Peeling Back the Layers of Hospital Dysfunction

Image source: Wall Street Journal

There are many layers to the dysfunction of America’s (and Virginia’s) health care system. I have written frequently about price opacity, the inability of consumers to compare medical services by price. Prices are essential to a market-based economy. Indeed, one could say that without prices, it is impossible to have a market-based economy. I’m not sure how you’d label the system we do have — there’s too much private ownership to call it socialism. But whatever it is, it sure as hell isn’t a market-based system.

The question I continually ask is why. Why is there no price transparency? Part of the problem is the convoluted system in which hospital charges bear no relationship whatsoever the cost of providing the service. Hospitals post charges. Government programs (Medicare and Medicaid) and insurance companies negotiate the posted charges to a lower level. And consumers pay some residue of those lower charges based upon how generous their insurance plans are. I chronicled my own experience with price opacity in the Richmond health care market when I elected to undergo hip-replacement surgery. (See “One Man’s Descent into Healthcare Price Opacity.“)

A recent Wall Street Journal article suggests that the dysfunction is so extreme that hospitals themselves often don’t know how much it costs to perform a routine, commoditized procedure such as knee replacement surgery.

The article highlights a rare instance in which a hospital, the Gunderson Health System’s hospital in La Crosse, Wis., undertook a study to find out how much it cost to conduct a knee replacement surgery. The hospital had been routinely jacking up its charges by about 3% a year, reaching a list price of $50,000 by 2016. But no one knew how much it actually cost to do the surgery. After a detailed, 18-month review, the hospital concluded it cost at most $10,500 — including the physicians.

Thus, another part of the answer to my question is the failure in hospital accounting. Hospital charges are largely unrelated to cost because the hospitals themselves often don’t know what procedures cost. If hospitals don’t know what routine procedures cost, how can they make rational business decisions? How can they exercise cost controls? No wonder health care costs go nowhere but up.

Writes the Journal:

Hospitals can be shielded from the competition that forces other industries to wring out expenses and slash prices. Hospital list prices are a starting point for negotiations with insurance companies over what they will actually pay, and those deals are confidential. Consolidation has given hospitals greater pricing power in many markets, according to health-economics researchers.

“Being cost effective was not an imperative in that type of market dynamic,” said Derek Haas, chief executive officer of Avant-garde Health, a health-care cost and quality analytics company that worked with Gundersen. …

For consumers, the prices paid for the surgery at some hospitals in the U.S. were more than double the prices at others, according to an analysis of 88 million privately insured people to be published in the Quarterly Journal of Economics.

In a market economy, competition would work to drive down the price of elective surgical procedures. If Hospital A charges an excessive price for knee replacement surgeries, orthopedic physician’s practices or a competing hospitals could enter the marketplace, charge less, and gain market share. But here in Virginia, hospitals have consolidated into massive health care systems, and they have shut down competition through Certificate of Public Need regulation. Regulations restrict entry of newcomers into the medical marketplace, thus conferring monopoly-like protections on hospitals. Virginia hospitals are not compelled to drive down costs and reduce charges to stay in business. They just ratchet up their charges each year, immune to pressures from the marketplace.

So, what is Virginia’s political class doing about this? Basically, nothing. Rather than address the core issues of competition and price transparency, the political class is focused on doing what it knows how to do, which is rob Peter to pay Paul — in other words to redistribute wealth. Thus, the public policy debate in Virginia focuses on Medicaid expansion and who pays for it. Meanwhile, costs for everyone, rich and poor and in-between, continue to rise with no end in sight.

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13 responses to “Peeling Back the Layers of Hospital Dysfunction

  1. Well.. I kinda thought you had finally seen the reality back when you said this:

    ” Then I thought to inquire if my health insurance company, UnitedHealthcare, even covered procedures conducted at Health City. When I checked, the answer was no. That was a deal killer. It didn’t matter if Health City could under-price an American hospital by 50%, without insurance, I’d personally pay more.”

    It’s not that we don’t have a market – we do. Like a lot of other things that we may not know an advertised price – we certainly can collect data from people who have the operation and get the bill. That info can be collected, compiled and published like a lot of things are these days.

    No industrialized nation has a “market”. In other countries – the govt decides the cost AND who is considered in need of the operation. Those that want it anyhow are free to use their own money and go wherever they want.

    In the US – the benchmarks are established by insurance and the lead insurer is Medicare – with a huge Single-payer pool.

    I’d also point out that a true market is not necessarily transparent – and having the govt mandate transparency violates the basic idea competition based on price and quality – which buyers would determine – just like they do with when a car has a sticker price and consumers can and do determine the actual selling price by collecting the sales data and compiling/publishing it.

    Insurance totally disrupts any semblance of a real market anyhow as you reported earlier. Whatever insurance you have – decides the price – not you.

    Of course – while we on the subject – what choices do you have for insurance? Many folks who have employer-provided don’t have a real market in insurance.. they got what the employer give them and from that point on -their connection with a “market” is far removed so that “transparency” is really not a relevant issue….

    I’d say that if you were going to spend your own money – you COULD find the information on price and quality and make your choice(s) and that actually WOULD be more like a “market”.

    And as you intimated earlier – someone spending their own money could go to the Cayman Islands or India or a lot of other places – i.e. a true “market”.

    Insurance changes everything. It’s no longer YOUR market – it’s the Insurance companies market – and yes they actually DO have price transparency… cuz it’s mostly their money!

    You gotta get off this kick where you’re blaming the wrong parties for the problem.

    There is no market – not because the govt won’t intervene … there is no market because of insurance. You gave up the market when you turned over those choices to your insurance company.

  2. The hospital industry is consolidating rapidly and, just like other industries, all the evidence is consolidation is being accompanied by higher prices, both at non-profit and not-for-profit hospitals. In 2017, non-profit systems drove about 65% of the hospital purchases. Studies have shown that communities with more independent choices have lower prices and that there is no significant cost difference between non-profits and for profit hospitals.

    To elaborate a bit on one of your points, if a hospital doesn’t know how much procedures actually cost, how are we actually evaluating how much non-profits (in return for the sizeable tax advantages they receive) are actually providing in community benefit and charity care?

  3. The reason the hospital doesn’t know is that they are only one cost for that procedure. There are other doctors and players involved . Usually the orthopedic surgeon bills separate… as does the anesthesiologist, etc…

    But again – if you have insurance and are expecting insurance to pay – you really don’t have the ability to “shop”… it’s a myth.

    If you’re paying yourself – there actually is a “market” Hospitals will quote a price for “uninsured” and other places like India, Mexico and Cayman Island will also quote a price.

    Elective operations in the US are also where cost-shifting takes place – where hospitals try to recoup some of that “free” charity care.

    Perhaps Steve Haner know the answer to this question: If I have an auto accident or a tree falls on my house – the insurance companies get an estimate and then cut a check and I am free to “shop”… usually. Why can’t it work that way with health insurance? Why would Jim’s insurance not pay for care wherever Jim found a provider?

  4. “The hospital industry is consolidating rapidly and, just like other industries.” That is a primary issue.

    Still fighting some of the medical industry regarding my botched operation last January. The responses to my complaints have led me to believe that I did not have a DR, I had a corporate employee, and I did not have an operation in a hospital, the operation took place in a corporate owned building.

    First, the surgeon … my substantive charges have had no response, even immediately after the first of his 2 operations. I finally scheduled a revision surgery at a different hospital with a different Dr.. The previous surgical damage made the revision a bit tricky, but I believe the best that could happen was accomplished.

    From the hospital, I have received the most ridiculous response in a letter. First, if the Dr. did something that should not have been done … like falsified records, used a Physicians Assistant in ways that he was not qualified for, disregarded prior history and prior reported allergic reactions etc, … then I need to contact the Dr. That is not the hospital’s business. Funny, it used to be that a Dr. had to meet certain standards to be admitted to practice at a hospital. But this Dr. is a corporate employee and the corporation evidently has hospital privileges.

    Regarding an assigned physician when I returned to the hospital a week after the first operation and the inaccurate record of my situation she wrote up, well evidently she corrected the record 4 months later so all is fine. Otherwise they say they are sorry my recovery took longer than anticipated, to which I respond that recovery was impossible without the revision surgery. The hospital is sorry they “did not exceed my expectations.” YIKES!

    All this is 2 corporations avoiding any responsibility for what happened … the one that bought up orthopedic practices around Virginia and a hospital corporation that owns quite a few hospitals in Northern VA. No liability anywhere … just pay up cause we won’t admit anything.

    • I’m sorry to hear about your bad experience. It sounds like you encountered a lot of bureaucratic ass covering and blame shifting. There is no incentive in the current system for hospitals (or physicians) to accept blame. Indeed, there is every incentive to avoid acknowledging errors or accepting responsibility. This is another grievous flaw in the health care industry.

      Many other industries are dedicated to continual process improvement. In order to get better, you have to flush mistakes into the open so you can modify systems to correct them. The best corporate cultures encourage the reporting of errors.

  5. Thanks for your kind words but I am saying more than that … I am saying that because the Dr and the individual hospital are no longer in charge of themselves … that is the reason there is no accountability. Hospitals used to care about the integrity of the physicians they admitted to practice because they also cared about the reputation of their hospital. Dr. for the most part cared about their patients.

    Maybe it’s the reduction in competition thing,. How do you get away from Inova in Northern VA? There is Virginia Hospital, now affiliated with the Mayo Clinic, but I hear that the affiliation is mainly financial. Same issue. And this Dr. actually yelled at me that I was going to cost him $30,000. Not sure how, but obviously his mistake with me meant he would loose compensation from somewhere and that probably means the ortho corporation. None of that money he said he would loose had anything to do will my bills and since the average ortho makes $750,000 I am not disturbed by his loss.

    So hospitals and Drs., owned by corporations, act differently because of that ownership. The basis of the Dr. patient relationship is changed for the worst.

  6. “This Dr. actually yelled at me that I was going to cost him $30,000.

    That tells you just about everything you need to know about this guy.

    • Jane says:

      ““This Dr. actually yelled at me that I was going to cost him $30,000.” That tells you just about everything you need to know about this guy.”

      This attitude of doctors toward patient works on three levels:

      1/ How the individual doctor views his or her patients.
      2/ How the health system (provider/insurer) views its patients.
      3/ How the Government that built and controls the system views its patients.

      Back in the 1970s and 1980s and before, the typical attitude toward the patient was built on real time intimate human interactions in all their complexities between two people who more often than not knew one another before and after each doctor visit or procedure, within small communities. Most doctors back then truly cared about the patient, and had too, to survive. So the bad apples were relatively few, and quickly culled out of the profession.

      Today those old fashioned and so called “inefficient” rules no longer apply.

      Attitudes towards patients now are built by a few leaders who rise to the top of health organizations irrespective of how they treat their patients. Bad doctors and administrators more often than not win control of health organizations. Why? Because their great focus, skill, and priority is on money, and on the corporate efficiency of their bureaucratic organization, not on patients. So now bad apples typically spoil entire barrels of doctors, esp. fleets of young doctors.

      And, of course, all of these doctors and their administrators are dancing to the tune of a very corrupt Federal Government, and the broken systems of that highly inefficient Federal Government.

  7. Excellent post, and I agree with the dysfunction you spotlight. There are many, many abuses to be found in the health care provider and compensation business and the first step towards eliminating them is to make our current “system” far more transparent. As you have noted before:

    Denying universal health care creates a moral dilemma; but doing something about it should not mean simply enlarging our current, grossly wasteful and opaque health care system — or the cost compensation and COPN regulation that has made it that way. As your quote illustrates, “Being cost effective [i]s not an imperative in that type of market dynamic.”

  8. So why doesn’t AG Mark Herring file antitrust suits against the big Virginia medical chains?

    He’s trying to save Network Neutrality with an argument that I wouldn’t have made my first month in law school because it presumes states can exercise basic jurisdiction over the Internet. Anyone with a modicum of knowledge knows that, in a packetized network, packets my travel all around the nation, and believe it or not, only the federal government has jurisdiction over interstate commerce. I expect this foolishness from California AG Becerra but I had hoped Herring would put his legal skills over politics – guess not.

    What are the Herfindahl-Hirschman Index scores for hospitals in the various geographic markets throughout Virginia? I suspect that, in some markets, the scores would be high. The following is taken from the US DoJ’s website.

    The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600).

    The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.

    The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010). Transactions that increase the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission. See id.

    Instead of whining and trying to raise taxes, why not go after market concentration?

    • Good points, TMT. Surely Herring is making an argument he knows he can’t win, on federal exclusivity grounds, but articulating what the feds ought to do.

      • As an aside, some of the principles underlying network neutrality make sense. Others don’t. For example, preventing an ISP from favoring its content affiliate makes sense. Preventing an ISP from blocking a user from certain websites makes sense.

        But preventing an ISP from selling a content provider faster service at a higher price is inconsistent with decades of precedent. Ever since the Bell System began offering customers point-to-point and point to multi-point private line services, customers could always buy a bigger and faster connection at a higher price. A big business customer might need a T-3 rather than a T-1 connection. Do we outlaw that? And if we allow it but don’t allow this for Internet content, how is it policed? You cannot distinguish between types of packets. No one knows what is riding on the packets.

        And forbidding zero-rating services is anti-consumer. Let’s screw with some guy or gal making $40 K a year and prevent them from watching HBO or ESPN without using their data so that we can help some Silicon Valley billionaire to be.

        Bringing Internet access under Title II of the Communications Act is inconsistent with the 96 Act that adopted deregulation as a national policy.

        And then there is the repulsive “progressive” double standard. It was bad for Trump to push Pai to repeal but fine when Obama pushed Wheeler to adopt NN.

        Herring should be fighting health care concentration instead of signing onto a brief from fools in California.

  9. I like TMT’s comments and I hope Jim keeps hammering on this. I stand by my previous comments that the U.S. healthcare system is not functioning efficiently at all levels. Larry argues that hospitals are not part of the problem and then argues about market definitions but the evidence suggests otherwise. The summary of what I have seen is:

    1) Hospitals in the U.S. are about 1.9X as expensive as comparable countries like Canada, France, and German. In fact, although all sectors (ambulatory, hospital, pharmaceuticals, etc.) in U.S. healthcare are much more expensive, this contributes the most to U.S. healthcare being significantly more expensive.
    2) Larry is right that 3rd parties pay a lot of hospital expenses, but studies still show that increasing concentration in provider networks has resulted in higher costs with no increase in quality (e.g. costs are lower in markets with more options regardless of whether the 3rd party or individuals are paying).
    3) Non-profits have no substantial difference in pricing to for-profits, are the primary drivers of consolidation, and the value of their community benefit ( provided in exchange for tax-exempt status) is questionable e given the vague “standard” and the freedom hospitals have to calculate community benefit.
    4) Government, even at the state level, has a legitimate interest in addressing consolidation and pursuing policies that foster competition and market efficiency. I’d like to see more discussion on what we can do in Virginia.

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