How Hospital Costs Ran Amok

Health care is an issue for libertarians


Hospital costs for uninsured Americans are ruinous, like nowhere else in the world. The Wall Street Journal recently pointed to a major reason: Hospitals gain a "charity" tax deduction for the difference between what they collect and their "list" prices. If they can actually collect the money, which they often do by threatening collection lawsuits, they make a tremendous profit. If not, then they deduct from taxable income their phantom "losses" from patients who don't pay.

So, for example, an ambulance ride with a "list cost" of $1000 could bring in $1000 from a patient who pays or a tax deduction of $1,000 from the patient who doesn't, which then can be deducted against other income. Furthermore, the "list" prices inflate other medical costs. The uninsured today are a major source of hospital profits, as detailed in J. Patrick Rooney and Dan Perrin's America's Health Care Crisis Solved. The book describes how a Denver hospital patient tracked down the charges for his treatment paid by medicare and health insurance companies, which totaled $6,000, compared to the $67,000 the hospital demanded.

How did this happen? The system evolved over recent years as collection methods improved and credit ratings became important for most Americans. The well-meaning tax deduction was legislated when hospitals could not collect from many uninsured patients. Now, however, aggressive pursuit and greater difficulty in declaring personal bankruptcy under new bankruptcy reform laws have made it far easier for hospitals to enforce collections. Now imagine the plight of uninsured poor and middle class Americans with an injured child. They face the choice between no medical care or possibly losing their savings, home, and credit rating. Medical costs are the reason for about half of personal bankruptcy filings. Equally, heirs suffer as the estates of their aged relatives—who sometimes die without sufficient insurance—and are also subject to the ravenous hospital charges that can deplete expected inheritances.

Health insurance costs are now so awesome that they are even wrecking large businesses—American auto manufacturers, for example. Health insurance costs also drive businesses overseas, they absorb much of the surplus from rising wages, and have increasingly made many Americans eager for a socialized system such as that offered in Europe and Canada.

Almost no other business in America has such abusive pricing power, including the power to keep charges secret from customers until they get their bills. The Wall Street Journal described how "non-profit" hospitals have accumulated billions of dollars of untaxed profits on the theory that they are providing a public service. The Journal pointed out that many of them provide very little actual care to the uninsured, while many of their CEO's earn salaries in the millions. Equally, they have little incentive or competitive pressure to be competent or cost effective.

The "solution" is either socialized medicine (with government control over costs and availability) or competition and transparency. The latter should be the American solution. However, federal and state governments often make competition very difficult. Still, it is slowly appearing. New services advertise basic heart and blood tests for about $200, as compared to more than $2,000 in most hospitals. A new system of "Minute Clinics" are appearing in some CVS drug stores for $59 per visit, and Wal-Mart is starting up similar clinics with $4 generic medicines. These clinics are staffed by nurses and backed up by doctors and databases. They can handle some 80% of common ailments. However, many states restrict them and the American Medical Association is now attacking them. Such systems could provide major savings for many children's sicknesses and save parents immense amounts of time spent waiting for doctor's appointments.

Individual health savings accounts offer an alternative for some, but groups are not large enough to really challenge hospital costs, especially for emergencies. Generic medicines are being used more often. But doctors often benefit from prescribing costly medicines. Databases now make it possible for pharmaceutical companies to track how often local doctors prescribe their most costly medicines. Then the companies often award them vacations, lecture fees, research grants, and consulting contracts. A major reform would allow health insurance companies to operate nationally across state lines and offer selective coverage, for example excluding certain very costly and unlikely diseases. In fact, Florida just passed a new law allowing health insurance choice. A surplus government insurance for rare illnesses would reduce insurance costs enormously and cost far less than our current system.

The costs described above are for private care. Medicare fraud is another immense waste. The Washington Post recently detailed a report where just one thief with a laptop computer succeeded in stealing $105 million. The Post report showed that fraud costs taxpayers some $60 billion yearly as medicare pays most doctor bills without review. The New York Times recently reported how doctors have incentives to buy expensive equipment and then charge Medicare even more for often-unnecessary tests or procedures. Even without fraud, the system encourages older patients to seek out specialists for every ache and prompts doctors to order masses of costly tests to shield themselves from lawyers. Many operations are also considered unnecessary, with numbers varying tremendously all over the country for the same ailments. Medicaid is another multi-billion dollar scandal of waste and fraud.

So why isn't all this being debated in the presidential campaign? For one, some of the richest and most powerful lobbies in Washington are run by the medical and pharmaceutical establishments. They don't want a competitive system. Democrats do propose forcing everyone to "buy" high-cost insurance, while continuing with the current system, and then have taxpayers subsidize premiums for the poor. But they also oppose tort reform which would hurt their trial lawyer political allies. Many Republican congressmen, meanwhile, also benefit from the lobbies and don't want to rock the boat. After eight years in power, they don't want to take criticism for having made little reform.

Medical cost reform is just one of many areas where Washington is corrupt and paralyzed, in particular because of the gerrymandered power structure, whereby sitting congressmen are almost invulnerable to defeat. They then legally collect millions in "campaign contributions" from the lobbies. Reform will only come about if Americans become better informed, yet most of the media is ignorant about health costs. Reform depends also upon major corporations attacking the current system, such as Wal-Mart has started to do with its in-store clinics. But most companies are silent and afraid to tackle the medical power structure. The Chamber of Commerce and National Federation of Independent Businesses seem reluctant to challenge both the monopolies and the current system. Lessons from the experiences of other nations are certainly available, but most Americans are ignorant of them and still believe claims that "our system is the best." It may be "best" for Medicare, some Medicaid recipients, congressmen, state and federal government employees, and the military, but then they already have "socialized" medicine; they just don't pay most of the costs.

This could be a big election issue for libertarians. Polling indicates that health costs are often the third most important issue expressed by voters. Neither major party wants major change in the current system, but the topic could get TV time for Bob Barr and other libertarians. Promoting competition and explaining to Americans how choice and disclosure will lower costs and provide greater accessibility, especially for the uninsured, is a vote-getting issue. Current medical costs already absorb twice the percentage of gross domestic product as in Europe. They are helping to bankrupt America.

Jon Basil Utley is associate publisher of The American Conservative. He is a former insurance executive with AIG and a former South American correspondent for Knight Ridder.


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  1. the topic could get TV time for Bob Barr and other libertarians.

    It could I suppose. If Barr was actually harping on it. But that might require showing some passion.

  2. Um I saw this line in the article

    “Medical costs are the reason for about half of personal bankruptcy filings.”

    As far as I know this is incorrect. There is only one study, which I know about, showing that about half the people that went bankrupt had medical bills of over $1000. This study is often misrepresented as showing that half of bankruptcies are due to medical costs which is clearly erroneous. If other studies are available I would appreciate a link to them. Otherwise the article is quite good.

  3. I find your arguments complex and your logic nuanced. Fuck that, DO SOMETHING NOW!

  4. “But that might require showing some passion.”

    If libertarians show passion, doesn’t that just make them crazy in the public’s eye?

  5. Robbie,

    It’s a fucking tightrope, I tells ya.

    But really, isn’t passion in politicians always looked at as a little crazy?

  6. As far as I know this is incorrect. There is only one study, which I know about, showing that about half the people that went bankrupt had medical bills of over $1000. This study is often misrepresented as showing that half of bankruptcies are due to medical costs

    I agree with this. What these studies often show is that the family might have $1800 in medical bills and $97,000 in credit card bills.

    But it is a very good article and provides a lot of food for thought on the complexity of our gerrymandered and regulated system.

  7. I’m not sure that we wouldn’t benefit from a “how dare you” approach to this issue, taking a page out of the liberal “shock and awe” book.
    It could be akin to “How dare you suggest we cut taxes! You clearly want children to starve, poor people to die, the corporashunz to rule the world, people not to be able to read, etc.” Only ours would be “How dare you tell someone that they only way they can get care for their child is to rely on your complicated and confusing system and consequently have to rely on their neighbors. If a man can provide for his family’s health by taking them to quality inexpensive clinics, why would you deny him that right?”

  8. What would commenters recommend as the one or two best libertarian white papers, books, etc. on this issue? This is a very complex issue and Bob Barr or any other candidate is not going to be able to address it in soundbites or five minute presentations.

  9. I strongly suggest Arnold Kling’s Crisis of Abundance.

  10. “This is a very complex issue and Bob Barr or any other candidate is not going to be able to address it in soundbites…”

    I’m going to stop you right there.
    Let me teach you a proven and effective technique for addressing an issue in soundbites in such a way that it is persuasive.
    Repeat after me: “For the children!”

  11. HSAs are a great idea; re-establishing the link between patient and payment would be a huge improvement. But without price transparency, and competition, it won’t change much. Learning, after the fact, that your doctor bills have broken the bank doesn’t really help much.

  12. creech I would also recommend Overtreated (Shannon Brownlee) and the pod cast below:


  13. “Databases now make it possible for pharmaceutical companies to track how often local doctors prescribe their most costly medicines. Then the companies often award them vacations, lecture fees, research grants, and consulting contracts.”

    NOT anymore. I work in the healthcare industry and the rules and regs no longer allow this sort of thing. Vacations, absolutely not. Grants are scrutinized very, very carefully and awarded with strict terms. Yes, doctors can go on the lecture circuit, but again, the rules and regulations have very much tightened in the last few years to prevent this sort of pandering. Accredited lectures, which award continuing medical education hours, require full financial disclosures to be made beforehand by the presentor to the audience, as well as to the local CME provider, and if this type of thing is discovered, then the credit hours are not allowed–(and can and will be revoked if found out after the fact) and cme credit is one of the major considerations for this type of audience.
    Consultancies are similiarly scruntinized. I’m not arguing that this sort of thing didn’t happen in the past, but by golly, it ain’t happening now.

  14. NOT anymore. I work in the healthcare industry and the rules and regs no longer allow this sort of thing. . . . Consultancies are similiarly scruntinized.

    No shit. One of the big durable medical equipment suppliers got tagged with a $400 million dollar fine a year or two ago for having overly lucrative “consulting” contracts with doctors that used its stuff a lot.

  15. I work for a pharmaceutical company. So I am really getting a kick out of most of these replies. Some of you guys are very good at making it sound like you know what you are talking about. But trust me…. You don’t. I think you just want to make yourself sound smart, when in reality you don’t know what you are talking about. This is how bad info gets passed around. If you dont know about the topic….Dont make yourself sound like you do. Cos some Reasonoids believe anything they hear.

  16. yur dum cus I sayz yur dum

  17. Well said, MP. What a pompous twit.

  18. @ dum:

    You make some very valid points there. I’m sure everyone will re-evaluate their positions based on your insightful and highly relevant comments. Thanks.

  19. Jon — I actually agree with your recommendations but some of your facts are lacking. My surgical group does ~35% uninsured patients (we are trauma/emergency general surgeons so we get the bulk of the uninsured for our hospital). Our collection rate for this segment is ~1.5%. State law procludes lawsuits for medical debt if you “make a good faith effort to pay” and this is defined as $1.00/month. Since this isn’t even worth going after most people, even those with money essentially walk away from their debts. At least here in Georgia collection practices becoming so awesome that we’re collecting more from the uninsured than the insured is completely unbelievable.

  20. I work in the healthcare industry and the rules and regs no longer allow this sort of thing. Vacations, absolutely not.

    I was going to say something about this but my stories are purely anecdotal. In my healthcare organization, the Dr’s are very skeptical and sometimes hostile to the drug reps. I was in a clinic one day and a rep asked a Dr. if she’d do a seminar for them…Dr. immediately interrupted her and said “I don’t do drug company sponsored events”.

  21. Dum,

    So you’re arguing (well you didn’t actually make an argument so I’m going to make one up for you.)
    You’re arguing that basically the way we’re doing it is right, form what I can tell, the assumption that this is the way it’s always been done since you worked in the industry right? I doubt you meet many people on a daily basis who disagree with you.

    Reminds me of probably my favorite expiriment. Heard about this on a forum along time ago use it as you see fit.

    Bunch of scientists took 4 chimps. Put them in an enclosed area. Around the area were water hoses. At the top of a set of stairs was a banana. Whenever one of the chimps goes for the stairs they all get sprayed. This goes on until none of the chimps even try for the banana. So the scientists take out one chimp and introduce a new one. They then turn off the hoses. The new chimps goes for the stairs and is brutally beaten up by the others. They replace another chimp now 2 hosed ones and two new ones remain. The new chimp goes for the stairs. Gets beaten up by the two hosed chimps and the chimp who has no idea why they beat him up. This goes on until none of the chimps who got hosed remain. Every new chimp gets beaten up for going for the stairs even though none of the chimps who were actually sprayed are there.
    If you could ask any of the chimps why? The reply would be “because this is the way it’s always been.”

    Either way why not inform us. I mean honestly I’m curious.
    “Because I said so.” does not an argument make.

  22. dum, go back to Fark, the adults are trying to have a conversation.

    Seriously though, why not eliminate Medicare and Medicaid and replace them with free smokes for the poor. The poor die faster, the tobacco industry prospers (vital to several important states such as North Carolina) and everyone saves money.

  23. Telling people they have to pay for things they want does not get votes.

    What dreamland country are you living in?

  24. Oh, sorry, e. I didn’t realize this was a forum for scholarly discourse. Allow me to furrow my brow and relight my pipe as I ponder your criticism.

    Ah, yes. The Reason boards. How could I have compromised their sacrosanct code of civilized, intelligent discourse. I hereby resign my tenure, and resolve to only partake in verbal jousting with the more left-leaning gaggle of morons on FARK.

    Let me warm up.

    Dur dur dur!

  25. Problem is probably effectively “unsolvable” because the “healthcare monopoly” (insurance companies, pharma, hospitals, medical providers, etc) effectively control about 17% of GNP. This is enough to send a MILLION DOLLARS to every Congress person to have them vote the way the monopoly wants them to vote.

  26. “I work for a pharmaceutical company.”

    In the mail room, I’m guessing.


  27. You lost me in the very first paragraph. It is nonsensical to talk about taking a $1000 “tax deduction” for the patient who doesn’t pay for the ambulance. There is no “deduction” at all. There is merely an accounting adjustment to reflect the absence of any revenue for that trip. No revenue. Actual costs that have to be covered by increased revenue from other sources, i.e., other patiients. That’s the way it works. It isn’t a tax issue at all.

  28. Dee said:”I’m not arguing that this sort of thing didn’t happen in the past, but by golly, it ain’t happening now.”

    I believe the author was explaining the origins of the problem. One reason we’re in this mess is the referenced conduct — all or nearly all of which happened in the past 30 years. That fact that the industry eventually got ’round to addressing that problem is nice, but it doesn’t repair the damage done.

    Let’s say a person chronically abused PCP for 30 years — but got clean last year. Should we be surprised if his or her family life is still a mess? Does quitting fix all the problems? Clealy not.

  29. Do any of you geniuses actually talk to people who work in medicine or pharma, or do you just read “studies” and pontificate therefrom?

    You might learn a bit by checking with people with real world experience.

  30. Interesting – finally a somewhat rational explanation for why hospitals are so expensive, and yet nobody seems well paid in proportion to the amounts being billed.

    I felt a tingling in my arms and my business partner insisted on taking me to the emergency room. Spent a rather unpleasant night in the hospital. I got a bunch of tests done but it was mostly waiting around for something to happen. Turns out I have adult onset diabetes, which I’m sure a simple $60 clinic blood test would have found.

    The bill for the visit was over $8,000, and the insurance company actually paid $3,000. This appears to mean that you need to have insurance not to pay for your care, but to have the legal standing to negotiate down your bills. I’m not sure if the service I received was even worth $300, but that’s just me. I spent 15 minutes total in front of doctors out of 8+ hours in the hospital, and you can’t tell me that isn’t ridiculous.

    Next time I feel sick I go to Wal*Mart or Rite Aid. I never loved those places but their service looks downright heroic compared to how I was treated at a hospital.


  31. When I was an executive with a top 50 manufacturing cimpany, an analysis of our total medical cost showed that 70% was associated with catastrophic illnesses. In any given year, there were relavely few such cases, but staggering costs.

    If all of the issues described in the article were “resolved” tomorrow, the areas addressed would amount to “only” 30% of the total national cost. These are not unimportant and let’s try to do what we can. However the total cost issue remains, as well as the rate of medical inflation issue. What’s the answer–or more probably, is there an answer? I do not know.

  32. Many, MANY years ago (10?) AMA issued guidelines prohibiting Dr.s from accepting cash, gifts, vacations, dinners etc. from drug reps. All the pharma companies had extensive retraining efforts and watchdog organizations to prohibit either the actual or even appearance of bribes. Virtually every employee had to go through this training (I was in R & D and had no contact with docs!).
    So it is untrue, and has been untrue for a while that docs are illegally incented by pharma to prescribe drugs. About the rest of your “facts”? I don’t know, I stopped when I came across a “fact” 10 years out of date. Editors, are you paying attention? How about some QC here?

  33. I *thought*, based on working a few years ago in a company that handled medical billing, that the reason that the list prices were so high is that there are many laws and contracts that stipulate that a given insurer pay some percent of list for a procedure. If you want to get $200 for an ambulance ride and your contract says you get paid 20% of list then you have to make your list price $1000. The problem is compounded by laws and audits that insist that you must actually try to enforce your list price. So if for example you allow an uninsured person to pay $400 then your actual list price is redefined to $400 and all previous bills are adjusted.

    Can a commenter who is involved in healthcare billing confirm of deny this.

  34. So many laughable points in this article.

    1) You’re in the doctor’s office. Doctor tells you you have a serious illness and need specialist Y. So you go home and do lots of research on cost (assuming that there’s good information) and go to specialist X? I don’t think so. Besides, what’s in it for specialist X to lower his cost as long as the other doctors keep playing the game?

    2) You’re on a low income and have an HSA. You have something that’s bothering you. You decide it’s not worth going to the doctor because let’s face it, that money is really for the kids. It’s cancer — you’re dead. Too bad for the kids. (PS — plenty of research (famous Rand study) to show that low-income individuals are very price-sensitive and will forgo preventive care.)

    3) OK, Medicare and Medicaid abolished and tort reform. Hospitals uniformly perpetuate outrageous pricing or other practices. Who’s gonna stop them? Can’t sue them… no big entities negotiating better terms… hmmmmm

    4) Similarly, Medicare and Medicaid abolished and HSAs rule. Docs stop purchasing and recommending MRIs and unnecessary equipment because…? The average person is gonna tell their doctor, “No, I don’t really need that MRI to rule out brain cancer”? I don’t think so.

    The free market does not work in health care. Show me a place where it does. Oh, that’s right, nowhere!

  35. I agree with the idea that a libertarian approach would be best. But your article is a poor argument; mostly populist rhetoric which distorts the facts.

    The line about medical debt is entirely false, an error which has been repeatedly refuted. It arose from a study done by two lefties promoting national health care in JAMA.

    Medicare sets its own prices for what it will pay doctors. Currently, it pays $130.15 for an hour long appointment with a frail elderly patient, no matter how sick they are, no matter how many medications they’re on. Sometimes they don’t pay you at all, if you forgot to tick all the right boxes. If it were lucrative to take Medicare, the numbers of MDs refusing new elderly patients would be declining, but it’s increasing. (Name 5 lawyers you can see for one hour for $130. Name 5 car repairs that take one hour that cost $130.)

    Blaming doctors and drug companies is what socialists do. This is not “Reason” but ‘passion’.

  36. dum assumes that his myopic views and daily experiences amount to omniscience of the entire process and all the factors that go into production, budgets, etc.

  37. I remember reading an article 2 years ago about those deferred medical expense accounts, I forgot the exact name, where you could save pre-tax money and use it to buy medical services. The article was pretty long and consisted of interviews with managers and workers at a small blue-collar manufacturing company.

    The point of the article seemed to be how much more time and effort was put into finding health care and comparing costs, and how much help managers were giving their employees. And the reporter seemed to be trying to put it in a negative light. But one fact kept creeping up: their medical costs went down from when they had more traditional insurance.

  38. Get it, Daniel Reeves? I was mocking dee’s comment by being dum. I then criticized dum as dee, and further commented on the situation as tweedle.

    Tweedle Dee.
    Tweedle Dum.


  39. I’m a gastroenterologist. 50% of my practice is Medicare. Medicare routinely denies my claims on the flimsiest of bases. Medicare has three times in the last five years simply stopped paying me altogether for as long as five months, having changed their claims procedures without telling me. Medicare patients are the most demanding, and they reimburse the least. Medicare payments are not coming out of some big account accumulated over the years by the benficiaries…**they are paid out of current Medicare taxes**..so I’m paying a fee to see them. If I could get rid of Medicare, I would.

    Drug companies and equipment manufacturers give me goodies all the time: ballpoint pens with their logos on them, notepads, clipboards. Does anyone think my decision-making is swayed by all this booty? Wow, a pen! We don’t get vacations, gifts, or research deals, period. My income is completely unaffected by my prescribing choices. I get no reward for using the expensive drug.

    To bill Medicare and the insurers (who also, BTW, routinely reject and delay claims) I must have a full-time employee and a billing system costing $25,000 with about $8,000 for annual license. If I could got to cash-only, I could cut my fees WAY back and make more money.

    It is a fact that if I don’t charge a high enough fee, Medicare will reduce the already paltry fee, as pointed out above. It’s a bargaining thing. But note this: if I charge my uninsured patients less, Medicare will declare that lower fee to be my actual fee, and cut my fees to that level. AND they will charge me with fraud for having “overcharged” all along, and demand I reimburse them for the difference **for all the Medicare people I’ve seen in the past**.

    This guy doesn’t know what he’s talking about, sorry. I’d love to see the end of Medicare AND commercial insurance, and the arrival of real competition, because I can compete.

  40. I read with interest “How Hospital Costs Ran Amok – Health care is an issue for libertarians” on healthcare transparency and socialized medicine. While transparency holds promise to lower cost and improve care, it cannot succeed without educating consumers on health and cost issues. Consumers will be taking on more risk and responsibility. Employers are on the front lines of helping consumers become more knowledgeable and empowered healthcare purchasers. Consumers faced with high deductible plans or health savings accounts lack the education and tools to successfully use these models. New online tools such as healthcare portals, symptom navigators, medical encyclopedias and electronic enrollment are making healthcare easier and less expensive.

    Andrew Ceccon

    A.D.A.M., Inc.

  41. With drug representatives, the major influence they have in swaying doctors prescribing habits is largely through information and gift cards. Gift cards, not for the doctor, but their patients. In a commercial pharmacy setting, I see doctors prescribe brand new medications largely because they are able to give their patients coupons for one free month of medication or $15 off each co-pay for the next 6 months. These same drug reps stop into the pharmacy and “bribe” us with new pens and sticky notes, while unloading a condensed break down of their new product and its major effects/side-effects and a huge informational brochure that goes more indepth. I do not perceive the behavior of drug reps as overtly wrong or underhanded, simply effective in their occupation. I do NOT share this view with their employer. Also please do not paint commercial pharmacies such as Wal-mart or CVS as bastions of honor and fair heathcare, we are not. Many of the billing practices referred to in the main article and an excellent comment by Khornet translate into the retail pharmacy as well. There are many many many procedures that must be followed, not for patient care but for the assurance that we will be paid by insurance companies. An example of this would be the absolute minimum we MUST charge a patient who pays for a GENERIC MEDICATION due to the requirements and payment structure of insurance and medicare A/B/D. The end result is the patient being overcharged and our company making a massive profit margin (quite unfortunate I know/endsarcasm) on something that is still cheaper than the recently released name brand medication that has only updated a binding agent that works longer or what not…

    I apologize for the long-winded introduction, but I did have a few questions to pose.

    What would be the result if Medicare A/B/D and insurance companies were required to pay a minimum of say 75% the list price for any medication where the charge to them is within a certain percent of the national average of cost. Anything outside the mean cost could be negotiated on a case by case basis.

    Would list price go down and keep the medical pharmaceutical and retail pharmacies in check due to Insurance companies demands? Or would insurance companies go for broke and start charging outrageous (sorry EVEN MORE outrageous) sums for premiums.

    Also my credentials are not grand but I have worked billing and claims in a national retail pharmacy this is where I have gathered my observations and assumptions. And yes some of my opinions are based on assumptions not personally known fact

  42. Aaah, too bad the Libertarians were too busy carrying their Obama-Hitler signs at Tea Parties to share this valuable information as the reform bill was being debated.

  43. Unless we are willing to watch people die needlessly, the only solution is to socialize health care.

  44. Keep in mind, people need health CARE, not health INSURANCE.

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