How Much are Misaligned Incentives in Health Care Costing Tax Payers?

On Christmas Eve, I took care of a patient who had just undergone surgery for an infected artificial shoulder. He was to be discharged on intravenous antibiotics three times a day for six weeks. This is a pretty common treatment. Patients are generally able to give themselves this medication with the help of a home care nurse who visits once a week. The total cost of this is approximately $7000 for nursing visits, antibiotics and supplies ($120 per visit for eight nursing visits plus $143 per day for antibiotics)

The social worker informed him that Medicare would not pay for home care nurse visits or supplies. BUT, Medicare pays for inpatient rehabilitation, which he would be eligible for to receive these antibiotics. Given the choice of paying $7000 for home administration versus $0 for inpatient rehabilitation, naturally he chose inpatient rehabilitation.

The problem is, is that his inpatient stay costs taxpayers approximately $21,000. $350 for room and board plus additional costs for antibiotics and supplies, totaling approximately $500 a day. Furthermore, although he was well enough to be discharged home before Christmas, he needed to stay until he could be placed in rehab. Because of holiday scheduling, most rehabilitation facilities were not accepting admissions. Thus, he had to stay in the hospital an extra four days in the hospital over the weekend and holidays. Given that the average cost of a hospital stay is $2338 in Maryland that added an additional $9352 or so of unnecessary expenses.

In sum, because financial incentives encouraged my patient to spend $0 rather than $7000 out of pocket, Medicare spent an unnecessary added $30,000 on his hospitalization and care.

To make matters worse, my patient didn’t even want to go to rehabilitation. He preferred to administer the antibiotics himself at home and found it hugely inconvenience to have to be an inpatient for six weeks just for antibiotics. He was a small business owner, and these extra days in rehabilitation would hinder his productivity at work. He was upset that he had to stay in the hospital over the holidays for unnecessary reasons. He was upset about this twisted logic, which forced him to choose the less resource efficient option and lamented the financial burden he was unwillingly imposing on taxpayers.

This decision would harm my patient in other ways. Medicare limits beneficiaries to sixty lifetime days of inpatient rehabilitation care, so if he ever needed future inpatient care, he would have fewer days available to him. Staying in a hospital facility can also be harmful medically, as added days in the health care setting place him at increased risk for health care acquired infections.

The United States has been in recession for years and calls for fiscal responsibility ring loudly. Fiscal crises and congressional deadlock have almost become the new normal. Rising health care costs account for 25% of total federal spending and stands at $2.8 trillion a year. This contributes a significant portion of our national debt at a time when we can’t afford wasteful spending.

The Affordable Care Act has attempted to curtail waste through various mechanisms including redirecting care from high cost specialists to lower cost primary care doctors, restructuring reimbursement from fee for service to a value based model. Others have suggested various cost cutting mechanisms such as reducing overtreatment, implement market-based incentives, and reduce overhead.

My patient’s situation illustrates another aspect of potential cost control that has not frequently been discussed. Skewed financial incentives caused by illogical Medical reimbursement schemes create additional unnecessary costs that are not just wasteful, but also harmful and inconvenient to patients. $30,000 is a great deal of money to waste on something that is medically unnecessary and unwanted.

This is but one example where misaligned incentives drive providers and patients to choose the less efficient, more wasteful option. Examples are abound in health care. Patients in New York regularly told me that they called an ambulance because it was cheaper to them (free!) than a $20 cab ride. An ambulance ride in New York City costs $704 per ride not including mileage. Medicare and Medicaid contribute approximately half of the FDNY’s total revenue of $205 million yearly.

I remember referring one of my clinic patients to the social worker because she had recovered from depression and wanted to get a job. The social worker discouraged her from finding employment and instead advised her to volunteer because she would lose her disability benefits if she found gainful employment.

Because uninsured patients do not have outpatient drug coverage, it is not uncommon for uninsured cancer patients to be admitted to the hospital in order to get outpatient chemotherapy infusions. This adds approximately $2338, the average cost of an overnight admission, on top of what would have been an outpatient infusion.

I could go on and on.

Policy changes that systematically reform these misaligned incentives could do much to reduce illogical decisions that cause wasteful healthcare spending. Lobbying and patchwork legislation have led to our current system of fragmented reimbursement schemes where benefits initially meant to help patients, create unintended consequences leading to wasteful spending. Long-term solutions to counteract our increasing federal deficit require bending the cost curve of health care. Taking a careful look at Medicare reimbursements that don’t make sense could potentially save millions of health care dollars and improve quality of care.

Special thanks to Donald List, LCSW-C, for assisting  with obtaining the costs of the therapies and services mentioned in this article.

Elizabeth Dzeng is a General Internal Medicine fellow at Johns Hopkins University. This post originally appeared in The Huffington Post.

28 replies »

  1. Are we sure that Medicare actually paid the hospital $30,000 in this case?

    The Medicare fee schedule may not be quite that stupid. Although there is an entire industry of billing consultants who find ways to manipulate Medicare payments to hospitals.

    The solution is to scrap the DRG’s and pay hospitals with global annual payments. Also, make ambulances a subsidized public service for all ages.

  2. How many father’s lives were extended 8 years so “she knew she had to get him to MD Anderson Cancer Center” by a baseball player, Richard Stengel, or Steven Brill? Weird how all these patients are knocking down the doors to get into MD Anderson, even taking $80K from Mom because they chose not to buy medical insurance, even though “the results our (USA) health care system produces are no better and often worse than the outcomes in those countries (most developed countries). And as far as the mortality rate affect of Time Magazine subscription or lack of them, I agree it is difficult to assess how much damage and culpability the sensationalized cover stories will have on future patient outcomes, but let’s hope MD Anderson exercises a bit more professionalism than Time Magazine’s Mr. Stengel or Mr. Brill if either of them end up “having to get there” and have to deal with “the costs they faced in a marketplace they enter through no choice of their own”. Entire piece is a illogical, divisive, politically motivated, “hack” job.

  3. No one ever went bankrupt or died as a result of a Time Magazine subscription. Or as a result of the $8 million a year some ballplayer got.

  4. Please note Steven Brill’s boss has been paid almost as much as the President of MD Anderson. The year of earnings Steven Brill points out, MD Anderson took in $531 million more than their “costs’. The same year, Steven Brill’s boss oversaw the loss of $4 million (and 34% loss of subscribers and advertising revenue). Only conclusion is CEO of MD Anderson is a bad person and Richard Stengel is a good person. Of course, I doubt Mr. DePinho named obama as the man of the year in any of his publications, and worse yet, he may even support The Constitution of The United States of America. He must be destroyed.

  5. Thank you for pointing out that we are talking about skilled nursing care. “Rehab” is most often used to refer to a distinct-part inpatient rehabilitation unit, usually under the direction of a physiatrist. The 60 % rule makes this form of care largely unavailable to single-joint replacement patients. Also, hospitals must be very careful about very short lengths of stay as the RACs are all over this. Observation status often makes sense, but is grossly misunderstood, and causes confusion because of the Part D rules which apply to outpatient status, like observation.

  6. The system does not care about charges because Medicare et al tell us what they will PAY. Charges are moot except to the uninsured, who, in most enlightened states, are offered a discount to bring the net charges down to what the average commercial insurance pays. This is also meaningless, as if one does not have insurance, one cannot afford even the heavily discounted charges. Hospitals and doctors are price-takers, not price-makers, and all this nonsense about $5 aspirins is sensationalist fluff.

  7. Just a word or two about Home Health Care; if your facts are as stated, then Medicare should have covered the cost of the patient’s nursing visits as long as your patient met the qualifying conditions which include the patient being homebound. The IV meds and supplies are not covered under the Medicare benefit, but if there was a secondary insurance this might have picked up some of that cost. Also, many hospitals and facilities have IV outpatient clinics that are cost effective and can be billed to Medicare. It sounds like the Social Worker met a few obstacles and needed some help coming up with other options. Lack of integrated systems and poor communication are key drivers to the issues you and your patient experienced and add significantly to the ever increasing cost of health care.

  8. Two words: ROOT CAUSE. This example begins with an “infected artifical shoulder”. Please note that such implants are not supposed to become infected. We have no details of this case. Post implant surgical infections have many causes. The most common is “surgical technique”. It is likely that this cascade of avoidable costs BEGAN with a preventable medical error. The second surgery to address the resulting infection – the results of which are the focus of this article- were also preventable costs. In other words, the fiasco is much worse than described herein.

  9. Just joining this conversation…and the info is bit shocking, especially for me who always scare for the word ‘tax’, and this time I need to get more unwanted tax information, in a positive way though.

    I might get thrill and little bit of anxious, but it’s better knowing rather than get hit without knowing.

    I hope the congress could make this more clear in the recent future.

  10. I may be that your patient didn’t have Part D coverage for prescription drugs since MedPAC’s June 2012 report (Chapter 6, p178) includes the following: “Medicare expenditures on home infusion drugs are concentrated on a small number of products. IV antibiotics covered by Part D accounted for the largest number of users of Medicare-covered home infusion drugs. More than 56,000 beneficiaries used Part D–covered IV antibiotics in the home in 2009, with a gross drug cost of about $70 million and an average gross drug cost per user of about $1,250.” The specific issue of Part B coverage of prescription drugs relates to medicines that the patients can give themselves v. those that require a clinician to deliver the medicine is complicated and is what MedPAC reviewed in this chapter.

  11. Conversely, if a hospital keeps a patient in the hospital on observation status for several days in order to minimize its readmission status and the patient then needs to go to a skilled nursing facility, Medicare won’t pay for the usual 100% of the first 20 days and 80% of the next 80 days because the patient did not have INPATIENT status for at least three consecutive days. Healthcare is a complicated business with not only lots of misaligned incentives but lots of unintended consequences as well.

  12. This supports the idea of paying a fixed price for care and letting providers decide how they want to spend the money.


  13. There are many geniuses working to set prices of medical care in HHS and CMS. Did you not know this?

  14. Additionally, as the hospital is reimbursed for a surgical patient admission under a DRG, and the pt is still there for X number of days awaiting placement in a rehab facility, there is another factor at work– diminished throughput. A patient who doesn’t need to be hospitalized is occupying a bed, meaning a patient in need of a bed, another surgery (and another DRG reimbursement) or another sick person in the emergency department is not being bedded. This diminished capacity lowers the working funds of the institution and reduces the ability of said institution to provide care to those who are uninsured or indigent.

  15. “The American health-care system does not tell doctors and hospitals what prices they can charge, and that’s what makes all the difference.”

    (WaPo’s one-line summary of Brill’s piece…relevant here too, obv)

  16. “when you think of the “asset protection” consultants – or whatever they’re calling themselves these days – tell people to do to shield their assets as they prepare themselves for long term care – government subsidized of course”

    The lawyer I hired when I had to get legal guardianship on my dad (I was already POA on my mother) started talking to me about “asset protection.” I cut her off — “don’t even go there.”

    A consequence of which was the $300k we forked over to my Ma’s nursing home over 4 years of LTC. I was not about to foist that off on the taxpayers. A lot of people would.

  17. Thank you very much for pointing this out. This actually points to another huge problem in health care.

    It was really difficult for me to try to pin down the costs for everything. The social worker helping me had to call several people to try to come up with some approximate costs. The fact that doctors and health care providers don’t know how much things cost and can’t easily find them, as well as the fact that we don’t know how much Medicare is actually getting reimbursed is highly problematic.

    Also problematic is that those who are not covered by insurance or medicare end up paying significantly more for the same services, as described in this article:

  18. Thank you very much for your comment and for the link to the health care facility article. That’s another great example of misaligned incentives which are truly frustrating for the providers trying to do the best for the patients and practice in a cost effective manner!

    I’d also love to see some good studies and/or congressional investigation on this!

  19. The criteria used by CMS and other insurers for coverage are flawed, and there is no one there who will listen. Just bureaucrats and suits.

    Look, they are paying incentives to use EHR medical deices that are experimental.

  20. Well, as most surgical admissions are paid globally via DRGs, it is unlikely that Medicare actually paid that amount. Actually there is an incentive to delay discharge to rehab where the DRG clock starts again. Nonetheless the wasted costs and general misalignment pointed out are root causes to our health care dilemma.

  21. Another area with misaligned incentives is behavioral health. Many insurers “carve out” the management of mental health and substance use treatment to managed behavioral health orgs (MBHOs), such as Magellan, Optum, and Value Options. The MBHOs often have policies and practices (prior authorizations, fail-first and step therapy requirements, phantom provider networks that result in long waits for new appointments due to inadequate networks) that result in barriers to access to care. This can push up medical expenditures by the MCOs because the MBHOs are trying to reduce utilization.

    For example, Maryland Medicaid (administered by MCOs) patients with both mental health and substance use disorders had 8-15 times more hospitalizations for medical conditions, such as heart failure, diabetes, pneumonia, and cellulitis, than those Medicaid patients without either of these behavioral health conditions. http://bit.ly/mdma2011

    And, Maryland Medicaid is on the verge of “integrating” behavioral healthcare while it simultaneously carves out substance use treatment from the MCOs. To their credit, they are looking at ways to align the incentives between the MCOs and the MBHOs using shared savings, shared costs, behavioral health homes, and collaborative care arrangements. The challenge will be in integrating services paid for by two different entities when cost-shifting by one can have a significant negative effect on the other.

  22. This is really shocking when you think about it – I’d like to see some back of the envelope calculations about what all of this is costing taxpayers ..

    Even more shocking when you think of the “asset protection” consultants – or whatever they’re calling themselves these days – tell people to do to shield their assets as they prepare themselves for long term care – government subsidized of course

    Anybody know what the good recent studies are on this?

    Would LOVE to see a congressional investigation of that business

    See also:

    When is a Health care Facility Not a Health Care Facility?