Hospital Charges

Steven Brill has gotten the health-technocrats very excited. For example, Uwe Reinhardt writes,

hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals

Pointer from Mark Thoma.

Solve the puzzle:

1. Itemized charges on hospital bills are very high. This is most obvious for items that you can buy yourself in a drugstore or supermarket.

2. Relative to these outrageous markups, profits at for-profit hospitals (and at “so-called nonprofit hospitals”) are not very high.

The explanation is that hospital costs are mostly overhead, meaning that they are not tied to billable services or events. The janitors who clean the halls and rooms once a day (or more)? Overhead. Record-keeping, billing, computer systems, communications? Overhead. Fancy medical equipment? Overhead. Nurses and other staff? For the most part, overhead.

Because most of the cost in hospitals is overhead (or fixed cost, in economic parlance), its allocation across billable items is arbitrary. That is why “tough negotiation” by Medicare does not really reduce overall health spending. Instead, it means that overhead costs have to be shifted somewhere else, including onto those who happen to be affluent but uninsured.

What would happen if we followed the prescription of Reinhardt and others, to force hospitals to bill everyone else at Medicare rates? Hospitals would either stop taking Medicare, drastically cut back on services (reduce janitorial service to once a week), or close altogether.

I am not saying that the business practices of doctors and hospitals are beyond reproach. But claiming that there is a free lunch in medical care from just paying providers a lot less money is unhealthy demagoguery.

13 thoughts on “Hospital Charges

  1. Overhead? What about covering the cost of uninsured persons who aren’t affluent and can’t pay? Hospitals can’t turn them away if they have a potentially life threatening condition. My wife, who works in health care administration says this is the bigger factor.

    • This factor is simply small potatoes, at the edge of the costs for most hospitals.

      In toto, uncompensated care in the US is $40-$60 billion per year, or 2% of total health care spending — the vast majority of which is reimbursed by the federal government. Except for hospitals that are overwhelmed with the poor, this is not why aspirins cost $10.

      The article is exactly correct. Hospitals bill whom they can bill. Insurance companies know this and work their charges down close to cost. It’s up to the uninsured who can pay to ante up the overhead.

  2. At a hospital I used to work at, they employed nearly 400 people in the business offices (the hospital and physician’s had two separate billing offices). These folks were mainly tasked with calling insurance companies and finding out when the payment was coming in for their account. I believe the technical (hospital) and professional (doctors) billing was separate due to some law. But imagine if you could combine these business office functions into one department, you wouldn’t need as many people.

  3. We should also not fall into the trap that giving people less to spend on health care will lower costs. There is however a free lunch to be had and that is to squeeze costs and make health care actually care about them rather than just operate as costs plus operations that have no incentive to control or evaluate them at all or worse, the incentive to magnify them and their profits along with them. Not until health care is provided with this incentive will anything change.

  4. I agree with the thrust of the post, but I don’t think you framed it right. The basic problem is that hospitals and doctors know that whatever their sticker price, Medicare and Medicaid will only pay a fraction of it. Since these govt programs are so huge and drive so much revenue, the medical crowd bumps the prices for all their services from two to ten times what they actually cost, just so they can get back something approaching their true costs. Insurance companies key off these govt-set prices and set their reimbursement rates at about 30% more. This is what someone who did medical billing told me.

    Nobody pays the sticker price. Unless you aren’t in Medicare/Medicaid and don’t have insurance, then you’re stuck with that made-up price. I’ve even been told by one medical staffer, when I complained about their ridiculous prices, that it would be against the law to offer me anything lower, which I think was bullshit as many practices do negotiate lower prices for cash-pay patients all the time, but perhaps it’s true if they did it en masse as opposed to on a case-by-case basis, who knows.

    So, as always, the fundamental problem here is massive govt involvement in the economy- forcing us to pay into their Medicare/Medicaid ponzi schemes that then greatly distort prices, creating all kinds of crazy laws to try and constrain the inevitable black market that springs up, always leading to more and more govt control- resulting in the cost redistribution you highlight.

    But the real problem is third-party payers, whether the govt or insurance for most medical services, get them out and the system can start improving.

  5. I agree with Bret. I don’t believe overhead is the reason for the high list prices. It may be part of the Cost Accountant’s reason, but I don’t think it’s as much of the economic reason for it.

  6. Boy, it sure would have been nice if someone, I don’t know, maybe a journalist, or even a health care scholar, could have thoroughly researched all this and explained it us, the public, our legislators, etc. so that we could have understood it before deciding on the ACA. Even the most well-informed, intelligent, and educated people I know – some of them in medicine or medical administration, and also the ones with some of the strongest views on the propriety or lack thereof of the ACA – have no idea about how any of this stuff actually works in practice or why. I haven’t met anyone who sees both the forest and the trees.

  7. Essentially all airline costs are also fixed. The airlines seem to be moving more towards the healthcare model – charging for bags, ticket change fees, etc. Costs that are almost all overhead.

    As another commenter said, I see a lot of this due to 3rd party payers. Corporate travel agreements get rid of a lot of these fees.

    It seems to be a case of increased price discrimination. With the costs being significantly shifted to low information consumers.

  8. By the way, things like this are why people are terrified of going without the shelter of some insurance company for all their health-care transactions. There was never any reasonable hope of moving to private payments and high-deductible catastrophic plans (genuine “insurance”) when basic prices for services are so obscure and astronomically inflated on first presentation.

    As far as “low profitability” goes, I have some lingering skepticism about cost rationality in American health care institutions. It seems that, like a lot of other quasi-non-profits (like higher education) that costs have exploded simultaneously with an outrageous expansion of high-payed administrators. A “normal profits” scenario, perhaps, but one where the bureaucracy seems to have taken over the business model for their own benefit.

  9. Presumably in Briitain, France, Australia, etc., hospital prices are not affected by the factors which distort charges to the uninsured in the US. So what do THEIR costs for hospital rooms, nurse visits, injections, etc. look like?

  10. I am a medical provider, solo practice.
    I tell my patients that my charge for everything is one million dollars. Medicare, Medicaid, and private insurance pay me what they want anyway.
    If I charge a private pay a lesser rate than I would a Medicare patient, I am defrauding the government, since the lesser rate is my “customary” fee.
    If I charge a private insurance patient with a high deductible a lesser fee than the private insurance rate within the deductible, I am defrauding the insurance company, since the lesser rate is my “customary” fee. This is all spelled out in the contracts with the payers.
    My highest paid employee is my long-suffering business manager who spends endless hours on the phone dealing with these “payers”.

  11. Not directly related but hospitals seem to be extremely in efficient. I saw a panel discussion were a couple of the people talking suggested that we do not need hospitals at all at least not big hospitals. I wonder if more smaller hospitals would be more efficient.

  12. In most other industrialized nations, hospitals receive government support from taxes. The individual patient is not expected to pay the full allocated cost of their care.

    In other words, when a French hospital charges $100 and an American hospital charges $2,000 for the same procedure, the French hospital is not 20 times more efficient and the wages of French nurses are not 20 times lower. Instead the French hospital is subsidized by sales taxes and income taxes before any patient gets a bill.

    In theory, if Americans nationalized our hospitals and paid an extra 5% in taxes across all brackets to cover overhead, then our health insurance premiums would drop in half.

    But that is not a bill that is going to pass any time soon.

    The best short term solution is to collect a Medicare Part A premium of about 2% of income from anyone who stays uninsured. Then when they did need hospital care, Medicare would pay the bill per its own fee schedule. This is kind of like the individual mandate, only the ‘penalty’ for not buying coverage goes to the institution that provides the care.

    In purely medical terms, about half the hospitals in America could close tomorrow and we would not miss them. Some aspects of emergency care could be handled in fire stations, plus we would need more ambulances and helicopters. The US military provides superb emergency care and sometimes the nearest hospital is in Germany.

    The problem is that the closing of hospitals would close off perhaps the greatest safety valve of the American labor market of the past 20 years. Because of productivity gains and offshoring, manufacturing employment has plummeted. Hospital jobs have been a big factor in taking up the slack. Without our overstaffed and overpaid hospital jobs, I think we could be looking at a Depression, at least in many cities where hospitals are the major employer.

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