Economics

Unreformed: Taming the Charge Monster

Any backpacker travelling on a shoestring budget in Thailand knows not to blow their entire budget on premium whiskey in a premium hotel on the first night in Bangkok. Rather, you need to skip the occasional meal, stay in a cheap dorm with random strangers, and drink cheap beer on Khao San Road if you wish to see the country and return home without having to wash dishes in a restaurant in Bangkok to repay the loans. Both Democrats and Republicans seem impervious to a simple wisdom that I learnt when backpacking – you save money if you go for cheap stuff. The operative word here is “cheap.”

Both the Affordable Care Act (ACA) and the Better Care Reconciliation Act (BCRA) impose cost sharing, such as deductibles. Deductibles lower premiums by cost shifting. Because the sick, for obvious reasons, are more likely to meet their deductibles sooner than the healthy, deductibles shift costs from the healthy to the sick, or are a “tax on the sick.” Deductibles also reduce premiums by reducing the administrative loading of insurance – because insurers have fewer small claims to process, administrative costs reduce.

Whatever the morality of deductibles, and they are a trade-off between higher premiums for healthy Peter and higher out of pocket expenditure for sick Paul, a deductible is short-lived if decimated, for example, by a single visit to the emergency department (ED) for vague chest pain which leads to a triple rule out CT angiogram. This is because the charges imposed on the patient before insurance kicks in are the list charges – the dreaded, illogical, evil and, frankly, stupid chargemaster rates. This is not like drinking premium whiskey in a premium hotel. It’s worse. It’s paying ten times the rate for premium whiskey in a premium hotel for cheap beer in Khao San Road.

The chargemaster is a hospital’s list price which hospitals use to show how much charity work they’re doing.

“Look we just did $3000 of charity by giving away ten $100 saline drips, which only cost us $2, for free. Can we keep our Mother Teresa, I mean non-profit status?”

Hospital administrators, in clandestine meetings, use the chargemaster to negotiate with insurers reimbursement for medical services. To give you an example of the negotiation, let’s take Tom, a brash CFO in a hospital in New York who, negotiating with Price, a brasher CEO of Blue Cross Blue Shield, says “see, we charged that poor bastard, Abdul the cab driver, who has no insurance, $10, 000 for a triple rule out CT angiogram, and all we’re asking you for is $1000 for the rich employees at Goldman Sachs who make thirty times Abdul does. Is that really too much to ask for, Price?”

You can instantly see several elements, lunacies actually, about this set up. The higher the list price, the higher the starting point of the negotiation. The more aggressively Tom bargains, the more dollars the hospital gets. The more aggressively Price counter offers, the fewer dollars the hospital receives. If Tom knows that Price is an aggressive, alpha male bargainer, he’s likely to raise the list price of a CT angiogram. If Price adduces from Tom’s swings at the local golf club that he’s a “win at any cost”, Harvard MBA gunner with a Napoleon complex, he’s likely to make a ridiculous counter offer. This is a vicious cycle – logical and illogical in equal measures.

Let’s revisit their imaginary, though not unimaginable, conversation.

Tom: $10, 000 for CT angiogram for uninsured Abdul. For the rich people your plan covers, all I ask is $1000.

Price: No, $200. Take it or leave it.

Tom accepts, but his ego is bruised. Once bitten, twice shy. Tom returns with a vengeance.

Tom: $15, 000 for MRI/ MRA of the brain. That’s what we charged Abdul, that uninsured cab driver straddling the 400 % Federal Poverty Limit (FPL). For your Goldman Sachs’ bankers, all I ask for is $2000.

Price: No, $200. Take it or leave it.

Tom: Did I tell you we’re merging with three other hospitals in New York?

Price: ok, can we make it $1800?

Tom: Price, what difference does it make to you? The Medical Loss Ratio means you can pay hospitals as much as you want – it’ll get counted as “medical expenses.” Those framers of the ACA missed this obvious point.

Price: Tom, it’s not always about the money. Sometimes it’s the ego. Remember, I got bullied at school for not sharing my chocolate.

Tom: ok, $1900 – just because I got bullied at school, too.

Price: Thanks. Please don’t charge anyone else less than $1900 for MRI/ MRA of the brain. I know you might be tempted to because you could feel bad for bankrupting people. I also know Medicare only gives you $500 for MRI/ MRA.

Tom: I don’t feel bad for bankrupting people. You want the “most favored nation” status? That’s fine. Also, I can always use the anti-trust law to keep our negotiation secret. I’ll use a law to our advantage. These regulators are such idiots!

Price: Ha! They’re asses, to be precise.

Tom: Ha! Ha! Yes, asses!

Price: not even that uninsured cab driver, straddling the 400 % FPL. You can’t feel sorry for him just because he’ll be bankrupt. Remember, that’ll violate our treaty.

Tom: You mean Abdul? I wasn’t planning to. We still need to get the $100 he owes us for a saline drip we started just in case he was dehydrated. He wasn’t dehydrated, and he only used 1/3, but that’s not the point. If I must bankrupt that cab driver to keep our legal treaty, I will.

Price: Thanks Tom. No mercy on the middle class uninsured.

Tom: Don’t worry, Tom. There’ll be no mercy on those free riders – even the Democrats are on our side. They didn’t touch the chargemaster.

Price: They need both of us, which is why we supported the ACA. Without your high charges what’s the point of insurance? They need the insurers. They wouldn’t know their posteriors from their elbows without the insurers. Single payer? Bring it on. It’s great opportunity for administrators in private insurance to run the country.

Tom: I agree you guys are invaluable. But we stuffed the Democrats’ mouths with gold. That’s why they didn’t get in a tizzy with the chargemaster.

Price: But what about the Republicans? What if they get a whiff of the chargemaster? They’re an unpredictable lot – they have no principles. I really fear them.

Tom: Don’t worry about the Republicans. Just say “abolishing the chargemaster is a short step to socialism” and their frontal lobe will stop working.

In the phallic war, and eventual financial kumbaya, between Tom (hospital) and Price (insurers) it’s Abdul (unsubsidized middle class) who gets shafted. The chargemaster is American healthcare’s most evil component. It embarks on a feeding frenzy like remorseless sharks. It is responsible for the medical bankruptcies, which seem to cause angst in many who aren’t bankrupt. It’s like a local infection which causes septicemia, so one wonders why undifferentiated bombardment of the septicemia deliberately misses the source of infection.

The chargemaster is still here. How did the ACA miss this elephant in the room?

Healthcare reform is like an Olympic Valsalva maneuver which first leads to a belch then a fart.

That the ACA failed to tame the charges is testament either to the incompetence of central planners or the power of rent seeking. That the BCRA doesn’t even pretend to touch the charges exposes an extraordinary depth of Pavlovian anti-ACA feeling among the Republicans – they’re like a toddler, still mastering sphincteric control, who doesn’t want what his older brother has simply because his older brother has it.

That the policy wonks, health economists, and other quantitative moralizers who, in an unprecedented moral frenzy, have compared healthcare’s re-reform to ISIS and the Iraq War, have proposed little to tame the charges, reveals a troubling level of mathematical puritanism which resides in that no man’s land between absurdity and idiocy. Ideology, particularly when ostensibly supported by statistics, truly guts common sense.

For crying out loud, it’s the costs, stupid. Instead of moralizing about deductibles, “taxes on the sick,” whether healthcare is a right or privilege, personal freedom, and other ideological chicanery, how about lowering the ducking costs, people?

The left believes, rather disingenuously, that costs can be tamed by incentivizing doctors to do the right thing. It’s a Goldilocks aspiration which, far from dealing with costs, has created a Father Bear’s electronic medical records and a Mother Bear’s regulatory overload. Goldilocks ran away before tasting the porridge.

The right believes, rather comically, that costs can be tamed by giving people choice. The latest of this façade in choice is the Health Savings Account (HSA) – where pre-tax, Abdul can put aside money that he’d have used for visiting his relatives in Afghanistan to pay for medical services should he need them.

Let’s bring Abdul back into the story. Say he has a very low premium plan with a super high deductible of $15, 000. Say Abdul decided to go a little thrifty with his Eid celebrations and put $20, 000 over 3 years into the HSA. Unfortunately, Abdul has a dizzy spell, and visits the emergency room, gets a head CT to rule out stroke where some fastidious radiologist reports “please note MRI is more sensitive for acute stroke.” Abdul has an MRI, but also an MRA (because you might as well have a look at the arteries whilst you’re there). Everything is normal.

The unadjusted bill is $25, 000 – $15, 000 for the MRI/ MRA, which Tom used to extract as much money from Price. Abdul pays $15, 000 out of the charged $15, 000. The insurer, thanks to Price, pays $200 of the remaining $10, 000.

Abdul’s HSA is carpet bombed more mercilessly than Dresden. He defers that trip to Afghanistan, again, to visit his family he left behind. He wonders if the chargemaster was invented by the Taliban to fight the Americans.

At the risk of sounding naïve, allow me to make a modest proposal which I believe will be more effective in the long run than both the comically biblical ACA and the biblically comical BCRA.

Here it is. Please don’t be shocked by its brevity.

Jha’s Healthcare Reform in a Tweet:

“Thou shalt not charge un- or under-insured more than Medicare rates for services rendered in any hospital which accepts Medicare.”

Quad Erat Demonstrandum

 

About the Author:

Saurabh Jha is a cantankerous contributing editor to THCB. He can be reached on Twitter @RogueRad

 

 

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PeterkellyneigercpaDon LevitWilliam Palmer MDgvenkat Recent comment authors
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Peter
Member
Peter

Can anyone tell me the difference between MSRP and Charge Master?

Does anyone believe MSRP represents true costs? Does anyone believe Charge Master represents true costs?

MSRP is a sales mechanism which allows the word “SALE” to be used, but has nothing to do with costs. Charge Master is an equal hoodwinking method to keep profits up while fooling payers into thinking they’re getting a deal.

Barry Carol
Member
Barry Carol

Peter, in my experience, MSRP bears some reasonable relationship to actual fully allocated costs. Chargemaster prices do not. You can’t buy a new car for 10%-15% of MSRP if you’re willing to pay cash, for example. Maybe you can get 10% off MSRP if the vehicle isn’t a hot seller.

Payers are well aware of what Medicare pays for any given service, test or procedure. They’re also well aware that chargemaster rates are a joke.

Peter
Member
Peter

Barry, how do furniture sellers offer 70% off if MSRP is a representation of costs? Ford dealers here routinely offer $10,000 or more off MSRP. MSRP is a sales tool, not a representation of cost. It is also a way for manufacturers to loophole the law on them setting retail prices. No one sells at MSRP except for shelf items.

Charge master may be worse, but both are scams.

Barry Carol
Member
Barry Carol

Some businesses like furniture are geared to moving goods on sale as compared to a high list price. At least in the furniture business and all others except healthcare, though, the customer can learn both the MSRP and the sale price before he commits to buy the goods. The opacity of healthcare pricing before services are rendered is the real problem at the end of the day.

kellyneigercpa
Member

Colorful article. Your creativity helps with the understanding of this topic. Hospital cost reduction is key to sustainability. In the current environment, a hospital would not survive being paid on Medicare and Medicaid rates. The cost of labor and supplies are skyrocketing. The requirements of IT to satisfy government EHR regulations, maintain compliance with HIPPA, and guard against cyber attacks are becoming cost prohibitive.

Don Levit
Member

Got a colposcopy today Got on Medicare in Nov and my doctor said Medicare pays for it The charge master price was $3,300 The Medicare reimbursement was $355 Asked the lady what private insurers pay and she said one pays $1,200 Thought I got a “steal,” but am adjusting Regarding HSAs, they are more effective to pay current expenses than for accumulation The average balance is $2,000-$3,000 with the only option being a savings account Read a report from Morningstar recently in which interest on savings accounts was less important than maintenance fees, for the maintenance fee on the average… Read more »

Don Levit
Member

Corrections
Got a colonoscopy today
Providing 2-5 times the balance of an HSA

William Palmer MD
Member
William Palmer MD

The RCCAC, the ratio of Costs to Charges as Applied to Costs, is a key figure Medicare uses to calculate whether or not your DRGs are being paid fairly. Hospitals must STILL do a cost report to justify DRGs, [Sic!]….after all this time (astonishing because they promised 30 years ago that they would get rid of the need for the Medicare Cost Report when the DRGs began. This ratio uses the chargemaster to calculate the costs. As mentioned in Saurabh’s fine article, chargemaster us used to bill the uninsured. If Medicare patients have same day surgery and need self administered… Read more »

gvenkat
Member
gvenkat

This is a great article. We can argue about the nitty-gritty but I shared it to friends on FB –
a lot of them not in HC. Most of them didn’t even know who a chargemaster was and the dysfunctional impact he/she has on our “system”. So kudos – I wish I had thought of it!

Edgardo Tenreiro
Member
Edgardo Tenreiro

Medicare pricing for all…cute. Of course HHS bureaucrats know what the profit and loss signals (i.e., prices) ought to be across time, locations and tens of millions of items in charge masters all over the land, not just for hospitals, but every single medical provider. Without a free market nobody can generate meaningful prices, no matter how much information a central bureaucracy demands from providers, no matter how much computing power it has and no matter how fast it feeds those “prices” down the chain of command to providers. With these pricing mandates from above, providers have no idea about… Read more »

anish_koka
Editor

Fun post as usual by Dr.Jha. Brief comments- 1. This proposal would help reduce the amount of debt that Abdul would go into, but would still bankrupt him. 2. Barry – You’re not seeing inside the blackbox of the hospital to know if what the hospital executives say makes sense. Actually the hospital executives don’t really have a good idea what, or how to be more efficient. 3. I worry about HSAs without a physician to help guard the HSA (works in the ambulatory setting – little help when you show up in the ER – though hopefully in the… Read more »

Barry Carol
Member
Barry Carol

Anish, you’re correct that I don’t have much insight into what hospitals may be able to do to become more efficient. However, I’m hearing all the time from insurers that hospitals are getting plenty of pressure from payers to become more efficient and, as hospitals consolidate into larger systems and make more use of IT, they are tracking lots of different variables to both monitor efficiency and become more efficient. In 2013, my cardiologist’s practice of five doctors was sold to a large hospital system in NYC. He tells me that they track EVERYTHING and a lot the pressure he… Read more »

Steve2
Member
Steve2

If you make apples to apples cost comparisons between hospitals, you can easily find 20%-40% differences in average cost per admission at similar hospitals. That is, I think, where the low hanging fruit lies. Beyond that there is a some room for “efficiencies” by providing the care people need rather than that which is paid for by the insurers. Probably another 2%-5% (just guessing). Expanded use of mid-levels is a mixed blessing, in terms of overall costs, but likely gives us another small cut. Billing takes up a ton of time and costs. I think there are real potential efficiencies… Read more »

Barry Carol
Member
Barry Carol

Thanks Steve. I wonder if you could provide a little more insight into what inefficient care actually looks like as compared to efficient care if we look at two hospitals that are similar in size, case mix, acuity, and payer mix and what differences a patient would notice if he knew what to look for. For example, if I’m a patient needing an inpatient procedure and I’m in one of the inefficient hospitals, will I get more unnecessary tests? Will scheduling of tests be less efficient so my length of stay is longer than it needs to be and the… Read more »

Paul @ Pivot ConsultingLLC
Member

ditto Barry’s queries. In my experience there are other categories that I think may be large factors. Capital budgets (think marble and soaring glass lobbies, architecturally designed of course), bloated administrator staffs, and “public service” non revenue generating programs often found in non profit hospitals.

Barry Carol
Member
Barry Carol

I think lots of people would find some incremental hospital costs worth paying for. I, for one, would be willing to pay extra, within reason, for a single room because I think it’s more restful, promotes healing and reduces the probability of mistakes like mixing up charts and giving a drug to the wrong patient. Amenities like valet parking, better food, flat screen televisions, art on the walls, and even marble floors and waterfalls in the lobby have value to a certain segment of well insured and upscale patients that hospitals would like to attract more of. Pure waste that… Read more »

Steve2
Member
Steve2

That is a heck of a request. People write long papers, probably whole books on that topic. People much smarter (ok, low bar) and well read than am I. I have linked to a Commonwealth piece that identifies some commonalities. There are lots of others, so you can scan them if you wish. That said, I do work at place that consistently ranks as a top 10 or 15 hospital for quality/efficiency, so I can just tell you what I observe. I am partially contrasting this with our main competitor hospital, which is also a very good hospital, but a… Read more »

Barry Carol
Member
Barry Carol

Thanks Steve. Everything you said makes perfect sense to me. I think the issue of culture is especially important along with the need for buy-in from the doctors, nurses, techs and other staff. Hopefully nurses and techs feel empowered to speak up even to senior doctors when necessary. Some of your hospital’s strategies appear driven by economic necessity such as your approach to the TIVA pumps and paying doctors somewhat less than your competitor because you can’t afford to match them. It would be nice if lower costs combined with good care quality could be rewarded with more patients. Perhaps… Read more »

anish_koka
Editor

I’m working on a post about this.

Paul @ Pivot ConsultingLLC
Member

Just to reiterate a point made in previous comments: our employees who chose high deductible plans only pay the insurer negotiated rate for services…not “list” price.

Secondly, deductibles can be an excellent tool. We made company contributions to the Health Savings Account that matched the deductible. In this way we were able to create a financial incentive for employees to be prudent consumers/shoppers (yes, I know some don’t hate these terms..I love ’em). They KEEP the money saved. It works to slow the growth of health care expenditures just as the huge Rand study (2011) showed.

Barry Carol
Member
Barry Carol

My son works for a pharmaceutical company. About 42% of their U.S. employees now have a high deductible health insurance plan coupled with a Health Savings Account. Drug companies hate high deductible health plans when they’re selling drugs but they like them and embrace them when they’re buying or self-funding health insurance for their employees. When they’re selling drugs, they’re a vendor / provider. When they’re buying or self-funding health insurance for their employees, they’re a payer. Those two perspectives couldn’t be more different.

Margalit Gur-Arie
Member

There is a BIG difference between fully funded HSAs and: “Hey, irresponsible loser, here is an empty HSA for you, go save thousands of dollars in it from your slave-labor wages, because it will make you free like our founding fathers intended you to be…”

Michel Accad
Member

Barry and Margalit’s clarifications are helpful but I would imagine Abdul would still risk bankruptcy even if he were charged Medicare rates. Yet, as Margalit pointed out, if they were to operate on Medicare rates alone, most hospitals would be barely scraping by. How messed up is that?

Barry Carol
Member
Barry Carol

I’ve asked hospital executives numerous times over the years if they could sustain their business model and mission if they received Medicare rates for all of their services delivered to all of their patients with no uncompensated care. The consensus answer was no. Before Maryland implemented its all payer system for hospital based care in 1977, Medicare and Medicaid both agreed to pay more than they were paying previously so private insurers could pay less. That approach would probably be a non-starter now given today’s fiscal realities at both the federal and state level.

Barry Carol
Member
Barry Carol

As Margalit notes, insured patients will have their bill submitted to their insurer and will thus be entitled to the contract reimbursement rate for care within the deductible. He won’t be exposed to paying the full list price. Moreover, since claims within the deductible are submitted to the insurer to determine the “allowable” amount, there is not any administrative savings accruing to the insurer as a result of high deductible health insurance plans. What do accrue to the insurer are lower medical claims costs than would have been paid if the deductible were lower. Second, for quite a number of… Read more »

Michel Accad
Member

Helpful comments, Barry.

Margalit Gur-Arie
Member

I would like to repeal and replace Jha’s Healthcare Reform in a Tweet by striking out un- or under-insured in the first line. Why? Because it is superfluous (and possibly illegal under current law) for under-insured and arguably violates equal protection for un- (yes, I know…. but it’s still discriminatory). The insured Abdul will not have to pay charge master prices in the ER or anywhere else when the service is “covered” [it just occurred to me that covered is spelled eerily similar to covfefe….]. The ER bill will go to the insurer first and will be adjusted to make… Read more »

Michel Accad
Member

Good comments, Margalit, but aren’t you concerned that a single price system is only a step away from a single payer system? 🙂

Margalit Gur-Arie
Member

Yes, I am shaking in my boots…. 🙂