An American health care scam?

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Described in an EconTalk episode with Russ Roberts and Keith Smith.

So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000.

This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what’s called Disproportionate Share Hospital payments.

So, when you hear uncompensated care, that is the $87,000 that your friend saw written off on the difference between hospital insurance and what insurance paid.

So, the fact is, the hospital made money on that case. But they claimed that they lost $87,000.

And then that fictional loss provides the basis for a kickback from the federal government, called–it’s uncompensated care or DSH, Disproportionate Share Hospital payments.

I would like to know more about the revenue and expense breakdown at hospitals. I am not going to jump on this as a big factor until I see something more definitive.

The problem I have is this: if hospitals are being paid exorbitant amounts per procedure, where is the money going? Bloat? Profits? High salaries? Waste? Cross-subsidies for procedures that are under-charged? I want to see the analysis of the accounting.

18 thoughts on “An American health care scam?”

  1. A case to examine. Prior to 2005 or so Kaiser Permanente did not bill for services. They had no billing program. They charged a membership fee to employers and members. However when the installed a billing module from Epic software they began to run actual charges on patients. Their annual return as reported — hardly changed. They are a non-profit. But in reality operate just like any for profit organization. There is no slush fund accumulating in the organization. Expenses equal revenue – almost with a little left over for capital investment. One can quibble over their expenses and their pricing. But there is not a lot of money to be squeezed out. They faced heavy competition in the California market. As an economist I could never see where there was room for cost savings. My department (IT) was constantly faced with belt tightening. I am now retired but after seeimg other med facilities I doubt much could be saved by altering the management of the facilities

  3. On the patient side, medical invoices are unclear, even opaque. My wife had an ACL repair at a local clinic. We paid $3000 up front, which was their estimate for cost beyond insurance. After surgery we received an invoice with additional payment due. I looked through all past statements and couldn’t find the $3000. So we called and requested a statement that would show our payment. They sent a multi-page accounting list. Nowhere on any statement was there a number representing the total cost of the surgery. We had made an additional payment of $124 early on. That $124 was debited and credited on the long form 21 times! I called again to ask about this, and the person said they had an accountant trainee who was trying to figure out what to do with that $124. It appears it was repeatedly shifted in response to insurance payments. I doubt that the clinic knows what anything costs. They play with numbers until their labrynthine accounting system finally comes up with a zero.

  4. I agree with Arnold. Discussion of charges, discounts and cost to patient was confusing. The mention of trying to maintain the appearance of non-profit was an incentive for pricing this way contradicts a statement later in the podcast that hospitals in agreeing to take all comers would no longer be taxed. Since they’re not taxed, why worry about profits?
    The hospitals are not the only providers that engage in this practice. I recently had surgery. The anesthesiologist is an outside contractor his bill to Medicare looked like this:
    Injection of anesthetic agent, thigh nerve: Amount provider charged $1050.00
    Medicare approved amount: $65.72
    Amount Medicare paid: $52.35
    Maximum you may be billed: $13.14
    There must be a reason for this type of billing. However, I have no clue what it is.

    • I think part of the reason is that insurance staff are judged by how deep a discount they can negotiate from providers. Raising the sticker price doesn’t negatively impact anyone who can affect the decision.

      Back when my dad was in practice, he said that Medicare payments would only cover about 30% of the overhead of the visit. In other words, he didn’t make money from Medicare patients, and still would have lost money if the payments had tripled. He treated them (he is a doctor, after all), but they were heavily cross-subsidized by other patients.

      • Just to add a little humor to your day. The claim had 3 footnotes.
        A. The approved amount is based on a special payment method.
        B. After your deductible and coinsurance were applied, the amount Medicare pais was reduced due to Federal, State and local rules.
        C. This claim shows a quality reporting program adjustment.

  5. I expect a whole bunch of the answer is that the system wastes enormous resources (several staff careers per doctor) on zero-sum conflicts between providers and insurers.

  6. Clearly it would be far more efficient for these issues to be resolved within the federal bureaucracy. /s

  8. Its a good question. Kaiser quoted me $15,000 for cataract surgery single vision both eyes. I called. I have a hdhcp and asked the rep “so I pay the first $5k, and 20% of the $10k right?” “Right.”

    I checked Thailand. $4 – $5k for both plus expenses. Vs $7k in the US. I stayed here the $2k wasn’t worth it to me.

    My bills came to $4400 complete. So on par with Thailand. Not much fat on a pair of cataract surgeries.

    Where does 17% of GDP disappear to?

  9. Here are some answers:

    1. I think the answer to your question is “all of the above”. Many if not most hospitals are non-profits, although they do indeed generate profits (which are usually called “revenues in excess of expenses” or something to that effect). Most hospitals are relatively profitable. Profits get reinvested into physical facilities, and hospitals tend to pay relatively high salaries and good benefits. It is difficult to put your finger on precisely where the money goes. If you want a good comparable, think of the P&L of a university. Higher tuition (i.e., revenue) flow to many line items.

    2. Accounting for acute care hospitals is extraordinarily complicated, due to all the cross functionality that occurs in a hospital. Hospitals have very complex computer (MIS) systems that attempt to track this, but the information is only nominally accurate. I used to work as a consultant to hospitals, and we were sometimes engaged to estimate the return on investment for such-and-such a new activity, such as increasing the size of a certain department. Our estimates were very very rough, and yet we had access to all the hospital accounting data.

    3. Note that Cochrane’s piece was more focused on the strange nature of the hospital bill, not the total amount that the hospital ultimately received. I think he is correct that a big part of the explanation is that hospitals want to show a large about of uncompensated care. But I think there are other reasons as well, which include: a). there are historical/evolutionary reasons why the hospitals are incentive to show high “gross” charges. These mostly relate to many years ago when Medicare and Medicaid paid gross charges less a “discount” This incentivized hospitals to increase “gross” charges so that they could still show a big discount, yet remain profitable, on both an absolute basis and (hopefully) on an individual procedure basis; b). hospitals consider the “net” revenue they charge to each insurance payor to be highly confidential (think how Boeing does not disclose sales prices of airplanes to individual airlines). In order to muddy the waters on this, it is necessary for there to be big discounts relatively to gross charges. In other words, if the discounts were relatively small (say 10% or 20%), the payors could make reasonable estimates about what they were each paying, and thus, net reimbursement would no longer be confidential; c). there are large economies and diseconomies of scale for some activities. For example, if a hospital accepts patients for a very small healthcare plan, there are fixed costs associated with this (i.e., negotiating the contract, making sure there isn’t some sort of adverse selection with the plan members, etc.). To guard against this, the hospital will charge more for this health plan. There needs to be a big enough discount in all cases to allow for these outliers; d). for some services, there are genuine “private pay” patients for which the institution can charge full freight, or almost full freight. So the inflated prices help the institution collect “net revenue” which is discounted from the bill, yet still profitable, and e). as discussed above, hospitals often have poor internal data regarding their true costs on a procedure basis.

    Much of this is my speculation. It’s been over 10 years since I worked in the profession. Regardless, pricing is one of the many elements of the healthcare system that is highly opaque. There are folks who work for hospitals and insurers who specialize in pricing, and one of them could tell you all about it. Unfortunately, it is hard to get such a person to talk with you, or anyone else for that matter.

    • I’ve wondered if even hospitals know where all the money goes. It seems silly to suppose that they don’t, but consider this. If they kept an accurate set of books somewhere, ones that show an aspirin costing 2 cents, not 20 dollars, the insurance companies and Medicare would both want to see those accurate books!

      The overall structure of the industry seems to guarantee problems. A normal business would say “is this expensive piece of equipment worth the money?”, but a hospital would say “are we billing enough procedures with this MRI so that our costs are covered?” So their incentives are to overuse an MRI, not economize.

      Of course, then insurance companies have to review all medical decisions to keep hospitals from doing this. That annoys doctors and wastes their time. Plus it doesn’t seem to work well. I went to the ER one morning early, suspecting DVT in my leg. Triage just told me the ultrasound people weren’t in yet, and wait a couple of hours. The result — two “complex” ER visits billed to Medicare.

      • Well to there are some good reasons that hospitals don’t know their true costs. The movement of many patients within a hospital are rather chaotic. Although it is theoretically possible to track this patient precisely, and all the supplies and services that they consume, the industry has decided that this is just too complicated. Some costs are tracked, but others are not. Those that are tracked are done so in an approximate fashion. For example, if you spend a day and a night in ICU, the hospital assigns you (and your bill) one day in ICU. In reality, the costs you incur will depend on how sick you are, how often you ring the little bell that summons the nurse, etc., etc. But to track the costs this way would require each medical practitioner to log their time by patient, and many other complications. It isn’t handled this way.

        Tracking costs in an outpatient setting, or one where the protocol is more homogeneous is easier and more accurate. For example, a dentist will know his or her costs quite accurately, because the patient receives a relatively small number of procedures, stays in one place, consumes a relatively small number of supplied, and is visited by about 2 people (e.g., the dentist an a hygenist). The cost equation becomes exponentially more complex as you add complexity to the point of care, such as at an acute care hospital.

  10. https://www.vpr.org/post/midst-financial-struggle-vermont-hospitals-boost-workforce-programs#stream/0

    In Midst Of Financial Struggle, Vermont Hospitals Boost Workforce Programs

    “Over the last 10 years, the number of registered nurses in Vermont dropped by about 25 percent according to a draft report by the state’s Rural Health Services Task Force. That report also shows that there will be almost 4,000 vacancies between now and the spring 2020. And as the state grows older, more nurses will be retiring in the coming years.”

    Me:
    And the problem is that Obamacare taxes go to the states with economies of scale, so do the nurses and doctors.

    “When hospitals don’t have enough staff, they hire traveling nurses to fill the gaps. The nurses come from out of state through agencies, and it costs hospitals a lot more money.
    The task force’s draft data shows a group of Vermont hospitals found a 113% increase in spending on traveling staff since 2015. In 2019, 11 of the 15 hospitals in Vermont spent $56 million total.”
    —
    Me:

    The problem is not just medical, most large government programs will favor the large states and burden the small states with low economies of scale. Bernie has this backwards, he is not looking at the data and has gone full delusional with respect to Vermont, Wyoming, Alaska and a few others. We are deliberately depopulating these rural states and have no Constitutional option except to shut the Senate.

  11. Keith Smith does not appear to be an expert in health care policy or financing. DSH payments don’t work exactly like that quote implies.

    Specifically, they are not proportional to commercial insurance claims. Medicare DSH patient percentages are related to Medicare-insured people receiving Supplemental Security Income (i.e., very low income) or Medicaid-only insured people (i.e., under 138% of income).

    I highly doubt Russ Roberts’s friend is on Medicare or Medicaid, so it is not relevant in that way, but it’s a nice try.

    • By the way, this is not to say that it’s a sensible system. We all know it’s full of scamming, but the scamming is much more difficult to understand than this

      • DSH payments to hospitals are running about $20 billion a year, and go to largely urban institutions with a high percentage of indigent patients. They have little to do with overbilling by prosperous hospitals.

        I like Keith Smith and I love Russ Roberts, so this podcast was a great listen.

        Smith’s center probably does not do brain surgery or heart surgery or transplants or triage for accident and gunshot victims. We do need hospitals for extreme care like this, although we do not need all of the 5,000 overpriced hospitals we have today.

        Medical tourism is still expanding slowly. This partly because relatively few Americans have $8,000 to spend in addition to paying health insurance premiums.

        If we ever did expose health care to the global labor market, the downside would be a huge decline in hospital wages and employment in America. This would not be unjust but I suspect it could cause a recession. Some would say that the overall economy would be stronger with healthcare bloat than without it.

    • Helmholtz is right (his reply to himself below is also right). I was a DOJ attorney who represented Medicare in several DSH suits brought by hospitals. The formula for computing entitlement to and amount of DSH (which makes no sense, don’t get me started) does not depend on how much the hospitals bill patients or how much they claim to be writing off. It’s the sum of two ratios of which patients are covered by different types of coverage. IIRC somewhere north of 90% of hospitals outside of Maryland (which has a separate system) serve a “disproportionate” share of low-income patients under the statutory formula.

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