The Business of Health Care

How to Cut Medicare Spending: Attack Large Claims!!

Medicare reform thus far has been focused on $79 office visits, co-payments for home health care, hospital readmissions, Miami infusion clinics, the price paid for scooters, $45 resting EKG’s, the Plan B deductible, etc. These are important areas to pursue — but they are not where the real money is.

While we are debating the ‘doc fix’, the drug companies, device companies and hospitals are backing up the truck and cleaning out the store!

Consider the following paid claims paid by Medicare in Indiana in 2011:

  • 113 Heart Transplants: average payment was $773,877 a piece
  • 96 Bone Marrow Transplants: average payout was $509,637 apiece
  • 129 Liver Transplants: average payout was $367,000 apiece
  • 2,200 Tracheostomies: average payout was $376,103 apiece
  • 1,517 Open Heart Surgeries: average payout was $185,000 apiece

Altogether, the 12,000 largest claims in one state totalled $2.4 billion in Medicare spending. If the other states are consistent, then large claims like these ate up $120 billion of Medicare’s total spending of $545 billion. And when you factor in sepsis treatments, defribillator-implants, and similar claims that cost “only” $75,000 each and so did not make the above list…….. then almost two-thirds of Medicare spending — over $300 billion a year — is focused on just ten percent of beneficiaries.

This has nothing to do with doctor’s fees, which are normally just a fraction of the cost. A heart surgeon might receive $2,500 out of a $60,000 operation. An orthopedic surgeon may receive $3,000 out of a $40,000 operation. Neurosurgeons may receive $650 when the hospital’s ‘facility fee’ is $60,000.

Drugs and devices often make up 40-50% of every large claim. Hospital and rehab centers take another 40%.

Many of the largest claims are quite simply padded. Kidney transplants can often be done with a 5 day inpatient stay, and yet the hospital might collect $250,000. No wonder hospitals stay quiet about it; no wonder they lobbied for the IPAB to do nothing about hospitals until 2020.

The 500+ DRG codes for hospital care include too many higher payments for ‘complexity.’ (Pending changes to DRG’s might only make this worse.)

From now on, if there are three codes for a heart procedure, only the cheapest code should survive. If there are two therapies for prostate cancer, the only fee left should be the cheapest one.

This will greatly reduce systematic upcoding, which has been a major driver of costs in Part A.

  • In 2000, Medicare paid $104 billion for 13.1 million hospital visits.
  • In 2010, Medicare paid $182 billion for just 13.8 million hospital visits. This was all very clever on the part of hospitals, but it drains the federal budget.

For the last 25 years, health policy experts have waited for better drugs and faster surgeries to cut back what we spend on hospitals. And in fact, we have reduced hospital utilization and days of care. But hospitals have brought in more revenue on fewer patients, and we have let them do it through upcoding. They use a whole portfolio of “revenue-enhancing” techniques:

  • falsified diagnoses
  • routine use of modifiers that exempt claims from auditing
  • claims for services and supplies not provided
  • add-on codes and claim splitting

Higher spending on hospital care has nothing to do with the health of seniors. It is solely due to the exploitation of graded fee schedules. Hospitals will scream at any reform…….but most American hospitals are over-built and overstaffed — especially with computer analysts, billing clerks and technicians. In 1990, America had 1.7 millon hospital beds, 3.5 million employees, and total budgets of $235 billion.By 2010 there were 940,000 beds, 4.6 million employees, and total budgets of $726 billion.

And all of this happened while better drugs and microsurgery made general hospitals less necessary.

Here are several more steps we could take right away:

  • All transplant DRG’s would be reduced to $50,000. (The prices of drugs with no substitutes would have to be controlled.)
  • No claim over $30,000 would be allowed for any heart surgery, and no balance billing would be allowed.
  • When in doubt, pay hospitals $2000 a day for the first 10 days of care, and $1,000 a day thereafter. A heart surgery with 8 days in the hospital should cost about $15,000 for room and board, and $10,000 for the doctors and other professionals. This is a long ways from the $50,000+ that is now collected.
  • The itemization for large claims should be published in the newspaper, of course deleting the names of individual patients and doctors. The American public which gets angry about a $400 Presidential haircut will have lots of time to be angry at a $2,500 stent that costs $15 to produce.

If Medicare announced tomorrow morning that it would pay no more than $8,000 a year (vs. $8000 a month) for any drug, the supply of drugs would be virtually uninterrupted. The manufacturers make money in Europe and Canada all the time with lower prices. Those countries say, in effect, this is all we will spend for heroic medicine. And the drug companies comply.

We do not need to have ‘death panels’ if we reduce the spending on each claim. More and more, we must recognize that the cost of health care is what we decide to pay for it. If we pay $25,000 for heart surgeries, we will get $25,000 heart surgeries. If we decide to pay $8,000 a year for a cancer drug, we will get $8,000 cancer drugs. Other national health systems prove this year after year.

Up until now, Americans have never felt that large expenditures on just one patient actually took anything away from other patients. Americans still tell pollsters that $1 million is not too much spending on one life. Other nations, including socialist ones, are aghast at spending that much on just one person.

This is not to say that slashing large claims will make the Medicare budget problem go away. The sheer number of baby boomers turning age 65 will drive costs upward no matter what. The extension of life spans will cost a lot of money, and we will need higher lifetime taxes in order to pay for it.

Medicare has been an enormous success, but it is not self-financing. A senior who gets a hip replacement does not go out and earn more money and increase tax collections. Saving lives is expensive twice — first when we do it, and then with higher Social Security and Medicare costs in the decade of extra life. I have often thought that doctors should be taxed for saving elder lives, not paid to do so. Fiscal reality means that certain procedures must be deemed not worth the cost.

So we have no choice but to tackle the highest payments first. If a family is spending too much on food, it has to start with the imported cheese and caviar. If a family is spending too much on car payments, it has to sell the Lexus, not the Yugo.

Bob Hertz is director of the Health Care Crusade and a regular contributor to the THCB discussion.

4 replies »

  1. Thanks to Alvin and Barry for your comments.

    My primary source on the large claims was a State of Indiana summary called “50 most expensive statewide discharges by MS DRG” Jan-Dec 2011.

    As far as I know, this table has the actual DRG amount which Medicare pays.

    Also see a posting on 4-12-2011 on a small blog called Misunderstood Finance by Milton Recht. The title is :
    “Small Percentage of Medicare Beneficiaries account for most of its costs.”

  2. I’ve said many times that I would love to see a comparison of the number of employees per licensed bed between U.S. academic medical centers and community hospitals vs. their Western European and Canadian counterparts. I know that we have more billing clerks but that’s a drop in the bucket in the scheme of things. What the heck do all of these extra people actually do?

    Colleges have gone through the same thing. In the last 20-30 years the number of college and university employees, especially administrators, per student has skyrocketed without much impact, as far as I can tell, on the overall quality of the education that students actually receive. On the plus side, the student unions are bigger and fancier as are the football stadiums and athletic training facilities.

    Medicare has to deal with determining prices for at least 10,000 different medical services, tests and procedures and they can vary considerably from one county to the next based mainly on differences in medical input costs. The U.S. has 3,147 counties. It’s inevitable that Medicare will overpay for some billing codes and underpay for others and the workings of the RUC tend to ensure that procedures continue to be much more generously compensated than E&M codes. Hospitals make most of their money on surgical procedures and cancer treatments. The medical, as opposed to the surgical, cases aren’t nearly as lucrative.

    I would attack drug costs with reference pricing. In each therapeutic class, the most cost-effective drug would be paid for in full and patients would pay the entire difference for more expensive drugs unless they couldn’t tolerate the cheaper drug for some reason which would probably happen about 10%-20% of the time. For devices, we need to get rid of the confidentiality agreements that currently preclude disclosure of actual contract, as opposed to list, prices. Let hospital discover what their competitors are paying and maybe we can get some convergence toward the lower prices paid by the larger, high volume hospitals.

    Finally, I recently had a Medicare eligible relative go through a six week hospital stay at a leading academic medical center with almost half the time spent in the ICU but no surgical procedures were performed. Medicare was billed almost $500K by the hospital but it was paid less than $70K which it accepted as full payment. So, I’m not sure if Bob’s figures reflect billed charges or what Medicare actually collected. The difference is always huge.

  3. Are you sure these numbers are right? They just sounded really high to me. I took a look at MedPAR data for 2011 and it showed a total of 2,200 heart transplants in Medicare with an average payment of about $175,000 for the whole country. Certainly $175,000 is a tall order but a heart transplant is pretty complex business. Just interested in how you came to these.