Why Can’t Hospitals Stop Over-Billing Us? (Part 2/2)

In a prior post, I read Steven Brill’s story on health care hospital bills and offered a brief analysis of the “average hospital” in contrast with MD Anderson.  The data show that average hospitals are low-margin organizations.

Below, I argue that although the data disagrees with the vilification of general hospitals in “Bitter Pill,” the article is spot-on in his assessment that medical bills are incredibly over-priced.  Then, I offer a hypothesis on why.

Inefficiencies Increase Costs

Despite its surprisingly low profit margin, the general hospital is not free of blame for America’s increasing health care costs.  To the contrary, this brief look at the hospital finances in a single state suggests something far more sinister.  Of course, one-third of the hospitals in Pennsylvania held a meeting and decided together to lose money.  Perhaps a set of unifying reasons exists to explain this finding.

Mr. Brill’s article highlights that a Tylenol pill is billed at $1.50 when it costs a regular consumer about 1.5 cent.  While the MD Anderson chargemaster may be in part arbitrary in its 100-fold increase fueling MD Anderson’s operating margins, the markup may reveal a different story for a typical hospital.

The Catch-22 of Hospital Medicine

Over-billing for generic medications creates unfairly heavy burden on the un- and under-insured patient, but the phenomenon is perhaps unsurprising.  Getting Tylenol in a general hospital is akin to receiving one in a Rube Goldberg pill dispenser.  She first rings the bell for the physician to be paged.  Then, her physician places an order, a pharmacist reviews the dosing, the pharmacy dispenses the medication to the floor, then the nurse retrieves the pill and delivers it to the patient.  This same overhead structure exists for an order of Tylenol as it does an order of Rituxan (anti-cancer drug that according to Mr. Brill is billed at the incredible price of $13,702 a dose).  MD Anderson has the advantage of over-billing for both Rituxan and Tylenol and coming out far ahead; the typical general hospital is stuck with billing Tylenol and other generic medications that are simultaneously too expensive for the patient and not profitable enough for the hospital.

This phenomenon explains why overusing American emergency departments for primary care purposes may be bankrupting America’s safety-net hospitals that do not have the privilege of prescribing thirteen-thousand-dollar medications.  In a Huffington Post article, Amy Chen explores the safety-net hospitals that were forced to accept patients through their emergency rooms who have been turned away from other hospitals.  These hospitals now face serious financial troubles.

(Note: The catch-22 between the necessity to deliver non-acute care and the inherent inefficiency of an emergency department to do so is a complex dilemma outside the scope of this post.  It suffices to say that providing the insurance coverage without providing the delivery infrastructure is insufficient.)

Where is All the Money Going?

According to National Health Expenditure in 2011 from Center for Medicare and Medicaid Services, in 2011 America spent $2.7 trillion dollars on health care spending.  The natural question is: where is all the money going?  The same source reveals that hospital spending accounted for the single largest slice at $850.6 billion.  The natural question is, once again: where is all the money going?  “Bitter Pill” is a brilliantly composed article that highlights the legitimacy of our anger.  Insurance coverage or not, this figure represents the amount of patient dollars pouring into the general hospital.  It would be okay if we are getting $850.6 billion’s worth of quality out of our health care system – but we are getting far less.

When an entire industry of acute care hospitals rely on overcharging patients to cover for its inefficient operations, the story of a ludicrously profitable hospital that aggressively bills its patients for extra revenue makes for an excellent villain.   But let us not forget the forest for one particularly tall tree.

Just as both right heart and left heart are key to the understanding of heart failure, both cash flow into a hospital (revenue) and out (cost) are integral to the understanding of hospital economics. Therefore, the solution to health care spending will depend on both hospital cost reduction and hospital reimbursement reduction – by definition.  The debate will depend on whether cost-containment or reimbursement-reduction should take priority.  If the implications drawn from PA Health Cost Containment Council dataset are correct, a wrong policy decision may both minimally curb hospital spending and critically cripple the only source of health care on which many uninsured Americans rely.

[ Part 1 | Part 2 ]

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Why Can’t Hospitals Stop Over-Billing Us? (Part 2/2)

2 thoughts on “Why Can’t Hospitals Stop Over-Billing Us? (Part 2/2)

  1. David says:

    Thanks for this very interesting continuation of your previous post. I appreciate your redirecting the focus towards the modal hospitals as opposed to the outliers (e.g. MD Anderson).

    The major conclusions that I draw from your post (not explicitly stated) are:
    (1) We need to shift care to non-general-hospital, lower acuity settings such as urgent care centers and/or more continuous ambulatory care settings.
    (2) Low profit margins do not indicate efficient care or value-creation, so additional metrics are likely needed.

    I also wanted to add the observation that general hospitals are now competing for ED visits. While the system as a whole is burdened by unnecessary emergency care in lieu of primary care, it seems that safety net hospitals can earn significant profit through ED volume. This practice requires avoidance of non-payment for ED care rendered, and it thus might be especially prominent in states with near-universal coverage (e.g. Massachusetts). Regardless, it will be interesting to see how cost reduction efforts impact hospitals as a whole as current sources of cross-subsidies are reformed.

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