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Nobody Has Any Idea What’s Going on in Our Health Care System

Glove

The federal government has just released new data about Medicare reimbursement rates showing that the price of treatments vary widely from hospital to hospital. The data, drawn from 3,300 hospitals across the country, looked at how much each facility charged for the hundred most common treatments.

The variations in price were incredible. For example, two different Florida hospitals charged $40,000 and $91,000, respectively, for a gallbladder removal. One hospital in the District of Columbia charged $69,000 for a lower joint replacement, while another charged just $30,000. And these were only a few of the hundreds upon hundreds of examples of staggering price ranges.

The most alarming thing about this data is that nobody has any idea why this is happening. NYT:

Mr. Blum, the Medicare official, said he would have anticipated variations of two- to threefold at the most in the difference between what hospitals charge.

However, hospitals submitted bills to Medicare that were, on average, about three to five times what the agency typically pays to treat a condition, an analysis of the data by The New York Times indicates. And variations between what hospitals charge may be even greater.

Mr. Blum said he could not explain the reasons for that large difference [...]

“There’s very little transparency out there about what doctors and hospitals are charging for services,” Mr. Zirkelbach said. “Much of the public policy focus has been on health insurance premiums and has largely ignored what hospitals and doctors are charging.”

We’ve known for awhile now that hospitals vary prices widely. Stephen Brill’s piece in Time delved into some of these numbers on a small-scale basis. A systematic study like this lets us know exactly how widespread the problem is, however. What’s becoming clearer and clearer is that the US health care system is more distorted, less transparent, more dysfunctional, and packed with more perverse incentives than most people realized. Right now, it’s about as far from a functioning market as it can be.

If we fix health care, all our other policy problems get easier. If we don’t, we’re going to go totally broke in a few decades. As this study plainly shows, the problem is hellishly complicated, and bound to get more so with time. All the more reason we should get started now.

[Glove image courtesy of Shutterstock]

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  • Jim Luebke

    Who decides how much things cost?

    Do they ever talk to each other?

    Do their suppliers have any kind of established market that provides price signals, or allows for price competition?

  • Stacy Garvey

    We’re not going to fix it. It will collapse and individuals, organizations and some states will figure out ways to work around the existing system by creating shadow organizations. There are clinics popping up down south that don’t except insurance but do provide a complete list of fees and services online.

    • http://www.facebook.com/corlyss.drinkard Corlyss Drinkard

      Well, since the aim of Obamacare was to destroy the medical insurance industry, it looks like it’s succeeded.

      • Andrew Allison

        Much as I despise Obamacare, I don’t quite see how mandating heath insurance coverage is an attack on the medical insurance industry. Quite the reverse in fact.

        • http://www.facebook.com/corlyss.drinkard Corlyss Drinkard

          First, sever the connection between work and health insurance. Then, make the gov’t owned exchanges the only option available to the middle class. Next, set the reimbursement rates so low as to force profit making and publicly owned insurance companies out of the field, leaving millions without coverage. Lastly, claim the gov’t knew all along that private insurance co. couldn’t handle the job, and suddenly there’s a nationwide outcry for gov’t to fill the role, which it will be only too happy to do.

          • Andrew Allison

            With respect, I fear that you are confused. Health insurance is a benefit offered to most employees, i.e., not readily severable; the government exchanges are for only those who do not have other insurance, and are optional (I suspect that many will choose to pay the penalty instead); reimbursement is paid to providers by insurers, and is already so low that service is being denied to insured patients.

          • http://www.facebook.com/corlyss.drinkard Corlyss Drinkard

            Have you been following the rate at which businesses are shedding health insurance as a benefit for employees because under O-care it’s less expensive to pay the penalty than to provide health insurance?

          • Andrew Allison

            There’s no question that O-care is going to make a bad situation worse. To be accurate, employers are not shedding insurance, they’re avoiding it by reducing hours worked (which is even worse). But at the end of the day, there will be more, not less, people insured.

          • http://www.facebook.com/corlyss.drinkard Corlyss Drinkard

            “employers are not shedding insurance, they’re avoiding it by reducing hours worked”
            A distinction without a difference? That sounds a lot like “the quick reaction team in Tripoli was not told to stand down; it was told simply not to go.”

          • Andrew Allison

            Might I gently suggest that you re-read my previous post, to which you responded with an irrelevant kee-jerk. Specifically, I wrote that what is actually happening is much worse than what you mistakenly wrote in a previous response. Furthermore, if you go back to the beginning of this sub-thread, you will see that it was generated by an equally mistaken assertion that “the aim of Obamacare was to destroy the medical insurance industry” when, in fact, the exchanges are actually “cafeterias” of private insurance plans.

  • Andrew Allison

    I think I know exactly what’s happening: because hospitals are not fully reimbursed for the cost of emergency room and Medicare treatment or, for that matter insured patients, they set “list” prices which they hope will enable them to remain in business. It’s ALL about net reimbursement. The scandal here is that half of all insurance and 25% of medical service provider costs go to administering insurance rather than healthcare. This incredible misallocation of resources goes far to explain why, at three times the peer capita expenditures, overall US outcomes are sub-par. The first step toward cutting this Gordian knot is to eliminate State-by-State firewalling, er regulation of insurance companies, thereby broadening both the range of products and the competition. Ultimately, however, the only way to provide the minimum level of service for all which society appears to want is single-payer, warts and all.

    • johnfembup

      “The scandal here is that half of all insurance and 25% of medical
      service provider costs go to administering insurance rather than
      healthcare.”

      False.

      Until recently, I managed the employee benefits for a prominent organization you would instantly recognize. We purchased from two major insurers. The insurers’ total administration cost – including their profit margins – came to about 5% of our total expenditures for the benefits plan. That 5% is in line with what insurers charge to their group customers, taking into account enrollment, complexity of coverage and other relevant factors.

      In fact, CBO data show that Medicare is a bit more expensive than private group insurance coverage.

      The current disclosure about price variations is valuable because it reveals how far medical care is from a real market where competitors can actually, you know, compete.

      But prices are still not the only or even fundamental issue. Costs are. Medical insurance is expensive because medical care is expensive; medical insurance premiums rise because the cost of medical care rises.

      “Single payer” is an insurance scheme and ignores the more fundamental problem of medical cost. Fooling around with insurance whether public or private and whether single payer or not, won’t fix the more fundamental medical cost problem.

      I doubt anyone would want to keep seeing a physician who treated one’s symptoms but ignored the disease. That is precisely what talk of “single payer” does. It’s a way to ignore the more fundamental issue, which is the high cost of medical care and whether anything can – or should – be done about it.

      • Andrew Allison

        No, true. And a thoroughly disingenuous response. As I wrote, the issue is not medical costs (which obviously need to be recovered if service is to continue), but the costs associated with insurance.

        The insurers total administrative cost is irrelevant. What’s relevant is how much of the premium dollar gets disbursed for care, and there are numerous studies showing that, as I wrote, it’s about 50%.

        You also falsely state that Medicare administration costs are higher than private (http://www.pnhp.org/news/2013/february/setting-the-record-straight-on-medicare%E2%80%99s-overhead-costs). As noted in the reference, Medicare’s cost is 1%. It’s Medicaid (which has nothing to do with insurance) that’s 6%.

        I stand by my argument that we can’t afford to waste half-or-more of insurance premium income on overhead.

        • johnfembup

          Sorry, it’s still false. Asserting otherwise does not make it so.

          For one thing, overall private insurance admin costs are closer to 8% of premiums. Allowing 2% for state and federal taxes, and 5% for profit explains why Congress set the MLR target under ACA at roughly 85%. Of course admin costs
          for large private groups are even less than 8%. The admin cost for the
          plan I managed – including the insurers’ profit – was about 5%. State and federal taxes, of course, are not “admin costs” nor is profit. The absence of taxes and profit margins in Medicare expenses does not mean Medicare is more “efficient”.

          For another thing Medicare’s reported expenses are actually understated. That’s because Medicare receives off-budget
          services from other government agencies.
          In other words, the costs for those off-budget services are not reflected in Medicare’s admin costs. Examples include IRS, which collects the taxes that
          fund the program; SSA, which helps collect some of the premiums paid by
          beneficiaries i.e., those deducted from Social Security checks; and HHS, which helps to manage accounting, auditing, and fraud issues and pays for certain marketing
          and building costs. This practice also does not mean Medicare is more “efficient”.

          For another thing, seniors incur much higher medical costs than the rest of the
          population, which means their premiums are much higher than private insurance
          premiums. But higher medical costs do not mean correspondingly higher admin costs; it does not cost 100X’s as much to adjudicate a $10,000 claim vs. a $100 claim. The premiums for Medicare and for other private
          insurance are not commensurate.

          So in short, Medicare admin expenses as a percentage of Medicare premiums uses a numerator
          that is understated, and a denominator that is overstated. The resulting percentage of premiums is neither a
          valid measure of Medicare “efficiency” nor a valid means of comparing costs between Medicare and private plans.

          Far better to look at Medicare admin expenses on a per-person, per month basis, and to compare Medicare admin expense to private insurance on that basis also. Admin expenses in the plan I managed
          were about $19 per person per month.
          Based on CBO projections for 2013, Medicare will cost roughly $31 and $32 per person per month.

          None of this touches on the lousy Medicare coverage – so lousy that equivalent coverage would not be “qualified” under rules for the Exchanges to be offered next year. So lousy that having Medicare alone places individuals at risk of bankruptcy and virtually requires purchase of a Supplemental policy – at the individuals’ own expense, of course.

          I think you need better information and you might start with better sources.

          • Andrew Allison

            Sorry, but it’s still a straw argument. What percentage of private insurance premiums gets disbursed? You also completely failed to address the healthcare provider overhead.

          • johnfembup

            “What percentage of private insurance premiums gets disbursed?”

            In the case of the group plan I managed about 95%

            On average in the US about 85% – less for individual and small group policies, more for larger group plans.

            I’ve taken you around that barn before with little apparent effect.

            “I stand by my argument that we can’t afford to waste half-or-more of insurance premium income on overhead.”

            Your assertion is not an argument. And your facts are wrong, as “half-or-more” of insurance premium is not even SPENT on overhead, much less “wasted.”

            You really do need better sources.

            Thanks anyway for the conversation.

          • Andrew Allison

            A for-profit company with 5% admin distributing 95% of its revenue to third parties? Surely you jest? Might I, with the very greatest respect, suggest that it is you who needs better sources.

          • johnfembup

            “Surely you jest?”

            Allison, I have told you what I personally oversaw as head of a $200 million annual medical insurance program.

            Our insurers charged us 5% including their profit ( I’ve clearly stated this, twice).

            The other 95% reimbursed medical expenses for our employees and their families, according to our plan rules.

            Put away your false humility, open your mind, and let the sun shine in.

          • Andrew Allison

            I am becoming more than a little irritated by your tone. Go take a close look at the financials of the largest private insurer (Wellpoint).

          • johnfembup

            Well of course it’s your choice to be more “irritated” if that’s what you prefer.

            But being more open-minded is still a better choice. For one thing, about my experience as a head of benefits for a major company.

            I’ve recited the facts of my experience more than once in this string and see no point in a re-telling.

            (btw one of the two companies that administered our group medical coverage is
            Wellpoint. That’s some irony for you. And as a result I understood a good bit more about Wellpoint’s financials than you perhaps suspect.)

            If you feel taking the last word here means you “win”, be my guest. I’m done.

            As I said before, thanks anyway for the conversation.

          • Andrew Allison

            Then you must be aware that their top line overhead is 37% which, despte the single example you repeatedly cite, make your argument utterly mendaceous.

          • johnfembup

            37% of what?

          • johnfembup

            See, Allison, there’s a problem with your statement that you either don’t understand or don’t want to concede.

            Wellpoint has a significant block of self-funded business. The fees for that business are reported as revenue. But the expenses for that business are something like 95% of the revenue (that is my plan’s experience – that you try so hard not to believe).

            Clearly the self-funded business raises Wellpoint’s overall average of expenses to revenue.

            In other words, the 37% you cite averages together the admin ratios for Wellpoint’s insured and self-funded businesses. So it’s meaningless. As meaningless as observing that, on average, Americans have one testicle and one ovary.

  • ojfl

    And yet in our infinite wisdom we decided to make prices even less transparent through Obamacare. There are only two known forces in human history that cause prices to come down, competition and economies of scale, none of which are incentivized or created in Obamacare.

    • Andrew Allison

      Economy of scale is one reason that Medicare admin costs are one-fifth those of private insurance. Another is that Medicare is non-profit.

      • pacej001

        No. Under Medicare, care and medical services are still provided by fragmented inefficient providers, all of which is price and quality opaque to the patient. It a grossly distorted system.

        • Andrew Allison

          I agree, but the point I was making is that Medicare’s administrative overhead is one-fifth that of private insurers.

          • PapayaSF

            And Medicare losses via waste and fraud exceed the total profits of the top private health insurance providers.

  • http://www.facebook.com/quandle Evan Seitchik

    I think this is a little misleading—Medicare doesn’t reimburse hospitals based on what they charge for procedures and services, it reimburses them at fixed rates for various diagnoses and treatments.

    Whatever issues it may have, Medicare looks a lot more like a solution than a problem to me—a consistent and non-adversarial process for reimbursement independent of the push and pull between providers, payors, and individuals.

    • bannedforselfcensorship

      You are missing the other side of the problem. Not only is Medicare is the budget buster that you wish to expand, its also subsidized by private insurance. If you simply remove the private insurance, you will be stepping off the balloon, and those costs will flow to Medicare. Many people ignore this and just assume single payer will be cheaper than what we have now. Medicare is already single payer, running out of money, and is subisidized. Why would anyone think that is a good solution?

  • Lorenz Gude

    Actually I do know exactly what is going on in the US healthcare system. US healthcare costs twice as much as a percentage of GDP – 16% – as it does in Australia – 8.5%. Health outcomes are not woeful in the US – they are only slightly worse than in Australia and other developed and not so developed countries. You don’t need more studies to see what is going on. Steven Brill’s piece in Time (referenced above, but now behind a paywall) said everything you need to know, but most importantly that the Health Care industry spends a lot more than the defense industry on lobbying. The problem my fellow Americans is corruption. Same problem as with with our banking and financial system.

    • http://www.facebook.com/people/Don-DeVan/1534335366 Don DeVan

      So move to Australia….now.

    • bannedforselfcensorship

      So, once they have become part of the State they will become cheaper and no more lobbying will occur? See the Defense Department for an example.

      Furthermore, the main cost of healthcare is medical personnel’s salaries. I do not know what Australia pays, but I do know Europe pays less than America…far less. So, step one to achieve “European” cost structure is to cut wages for doctors and nurses. Good luck.

  • brendak

    The data is incomplete. For those hospitals that charge more for their services, how much ‘free’ health care have they had to disburse? The cost of treating people without insurance or with inadequate insurance must be paid by someone — that someone being everyone else.

  • GardenGnomeLF

    This chaos is a natural result of government interfering with every healthcare decision based on politics and not on healthcare.

  • rheddles

    The only, ONLY, problem is that the individual purchasing the service does not pay for it. Eliminate the tax deductibility of employee health insurance and the system would be fixed within two years. They might be chaotic and painful years, but then we would have a normal market.

    Every sector of the economy with chronic problems generally suffers from government interventions that had noble intentions but only aggravated the problem they were intended to ameliorate. Health care, education, housing. The government doesn’t know more about these sectors than all the people who work in and utilize them. Let those people make the decisions, not some overpaid apparatchik in DC who lives in a bubble.

    The Soviet Union proved this almost 25 years ago. Why our elites keep moving us closer to their model is a tragedy historians will ponder to eternity. If they have the freedom.

  • bannedforselfcensorship

    “the problem is hellishly complicated”

    Humanity has developed a very effective system of dealing with complicated problems like this, with a proven record of lowering costs and improving service. Its called a free market.

    • http://www.medicareforall.org/ SinglePayerActivist

      There was an increase in the use of the free-market in the 1970’s. That was the same time in which the majority of other free-market countries finished their implementation of universal health care. Thus, the free-market has had about 40 years to demonstrate that it could lower costs and improve service. It failed miserably with the U.S. being uniquely and dramatically out-of-control ever since.
      – Bob the Health and Health Care Advocate

    • Andrew Allison

      I beg to differ. The problem is how to provide a socially acceptable level of service to everybody. The solution, whether it be medical care, welfare, defense, etc.,etc., is also well understood. Universal services require universal management. That said, as I wrote below, a good first step for healthcare would be a free market in insurance rather than the current State-by-State regulation.

  • http://www.facebook.com/people/Don-DeVan/1534335366 Don DeVan

    This proves that requesting competitive quotes from health care providers would dramatically reduce health care costs. I did it & it works!

  • Jeff W.

    Healthcare can never operate well as a free market because the seller has too great an advantage over the buyer. The seller (an M.D.) has a tremendous information advantage, has a psychological advantage reinforced by all the high-tech gizmos and other trappings of the hospital, and is dealing with a buyer who is likely ill, in pain, somewhat desperate, and possibly even comatose.

    Free markets only work well when buyers and sellers are more equal. In healthcare, it is child’s play for the sellers to rip off the buyers. That is why traditionally, the doctor was trained to be a professional who was not primarily motivated by money.l

    • teapartydoc

      The “sellers” are anyone connected with health care. And they are all reaping the benefits of a government-supported monopolistic cartel.

  • teapartydoc

    The solution is to abolish government licensing of physicians. Read Milton Friedman’s chapter on licensing in Capitalism and Freedom. Google Timeline of Physician Licensing, and compare this with Timeline of Drug Regulation. Correlate these with the formation of the Federal Reserve System and the value of the dollar against gold. The Progressive Project is on a trajectory to oblivion.

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