Libby Rosenthal knows how to start a movement. In 2013, the physician-turned-journalist started publishing a series of exposés about medical bills, beginning with colonoscopy, pregnancy and delivery, and total hip replacement. She described everyday Americans struggling with outrageous, inexplicable bills, and the stress of negotiating with hospitals and with insurance companies. New York Times readers deluged her with their own accounts of billing misadventures, so many, in fact, that Rosenthal set up a Facebook group (“Paying Till It Hurts”) and invited readers to post their stories and their bills. It became a self-help network for thousands of fuming, frustrated people seeking solutions to their unintelligible bills.
Dissecting bills line by line became a popular exercise in outrage. In his 2013 Time magazine cover story, “Bitter Pill: Why Medical Bills Are Killing Us,” journalist Steve Brill flagged inflated charges like the $1.50 acetaminophen tablet, the $77 box of sterile gauze pads, and the Accu-Chek diabetes test strips for $18 per strip that he found online for $0.58 a strip. The markups were particularly egregious for some of the most expensive items, like $13,702 for a 660 mg injection of the cancer drug rituximab (brand name Rituxan, manufactured by Genentech, Biogen) for which Brill estimated the hospital — in this case, M.D. Anderson Cancer Center in Houston — would have paid what was still an eye-popping $3,500.
In addition to the staggering costs, people were upset about so many other mysteries surrounding their bills: Why was coverage denied? Why was the hospital allowed to bill the patient when insurance would not cover the service? How could the surgeon be “in-network” but the anesthesiologist be “out-of-network”? People who trusted the medical system to look after them felt betrayed, lied to, and cheated.
It’s easy to despise hospitals and health insurers for treating people so poorly. Understanding the strategies and casualties in the battle of the bills requires a little background, and the recognition that the root cause of this nasty, debilitating conflict is the familiar problem of our fee-for-service, pay-for-action business.
Each year, insurance companies collect premium dollars from individuals and employers ($1.2 trillion in 2017). During the course of the year, hospitals, doctors, nursing homes, and others try to wrest those dollars from the insurers by sending them bills. (They also sent another $1.3 trillion in bills to Medicare and Medicaid in 2017.) How much they collect from the insurers depends on the deals that have been struck: what services the insurance plans promised employees they would cover and how much they agreed to pay doctors and hospitals “in-network” (a preferred group) and “out-of-network” (everyone else).
What’s covered by the insurer depends on the health plan employees have chosen. Plans can have many variables: premiums, out-of-pocket expenses (deductibles, co-payments, and coinsurance), covered benefits (eyeglasses? psychotherapist?), and the network of preferred hospitals and doctors. People who don’t expect to use much care tend to opt for plans with lower premiums and higher deductibles and co-payments. People willing to stick to a small network of doctors and hospitals (like a health maintenance organization) save more because medical professionals and hospitals give significant discounts off their list prices to gain “in-network” status with insurance companies. The discounts pay off because insurers steer their members to them.
The annual negotiations to determine which hospitals are in network and how much insurers will pay for each service are complicated. Every price for every service is negotiable, and the agreed-upon prices are secret.
The annual negotiations to determine which hospitals are in-network and how much insurers will pay for each service are complicated. Every price for every service is negotiable, and the agreed-upon prices are secret. They can differ markedly for the exact same service. For example, a chief of obstetrics and gynecology recently complained that for a vaginal delivery of a newborn baby, one insurance company paid three hospitals in his city $3,000, $17,000, and $26,000. Why the difference? It all comes down to what kind of a deal each hospital negotiated with that insurer at the beginning of the year.
Each year, every hospital in the United States prepares a list of charges for every supply item and every procedure. This is called a charge description master, or chargemaster. Think of it as the starting point of a Dutch auction, in which the auctioneer starts at a very high price and then lowers it until a bidder accepts. For as long as most hospital CEOs can remember, there’s been no downside to pumping up their chargemaster prices, because they can discount them whenever and however they wish, and until recently, the figures have been confidential. In a 2013 interview, Dr. Brent James, then a leader at Utah’s Intermountain Healthcare, explained:
In a chargemaster, what you’re seeing is the old phenomenon called “mark it up to mark it down.” Hospitals will make an initial estimate of what something costs, and then they’ll mark it up — sometimes 400 to 500 percent. Insurance brokers measure [their] success in the size of the discount they get. That’s how you end up with $17 pieces of gauze. It loses all connection to reality.
A 2016 article, “U.S. Hospitals Are Still Using Chargemaster Markups to Maximize Revenues,” reported that in 2013, private insurers ended up paying, on average, two-and-a-half times the rate that Medicare paid for inpatient care. For outpatient care, insurers paid three times the Medicare rates. (Note that Medicare prices are closest to the actual costs of care.) Markups varied from state to state and also by services. The biggest markups applied to anesthesiology, CT scans, and MRIs: 13–28 times the Medicare prices.
This game of huge markups and big discounts hurts patients. The uninsured and those who are out of network are billed at chargemaster rates. Even with a discount of, say, 30 to 50 percent, the charges are still at least double — if not more — what Medicare pays.
Medicare pays hospitals and doctors after patients are discharged, based on the submitted codes. The reimbursement calculation for a hospital stay starts with a base rate for each admission. In 2019, the Medicare base rate was around $5,600. That number is then multiplied by several factors, including the disease-related group multiplier, a number that reflects how difficult it was for the hospital to take care of that patient. The multiplier can be as high as 26.4106 for a heart transplant in a patient with a major comorbidity or complication (major CC). A hip/knee replacement is, under the system, twice as complicated as an appendectomy: its multiplier is 1.9898, whereas an uncomplicated appendectomy has a multiplier of 1.0853.
Comorbidities or complications substantially boost reimbursements. The difference between a patient who undergoes a below-the-knee amputation without complications versus the same patient who has a comorbidity or complication could mean as much as a $7,000–$10,000 difference in the bill. Multiply that amount by tens of thousands of patients per year and you know why armies of individuals have been trained to trawl through electronic medical records looking for any signs of additional conditions that can be added to a patient’s list of diagnoses. Twenty-two years after the comorbidity or complication modifier was introduced, it became the new normal; 80 percent of patients were coded as having one. (Medicare pushed back and in 2007 revised its definitions to reduce the percentage back to 40 percent.) If you wonder why your clinicians sometimes pay more attention to their computer screens than to you, it could be because their paychecks depend on how many diagnoses they type in.
In addition to the set of bills that hospitals and clinics send (for the “technical” or facilities costs), doctors send a completely different set of bills (for “professional” services). Because doctors contract with insurers and government payers separately, each group of physicians — surgeons, anesthesiologists, pathologists — may have their own billing office. Laboratory tests may be billed separately, too. That’s one surprise bill after another.
The battle of the bills makes the United States a world leader in healthcare bureaucracy. One study estimated that about 25 cents of every dollar collected by a hospital is spent on administration, which means American hospitals spend more on paperwork than they do on nurses. Using data from the Organization for Economic Co-operation and Development (OECD), researchers found that administration consumed 8 percent of all healthcare costs in the United States, compared to 1–3 percent in OECD nations.
One team of researchers figured that it cost Duke Medical Center $14.50 to collect $100 of payment for the work of a primary care physician, or over $99,000 in expenses per physician per year just to bill. That number doesn’t even include the gargantuan expense of the electronic health record system. The bureaucratic complexity creates an ocean of work and a tsunami of mistakes and wastes everyone’s time.
Having fewer payers — or even a single payer — and simpler contractual arrangements could lower administrative costs dramatically. Because Medicare’s internal costs for administration are a fraction of those commercial payers, Medicare-for-all could reduce administrative costs from around 14 percent to 6 percent or less. Another way to simplify administrative billing and coding would rely on a common set of standards across the industry. Either strategy would help patients act more effectively like consumers in the market — whether for their health insurance plan or for their healthcare.
In 2014, the University of Utah (where I was Dean of the School of Medicine) tried to figure out how patients could determine their out-of-pocket costs before they get the care. We decided to build an online price estimator. Done right, we knew this could be a natural complement to the patient satisfaction ratings and comments we already posted online. Patients could use costs to comparison shop.
Despite a lot of well-intentioned effort over the next few years, the website was only partially successful. Here’s why:
First, every insurance company offers many different — sometimes hundreds of different — plans, with different covered benefits, deductibles, co-payments, coinsurance, annual cost-sharing limits, and lifetime limits. It was impossible for us to know what kind of health plan patients had and what its rules were. The best we could do was to ask people to enter what they knew about their deductibles, co-pays, and coinsurance.
Then there was the question of what benefits were covered. Before the Affordable Care Act, there were few rules governing these plans. After the bill was passed, insurers were required to cover ten essential benefits on their individual and small group plans: ambulatory (outpatient) services, emergency services, maternity and newborn, hospitalizations, mental health and substance use disorders, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, and pediatric services (including oral and vision care).
Even with the new laws, the definition of “cover” leaves a lot to discretion. Insurers vary the co-pays or coinsurance for each benefit and change what and how many services are covered. For example, coinsurance for a very expensive hospitalization or drug can total thousands of dollars. The government sets limits on the total out-of-pocket amounts ($8,150 for an individual and $16,300 for a family in 2020), but given that in June 2018, the median American household had $11,700 in savings, the caps don’t provide much security for most families.
Besides thwarting price transparency efforts, this variability in health plans also makes it very hard for people to choose the right plan — one study showed that over 60 percent of consumers selected their health plan online without leaving the initial screen. Picking the right plan also means being able to understand the complex offerings and to anticipate the healthcare needs for the coming year. Most people, even seasoned healthcare experts, have difficulty with both.
What we learned from our calculator experiment is that every component of the reimbursement and payment system needs simplification and standardization, starting with common definitions of units of “healthcare service.” Imagine organizing charges according to the ways people seek care: got pregnant and gave birth, had appendix removed, was treated for and recovered from a stroke, and so on. Whenever possible, a flat rate would include all the care needed through an expected period of recovery, including mental health support, with appropriate adjustments if the person had other serious medical conditions. By identifying clear units of service and making the prices known, patients and payers could comparison shop, factoring in performance in often-neglected dimensions like quality and outcomes, patient satisfaction, convenience, and amenities.
That’s what the Centers for Medicare & Medicaid’s Bundled Payments for Care Improvement (BPCI) program is designed to do. In BPCI, Medicare pays hospitals a flat fee for patients hospitalized for conditions like joint replacement surgery, pneumonia, inflammatory bowel disease, coronary artery bypass grafting, and stroke. Unlike the diagnosis-related-group-based payments, the fixed fee covers care during the hospital admission plus 90 days thereafter. The fee paid to the hospital also covers physicians’ costs (no separate billing). And if the patient goes to a nursing home or is readmitted within 90 days, the hospital doesn’t get paid any more. Medicare expanded bundled payments to 31 inpatient diagnoses and four outpatient diagnoses in 2020 and required participating health systems to meet quality measures to receive full payments.
Bundled payments could obviate most of the complex coding and billing rigmarole. Imagine if a patient could be diagnosed and assigned to a particular bundle of care upon admission (or even before admission). After verifying the success of care (quality metrics met, patient satisfied), a single bill could be paid, undisputed. It hasn’t happened yet, but the possibility is powerfully alluring.
By making the American healthcare system pay for results instead of pay for action, we can slash the Gordian knot of inscrutable, outrageous billing practices that consume gargantuan resources and frustrate everyone involved. Insurers should be working with clinicians instead of against them.
By simplifying and clarifying services that health insurers, hospitals, and medical groups offer, and by making information about their costs available publicly, people could make choices based on quality, accessibility, service, and other amenities, in addition to price.
Vivian S. Lee, M.D., Ph.D., MBA, has been a practicing physician, scientist, and healthcare administrator for more than two decades. Now president of health platforms at Verily (Alphabet’s health company), she also serves as a senior lecturer at Harvard Medical School and Massachusetts General Hospital.
This article is featured in the January/February 2021 issue of The Saturday Evening Post. Subscribe to the magazine for more art, inspiring stories, fiction, humor, and features from our archives.
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