Why Healthcare Costs Are What They Are

Healthcare is a commodity in this country, and one with the most inelastic demand possible. Therefore, marketplace behavior that would be intolerable in another setting flourishes here.

I would like to here offer a primer on payer/provider behavior. In my day job I do hospital operations. Rather than clutter up the page with footnotes and data, I encourage you to go do your own research. Here I only offer the starting narrative.

Unreasonable Things CMS and Other Payers Do


1. Run the CMS Recovery Audit Program. This program has the power to renege money from hospitals up to three years after claim payment. In turn, claim payment can happen years after date of service. Operationally, this means that CMS can come back years after a patient was seen and unexpectedly take the money back. One can imagine how challenging it is to keep a business solvent while knowing this could happen at any time. At one of the three health systems I have worked for, the RAC reached back eight years!

There is an appeal process, but it is prohibitively slow and relies on third-party contractors. Of course, CMS holds onto the money during the appeal.

Ostensibly, RAC exists because chart review shows that the clinical services rendered may have been more liberal than the data warranted.

Per Seema Verma: “Due to the size of the Medicare program – our systems process over one billion claims a year – we are able to review less than one percent of claims that Medicare receives each year, which means the Medicare program can be susceptible to more improper payments, fraud and abuse than in the private sector.”

In my observation, peak RAC angst happened in 2012.  The hardship was not just the administrative burden, but the backlog for appeals.  CMS wrote a check it couldn’t cash when it handed out audits it was not equipped to address the appeals for.

RAC’s contractors had inconsistencies in what they recovered. The contractors got paid regardless of the appeal outcome, so the incentive was to play fast and loose with hospitals and other providers.  I am pleased to report that these RAC program flaws have been corrected thanks to successful lobbying, but the betrayal still runs deep.

2. Create Ministry Plans that masquerade as insurance. Healthcare ministry plans, which are cost-sharing organizations that are not required to cover medical claims like insurance, are exempt from the requirements of the Affordable Care Act (2010) due to their religious affiliation.

Theses arrangements were born of a need for reasonably-priced help covering medical costs for people too young, healthy, or wealthy for Medicare or Medicaid coverage. Yet, these organizations often fail to fulfill claims, and when that happens there is no legal recourse. Bills may not be paid in a timely manner, or ever.

Because of aggressive marketing, ministry plans are at risk of becoming a public health hazard in the future. I would not recommend them to anyone I know.  Hospitals and other providers will negotiate with insurance carriers, but usually not ministry plans. These patients are considered self-pay, which is a vulnerable place to be if you cannot keep up with the costs.

3. Offer Medicare costs for Durable Medical Equipment that far exceed market value.

The bidding process that Medicare uses for the equipment offered through Part B is constantly being altered. The formulas are not explicit and have suspicious thresholds for supply and demand. This is why you see home medical equipment for sale at Walmart or Amazon for far less money. However, the promise of reimbursement (often after purchase) is what keeps families coming back for more, rather than using the open-market — especially if they are cash-strapped from managing a chronic condition.

Losing access to affordable home equipment means patients can no longer live at home, which can mean even more expenses.

Is it possible the price confusion is the result of the lobbying and government favoritism that could be taking place?

4. Medicare held for ransom by pharmaceutical costs. Medicare is totally beholden to drugs that do not have alternatives. It cannot negotiate prices. As a taxpayer, this affects you very much.

Unreasonable Things Hospitals Do


1. Build off-campus hospital outpatient departments (HOPDs).  These have the convenience of a doctor’s office (read: ample parking) but give you a hospital bill. Industry-wide, volume is shifting to outpatient care. However, these outpatient centers are held to the same credentialing standards as hospitals, and thus are expensive to run.  Even with the added outpatient volume, most every health system still makes its money on inpatients, but that could change someday.

These centers are profitable, convenient, and serve as brand ambassadors for the system. Since the integrity of the labs, radiation safety, physicians, etc, are hospital-grade, HOPDs are actually my recommendation for your care whenever possible. Just know that it is not less care, nor less money.

2. Leverage the chargemaster. While few pay what is on it, the list serves as the starting point for contracting. However, the lack of transparency in bill itemization prevents patients from making informed decisions; any item for sale on Amazon has more detail on value than a procedure being done to your body. Unless all hospitals in a given market begin sharing their negotiated rates, this will not go away. The chargemaster is a vestigial structure in a world where healthcare costs exceed inflation.

3. Use the phrase, “Special Procedures” to refer to interventional radiology. All procedures are special! Seriously though, there is a history to the evolution of the terms, but the definitions are not clear, and you often see signage for both in the same hospital, referring to the same place. No strong consensus can be reached, thus perpetuating the frustration.

4. Not easily share medical records. Hard to think of a solution that won’t require intervention at the federal level. The large electronic medical record vendors in the nation oppose required interoperability, under the laughably-thin excuse of “patient privacy.” Non-sequitur: the government already has your social security number.

5. Perform futile resuscitations, and otherwise overtreat at the end of life. Statistically speaking, patients over 80 with a non-shockable heart rhythm who have cardiac arrest without witnesses (and thus for an unknown length of time) have a nearly nonexistent chance of leaving the hospital alive. Yet, CPR is expected. Families may not always think through what comes after. CPR is traumatic and painful for everyone involved, and if successful, could be just the beginning of a life compromised by feeding tubes or ventilators for someone already in poor health. In addition to thinking about when to stop trying to intervene on a body wanting to die, perhaps we also need to ask ourselves when to even start, and just who benefits. Is the family acting self-servingly by not letting go?

6. Surprise bills. Sometimes the hospital accepts the patient’s insurance, but one or several specialists treating them there do not.  According to studies, about 20% of in-network ED visits result in an out-of-network bill.

Hospitals frequently must contract with for-profit speciality groups to staff specialities like neonatology, anesthesia, obstetrics, radiology, and emergency medicine. These are not hospital employees. The groups these doctors do work for may or may not have negotiated reasonable rates with the same insurers as the hospital the patient is in.

Some states have a mediation process for emergencies, but few patients know about it.

The specialist shortages that are the raison d’être for the outside groups could be explained by the barriers to entry for a medical education (mainly cost + the opportunity cost of time), but that is a topic outside of today’s scope.

7. Tax-exempt status for dubious “community benefit.” Charity care is not required in order to be designated a not-for-profit health system; the company can do fluff things like health fairs, which are basically marketing, or surveys. Whether these community services make up for the lost tax revenue is highly debatable. This is how we end up with nonprofit hospitals that are actually highly profitable — in some cases even more profitable than their for-profit counterparts.

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