Steven Brill: Let's Use Price Controls and Regulation to Control Health Care Costs

Journalist and media entrepreneur Steven Brill has a 36-page article in Time – the longest in the magazine's history – bringing much needed attention to how hospitals earn fat profits by routinely ripping off patients. The article highlights the eye-popping line items buried in the typical American hospital bill, such as $200 for a blood test that should cost about $14, a $21,000 bill to find out that a patient was suffering from heartburn, $32 for a warm blanket in a hospital bed, and so on.

Brill's piece shines in exposing how "chargemasters," which is what hospitals call their wildly inflated internal price lists, really do determine prices despite the claims of hospital execs. He also nails the story of how tax-exempt "non-profit" hospitals have been transformed into some of our "most profitable businesses and largest employers, often presided over by the regions' most richly compensated executives":

And in our largest cities, the system offers lavish paychecks even to midlevel hospital managers, like the 14 administrators at New York City's Memorial Sloan-Kettering Cancer Center who are paid over $500,000 a year, including six who make over $1 million.

Brill's superb muckraking journalism falls apart when he starts talking solutions. He believes our government-regulated system can be fundamentally reformed through even more government regulation. Brill suggests we make it illegal for doctors to maintain an internal price list for their goods and services (i.e., the chargemaster), levy a 75% tax on hospital profits, and impose price controls on pharmaceuticals.

He lauds Medicare for using its market share to get a big discount off the chargemaster. Brill is so focused on low prices, he misses that our real goal should be to have prices set by supply and demand. Bureaucrats set bureacratic prices, over-pricing certain services and under-pricing others. And doctors lose their incentive to look for new ways to improve quality and drop prices. (Ever wonder why doctors don't answer emails?) All of Brill's solutions would lead to more industry cartelization, not less.

Brill has nothing to say about a root cause of outrageous hospital bills, which is a third-party payment system that shields most patients from having to even look at their statements. Milton Friedman put it best in his 2001 Public Interest piece on the topic: "Nobody spends somebody else's money as wisely or as frugally as he spends his own." Patients who don't have a strong incentive to scrutinize their bills dominate the market. That means underinsured patients like Sean Recci, who Brill reports had to borrow from his mother-in-law to pay a $48,900 hospital bill, lose out.

Yes, for most patients the cost of cancer treatment would need to be covered by insurance under any scenario. But if patients purchased their own insurance plans (instead of through their employers) they would be required to foot enough of the bill to make them actually care what's printed on it.

Brill writes about a patient he calls Stephen H., who was treated for outpatient back surgery at Oklahoma City's Mercy Hospital. The bill came to $87,000, including outrageous charges, such as a $39 for the surgeon's gown. In other words, the bill was generated with the assumption that nobody would actually read it, and kudos to Brill for proving them wrong. Coincidentally, Dr. Keith Smith, who I profiled for Reason TV back in November, used to work at Mercy Hospital. After years of working at traditional hospitals, Smith became disillusioned with how they gouge for their services, so he opened the Surgery Center of Oklahoma, which offers transparent prices that add up to a fraction of what traditional hospitals charge. That's because insurance companies aren't involved.

Brill's most annoying idea for a fix is that we tighten anti-trust laws to prevent hospital consolidation, since all that market share is giving them too much bargaining power.

Wouldn't it make more sense to repeal the tangle of policies and laws that are driving consolidation of the industry in the first place? Those include higher Medicare reimbursements for big hospitals, and the Accountable Care Organizations that Obamacare established, which favor large providers.

And before turning to antitrust, how about repealing the laws that block new competition in the hospital industry? For example, Certificate of Need Laws, which are still on the books in 35 states, require all new hospitals to get permission from hospital-controlled state planning boards before they can open. Over the years, many physicians have opened their own hospitals to take on the big industry players, but now Section 6001 of Obamacare effectively makes it illegal for doctors to have an ownership stake in a new or expanding hospital.

Brill has done fantastic original reporting exposing the depth of the problem. But he never asks why other industries seem to be able to deliver higher quality at lower prices, perhaps because he subscribes to the myth that there is something unique about medical care. Getting out of that mindset begins with looking online for some old Milton Friedman articles.

Nick Gillespie sat down with Brill back in October to talk about another troubled industry that's also (coincidence?) largely controlled by the government: