many motives that would cause a doctor to
    “do more”
    a) I have always liked Mrs. Brown and she has been a patients for a long time; I just want to make sure that I do the very best that I can for her.
    b) Mrs. Brown is a pain-in-the-ass. She is a very demanding person. But I know that if I don’t prescribe another test, she’ll never leave my office.
    c) Something about Mrs. Brown’s symptoms rings a bell. I can’t put my finger on it, but I’m reminded of another case that went sour. I had better run some more tests.
    d) I’m afraid Mrs. Brown would sue me if I don’t get this disagnosis right–or even if I’m right, she has a bad outcome.

    Even the doctor himself have a hard time sorting out which of these concerns was driving his decision. We all make decisions every day that are driven by multiple

    But I am pretty certain that as we move away from fee-for-service, and stress evidence-based medicine, we will
    reduce overtreatment.

    I’m glad you agree about nurse staffing ratios. They
    do have a very tough job.

  7. Maggie –

    While Maryland’s all payer system, which has been in place since 1977, I believe, has conceptual appeal it probably could not be implemented in other states today. The reason is that Medicare and, especially, Medicaid would have to pay more so private insurers can pay less. That’s unlikely to happen anytime soon in today’s federal and state fiscal environment. Medicaid already accounts for 20%-25% of most state budgets and most hospitals insist that Medicare pays them less than their fully allocated costs on average, especially for outpatient services, tests and procedures.

    According to Uwe Reinhardt, when the NJ legislation dealing with how much to charge the uninsured was being debated, the original proposal was to limit charges to 100% of Medicare. Hospitals argued that they were paid less than full costs by Medicare and were sufficiently convincing that the limit was raised to 115% of Medicare for those with incomes at or below 500% of the FPL.

    • Barry–
      Actually Vermont is currently considering an all-payer system (This from a May 29 piece in the National Journal which adds: “Politically, however, it requires a state committed to both setting tough regulations and policing cronyism.

      Politicial conditions, not economic conditions, create the situation where state legislatures will support “all payer” which is, in essence price regiulation. Even though Medicaid pays more and Medicare pays slightly more, the state as a whole SAVES money because hospital costs are lower. (Keep in mind that State and local governments pay the health care costs for state and municipal employees. And an all-payer system can insist that hospitals meet certain quality targets (as Maryland does) which in turn means they are getting greater value for their dollars.
      In the past, quite a few states
      states had all-payer systems that were working pretty well. But then, the political winds shifted, and Republicans took over many state legislatures end governor’s mansions.

      In those states, lobbyists for big insurers and hospitals were able to persuade Republicans that they should go back to what some saw as “free market compeittion”– insurers and hospitals negotiating prices behind close doors., No transparency. The insurer or hospital with the greatest market clout won, and brand-name hospitals gouge all of us.,
      Now, however, Republicans have begun to lose their base in many parts of the country. Changing demographics weaken their chances of winning elections. They have alienated women, gays, Latinos and African Americans. . Politicians like New Jersey’s Cory Booker are appearing on the scene. The mayor of Newark, he is now running for the Senate and is wildly popular. (My husband recently said “I’d almost move to New Jersey just to vote for Corey Booker. If you knew how my husband feels about “Jersey drivers” you woudl realized what a remarkable statement this is.)
      These factors all suggest that over the next decade, Democrats will re-take many states. Under those conditions, I I can see some states moving back to an all-payer system.
      As the May 29 National Review story points out:
      “Maryland is running a 40-year experiment in price control—with impressive results. The state’s Health Services Cost Review Commission, whose members are appointed to four-year terms by the governor, has created a system like those in France and Germany, where regulation helps determine hospital prices. The results speak for themselves: Maryland has kept price inflation below the national average, maintained quality, and ensured the financial stability of hospitals, including the types of community facilities in poorer neighborhoods that have struggled and closed elsewhere.

      “Maryland’s system is what health care economists call all-payer rate-setting. The cost-containment board looks at services and hospital needs and then selects a uniform menu of prices for all payers. In most states, prices for the same procedure vary. Some payers, usually the public ones such as Medicaid, get a steep discount, while others pay more to make up the difference. (The country’s most expensive CT scan of the head is $1,545, according to the international health-plan study.) In Maryland, Medicare, Medicaid, private insurers, and patients who pay cash all get the same bill for a CT scan. It means that bigger, more powerful hospitals can’t demand higher prices from insurers. It also means that hospitals that treat Medicaid patients don’t get bankrupted by skimpy reimbursement rates.

      .In 1976, a few years after rate-setting went into effect, the average price for a hospital admission in Maryland was 25 percent above the national average. By 2009, it was 3 percent below. Robert Murray, the commission’s former executive director, estimates that the all-payer policy has saved the state $45 billion over that time. Prices there are not the cheapest in the country, but its hospitals have experienced the lowest growth per patient at the hospital level of any state during that period.
      “The system also pushes hospitals to hit quality targets and improve the standard of care. In the two years after the commission introduced quality incentives to reduce certain preventable complications, the rate fell by 20 percent.”

    • Barry–

      As for New Jersey’s experience: of course hospitals say they are underpaid.
      Most hospital CEOs think of themselves as “revenue centers” and believe their job is to increase revenues as much as possible.
      In fact, as health care reforms point out, hosptials are “cost centers” and need to begin thinking of themselves in that way.
      Even today, they use excess revenues to construct new wings that are not needed; to pay for hotel-like amenities (very expensive art, marble lobbies with waterfalls, parking garageds and elaborate maternity suites (Uwe Reinhardt talks about the lattecare.) These things have nothing to do with health.
      Eye-popping exectutive compensation at the top sets the tone for extragance and waste throughout the hosptial. (When shopping for a company to buy, Warren Buffet pays attention to this. When he make a purchase he is likely to get rid of executive stock options. He believes in the theory that executive compensation “sets a tone.” )
      On what hospital efficiency means: Both the Medicare Payment Advisory system and the Insitute for HealthCare Improvement have demonstrated, in very specific terms, how
      hospitals can become more efficient. IHI has actually helped many do just that. (go to their website.)
      MedPAC documents the fact that when hospitals are under financial pressure (because insurers have reduced reimbrusements, because their patient mix is changing) they can and do make a profit on Medicare, by reducing waste, focusing on things like patient safety (medical mistakes are terribly expensive) , and postponing plans for more contruction.

      In face of all of this evidence, what Paul Levy has to say about his personal experience at one hospital really isn’t relevant.

      Finally– on occupancy rates: ER docs and other physicians have talked openly about hospital administrators pressuring them to admit patients who really don’t need to be admitted in order to fill beds.
      We have more hospital beds than we need in many parts of the country. (All of that construction . . . .)
      Under reform, we will be paying physicians to keep patients out of hospitals by doing a better job of helping patients manage their chronic diseases.
      As a result, hospital admissions may well fall. (At the same time, more older patients will die, not in hospital ICUs but in hospices, or at home with hospice care. )
      I suspect that some hospitals that can’t meet patient-safety standards and have high infection rates (which under reform, will be published) will close. This will lower total health care spending becuase in the heatlhcare industry supply creates demand. (“:Build the beds and they will come”)
      Finally, as community health centers expand, many low-income families will get regular care at these CHCs–rather than in hospital ERs (*the least efficient, most expensive way to deliver care.)

  8. I have no particular expertise on hospitals, but let me raise a few points anyways:

    1. Per Woolhandler, Himmelstein, Grumbach, and Bodenheimer, what American hospitals certainly have is far more people in accounting.

    2. American patients and insurers are expected to pay the fully allocated costs of a hospital stay, in other words with all the loading.

    In many other countries, the taxpayers pay for part or even most of a hospital’s regular overhead.

    The patient only has to pay the marginal cost of the drugs or tests they consume.

    That is why you read those painful stories about Americans who live in Paris and get eye surgery for $200, and then need to repeat the procedure in New York and the price is $20,000.

    The French have no technical miracles and their nurses are not slaves. But sales taxes and income taxes flow to the hospitals before a single patient hits the door.

    Americans are so wedded to fully allocated costs that few can imagine a different world. It is like a national nightmare from which we are yet to awaken.

    Finally, as to John Goodman. I can usually tell when he is taking off on a right wing toot, and I ignore it unless it is just too offensive. He does bring on good news items, and probably his think tank gets a ton of money to hire researchers.

  9. Bob –

    You always hear about the billing clerks from the single payer crowd but I don’t think it accounts for very much as a percentage of revenues nor does CEO and senior management compensation. However, in addition to the study comparing hospital costs among countries, including the number of employees per licensed bed, I think it would be instructive to see how much of hospital revenue comes from sources other than payments from insurers and patients. It the U.S., hospital research budgets of academic medical centers are largely funded by the NIH and philanthropy plays a role as well. Modest revenues also come in from such areas as the cafeteria, the gift shop and the parking lot or garage.

    When Maggie noted that hospitals can make money on Medicare if they are efficiently run, it’s not easy to define what efficiency means. Perhaps some hospitals have more staff than others in areas like community relations, and some do a better job than others of matching nurse staffing to fluctuating patient loads. I know that a few years back when Paul Levy was CEO of BIDMC in Boston and the hospital needed to cut $20 million out of expenses to stem losses, it was an enormous effort to find the savings even though hospital revenues were about $1.2 billion.

    Aside from significant differences among hospitals in prices received per service, test, or procedure which are mainly a function of market power in the commercial insurance world, the biggest differences that drive revenue from one hospital to another are the payer mix – commercially insured, Medicare, Medicaid and self-pay (uninsured) and the average occupancy rate. Since most hospital costs are largely fixed in the short to intermediate term, the occupancy rate is a big deal and is often overlooked in talking about efficiency.

  10. Bob–
    Europeans pay far higher taxes than we do, in part because they fund their health care system in large part through taxes.

    “The U.S. collects about a quarter of its gross domestic product through taxes. In countries like Denmark, Sweden, France and Belgium, it’s closer to half of their GDP in taxes.’
    A great many Americans woudl be very very upset if their taxes increased to a pointe where half of GDP was going to the government in the form of taxes. (I personally would not be upset if taxes were raised for people in the top 10%– those with joint household income over l$110,000. But a great many people with household income over $110,000 don’t realize they earn more than 90% of their fellow citizens, and don’t think of themselves as “wealthy” So it would be quite a shock if we raised taxes to fund a single-payer system. )
    Traditionally, we have funded our heatlh care system through employer-based insurance. (Though that is changing. What the single-payer system folks rarely mention is that the government now pays more than half of the nation’s health care bills–not just through Medicare, Medicaid, SCHIP and the VA, but by buying insurance for federal state and municipal employees.)

    What’s important to understand is that paying for health care through taxes doesn’t make it any cheaper– though if the taxs are progressive, it does spread the burden more evenly throughout the population.

    Goodman’s think tank — NCPA–does indeed get lots of funding from sources that pay it to lie.

    According to an article in The Guardian newspaper, in 2008 the NCPA received USD 75,000 from ExxonMobil.
    (For years, NCPA has said that global warming is a myth) http://globalwarming.ncpa.org/issues/?c=global-warming

    In 1992, the New York Times reported that the NCPA was partially funded by the insurance industry. (“In In a 2010 pamphlet entitled “What does Health Reform Mean for You?”, the NCPA asserted without referencing any sources that under the health care reform law: “Most employers will have to reduce what they pay in wages and other benefits in order to afford the required coverage” and that “The extra burden on employers could cost as many as 700,000 jobs by 2019.” http://www.ncpa.org/HealthReform
    In fact the health care industry is creating jobs–and in the years ahead, reform will continue to generate more jobs for community health workers, nurse-practioners, physician assistants, hospital technicians, Exchange navigators and others in the health care industry.http://business.time.com/2011/11/21/how-health-care-reform-can-create-jobs-and-cut-costs/
    According to Greenpeace, the NCPA received at least USD 570,000 from Koch Industries in the eleven-year period ending in 2008.
    Beware of apparently “good news items” funded by special interests.

  11. Maggie – thanks for the points about Goodman.

    Barry – fascinating item about Paul Levy having a hard time finding $20 million of savings.

    If his hospital had 400 doctors making $250,000 each, he could have found $20 million of savings overnite by cutting their pay by $50000 each.

    These may not be the real numbers. But I used to be on a school board, and I became weary of those who said that we had to have layoffs when state and city revenue went down even a little.

    If each senior employee had been given a $3000 pay cut, no layoffs would have been needed at all.

    When you exempt high earners from even slight cuts, the budget dilemmas seem much worse than they really are.

  12. I did find the blog post by Paul Levy. He is a very good writer, and Barry your comments were on point.

    I get the impression that large hospitals are like government agencies. When times get tough, they think that forgoing wage increases are some kind of hardship.
    And that stopping the insane practice of cashing in unused sick days is some kind of bold economy.

    We have seen a lot of unions go on ruinous strikes rather than take pay cuts. Senior employees are protected against a nickel of cuts, in exchange for which younger employees lose their entire job.

    I do not mean to run off against Paul Levy. The utter absence of any solidarity in the American workplace is obviously not his fault.

  13. Bob:

    The $250,000 salary is about what a Primary Care doctor makes and for the care they provide, it is hardly worth the effort of cutting their salary.


    I would be surprised if Hospital Labor is the largest cost as usually it is Material and Overhead in most other instances.


    If you started at $100,000 for increased taxes, you would capture ~17% of the taxpayers in 2006 dollars. ~31% of the 2001/2003 tax breaks were screwed toward those making >$500,000. The recent return to rates of 35(?) and 39% left quite a bit of tax revenue on the table.

    Group: A tale of two hospitals.

    I was one of the unfortunate ones to have experienced two operations in a period of 3 months. I am a runner, cholesterol was 118 upon admittance, and heart efficiency rate of 67% (which I am told is above average with 60% being average). I am active and not over weight.

    September was the gall bladder and endoscopy ER visit and on the second entry, they kept me. I came out fine and no big deal.

    Three months to the date, I was back at MedCentral, Mansfield Ohio complaining of chest pains and this is when the ejection fraction rate was established. They did not send me to my apartment this time and kept me. The ER swarmed me. Triple by-pass, a lot of pain, and they turned me loose in a week. The nurses took good care of me and this no-name Community Hospital is ranked in the top 5% for heart care. I was lucky.

    I am now back in Michigan (home) dealing with a system several times bigger than MedCentral. UofM is a great hospital with plenty of resource and an ego/attitude to boot. I had started cardiac rehab in Ohio. Did the stress test, visited a funny Cardiologist, and went to my appointments whenever my job did not interfere (which they did frequently). I guess cardiac issues and rehab does not count towards a temporary medical disability.

    After getting laid off by my Ohio company shortly after being out of the hospital, I returned to Michigan. I still have my insurance. Visited my regular doctor and had the usual blood pressure checked and was referred to a new cardiologist who did the same (all within a week). I was again referred to cardiac rehab and was told they would call in about 3 days. My time is short as I expect to be back to work soon.

    The call came after a week went by. I get some young MA (the cardiologist is young and I like him) on the line who I explain the situation to over 5 minutes. She proceeds to tell me:

    – I will have to see a nurse for a checkup. It was obvious she did not look at my records.
    – They may not accept the stress test from Ohio. Why? Is MedCentral inferior to UofM?
    – And the insurance may not allow me to continue. I sporadically completed 16 visits of planned 32 so I know I have 16 left and can get more (up to 100 allowed yearly) if someone pleads my case. I know this because I talked to them.
    – We do not have your cardiac rehab records. You should because the cardiologist had them and MedCentral sent them twice.

    What this magnifies is the present day system of duplicating tests because you went to another hospital, multiple visits after already being checked out by a doctor and cardiologist, and a failure to coordinate systems. All of these issues are what the PPACA is supposed to reconcile. Other than the fact the MA had none done her homework, I am getting testy because this involves more money spent to fund their operation, more of my time to comply, a delay in my continuing cardiac rehab, and potentially higher insurance rates. There is a lot which needs to be fixed.

    I guess I will not see an insurance premium refund this year or next year . . .

    • Run 75411,

      Your story about your intereaction wtih the MA at the cardiac rehab center sums up so much of what is wrong with our health care system:
      Waste, Inefficiency, Lack of Coordination, Poor Information Flow. As you say, this leads to duplicate testing, unnecessary doctors’ visits . . .

      In addition, this particular MA just didn’t even try to do her job. (I’m becomign increasingly grumpy about how many people in this country just can’t be bothered. They like to say “no.”:
      “There is no listing under that name.” ”
      We’re out of that product (without going down stairs to see if there aren’t more”
      She gave you misinformation and didn’t bother to read your file.
      She shouldn’t be in customer service. And certainly she shoudln’t be in customer service in the health care industry. (If she were selling
      clothing, at least she would be doing much less harm.)

      In this case, I really think you shoudl tell your cardiologist the story, and write to her supervisor at the rehab center.
      Normally, I would never try to get someone fired. But in this case . . . At the very least, she needs rehab herself.

      It’s interesting that your insurance company has given you better advice than she has. I notice that some customer service people at some insurance companies are excellent. .

      On Primary care docs– most recent figures show that their median income is about $195,000. Half make less; half make more.

      The idea that one can (or should) cut the salary of someone who makes $200,000 or $250,000 by $50,000 is totally unrealistic. These people have lives that are now organized around the assumption that they will bring home a certain amount. They have mortgages, children in private schools etc. You can’t suddenly just upturn their lives.

      That said we can and should rein in incomes at the top of the health care industry (excecutives) and we shoudl refuse to over-pay for certain treatments. When it comes to phyicians incomes, orthopedic surgeons lead the pack. In 2011, they earned an average of $350,000 (that’s after business expenses such as office overhead, salaries for staff, malplractice insurance, etc. etc. etc. ) http://www.medscape.com/features/slideshow/compensation/2012/public

      Why have their incomes soared? In 2000, 282,350 Americans underwent knee replacements; now 658,340 people have knees replaced. In 2000 165,065 hop replacements were done. Now, that number stands at 302, 839.http://www.usatoday.com/story/news/nation/2013/03/19/hip-knee-replacements-sex/1994977/

      At the same time ” complaints about complications, botched operations, and the need for second surgeries known as “revisions’’ have been amplified.In one high-profile 2010 case, medical device giant Johnson & Johnson recalled two kinds of hip replacement implants made by its DePuy Orthopaedics division because of higher-than-expected rates of early failure.”

      45-64 year old boomers are replacing joints without first trying more conservative alternatives such as weight loss, and physical therapy.

      Some patients ” think it’s fountain-of-youth surgery, that we’re turning back the clock.” one doctor warned the Times. He points out that a new hip won’t increase a person’s muscular strength or reaction times. “Somebody who’s 80, who thinks he can be playing tennis with 60-year-olds — we tell him he should be playing doubles,” he said.

      Finally, and most importantly, if we want to make healthcare more affordable–and safer–we need to make hundreds of small adjustments–
      cutting costs by 2% here, 2% there. Improve efficiency by 6% here and 5% there–without cutting salaries. We can’t cut costs with an axe; we have to use a scalpel.

      P.S. People with total household incomes over $110,000 are now in the top 10% in terms of income. .

  14. Bob –

    You have to remember that union leaders, at the end of the day, are politicians. They need to please the majority of their members to keep themselves in office. Everyone knows that the seniority based culture calls for the last hired to be the first fired. The leadership knows that when tough times come, it’s better to keep 95% of the members happy by protecting their jobs and their pay while allowing the other 5% to be laid off instead of trying to sell pay cuts for all in the name of solidarity. Most unions just don’t work that way.

    On the other hand, if bankruptcy and possible liquidation or closure is a distinct possibility and all of the members’ jobs are in jeopardy, then they might reluctantly conclude that 85% of something pretty good is a heck of a lot better than 100% of nothing.

    Run75441 –

    You’re wrong about hospital costs. Labor and benefits are the biggest cost component by far. Roughly 5 million people work in hospitals in the U.S. and there are about 1 million beds. My estimate is that 50%-60% of the employees are nurses, techs and assorted therapists. Again according to Paul Levy, the average total compensation (including benefits) for employees of his former hospital at the time he was there was about $80,000 per year. On a nationwide basis, that’s $400 billion out of total hospital revenue at the time of about $650 billion or a bit more. Compensation accounts for roughly 60% of hospital revenue. Materials and supplies are 15% or so. Then you have utilities, insurance, including malpractice insurance, uncompensated care, depreciation and profit (if any) accounting for the rest. For profit hospitals are also liable for property taxes and corporate income taxes which non-profit hospitals are exempt from paying.

    By the way, I had a quintuple CABG in 1999 and needed a DES in 2005. I never smoked, don’t drink and maintain a normal weight but I have a family history of heart disease. Bad genes can negate a lot of healthy behavior. Remember Jim Fixx? Conversely, a lot of people who smoke, drink and rarely exercise but are blessed with good genes can and often do live a comparatively long and reasonably healthy life.

    • Barry–


      You write: “I had a quintuple CABG in 2999 and needed a DES in 2005. never smoked, don’t drink and maintain a normal weight but I have a family history of heart disease. Bad genes can negate a lot of healthy behavior. Remember Jim Fixx? Conversely, a lot of people who smoke, drink and rarely exercise but are blessed with good genes can and often do live a comparatively long and reasonably healthy life.

      Thank you so much for saying this. You are absolutely right. In our “shame and blame” culture we blame people for everything from heart disease to being diabetic, or suffering from depression which then leads to other physical problems. In each case there is a genetic component–how large or how small varies, case by case.

      But our tendency to “blame the victim” leads the patient himself to feel guilty–when he is already in a world of pain. Patients diagnosed with cancer often feel they did something wrong. Often that just isn’t true.

      I wonder if you would want to write a guest post about the genetic component behind many diseases? In many cases, we can’t quantify it–there are so many factors behind most diseases. But we can see the repetition in a family–even when siblings are separated early in life and grow up in very different environments with very different habits.

      On unions, you write: “The leadership knows that when tough times come, it’s better to keep 95% of the members happy by protecting their jobs and their pay while allowing the other 5% to be laid off instead of trying to sell pay cuts for all in the name of solidarity.”

      Yes, and I have to say that unions probably should represent 95% of their workers. Last hired first fired means that the youngest workers (who usually have fewer family responsibilities) are fired first. In normal times, they are more likely to be able to find another job than older workers. And, from a company’s point of view, it needs to hold onto experienced workers.

      That said, I always admire the occasional CEO or top executive who steps forward and says “Business wasn’t good this year, so I’m not
      going to take a raise.” Or “I’m going to take a cut.”

      As for cutting salaries by $50,000. Someoneone earning $190,000 has life and family responsibilities organized around the assumption tha the will bring home $190,000 (a mortgage, children, etc.) You can’t just blind-side someone with a $50,000 pay cut without causing
      real pain.

      On Paul Levy and how much workers were paid at his hospital: We need to keep in mind that Boston is the most expensive spot on the face of the globe for heatlh care, doctors’ salaries, and probably other health care workers.

      Hospital workers’ salaries in Boston just aren’t a good marker for the nation.

      At the same time, as I have said, health care is, by necessity, labor-intensive.

      On the other hand, medical technology (which includes not just equipment and devices but drugs) plus
      construction, installing those hotel-like amentiies (not just one-time capital expenses, but constant
      renovation, once every 3-7 year) may mean that capital expenses are catching up with the cost of labor. (As Don Berwick has said, “the crane is the hospital industry’s national bird.” ) But I don’t have any good numbers on this.

      I suspect that all of this varies widely– depending on whether you are talking about a marquee academic
      medical center, a small community hospital, or a public hospital in an inner-city.

  15. Barry:

    I do not think so and maybe I was not specific enough. Direct Labor or that Labor making a product for the customer or providing a service to the customer is the Cost of Labor. Everything else including fringe benefits is Overhead. I would venture to say the results are the same or similar to the costs of manufacturing a product. Total hospital labor compensation is not the same as Direct Labor to supply a service or make a product.

    There are way to many McHospitals (think McMansions or big box churches) and the duplication of equipment and services appears to be beyond what is needed. I would also suggest your 15% for materials is way to low to this former hospital supply manufacturer.

    Mine was not genetic. Perhaps, just stress. I was the surprise I the neighborhood and the family.

  16. Barry’s statistics point out why health care reform is never going to be pain free.

    For example, a single payor system designed along Canadian lines and living on a 12-14 per cent payroll tax would not be able to pay $650 billion toward hospitals.

    There would have to be layoffs. A Lewin study of single payer in Minnesota concluded that 42,000 persons would lose their jobs in one state.

    According to Michael Mandel, medical employment has been propping up the US labor market for 20 years.
    This ‘bubble’ may be coming to an end.

    • Bob–

      The Lewin study did not show that hospitals would have to lay off workers. It was very specific: jobs in the insurance industry would be lost–because the government would replace the insurance industry.

      We need all of the nurses, nurse practtioners, physican assistants, technicians, pharmacists, social workers, residents, physical therapists, cleaning people, doctors etc. that we have in our hospitals,and we need more.
      And I suspect we need all of the people in billing.

      MOreover, with the excception of a handful of top administrators and some specialists, they are not overpaid.

      If you have ever spent a week or two in a hospital as a patient (or spent hours by the side of a loved one) you would be aware that virtually everyone you see is working hard–and yet, as a patient, you may well find yourself unable to get help when you need it. Patients typically say that all of the nurses and other people were very nice . . .but I was left in a hallway for 1 1/2 hours waiting for a test . . . when I rang for nurse, it would be a long time before anyone would come . . when my mother was int he hospital she was lying in soiled sheets for an hour before I came to visit; I got some sheets and changed the bed myself.

      Healthcare is a labor-intensive business. Period. An economist named Baumol has written about many of the things that government does–education, heatlhcare . . . are, of necesssity, labor-intensive, and for that reason is it very hard to make a profit on them.

      As I document in my book, for-profit hospitals that try to make a profit on healthcare do so by over-billing Medicare, cheating shareholders, and over-treating patients (operating on heart patients who don’t need operations) while down-sizing staff. As a result, patients die. I can’t think of a single large for-profit hospital chain that has not wound up paying huge government fines for
      various types of wrong-doing.

    • Bob–

      Mandel’s cooking the numbers. Here is the fact: ” since 2003 non-healthcare industries have accounted for about 80% of all new private sector jobs. Healthcare is the industry generating more private sector jobs than any other, but if 80% of jobs are comign from other areas, that hardly means that health care iss “keeping our economy afloat.”

      Would we like healthcare workers to be more productive? Yes–that means designing better systems that allow them to work together–better coordination. See Run 75411’s first comment below, and my reply.

  17. Run75441 –

    In a typical large manufacturing company, total wages and benefits accounts for 30%-33% of revenues but hourly direct manufacturing labor costs might only be in the 8%-10% range.

    For hospitals, direct labor isn’t as easy to define. Doctors and nurses are obvious, of course. Then there are respiratory, physical, occupational and speech therapists. There are pharmacists, lab and radiology technicians. There are transporters, housekeeping and laundry and foodservice workers. Then there are the general overhead functions like IT, legal, billing, regulatory compliance, community relations and, in academic medical centers, researchers and teachers and their support staff.

    The problem for any enterprise is that it takes a pretty large commitment to both physical and human infrastructure just to open the doors before the first dollar of revenue flows in. To illustrate that cost cutting is not as easy as it sounds when business turns down for hospitals, think of a school with 1,000 students financed mainly by state and local revenue that is based on the student population. If the student population drops 5% or 50 students in the next school year and revenue declines by the same amount, costs may barely budge because if the enrollment decline is scattered throughout all grades and subjects it may not be possible to reduce the teaching staff and keep class size within the targeted range that is probably subject to a collective bargaining agreement and it takes the same infrastructure of support staff to serve 950 students as it took to serve 1,000. In other words, fixed costs are high and marginal costs are pretty low in elementary and secondary education. That’s the way it works for other high fixed cost businesses like hospitals, hotels and airlines as well.

    Regarding the breakdown of hospital costs, if you look at HCA’s most recent 10-K you will see that revenue for the for profit chain of 162 hospitals and over 40,000 licensed beds breaks down as follows: wages and benefits, 45.7% of revenues; supplies, 17.3%; other operating expenses, 18.3%; depreciation and interest expense, 10.5% and pretax profit, 8.8%. Bad debts and doubtful accounts were deducted from gross revenue to determine net revenue of $33 billion.

    Non-profit hospitals are likely to have a lower figure for both pretax profit and interest expense and a higher number for wages and benefits. Interestingly, HCA’s average occupancy rate was only 54% last year which I think is pretty low and outpatient revenue accounted for 38% of total revenue which is in line with many other hospitals.

    • Barry–

      Excellent reserach done by the Medicare Payment Advisory committee shows that it is quite easy for a great many hospitals to reduce their costs–by reining in new construction and by ceasing to issue new debt. (The two are, of course, connected)
      In 2011 MedPac told us that I
      “In response to the recession of the last two years
      , many
      hospitals initiated cost-control strategies and reduced their
      capital expenditures.
      The financial rating agencies agree
      that nonprofit hospitals began controlling costs in part in
      2009 by reducing their capital expenditures and refraining
      from issuing debt (Fitch Ratings 2010, Moody’s Investors
      Service 2010a, Moody’s Investors Service 2010b).
      Moody’s and Fitch Ratings independently concluded
      that capital expenditures for their respective samples
      of nonprofit hospitals declined between 10 percent and
      20 percent in fiscal year 2009, following increases in
      the previous two years. In a separate measure, Moody’s
      concluded that in 2009 nonprofit hospitals spent slightly
      more than the amount necessary to maintain or replace
      their existing level of capacity
      . Specifically, Moody’s
      found that median capital spending declined to 1.2 times
      depreciation expenses in 2009, which was down from 1.6
      times depreciation in 2008. (If a hospital were to merely
      maintain its existing capacity in a given year, the ratio of
      capital expenses to depreciation would be approximately
      1.0 times depreciation plus a small adjustment for changes
      in prices.) The Census Bureau reported that spending on
      hospital construction increased steadily from $15 billion
      in 2000 to $33 billion in 2007 and 2008 and then declined
      slightly to approximately $32 billion in 2009.

      ” As hospitals pulled back from the high levels of
      capital expenditures and employment growth seen in 2007
      and 2008 to more moderate levels of capital expenditures
      and employment growth. The result was the drop in cost
      growth between 2008 and 2009 from 5.5 percent to a
      more moderate 3.0 percent”
      That is exactly the type of “flattening of the curve”
      that we are looking for.

      More proof that Hospitals CAN reduce costs:
      “The effect of financial pressure on hospitals’ costs is not
      only evident over time; it is also evident when comparing
      hospitals facing different levels of financial pressure to
      constrain costs. Some hospitals have strong profits on
      non-Medicare services and investments and are under
      little pressure to constrain their costs. Other hospitals, with
      thin profits on non-Medicare services, face overall losses
      (and possibly closure) if they do not constrain costs and
      generate profits on Medicare patients”

      MedPac found that “hospitals
      under high financial pressure from 2004 through
      2008 restrained their Medicare standardized costs per
      discharge in 2009 to 92 percent of the national median

      Above is all from MedPac’s March 2011 Report to Congress

      Typically, over the past two decades, the hospitals engaging in new construction were not
      dilapidated hospitals, but our most expensive brand-name hospitals that were adding wings and amenities.

      Today, we don’t need more hospital beds or more hospitals. We should be closing run-down hospitals
      and sending low-income people to better hospitals in wealthier neighborhoods (when they really need inpatient or outpatient services.)

      Finally, a great deal of reserach shows that over-investment in cutting edge, over-priced and not terribly effective technology
      has been driving hospital costs. Too often, 7 or 8 hospitals in the metro area have the same super-expensive technology. They
      don’t all need it. Too much duplication. They should share it. Suburban hospitals in particular don’t need it.

  18. Maggie, what convinces me that Mandel may be right is when I go onto an internet job site like Simply Hired. (which I have done for my wife and one of my sons)

    Way over 50% of the posted jobs that pay a living wage are in health care, either hospitals or health insurance.

    It is very hard NOT to conclude that wasteful spending in health care is propping up the economy. It is certainly propping up the Minnesota labor market, which without health care jobs would have mostly fast food jobs and commission-driven sales jobs on the posting sites.

    Barry, you are perceptive as usual about the high fixed costs of hospitals. This is what drives the “creativity” of hospital billing practices, wherein paid consultants show hospitals how to extract every possible dollar from insurers with upcoding. This has enabled hospitals to get more revenue even as their services become less necessary.

  19. Maggie –

    When I think about reducing hospital costs, I’m thinking in terms of the current cost base. Scaling back construction reduces future embedded cost growth that occurs once the new facility or expansion is completed but doesn’t impact current hospital costs.

    To the extent that hospitals can improve their processes and reduce unnecessary tests, including imaging, they can serve more patients with their existing infrastructure which means future expansion can be deferred, reduced in size and scope or eliminated entirely. Paul Levy wrote about this when he was a hospital CEO.

    At the same time, with the fee for service payment model, doing fewer tests means generating less revenue. So far, hospitals have resisted capitation and global budgets because it’s very hard for them to accurately estimate their costs a year in advance. While ACO’s are a an interesting concept, if patients are just assigned to an ACO but maintain the ability and the right to seek care outside of the ACO network as well, it doesn’t seem reasonable to me to expect the ACO to pay for care sought outside of its network unless it’s care that it can’t provide in network and has a contract with an outside provider to handle it.

    As for multiple hospitals offering high cost services like proton beam therapy for prostate cancer, the fault lies with CMS for covering the treatment even though it’s no more effective than IMRT and paying generously for it. If it either didn’t cover it or used reference pricing which paid no more than what it pays for the less costly IMRT approach, you wouldn’t see massive investments in proton beam centers all over the place. Some hospital services, tests and procedures are very profitable and some aren’t. I can’t blame hospitals for wanting to maximize their share of the market for the most profitable business.

    Finally, depreciation, as you know, is based on historical costs while many assets are long lived and depreciated over time periods up to 30 years. Capital spending of 1.2 times depreciation is probably just about enough to maintain current facilities and update obsolete technologies as well as comply with changes in building codes intended to better withstand earthquakes, hurricanes, floods, power outages and the like.

    • Barry —

      In fact Hospitals are accepting capitation and sharing in the risk of health care. See “Breakfast with Atul Gawande”.(a Health Beat post.) He describes how his hospital (a major Boston hosptial) has already signed contracts with insurers that will force his hospital to achieve better outcomes at a lower cost–or “lose millions of dollars.”

      Accountable Care Organizations already are forming all over the country.
      And hospitals realize that they are going to have teo survive on lower revenues– or close. This is why they are tightening their belts– reducing readmissions, etc. And this is why Medicare spending is no longer growing as rapidly as it did in the past.

      A hospital’s capitol costs are important becuase as you say, when they expand, ultimately their operating costs expand.

      Secondly, the cost of over- building and turning hospitals into quasi resorts is a huge drain on our health care system.

      We have to remember that waste in our system is all about an extra 1% here, an extra 1% there.

  20. Maggie –

    If Dr. Gawande was referring to the Alternative Quality Contract that his hospital and others have with Blue Cross and Blue Shield of MA, it’s not a capitated contract as I understand it. Rather, it’s an agreement to share benefits or pay a penalty depending on total spending incurred by the insurer’s members within the Partners Health System calculated using the traditional fee for service payment model for physician services and case rate or per diem payments for hospital based care. The budgeted target was deliberately set quite high in the early years to induce hospital systems to sign onto it and it’s not clear how large the penalties are in the near term if the spending targets are exceeded.

    Pure capitation would pay a fixed amount per member per month for all care that the member needs whether it is performed within the provider’s network or outside of it. The problem with the ACO’s as currently proposed is that members would be assigned to an ACO but would still be allowed to seek care anywhere they want without approval or even knowledge of a doctor who is part of the ACO. In short, ACO’s will not have sufficient control over where the member receives care which makes it somewhat unfair to hold it completely accountable for incurred costs vs. a budgeted target. I think this is an area that will need considerable work and revision as we move forward.

    • Barry–

      There are various ways that hospitals can be rewarded for better outcomes at a lower cost,
      and penalized when they fail. What is important is not whether we are talking about “capitated care” or
      another form of risk-sharing; hospitals are being held “accountable” for quality and costs.

      Accountable Care Organizations are already up and running — more than 300 around the nation:
      An extensive article in the December issue of Health Affairs titled “Many Accountable Care Organizations Are Now Up And Running, If Not Off To The Races” reported that there are more than 300 ACOs now in existence, some chartered by Medicare and others formed by private insurers, and that some of them have yielded early results that are promising – even though the overall picture may be inconclusive.

      Here’s what we know, according to the report, which is available for a fee:

      •The transition to ACOs is an ongoing process that will take many years – despite the pressure to get results quickly.
      •While hospital systems are the main backers of ACOs, physician groups are also becoming surprisingly active in forming ACOs. Large insurers like Cigna have launched their own pilot ACOs, with good early results.
      •The first challenge is engaging physicians and other providers, which must happen before the care process can be reorganized to make it more efficient.
      •Patients must also be educated about the new concept, in carefully crafted messages – and some new ACOs have been challenged by the process of obtaining patient consent for their data to be shared with CMS.
      •Another early challenge was finding that many people covered by the ACO lacked a primary care physician, so the first step was connecting them with one.
      •Several of the new ACOs reported that they were able to achieve cost savings by improved discharge planning that makes readmissions less likely, or by using “care navigators” to help patients manage complex or chronic conditions.
      •Often, when a medical group becomes an ACO, the financial investments it must make in electronic records or additional case managers cause it to lose money at first

      Note “promising early results.”
      Note there is no mention of patients going outside the ACO and this creating prob lem.s

      These days Obanacare’s opponents are staying up late trying to think of ways that it will fail. (The folks at CATO are
      so desperate that they are becoming hysterical). This sounds like one of those fear-mongering fantasies.