Black Hat Hospitals

Steve Brill’s recent Time magazine article, “Bitter Pill—Why Medical Bills Are Killing Us,” which blasts opaque and outrageous billing practices at some of our nation’s hospitals, is an overdue chapter in a critical primer to educate the American public on the perverse incentives plunging our healthcare system and our nation into dysfunction and debt.

The Time piece was the first major media effort in some time to shine a light on the factors beyond the insurance industry that contribute to costs that now eclipse 16% of our gross domestic product.

Brill’s article clearly touched an exposed nerve. The American Hospital Association immediately issued a multi-page response refuting many of Brill’s observations and complaining that billing practices were an outgrowth of a cat’s cradle of cost shifting and an increasingly Darwinian landscape where only the best-equipped and well positioned hospitals will survive.

Yet, Brill’s facts are hard to refute. Many not-for-profit hospitals are paying seven-figure executive salaries and posting double-digit margins achieved through complex and imbalanced billing practices that rival Egyptian hieroglyphics. Time’s exposé demystifies the complicated calculus of hospital billing and alleges that the system of billing and reimbursement is hopelessly broken, leaving the most vulnerable of victims in its wake: those earning too much to qualify for Medicaid but too little to afford coverage.

The stories are gut wrenching and identify a range of misaligned financial and care motives across high-margin practices, such as oncology, imaging, lab, emergency and pharmacy services. The findings underscore a June 2009 Harvard study that found 50% of all U.S. bankruptcies are directly related to medical bills and/or illness.

When I crossed the proverbial River Styx from healthcare consultant to regional CEO of a health plan, I was plunged into a high-stakes battle with large hospital systems demanding, and often receiving, double-digit unit cost increases. The result was a zero sum game. In my resolve to control the double-digit trend, I would try to extract steeper discounts from smaller providers and community-based hospitals—ironically the providers who offered similar quality to bigger systems but with lower unit costs. However, consumers demanded big-name brands. The daisy chain of cost shifting punished weaker players and slowly drove primary care and small hospitals to the edge of extinction. Meanwhile, the uninsured paid the most for healthcare, often paying 200% to 400% more in healthcare’s most expensive setting, the hospital emergency room.

In 2007, I watched two regional hospitals engage in an arms race for membership through aggressive marketing and sub-specialty expansion. When the hospitals both sought to expand their cardiology programs, the practice of inserting post angioplasty stents increased by 300%. While the risk of stents outweighed the benefits for certain patients with coronary artery disease, cardiac interventionists routinely placed stents in their patients, not always because patients needed them but because the doctors could earn more money. It’s a familiar story: The doctor tells the patient he needs a procedure. The patient, fearful and accustomed to the notion that more healthcare must be better, consents.

Any payer that attempts to disallow a recommended procedure as unnecessary is accused of bureaucratic meddling or, worse, jeopardizing the quality of care for the sake of making a buck. Years later, we are finally beginning to understand that whoever regulates costs, access and necessity of treatment in the healthcare system—be it a payer or a government agency—is automatically fitted with a black hat and labeled the villain.

The Time article describes certain hospital billing practices as part a nationwide game of cat and mouse, as facilities seek to balance highly variable reimbursement from Medicaid, Medicare and commercial insurance.

The fight over the true cost of care is often invisible to those footing the bill—employers. Many employers have no line-of-sight into the thorny negotiations between hospitals and their insurers. To make matters worse, if a large healthcare system threatens to drop out of an insurer’s PPO network, employers often urge their carrier to resolve its contract differences with the hospital to limit disruption for employees. The insurer, concerned over losing membership if the PPO network loses a flagship provider, quietly caves, and the cost of inpatient healthcare continues to rise. To make matters worse, employers have consistently resisted implementing narrower PPO networks that might otherwise force billing outliers back toward the mean costs of delivering care. It seems employers want to fly first class but only pay for coach.

The insurance industry has committed its share of financial and public relations misdemeanors as healthcare costs continued to climb over the past two decades. Yet insurers were uniquely singled out during the debate that preceded passage of the Affordable Care Act. Politically, the black-hat payers were easier targets than other stakeholders who have abetted the demise of our system:

•  Consumers with unrealistic expectations
•  Doctors using malpractice avoidance as air cover to oversubscribe services
•  Drug companies and pharmacy benefit managers engaged in intricate and difficult-to-understand pricing practices
•  Employers who have remained parochial and averse to disruption
•  The food and agriculture industries employing practices that promote products that adversely impact public health
•  The government for its serial under-reimbursement of providers through Medicaid and Medicare
•  A range of stakeholders who ineffectively advise and assist the industry in its quest for an optimal balance between quality and affordability.

Brill’s thoughtful rendering, which illuminates the need for hospital payment reform, is an inch wide and a mile deep. He stops too soon, however, because he refrains from identifying other accomplices that drive these billing behaviors—including the Medicare and Medicaid systems, which enjoy low administrative costs but account for an estimated $100 billion in annual waste and fraud arising out from unmanaged fee-for-service care. Medicare is beloved by seniors in part because it does not manage care.

What Brill also misses is the private sector’s apathy in aggressively punishing high outlier unit costs by taking on some of our most sacred players—large teaching hospitals and system oligopolies that now dominate many regional landscapes. As consultants, we have failed to convince employers of the merits of eliminating open access PPOs, increasing consumer-directed health plans, using scheduled reimbursements for elective surgeries and enforcing a bilateral social contract around good health by requiring workers to see a primary care doctor and receive age and gender appropriate testing to better manage their health.

Like any stakeholder that feels unfairly singled out, the AHA response to the Time article was swift and predictable. I’m sympathetic. Laying our affordability crisis at the feet of any one group misses the point. The need for reimbursement reform and billing simplification, however, is irrefutable. Our system is in crisis. The questions remain: Will we move toward a delivery model that allows market-based reforms and gives consumers a greater role in driving higher-quality, cost-effective delivery? Or will we wake up in a decade to a single payer that rations access and so-called peanut butter spreads of reimbursement?

One could argue our healthcare system can be summed up by the average U.S. hospital bill—opaque, misunderstood and bearing little relationship to the true cost of the services.