Health care reform

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

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Journalist and media entrepreneur Stephen Brill has a 36-page article in Time – the longest in the magazine's history.

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:

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  1. I have bad memories of Mercy Hospital… I will never go there if I can avoid it in the future.

    Long story.

    1. Heh, nice L4D reference.

      1. that’s not really a L4D reference. I actually was at Mercy Hospital in OKC 14 years ago. It was a personally painful experience for me. Not that the hospital itself is bad. Just what happened to me there was.

        1. Boo hiss.

    2. I lol’d.

      1. This is why there are no hospitalized libertarians.

        1. Obama’s second term has just begun…

        2. Because they submit our cases to the death life panel immediately?

        3. that’s because the term used for them is institutionalized.

  2. 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.

    Don’t insurance companies have an incentive to pay as little as they can?

    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.

    Are you arguing that patients/employees don’t foot the bill for their employer-based insurance?

    1. Don’t insurance companies have an incentive to pay as little as they can?

      Yes, but they don’t have an incentive to make their customers pay as little as they can.

      Are you arguing that patients/employees don’t foot the bill for their employer-based insurance?

      No, he’s arguing that if employees knew how much of the health care dollars were wasted when they pass through third party groups before they get to the actual hospital they would be more apt to want to know about what they are paying for.

      1. Yes, but they don’t have an incentive to make their customers pay as little as they can.

        Are you talking about deductibles or premiums?

        No, he’s arguing that if employees knew how much of the health care dollars were wasted when they pass through third party groups before they get to the actual hospital they would be more apt to want to know about what they are paying for.

        Why is that different for employer-based insurance versus open market insurance?

        1. Are you talking about deductibles or premiums?

          Yes.

          Why is that different for employer-based insurance versus open market insurance?

          The difference is that with open market based insurance you have options from which to choose in order to use said third party payer. With employers, you usually are limited to one insurance company.

          1. Why don’t insurance companies have incentive to compete on price like almost everyone else?

            I’m not seeing how you tie “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” to “The difference is that with open market based insurance you have options from which to choose in order to use said third party payer.”

            1. Why don’t insurance companies have incentive to compete on price like almost everyone else?

              They do, but they sell to companies, not individuals. And there are a variety of reasons your employer may choose a provider, not all of which involve your best interests. The point is that there would be a more robust market -thus bringing down costs- if people purchased their health insurance directly instead of just going along with whichever insurer the company selects. Most employees get no say in which insurer their employer uses.

              1. Oh, I absolutely agree that separating insurance from the employers would be a good thing, just as it would be with 401(k)-type plans.

                I just don’t think that addresses or solves the particular issues pointed out in the article.

    2. Insurance companies do pay as little as they can get away with. Most people would do the same. The thing is, insurance companies only worry about their own payments. If a lot of private consumers were paying the bills themselves, they would all start noticing “hey, why are you double charging me for this here, and then charging me $10k for a simple test?” Insurance companies can easily navigate the BS and cut a lot of it down as well as negotiating the price. They do a lot of business. Individuals do not have that kind of leverage, nor do they have the knowledge to sniff out all the BS, double charging, overcharging, etc.

      1. Yeah, the complexity and opaqueness are definitely issues, but those are distinct, imo, from a third party payer problem.

        1. The reason there is so much complexity and opaqueness is because of the fact that we have third party payers.

          Imagine if you needed groceries for the week, so you gave a list to a third party and said “get me everything on this list, and then send me the bill.” That’s insane and no one who isn’t fabulously wealthy would do this. This however, is exactly what we are doing with third party payers.

          1. Hospital bills are complex and opaque even when you pay cash.

            1. They would be less so if everyone paid cash.

            2. The problem has more to do with fee for service being the dominant model for health insurance in the US. Under FFS, the insurer is sent a bill by the hospital for every item or service that the hospital undertakes in a particular visit. The incentive is thus for hospitals to charge for as many discrete procedures and services as is possible, and for insurers to have a large administrative staff to review these lists sent to them by hospitals.

              There are different incentives under different payment systems.

              1. What would be a viable different pay system for hospitals? (That’s a genuine question, btw, not snark or an attempted gotcha.)

                If two people show up with chest pains, their treatments won’t necessarily be the same. How do you price what you do for each?

    3. Don’t insurance companies have an incentive to pay as little as they can?

      Yes, but the regulations or perversions in the incentives in the system muddy that.

      Example: The doctor prescribes you some medication.

      Within a category, they might prescribe the name brand, or they might prescribe the generic.

      The name brand costs 15 to 20x what the generic costs.

      So a battle ensues between the pharmeceutical companies and the insurance companies.

      The pharma companies KNOW that the patient is insulated from the cost of the medicine, insurance companies know this too, so the insurance company adds a $10 copay if the patient chooses the name-brand. That’s designed to send a price-signal to the patient, to let them know that the name brand is more expensive than the generic.

      So the pharma companies strike back and offer a $10 rebate coupon and maybe, a 50c applicator pad (for example) for the medication, thus erasing the $10 copay, reincentivising the patient to choose the namebrand. The insurance company could pay $10 for the generic medication, or $200 for the name brand, but again, you, the patient is entirely shielded from this cost differential.

      1. Well, that not really how my insurance operates. When I go to the pharmacy to pick up a prescription, they will often tell me that my insurance company will only pay for the generic, not the name brand. So, of course, I go for it. I usually only pay about $5 for the generic.

        1. That may be how some are going. I read a long expose’ about how this worked about two years ago. This battle may be forcing some insurers to just refuse to pay.

          I smell a mandate coming.

        2. Although, I’m remembering how they detailed an example of this dermatology medication that came with the applicator pad (mentioned above). I’m wondering if that was a trick to declare the medicine was ‘different than the generic’ and therefore forced it into a new category, making it so the insurance would have to cover it.

          Been too long since I read it.

      2. That’s fair, but I’m not sure how best to get around that. Maybe if insurance covered the generic less a copay and the patient covered the full price differential for the name brand if there is a generic. That’s a hell of a price signal that I’m sure the pharma companies would try to make illegal.

        1. I think there needs to be major reforms to how patients are insured in the first place, which would shield the consumer less from the costs of their healthcare.

          While it’s hard to say, it would be interesting to test a system where your appointments were covered, but none of your medication was covered. Or had limited coverage. We might begin to see some of these mysterious $8000-a-bottle drugs drop down to $5 a bottle.

          The biggest problem I see with healthcare in general, is no one knows what things cost.

          I took my daughter to the hospital for a itty, bitty outpatient surgery where she had a little skin lesion taken off her scalp– required she got put under, required about four or five stiches. Whole thing took about an hour.

          $50,000.

          1. The biggest problem I see with healthcare in general, is no one knows what things cost.

            I have a HDHP policy and it is like pulling teeth to get an answer about what anything costs before it is billed rather than after. It’s not a lot different from “we have to bill you so you can see the price.”

            $50K seems… pricey for such a procedure.

            1. I was stunned. Performed at one of the best children’s hospitals in the world.

              While we were sitting in the waiting room, there were three or four families with their kids, and then as you began to look up and notice, one kid was missing an arm, another one didn’t have any legs, another one had some kind of genetic disorder… another one no hair… we began to seriously realize just how small our problems were.

              Then after the fact it made me realize that if my daughter’s procedure was $50k, these people’s insurance must be paying in the high six figures, or seven figures.

    4. Don’t insurance companies have an incentive to pay as little as they can?

      What? How DARE the insurance companies REFUSE TO PAY FOR MY TREATMENT!

      I demand a LAW that says that HAVE TO PAY FOR IT, no matter WHAT it costs! I Don’t CARE!

      See what that does to insurance companies bargaining power?

      1. See what that does to insurance companies bargaining power?

        Sort of like what government mandating everybody buy insurance would do to insurance companies’ bargaining power?

    5. Don’t insurance companies have an incentive to pay as little as they can?

      Not anymore. They have an incentive to pay 80% of their premiums.

      1. Say hello to higher prices!

  3. Fucking stupid, how does it work?

    1. The man is a fucking idiot.

    2. He had another story explaining that Obamacare was a wealth-transfer program moving wealth from old people to young people. I couldn’t read it past the first sentence.

      1. Every day is opposite day for SadBeard.

    3. “But a shortage of people wanting to enter the medical pipeline is the last thing we should be worrying about. ”

      it’s incredible how someone can be so wrong all the time.

    4. He’s clearly the most qualified to determine what all doctors should be paid, NutraSweet. Aren’t all mongoloids?

    5. Rather he rejects Medicare expansion because if Medicare expanded, “no doctor could hope for anything approaching the income he or she deserves (and that will make future doctors want to practice) if 100% of their patients yielded anything close to the low rates Medicare pays.” It’s true that many American doctors do believe that they would be crushed if they were paid only Medicare rates. They insist they’re hard-pressed as it is, barely getting by, and practically treat these Medicare cases as acts of charity. There’s no way they could swallow those reimbursement rates without the whole system collapsing.
      But that’s not remotely true.

      Yglesias is full of shit. For a small bit of perspective, at the very large hospital I work for, Medicare accounts for 32% of our volume and only 15% of payments. There’s a reason so many doctors have stopped accepting Medicare patients.

      1. What’s even more striking, as the Washington Post’s Sarah Kliff observed last week, these highly paid doctors don’t buy us more doctors’ visits. Canada has about 25 percent more doctors’ consultations per capita than we do, and the average rich country has 50 percent more. This doctor compensation gap is hardly the only issue in overpriced American health care?overpriced medical equipment, pharmaceuticals, prescription drugs, and administrative overhead are all problems?but it’s a huge deal.

        Yes, and that’s one of the reasons why 1 out of every 11 Canadian doctors leave for America after getting their M.D.

        Yglesias even fails at being a useful idiot.

  4. “…bringing much needed attention to how hospitals earn fat profits by routinely ripping off Government Subsidies to heathcare expenses”

  5. (Ever wonder why doctors don’t answer emails?)

    No. Most of them don’t know how to use outlook. Another large percentage want to use Gmail or Yahoo to practice medicine (HIPAA, anyone) and never open their exchange account. The last remaining few are too busy fucking with their iDevices instead of practicing medicine. They know who they are. Because I know who they are.

  6. He lauds Medicare for using its market share to get a big discount off the chargemaster.

    Medicare is the reason hospitals have ‘chargemasters’.

    1. This^^

      Nobody actually pays what is on the ‘chargemaster’ but the list is created to drive the medicare baseline up.

      Ask for 4X more than it costs , because Medicare will only pay 50%.

      There is no control to determine what Medicare should really pay, except for what hospitals charge.

      The only things that get charged and paid at a reasonable rate are the things that people pay for.

      1. Our ambulance company charges $650 for a transport.

        Medicare and Medicaid give us under $300 and says we can’t ask the patient to pay anything more.

        1. Paramedics get paid shit, at least back in Oklahoma. One could get a much better paying and less stressful job right out of high school.

        2. i have a client who asked me to look into what’s involved with become a “non participating” for medicare so he can balance bill.

      2. My understanding was that Medicare paid based on a price list of procedures that was developed by some Harvard-types back in the early 1990s, adjusted for inflation. The Harvard-types made the price list based on their estimates of how much time and skill it took to do each procedure. Is that not the case?

        1. I think that is the “Relative Value Unit” regime, which is part of the reimbursement equation, geography is a factor as well. But that might be just for physician compensation, not necessarily the hospital.

          1. Skimming the hospital payment system description that NoVAHockey posted, it appears that what medicare pays a hospital is entirely unrelated to the hospital’s “chargemaster.”

        2. see this for a breakdown of how the various payment systems for medicare are designed. http://www.medpac.gov/payment_basics.cfm

  7. My problem with Brill’s article is that the people he profiles are the exceptions and not the rule, and thus aren’t the reason hospitals make ‘too much’ money. I believe the number of people who are both without insurance and who end paying anywhere near the amount of the ‘chargemaster’ generated bill comprise both a rather small percentage of patients and of the hospital’s net billings. Put another way, it isn’t because of the people Brill profiles that the hospitals and doctors make the money they do, I believe that hospitals make more in absolute dollars of profit from patients with standard insurance than they do from people without coverage or with minimal coverage.

  8. Goodbye medical innovation.

    At least a portion of our continuing rise in costs (at least for meds) has to do with Europe instituting price controls and demanding the new meds under these fixed ceilings backed by the threat of patent forfeiture. As a result, the outlet has been the U.S.

    We do it, and that’s all she wrote for new meds, unless the solution becomes more crony subsidization. Given how the Left has so impugned “Big Pharms” it will be very amusing watching the contortions they’ll go through to explain why EVILMEGAGREEDYDRUG Corp. needs your tax dollars. I really can’t wait to see Tony explain that reversal without a hint of irony or self-awareness….

    1. Besides, wasn’t it like 3 years ago that we were being told Obamacare would solve all our healthcare woes????

      1. This is what pisses me about this fucker. He says we need Obamacare to make health care affordable. It passes and now he says we need to pass new laws to make healthcare affordable. WTF?

        He says we need to tax the rich in order to make things fair, so he signs a bill raises taxes on the rich. Now he says we need to raise taxes on the rich, so that they pay their fair share. WTF?

        This fucker is straight-up evil.

    2. You don’t think they get plenty of tax dollars now? What do you thin NIH is doing with that budget?

      1. You don’t think they get plenty of tax dollars now? What do you thin NIH is doing with that budget?

        I know they do, and they’ll get more, much, much more.

    3. That sounds like a good plot for a book!

    4. I don’t see him advocating for abolishing the NIH.

      Oh are you under the impression that Pfizer is interested in innovation and curing people instead of making profit?

  9. More government control over health care will lead to one thing–rationing.

    How much health care do 300 million Americans want? As much as possible.

    How much can the system pay for? Not even close to that much.

    So you ration or we all go broke. Or we kick the government out of the equation.

    1. no … we’ll ration and go broke.

  10. levy a 75% tax on hospital profits

    I’m sure that will cause hospitals to charge less.

  11. Don’t worry. Nobody actually reads Time anymore anyway.

  12. Another Medicare story: The feds hired a new administrator. So our crew responds to a call for a person having a stroke and we put “stroke” on the billing form.

    The claim is rejected, because “stroke” is not a billable diagnosis. It’s supposed to list what specific kind of stroke. Which our EMTs and paramedics can’t diagnose. Because they aren’t doctors. And an ambulance doesn’t have the equipment (and couldn’t).

    So we swallow the cost. Which allows the administrator to cut Medicare spending. Which earns them a bonus from the feds. It’s a nasty system.

    1. Just put the worst possible stroke on the form, the one that would cost the absolute most to treat. When it doesn’t cost as much, savings.

      1. then they nail you for fraud

  13. How can this be? Just a day or two ago, John was assuring me the steely-eyed number crunchers at the insurance company are holding prices down much better than anybody spending his or her own money ever could.

  14. One way Brill gets the profits so high is that his definition excludes depreciation from costs “because it is an accounting book entry, not an
    actual cash outlay.” OK, but then how about subtracting capital expenditures because they are an actual cash outlay? I bet that would shrink his reported margins quite a bit.

  15. And another thing: the insurance company, contrary to popular delusion, is not spending “their own money” they’re spending the policyholders’.

    If they look back over the course of the year and discover they are not making as much money as they anticipated, what do they do? They raise premiums.

  16. Brill is getting way to hung up on individual line items on the bill. Who cares if the bill charges $32 for a blanket? If you take your car to a mechanic for an oil change, his bill is going to list a higher price for the can of oil than it would cost at Autozone. But what matters is the entire bill for the whole service, not any individual line items.

    1. The difference is that you know ahead of time how much that oil change is going to cost before the mechanic even touches the car. Places like the Oklahoma Surgery Center, which openly lists the costs of their services, are the exception, not the rule.

      Nobody in their right mind would shop at a place where you didn’t know the cost of the good or service before plunking down money. But because the medical industry is protected by this monopolistic practice, the average real cost of a normal birth is now $10,000 instead of the $500-$1000, inflation-adjusted, that it was 60 years ago–even though a normal birth procedure is no more complicated now than it was back then.

  17. Go to your boss some time and tell him, “Hey, I had to put a set of tires on my truck; those things are expensive. Give me a raise.”

    More likely than not, your boss will laugh at you.

  18. “14 administrators at New York City’s Memorial Sloan-Kettering Cancer Center who are paid over $500,000 a year,”

    If they aren’t worth their money, maybe someone – like Steve Brill – could go in there and offer to do the job for $250,000. I really like how my boss tries to hire the best people at the lowest cost but whenever you read an article like this, it seems every other employer cares nothing for keeping compensation down. Yet they are always portrayed as greedy. What’s wrong with this picture???

    1. The math works differently in a non-profit. Since you can’t pay profits to shareholders, and the top folks in the non-profit run the show, there’s an obvious place for the excess revenues to go- into the pockets of the top folks. When the non-profit subsists on donations, there’s a natural check to this. When it subsists on government largesse, that check is pretty weak.

  19. Is there any libertarian solution that–even if it saves money across the board–doesn’t end up telling people to fuck off and die if they’re too poor to afford care? Just curious.

    1. At some point, that’s inevitable. Even if you assume we should subsidize basic health care for anyone who can’t afford it, it’s financially impossible to subsidize gold-plated health care for anyone who wants it. Which means that some people are going to die sooner than others because of their life/employment situation. Life’s a bitch, and there’s no government program to fix that.

  20. Fee-for-service would fix the problem of inflated costs, and government efforts should be towards restoring that as the standard. Getting rid of the tax breaks for employer insurance would be a good start. Insurance should be limited to catastrophic care issues. Regular health care should be out of pocket.

    The average American’s health insurance costs them (through their employer) far more than they take out in benefits each year. If they put that money even in a crappy savings account set aside for health care, I bet they’d come out ahead.

    Health care is not a competitive industry, and if it were, the costs would go down and the quality of care would go up. But the comprehensive insurer model discourages competition among providers and leads to the fucked-up system we have now. Fee-for-service would encourage patients to shop for doctors as vigorously as they shop for cars or groceries.

  21. Reading the hospital bill is crucial. Not to pile on Mercy Hospital — two of my children were delivered there, and the docs and nurses were great — but the hospital charged us two grand for things we didn’t even have (an epidural, for example; my wife seems strangely confident she would have remembered having one of those): http://brandondutcher.blogspot…..iends.html

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