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.