Costs Are Not The Same As Rates

Many “old” media outlets do not identify the authors of their editorials. Thus, when an opinion is offered, you have no way of knowing who wrote it or what their qualifications are. Your only recourse when there is something unsupported or absurd used to be to send a letter to the editor, where you have about a 0.5% chance of being chosen for publication. And they would edit what you sent in. Then, blogs were invented.

This thought was prompted last week when I read a New York Times editorial entitled, “Financing Health Care Reform.” Here’s the quote in question:

Meanwhile, it will be important to get some guaranteed fast savings from the health care industries by cutting and reallocating hundreds of billions of dollars from projected spending on Medicare and Medicaid, as the Obama administration has proposed and Congress is considering. Just to be sure, Congress ought to establish a fail-safe mechanism that could impose additional cuts after a few years if savings are less than projected.

Since I don’t know the author(s) or whether he/she/they actually know anything about Medicare and Medicaid, I am uncertain how to respond to this suggestion. Except to say: “Are you out of your mind?” Medicare rates just barely cover costs today, and Medicaid rates have not covered their costs in years.

This is all part of a general confusion about cost savings versus appropriation savings, a point I made back in March:

On the cost front, the president for now seems to be confusing underlying costs with how much the government chooses to pay. His budget proposal apparently would reduce Medicare payments to doctors and hospitals as a way of building a savings account for greater access. Reductions in appropriations might reduce costs to the federal government, but they do not reduce the underlying costs of care. With 50% of American hospitals operating at a deficit right now, it is hard to imagine how a reduction in federal payments for Medicare patients deals with the cost problem.

If we have a desire, which I support, to provide greater access to health care, let’s consider it a national priority and pay for it directly. But a fear of using the dreaded “T” word — taxes — is causing the executive and legislative branches to force cuts in services. And meanwhile, the President doesn’t want to us to use the word rationing because he knows the negative political ramifications of that (even though we certainly ration care today, mainly by family income). But what do you think will happen if you cut revenue to health care institutions and doctors?

Readers here know that I strongly support improvements in the quality and safety of patient care and the reduction of inefficiencies in the provision of care. Washington seems to think you are more likely get those improvements by underpaying hospitals and doctors for the care they deliver. You will not.

How you get there is not simple, but it involves transparency of clinical outcomes and rate structures so employers and workers can see the actual value offered by different health care providers. This would stimulate competition, too, in that insurance companies could then offer plans and products that reflect providers’ relative value propositions to their subscribers. Meanwhile, let’s pay primary care doctors and other cognitive specialists rates commensurate with their real importance in the health system. Then, they could take the time needed to care for patients appropriately and not just act as a triage way station to higher cost specialties and invasive procedures.

Isn’t it revealing that Medicare and Medicaid could today set an example for all by requiring this kind of transparency and these payment changes, but there has not been the will to do so?

So, instead, we take a political shortcut, one that will have adverse consequences for years to come.

Paul Levy is the President and CEO of Beth Israel Deconess Medical Center in Boston. He blogs about his experiences at Running a Hospital, one of the few blogs we know of maintained by a senior hospital executive.

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  1. Great points Craig, it is failed public plans ruining our healthcare systems not the private plans. Fix the public plans the private can take care of themselves!

  2. Paul, thanks for emphasizing the important distinction between “cost” and “rate.” I can’t tell you how often I find that these terms are conflated in discussions about health care delivery and health care reform – including, sadly, by Messrs. Obama, Orszag, et al.
    However, I believe that your comments actually understate the truly critical aspect of the problem that is obscured by this semantic distinction.
    At the time of this writing, the Congressional Budget Office (CBO) has scored the Senate HELP Committee’s working markup at $1.6 trillion over ten years and the House’s corresponding bill at $1 trillion over the same period (although it is generally accepted that the House’s bill omits several key components that, once addressed, will raise the total to over $1.5 trillion when re-scored) of which 85% is expected to occur in the last five years of their budget window.
    In order to pay – at least partially – for this added expense, the White House has been negotiating with the American Hospital Association (AHA) and other hospital industry groups to reduce payments by $150 billion over this same ten year period. This is on top of a similar agreement to lower Medicare’s prescription drug costs by $80 billion recently reached with the Pharmaceutical Research and Manufacturers of America (PhRMA).
    This cumulative total of $230 billion represents a reduction in payments made by the federal government makes to these providers – not a reduction in actual cost that is unlikely to occur to any significant extent. Instead, this $230 billion underpayment will be cost-shifted to the 174 million Americans who receive coverage through the private health insurance system (and, to a lesser extent, those who self-pay) in the form of higher insurance premiums, increased out-of-pocket expenses, and increased payroll contributions – all of which constitute a “hidden tax” of $1,321 for every man, woman, and child.
    Bear in mind that this type of cost-shifting is neither new nor unique. It has long been understood that large public programs like Medicare and Medicaid are perniciously underfunded; however, most Americans are unaware that this is intentional. In 1997 Congress enacted the Sustainable Growth Rate (“SGR”) formula that capped Medicare’s growth rate (which, at the time, was increasing faster than the private health care industry) and shifted an escalating share of this cost increase to the private sector. Current estimates are that Medicare underfunds by between 10.3% and 17.0% and Medicaid by about 42% (although the funding formulas differ from state to state. According to a recent study by the Hoover Institute at Stanford University, the effect of government cost shifting is almost 8 times the cost of all uncompensated care provided to the uninsured, illegal aliens, etc.
    Estimates differ as to the degree of this underfunding; a recent Milliman estimate places the current figure at around $100 billion while other studies that more broadly consider how healthcare providers actually allocate fixed costs (the so-called “chargemaster rate”) place the number at over $200 billion. In either case, this huge cost-shift from the government (federal and state) to the private sector each year acts as a “hidden tax” on all private-sector purchasers of health care – and, thanks to mechanisms like the SGR, it’s accelerating.
    The consequence of this shift is striking. Not to get too technical, while the General Consumer Price Index (“CPI”) has increased at a modest rate of 2% to 3% each year, the Medical CPI has gone up about twice as fast, roughly 6%. However, this governmental cost shifting forces the effective rate for private sector premiums up by about 10% to 12% each year – a rate that most employers and employees find unsustainable.
    And who pays for this increase? Studies have repeatedly shown it is paid for in a combination of three ways: 1) a decrease in employer profits as they absorb about half the cost themselves; 2) reductions in employer-sponsored benefit plans that increase out-of-pocket expenses and payroll contributions; and, 3) a general stagnation in wages paid to American workers (the U.S. Department of Labor reports that, although total compensation has gone up about twice the General CPI, net compensation or “take-home pay” has largely stagnated as most of this increase came in the form of additional employer spending for health insurance benefits.
    In summary, then, it should come as no surprise that the White House’s negotiations have produced no actual, quantifiable “cost savings” to pay for health care reform. Instead, Americans will be indirectly taxed so that the federal government can pay artificially lower “rates” to these providers. The only party who wins in this exchange is the same government that largely caused the problem to begin with.
    Medicaid is currently bankrupting the states and, while annual Medicare spending is currently increasing at 7.2% (compared to 6.1% overall), subsidies by private-sector payors effectively mask an increase in utilization that is nearly twice that rate – and which will increase dramatically as the aging baby-boomers move through the program.
    Nevertheless, rather than tackling the politically dangerous subjects of Medicare and Medicaid reform, President Obama chooses to blame the budgetary problems of these bloated public health plans on the inefficiencies of the private sector. The Administration and Congress use their own version of “Three-card Monte” to obfuscate the true cost of their health care reform scheme and then, in a ludicrous example of rhetorical jujitsu, claim that for private health care to avoid complete ruination they must be remade in the form of their corpulent government counterparts.
    Our health care system is in trouble. But we, as Americans, should demand that our elected representatives engage in real health care reform that addresses the true causes and stop trying to merely treat the symptoms.

  3. Hospitals and physicians have a lot of work to do when it comes to medical necessity and price transparency.
    Two examples immediately come to mind as illustrations of what even educated consumers are up against.
    First is “routine” lab tests associated with an initial annual physical exam. My daughter went to a Boston Partners-affiliated primary care physician who did a good job with the physical examination and medical history. However, the costs for the lab tests the MD ordered (all of which were drawn at the physician’s office) were more than double the cost of the exam, and none of which were indicated by any element of the physical exam. Coincidentally, the labs were sent to the hospital outpatient lab for processing and were billed not by the physician but by the hospital. What is wrong with this picture?
    The second example is the overly high rate of Caesarean section deliveries in the US. As a surgical procedure, it is not without risk to the mom and the baby, but is viewed more and more as a scheduling convenience for patient and physician even when done for less than full term pregnancies. Why should health insurance premium and tax dollars pay for the additional cost of the C-section unless it is done for a legitimate medical reason?

  4. “Does everyone deserve high quality healthcare?”
    YES! But what is low quality affordable healthcare, higher infection and death rates and botched procedures? By the way, private rooms with gourmet food service and a personal masseuse is not quality healthcare, it’s marketing.

  5. Unfortunately, we are all caught in a system that has spent the last 20+ years dealing with new regulation from the fed (followed by third party payors) that has driven up costs to provide care on all fronts. Every aspect of this system has made huge amounts of money. The facilities have made money due to a payment system that has been playing catch up. Facilities adjust cost based on what they get paid and get all the margin they can create as in most business. Physician providers (salaried or private practice) have been practicing defensive medicine for years. Until the critical mass across the country resulted in limited tort reform, most physicians could not practice by what they thought was best practice. They were intimidated into doing an additional test or treatment to confirm a diagnosis. This administration has explicitly omitted caps on damages from this health care reform discussion.
    Home health,imaging,physical therapy, DME etc. have all had a time when margins were huge due to a system that paid more than cost and a reasonable margin. Third party payors have made massive amounts of money by paying less for a service and charging more for rates. These payors have taken the autonomy of fine physicians and replaced it with a set of rules to be enforced by an LPN. I agree we need to find cost as a benchmark for reimbursement, the question is can a group of self serving politicians be part of that. The discussions regarding reform should be ongoing and not passed through the legislature in a few weeks

  6. if we all knew (including me, the MD) what things actually cost, and we knew what others charged, and we had some way to compare value then in fact we would have a normalized healthcare system that operates the same way a grocery store does.
    is it feasible? well, not with the current regulatory and legal burdens. for example, the uninsured by law face a fee schedule that typically is 3x medicare. why? because if I don’t charge everyone the same thing, I can get sued for discrimination. So, while it is utterly retarded (and we always reduce our cost to medicare rate quietly) we have no choice.
    more important however, is how to deal with the concept of physicians milking the system, hospitals milking the system, suppliers milking the system, and frauds milking the system. look, I’m a doc. I don’t ‘milk’ the system, but you can bet I know how and in some cases feel a little guilty. but what can we do? we’re getting killed on so many reimbursements, the inevitable result is to nudge a little. and there is nothing anyone can say because EVERYONE and I do mean everyone does it, and in fact it is considered standard of care.
    Let me give you an example, so you understand. A bone met if treated with radiation can be treated in a single fraction, ten fractions, fourteen fractions or twenty fractions. Radiation is paid by the fraction. Guess what the standard is? Most use fourteen. Yet a randomized study says 8Gy in one is the same as 30Gy in 10. If we were paid for ‘course of care’ it would be treated 8Gy in 1 by 95% of the centers overnight. I’m sure other examples in other specialties can be easily identified. At the same time, there are plenty of circumstances where we do more and get paid next to nothing – it is just the way the system works.
    Is a single payor system the salvation? Maybe – but you can bet there will be clinics that cater to those who can actually afford better, just like in europe. Does everyone deserve high quality healthcare? Does everyone deserve high quality food or cars? These are questions not answers.

  7. Peter,
    As I understand it, hospitals and all other providers are required by law to bill everyone at the same rate (list price). Payers with whom they have contracts then pay a net rate based on whatever contracted discount from list they were able to negotiate. Medicare and Medicaid pay a dictated rate that they determine which may be more or less than the actual cost of providing the service. To further complicate matters, hospitals are paid for very expensive, complex Medicare cases, called outliers, based on a formula that incorporates the difference between the chargemaster rate (list price) and the DRG rate. So, the hospital has every incentive to post very high list prices and to raise them at high single digit to low double digit rates every year. The poor uninsured patient who may happen to have a decent income and/or some assets, is then expected to pay the ludicrous chargemaster rate. It’s an outrage, pure and simple.
    As for the lab example you cited, the two major national lab companies, LabCorp and Quest Diagnostics, are just as bad as the hospitals. I’ve gotten Explanation of Benefits (EOB) forms from my insurer many times for blood tests that show something like the following: amount billed, $300; amount allowed (insurer’s contracted rate), $65; amount paid by the insurer, $52; my responsibility, $13 (20% of the contract rate or amount allowed). Again, without insurance, you are expected to pay five times or more for the same service, test or procedure than the insured patient. This is why we need transparency for contract rates and not just list prices. It is also why, I think, we also need tiering and differential co-pays to help steer patients toward the most cost-effective providers once the transparency tools are in place to clearly identify, for both patients and referring doctors, who they are.

  8. “Isn’t it revealing that Medicare and Medicaid could today set an example for all by requiring this kind of transparency and these payment changes, but there has not been the will to do so?”
    Indeed so. But in order to make any meaningful changes, it is necessary to know what the actual COSTS are. And since health care charges (“RATES” if you will) are nowhere close to the ACTUAL costs, all the players are running about the stage blindly and no one is turning on the lights.
    After a career in the private sector working hard to squeeze a few after-tax pennies from every dollar of revenue, my post-retirement employment includes five years in a not-for-profit healthcare system, giving me shocking insights into how crazy the accounting system is in that world. When your world revolves around The Budget instead off a monthly P&L showing actual numbers and how they are spent, it is easy to drift into a fantasy land that allows marble floors and walls, live plants for atmosphere, complimentary coffee and in-house landscaping department with enough resources to furnish seasonal color at pleasing locations around the campus, while simultaneously charging for parking, and billing the kind of charges for lab tests reflected in Peter’s comment above.
    Central to the challenge is exactly what this health care reform discussion is about. Too many patients are either uninsured or underinsured and the institution that gets stuck with them (Yes, the ER staff has ways to thin their ranks, but many still get through) has to make up the expenses some way.
    In some cases even those with insurance run waaay past the limits and the institution absorbs those expenses as well. I know personally of a woman whose uninsured husband died leaving her with hospital bills exceeding thirty thousand dollars that were forgiven in the name of “community service.”
    Problem is no one has any real idea what the real costs are. There is no line item on the bill for “your share of unrecoverable expenses to the hospital.”
    Unless and until someone starts tracking actual expenses, then all this conversation about “costs” is nothing but smoke. It is time to determine “rates” for professional services and make those rates part of the bill. But the same bill should reflect actual COSTS to the provider. And by costs, I don’t mean “rates” but costs plus whatever is added either for profits (in the case of a for-profit provider) or other expenses unrelated to the patient’s treatment (in the case of a not-for-profit provider).
    When a way is found to cover ALL patients, it is reasonable to expect that whatever today’s “rates” are should decrease, at least to the degree that they are inflated to reflect all that “free” care now forthcoming for the uninsured, the indigent, illegal aliens and others that I hear now get care for free by the current system.
    I will be looking for that shrinkage as tax dollars and added insurance premiums come rolling in from a newly-covered population now not in the system. But I’m not holding my breath.

  9. Before I had an understanding of how hospitals charge I thought a $265 rate (price) for a simple blood test (liver function, white cell count) WAS the rate when the doc I was using was affliated with UNC hospital; then I found out I could have gotten a 20 item blood test through a local PCP who sent his tests directly to a local, out of hospital lab, for $65. Mr. Levy, what type of transparency would solve this? I always smell a rat when I hear overchargers talk about “value” instead of price. Certainly purged inefficiencies (fraud billing) will bring us savings, but “rates” will also have to come down. What type of value are we getting from the CEO of Blue Cross Blue Shield who gets a multi-million dollar bonus for raising rates and pumping profits, while the premium payers struggle to maintain coverage and pay their co-pays and deductibles?

  10. The post makes what I feel is a fundamental point: Our cost issues are not a rate problem, they are a volume problem. Good care should be well paid for, while poor quality care should receive squat. With that said…
    Hospital administrators – Please take a fresh look at your chargemasters if you offer ancillary services. Is charging 4x Medicare rates to the uninsured defensible? I think it would be difficult to make that case.

  11. Paul,
    It is episodes of care that include an inpatient hospital stay or an outpatient visit (including ER visits) that are killing us financially. I wonder, for example, how many of the surgeons who practice at BIDMC or any of the other hospitals in Boston embrace shared decision making for procedures that do not need to be performed on an emergency basis but are scheduled in advance? Do you have a palliative care program for end of life situations? Do the doctors, especially the oncologists, embrace it or resist it? What, if anything, is the hospital sector doing to increase the use of living wills and advance directives for healthcare? How much of your imaging ordered by emergency medicine doctors or local PCP’s and specialists is motivated by defensive medicine or is money driven?
    Excess and unnecessary utilization of healthcare services is marbled throughout the system but is especially significant in the hospital sector. To the extent that we are successful in reducing it, hospital revenue will decline materially even if your reimbursement per procedure actually performed is more than fair. Lower revenue, of course, means that the hospitals will need fewer employees. Layoffs are painful and unpleasant as you know better than most. So, there is not exactly a great incentive on the part of either the CEO or the financial side of the hospital to make this happen. If you can demonstrate better value through more cost-effective practice patterns, a given hospital should be able to increase its market share, but for the sector as a whole, some hospitals will need to downsize or close and many employees will lose their jobs. The best way to drive this process, in my opinion, is through tiering of doctors and hospitals like we already do with prescription drugs. Patients should pay higher co-pays to go to the higher cost doctors and hospitals. It doesn’t need to be a huge difference, but it needs to be enough to get patients’ attention.

  12. The reality is that everybody has to give up things to get an efficient health care system. We spend twice as much as any other country (in GDP terms) in the world, but get half the results. The more successful countries have made it impossible to get rich off of the health care system. Don’t get me wrong, good livings can still be earned. But the era of an insurance VP denying preventative care through purges which costs $15,000 (maintenance medications, etc) a year in order to reduce the medical loss ratio must end.
    What happens is that patients skip out on needed treatments. They get really sick. And they end up in hospitals with really serious illnesses. There are plenty of documented cases of patients with treatable chronic illnesses foregoing medical care because their insurance was purged and they couldn’t afford medication only to end up in hospitals which spend $900,000 chasing after the $15,000 mistake.
    Ending that system means giving people the right to buy into a public option. It means ending pre-existing condition discrimination. It means ending rescissions. It means patients realizing that if their illness devolves to a terminal illness that treatment probably shouldn’t be pursued. (I oppose feeding tubes in Alzheimer’s patients, chemo/surgery for stage V cancer patients, etc).
    And it means negotiating prices with the federal government. I have no doubt that health care can still be profitable under that scenario (see Defense Contractors for proof of that), but being profitable will be aligned with actually providing good medicine, instead of just taking the easy road.

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