The health care rip-off

I was chatting one day with the handyman who does stuff at our house and was shocked at the prices that he and his wife (who is also self-employed) have to pay to buy health insurance. Even after paying so much, that coverage provides much less than what my wife and I have through her employer-based insurance. For even routine medical procedures, he pays far more out-of-pocket than I do.

One might think that this is because our insurance company is paying the difference but that is not the case. It is because hospitals charge what they think they can get away with and the weaker you are, the more you pay. In a long article in Time, Steven Brill says that people without insurance or with individual insurance policies, are mercilessly ripped off, with hospitals charging patients prices that are sometimes five times what those with employer-based insured pay. Why? Because they can.

The stories that Brill tells are horrifying. Hospitals and doctors often encounter people at their greatest hour of need when they have little time or energy to negotiate. Hence they can refuse to discuss lowering prices and blatantly rip off people who do not have any clout. The health industry acts like any other corporate conglomerate, making profits at the expense of sick and powerless people. Describing one such hospital system, Brill writes,

The hospital’s hard-nosed approach pays off. Although it is officially a nonprofit unit of the University of Texas, MD Anderson has revenue that exceeds the cost of the world-class care it provides by so much that its operating profit for the fiscal year 2010, the most recent annual report it filed with the U.S. Department of Health and Human Services, was $531 million. That’s a profit margin of 26% on revenue of $2.05 billion, an astounding result for such a service-intensive enterprise.

And this profit margin is achieved after having huge overhead costs and paying its executive princely sums. But as Matt Yglesias points out, after exhaustively describing the litany of horrors of the health industry, Brill shies away from obvious solutions in favor of tinkering at the edges.

The framing device, which is clever but wrong, says we spend too much time debating who should pay for U.S. health care and not enough time debating why the prices are so high.

The analytic core of the article shows that when it comes to hospital prices, who pays determines how high the price is. When an individual patient comes through the door of a hospital for treatment, he or she is subjected to wild price gouging. Insane markups are posted on everything from acetaminophen, to advanced cancer drugs, to blankets, to routine procedures. Because these treatments are so profitable, internal systems within the hospital are geared toward prescribing lots of them. And even though most hospitals are organized as non-profits, most of them in fact turn large operating profits and their executives are well-paid.

In addition to providing insurance services, a key service that a proper health insurance company provides is bargaining with hospitals so you get screwed less. No insurer worth anything would actually pay the crazy-high rates hospitals charge to individuals. But in most markets, the hospitals have more bargaining leverage than the insurance companies, so there’s still ample gouging. The best bargainer of all is Medicare, which is huge and can force hospitals to accept something much closer to marginal cost pricing, although even this is undermined in key areas (prescription drugs, for example) by interest group lobbying.

I can see two reasonable policy conclusions to draw from this, neither of which Brill embraces. One is that Medicare should cover everyone, just as Canadian Medicare does. Taxes would be higher, but overall health care spending would be much lower since universal Medicare could push the unit cost of services way down. The other would be to adopt all-payer rate setting rules—aka price controls—keeping the insurance market largely private, but simply pushing the prices down. Most European countries aren’t single-payer, but do use price controls. Even Singapore, which is often touted by U.S. conservatives as a market-oriented forced-savings alternative to a universal health insurance system, relies heavily on price controls to keep costs down.

Felix Salmon points to another flaw in the Brill article and that is that he does not say much about doctor salaries, apart from a sweeping statement that US doctors would not earn what they ‘deserve’ under a Medicare-for-all system.

Weirdly, in 24,000 words which include a lot of railing against the large salaries enjoyed by hospital executives, Brill never supports or clarifies this assertion: he never says how much money doctors deserve, how much they actually make, or how high physician salaries would need to be in order to make future doctors want to practice. That last one, in particular, seems very unconvincing to me: the world is full of highly-qualified doctors who would love to be able to practice in the U.S. for much less than the current going rate.

In his conclusion, Brill says — again, without adducing any evidence whatsoever — that “we’ve squeezed the doctors who don’t own their own clinics, don’t work as drug or device consultants or don’t otherwise game a system that is so game able”. It’s a bit weird, the degree to which Brill cares so greatly about keeping doctors’ salaries high: he certainly doesn’t think the same way about teachers.

Kevin Drum looks into the issue of doctor salaries and finds a handy chart that compares doctor remuneration in the OECD countries and it is easy to see that the US doctors do pretty well.

I have long been an advocate that we need a single-payer universal health care system in the US and that the best way to achieve it would be to simply expand Medicare to cover everyone. The private health insurance system in the US is, next to the finance sector, the biggest rip-off around, a system that pays the people at the top extremely well at the expense of those at the bottom.

Reader Norm sent me a link to an article describing a new study that says that traditional Medicare administrative costs are only around 1% compared to that of the private health insurance industry which is around 20%. But those who want to preserve the awful existing system misleadingly lump in the costs of the privatized portion known as Medicare Advantage, which raises the costs to around 6%.

Why people are not up in arms about this issue is mystifying. I have to suspect that part of the reason is that elite opinion takes as a given that the private health insurance system is the only way to go and thus it is difficult to break through that phony consensus.


  1. sra says

    I actually know a physician who was forced out of the Cleveland Clinic for not referring enough surgeries. It’s pretty frightening when you look at the actual metrics hospitals use to rate themselves – it’s not about the quality of care at all.

  2. otrame says

    Some doctors are definately over paid, but while trying to get costs down don’t forget that, depending on speciality, doctors have to pay as much as 1/2 of what they make to malpractice insurance, and I believe OB-GYNs pay even more.

    What this tells me is that tort lawyers are over-paid.

  3. twosheds1 says

    I wonder why this isn’t considered fraud? I don’t think single-payer is in our near future, but price controls seem to be a good way to go. Keeping costs down seems like something both parties could get behind.

  4. Trebuchet says

    I haven’t read the Time article yet and probably won’t get to it today — because I have to go to a doctor appointment.

    As it happens, I just got an “Explanation of Benefits” from my insurance for an emergency room visit in December.
    Amount charged by the hospital: About $22,000.
    Amount paid by insurance: About $7000.
    Amount I owe: $50 for a copay. And I can probably challenge that since it’s waived if you’re admitted to the hospital, which I was, just to a different hospital.

    i’m on my former employer’s “early retiree medical” plan, which is ironically less expensive than when I was working. Unfortunately I have to go on Medicare this fall so cost will go up and coverage will go down.

  5. Pteryxx says

    but while trying to get costs down don’t forget that, depending on speciality, doctors have to pay as much as 1/2 of what they make to malpractice insurance, and I believe OB-GYNs pay even more.

    To me that’s a reason to regulate or nationalize malpractice insurance, possibly alongside a system to support patients that are victims of malpractice (or just patients in general). Patients often sue for huge malpractice awards because they have no other means of acquiring health care or support except via cash settlements.

  6. mrcreosote says

    Van Gorder, an ex-cop turned hospital executive, rescued troubled Scripps from near insolvency a dozen years ago as its new CEO. Now, he’s put Scripps in the middle of a cultural transformation aimed at saving hundreds of millions of dollars a year by — get this — coaxing physicians and managers at Scripps to work together, and standardizing care across every hospital in the system.
    The health care industry is the worst managed in America. It wastes near $765 billion a year due to inefficiencies, mistakes, duplicative, and unnecessary services and fraud, according to the Institute of Medicine. That’s nearly a third of total health care spending.
    In most industries, uncovering useless spending and promoting cross-functional teams have been standard procedure for decades. In health care, where the relationship between price and costs can seem almost random, this counts as cutting-edge management innovation.

    In California, for instance, the same routine joint replacement costs between $15,000 and $130,000 for the same procedure depending on the hospital, with no correlation between quality and price, according to the School of Public Health at the University of California-Berkeley.

    Price variation among hospitals within the same system is even harder to explain. At Scripps, there was a cost difference of $6,000 between two Scripps hospitals performing the same cardiac procedures, using the same protocol, even with the same surgeon.

  7. markhoofnagle says

    “The stories that Brill tells are horrifying. Hospitals and doctors often encounter people at their greatest hour of need when they have little time or energy to negotiate. Hence they can refuse to discuss lowering prices and blatantly rip off people who do not have any clout. ”

    I hope the “they” doesn’t include doctors in this equation. As a doctor working in a hospital neither I, nor any other doctor I know, has any ability to affect this goddamn chargemaster. We have no idea what our services are costing, and that’s part of the problem. Because even the chargemaster doesn’t reflect the costs, but merely an opening bid in a war between providers and payers.

    My only problem with the Brill article was that the chargemaster is a bit of a red herring when it comes to discussing excess costs in healthcare. Yes, it screws the powerless, and the uninsured, and it’s horrible. But, most patients are not uninsured. Most have insurance or medicare, and these payers pay a fraction of the costs. Part of why the chargemaster exists is to try to squeeze more out of payers that refuse to pay what things actually cost. So they inflate the bill more, so the payer ends up paying a larger amount. There isn’t an easy solution to this because part of what hospitals are doing with this is covering their losses on mission work – running ERs, EMTALA, providing care for the uninsured, the majority of whom never pay – by taking the costs out of the paying customers. EMTALA was an unfunded mandate, and the hospitals have to make up the difference somehow, make enough money to continue to expand, be competitive, hire new talent, by more technology. You can’t, as Brill assumes, have a hospital with no profit or equal input and output. That hospital will be destroyed in the competitive market of healthcare where the latest tech, procedures, facilities etc., are what keep you growing and thus viable. If you’re shrinking, you’re dying. Also his criticism of CEOs needs to be placed on a relative scale. He’s upset at CEOs making between 1-2 million in most cases. The national average is 13 million! It is a tough job and a necessary job, and relative to most CEOs, who I doubt run anything as complex as a hospital, they’re getting paid a small fraction of the average, and a modest amount relative to the lower pay health care workers – nurses or administrators. I’m never going to be a CEO, I don’t have a dog in that fight, but of all the industries to complain about CEO compensation, healthcare? We’re small potatoes, and our CEOs are overseeing profits, unlike the robber barons who screw their shareholders and get golden parachutes.

    I wish hospitals could send bills that were progressive based on who can pay what, but they can’t. They have to give everybody the same bill. Sadly, the only bill that works to eke money out of resistant payers is hyperinflated. The good news, is that even if you are uninsured, you can negotiate that bill, most of the time, as long as it hasn’t gotten to collection and the lawyers. That’s the lesson that I’m glad Brill’s article is spreading the word on. Hospital bills aren’t written in stone, and they are insane, so negotiate, get an advocate, don’t treat it like any other bill which has some semblance of sanity or reality.

    As far as the real sources of excess cost in US healthcare? The inability of medicare to bargain with drug companies for cheaper drugs (thanks W), the VA does this and pays half as much for the same drugs. We spend too much on procedures and encourage proceduralists to do too many operations because that’s where the money is. We practice defensive medicine – fully a third of excess costs might be due to this problem. We treat people inefficiently in the wrong places – primary care in the ER – this might represent again, fully a third of excess costs. Physician compensation? Estimated at about 5% of excess costs in US healthcare according to McKinsey. Privatization of medicare administration by the Bush administration? Hugely expensive, probably 10% of excess cost (excess compensation of physicians is about 60billion excess, medicare administration privatization about 100billion excess).

    Brill used McKinsey too, so his final recommendations are mostly on. But taxing hospitals at 75% and forbidding CEOs to be paid more than they are seem to be the minor sources of excess cost. Let’s have collective bargaining for drugs, reform the fee-for-service system to discourage overutilization, get primary care out of the ER, and let’s kick the private contractors out of medicare for a start. Then you can start talking about cutting my (future) pay after I’ve devoted 17 years of my life, post-college, to train to be a surgeon.


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