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FANTASYLAND GENERAL  
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Robert Kuttner
June 13, 2024
The American Prospect
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_ Hospital pricing is impenetrable to consumers and regulators alike.
The result: increased costs and profits, and wasteful reliance on
armies of middlemen. _

, ILLUSTRATION BY JAN BUCHCZIK

 

In 2018, the Department of Health and Human Services issued a rule on
hospital pricing transparency
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requiring hospitals to post prices in easily accessible form. This was
done under a Republican administration, and it expresses free-market
ideology: If consumers have more information, they can shop around for
the best price. A better-informed consumer will in turn discipline
sellers, lead to more salutary competition, and restrain costs.

The rule was strengthened in 2021
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include sanctions for hospitals that failed to comply. What followed
speaks volumes about the folly of attempting to use consumer market
discipline in a profit-maximizing system that is opaque and
manipulative by design. In practice, most people just follow the
advice of their doctors and use the hospital where their doctor
practices.

Suppose you are the rare outlier who would like to shop for the best
deal. If you look at the website of Mass General Hospital
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you will learn that an “HC BYP FEM-ANT TIBL PST TIBL PRONEAL ART/OTH
DSTL” will cost you $35,014.00. Even if you can decipher what that
means, it’s just the beginning of determining the real price.

Posted price lists give hospitals wiggle room by noting that the
actual price will vary with the length of stay and the patient’s
condition. And a bill for a single procedure typically has multiple
elements, from individual treatment aspects like sutures or
anesthesia, to “facilities fees,” which have of late been added
even to routine outpatient care
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like consultations and ordinary screening.

Every procedure has a billing code. In recent years, there has been an
epidemic of upcoding, in which the hospital bases the charge not just
on the procedure that necessitated the current visit, but on every
prior condition the patient has ever had.

Upcoding also undercuts one widely hyped reform that was supposed to
restrain costs: so-called Prospective Payment Systems
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introduced in the late 1980s. The idea is to pay hospitals a lump sum
for treating a given condition rather than reimbursing each specific
task. This was supposed to give hospitals an incentive to use the most
cost-effective treatments rather than the most profitable ones. But
with upcoding, two patients in adjoining beds can receive identical
treatments, and the one with a medical history that becomes the basis
for upcoding is more profitable to the hospital than the other. HHS
audits hospitals to limit extreme abuses of upcoding but cannot audit
every charge, and the penalties for flagrant abuses are slaps on the
wrist.

People are skeptical of giving their data to Big Tech platforms. But
they trust their doctor. Clinically, the physician needs to know their
entire medical history and is professionally bound by an ethic of
confidentiality. Patients expect their doctor to keep the information
safe. Little do they know that this data is used to raise prices on
them.

The airlines have multiple possible prices for the same seat, but
hospitals have a practically infinite number of possible prices for
the same procedure. Indeed, compared to hospitals, airline pricing is
a model of transparency and simplicity.

ONE OF THE BIGGEST FALLACIES in treating hospital prices as
consumer-determined—and why public posting is no kind of
solution—is that most individual patients never actually do all the
paying. Hospitals typically negotiate price schedules with insurers.
Depending on the relative market power of the hospital and the insurer
in a given area, the same hospital will make different pricing deals
with different insurers.

In Boston, where I live, the Mass General Brigham conglomerate is both
the most prestigious and the most economically powerful hospital
system. Though insurers attempt to “manage” care, no insurer would
dare tell a subscriber, or an employer who buys insurance for
employees, that they are not allowed to use Mass General Brigham.
That, in turn, gives the hospital more power to negotiate relatively
higher charges with the insurer.

The insurers, in turn, have also been merging, in order to maximize
their market power with hospitals. The wave of mergers in the health
industry has nothing to do with greater “efficiency” and
everything to do with the quest for greater pricing power.

But there is one area of convergence for these behemoths fighting over
price. Both the hospital and the insurer gain to the extent that they
can offload costs onto patients.

For instance, if a given procedure is not covered by insurance, the
“self-pay” rate is typically several times that of the
hospital’s negotiated rate with the insurer. This has nothing to do
with the hospital’s costs; it simply reflects the fact that the
individual patient, unlike the insurer, has no bargaining power and
has not negotiated a discounted rate in advance.

I encountered one of the games hospitals play when my mother had an
emergency admission to Mass General Hospital after a bad fall. She was
admitted and treated by specialists, and was an inpatient for three
days. But she was placed in a category invented by hospitals called
“admission for observation.” That misclassification, for billing
purposes, technically made her an outpatient.

Under Medicare, an outpatient is responsible for a 20 percent co-pay.
An inpatient is not. But why does Mass General care if Medicare saves
money? Because under a Medicare policy instituted under George W.
Bush’s presidency, hospitals are punished if they bill Medicare
under inpatient rates when they might have charged outpatient rates.
So the government created an incentive for hospitals to make patients
pay more.

Shifting costs to patients is a major source of profit maximization
for both hospitals and insurers. Many insurers have a variety of
complex requirements for authorizing treatment. The purpose is partly
legitimate—to avoid medically unnecessary care—but it has the
handy side effect of tripping up patients who fail to comply with some
arcane technicality.

Having written numerous pieces on health care for the _Prospect_ and
having served earlier in my career as national policy correspondent
for _The New England Journal of Medicine_, I am more sophisticated
than the average patient trying to navigate the system. But in trying
to determine what I needed to do to be sure that Blue Cross would
cover a pending minor surgery, it took me upwards of ten hours on the
phone with Blue Cross and staffers in two doctor’s offices to avoid
getting caught in a trap that would have substantially increased my
costs.

Blue Cross insisted that under my PPO plan, my treatment by a
specialist did not require a referral from my primary care doctor. But
after I saw the specialist, Blue Cross refused to pay his bill for the
initial consultation, or to authorize further procedures. On what
grounds? They had not heard from my primary care doctor.

After numerous calls and emails, I finally figured it out. Blue Cross
has its own terminology and I wasn’t using the right words. Blue
Cross does not require a _referral _to a specialist; but before it
will approve payment, it does require _pre-authorization _based on a
communication from the primary care doctor on the medical condition
that necessitates the treatment.

If I hadn’t figured this out, I would have been liable for the
specialist’s entire bill. At best, I would have to engage in
prolonged wrangling with Blue Cross after the fact. The terminology
game serves as a trap to confuse the consumer of health care.

None of these needless complications apply when the insurer is
Medicare, an island of efficient socialized medicine amid an ocean of
sharks. No referrals or “pre-authorizations” are required; there
is no such thing as in-network versus out-of-network. The money saved
from this endless gaming and counter-gaming goes to patient care.

Medicare Advantage is a whole other story. Despite the misleading
branding, Medicare Advantage plans are run by private insurers. They
are a kind of HMO, related to Medicare only in the sense that if you
qualify for Medicare, the government will pay premiums on your behalf
to the Medicare Advantage plan.

These plans are aggressively marketed to older Americans on the
premise that they offer lower-cost and better coverage. Traditional
Medicare does have some deductibles and co-pays, though they can be
covered if you purchase a relatively inexpensive Medigap policy. But
Medicare Advantage has no co-pays, and special perks like gym
memberships and wellness programs.

That’s the theory and marketing pitch. In practice, cost-shifting to
patients, gaming the Medicare program, and reducing treatment are the
central components of the business model.

Medicare Advantage plans often decide that a proposed treatment, test,
or medication is not medically necessary. So the patient either
absorbs the entire cost or goes without. Unlike traditional Medicare,
the private plans also stringently limit which doctors and hospitals a
patient may see. All of this makes Medicare Advantage plans highly
lucrative to insurers, at the expense of patients.

In this sense, sticker prices and promises of cheaper coverage have no
relationship to what the plan actually pays, or doesn’t pay, the
doctor or hospital on behalf of the patient.

SURPRISE BILLING IS ANOTHER AREA where there is an endless
cat-and-mouse game between insurance industry profit maximization and
attempts to protect consumers. The most common sort of surprise
billing comes when a patient gets treatment from a medical provider
who turns out to be out-of-network, and charges an exorbitant bill.

The No Surprises Act of 2021 prohibits the most extreme forms of
surprise billing. Typically, that occurs when a medical provider whom
the patient did not select, such as an anesthesiologist in a surgical
procedure, turns out to be outside the insurer’s approved network,
and the patient is billed after the fact for the full, nondiscounted
fee.

The federal government found that 16 percent of in-network hospital
stays involved at least one non-network provider
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The act says that hospitals and other providers must not bill patients
for more than the in-network rate if it turns out that someone on the
medical team was out-of-network.

But the whole concept of in-network versus out-of-network is worth a
closer look. It began in the 1970s with the arguably legitimate
premise that the entire team of doctors who worked for an HMO were in
close communication on a patient’s comprehensive needs. This
supposedly improved care and reduced costs. The patient, therefore,
needed to use a specialist who was in-network.

Expand

[JUN24 Kuttner 2.jpeg]

Conglomerates like Mass General Brigham in Boston have more power to
negotiate higher prices with insurance companies.  ANTHONY
NESMITH/AP PHOTO

As HMOs grew from so-called staff-model systems into networks whose
only common feature was that participating doctors agreed to accept
the HMO’s treatment protocols and payment schedules, providers on
the “common team” treating a given patient had often never heard
of each other. The point was not better communication; it was
restraining the HMO’s costs and increasing its profits.

Today, in-network versus out-of-network is a pure game of gotcha. If I
happen to misunderstand the complex requirements and get treatment
from a doctor who is considered out-of-network by my insurance
company, there is no clinical difference. The only difference is that
I am stuck with a larger co-pay.

Insurers and hospitals have used the issue of which doctors are
in-network to play chicken with each other, as they bargain over what
the insurer will pay the hospital. In New York, UnitedHealthcare has
repeatedly threatened to remove Mount Sinai Hospital and its
affiliated doctors from its network of approved providers.
UnitedHealth has done this because Mount Sinai was bargaining for
rates more in line with what the insurer pays other New York hospital
systems. Had UnitedHealth carried out its threat, tens of thousands of
New Yorkers would have had to pay out-of-network charges or switch
doctors.

The hospital and the insurer finally came to terms
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March, but only after UnitedHealth had already classified Mount Sinai
inpatients as non-network, disrupting treatment of cancer patients,
among others. As part of the deal, that cynical move will be reversed.
Note that this battle had nothing whatever to do with using networks
to ensure quality of care. On the contrary, it degraded care. It was
purely about money.

IN THE LATE 1960S, A PHYSICIAN and public-health researcher named
John Wennberg began doing systematic analysis of clinically
unwarranted variations in medical interventions and their costs. The
results, updated annually in what became the Dartmouth Atlas of Health
Care, were shocking. Wennberg’s studies, among the most widely
replicated findings in health research, found that hospitals in
comparable cities performed medical interventions at absurdly
divergent rates and with wildly divergent costs, based not on medical
necessity but on market power and profit maximization.

Wennberg died earlier this year, at 89
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and his work continues. A recent summary of his findings
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research, reports: “Where there are more hospital beds per capita,
more people will be admitted (and readmitted more frequently) than in
areas where there are fewer beds per capita. Economically, it is
important for hospitals to make sure that all available beds generate
as much revenue as they can, since an unoccupied bed costs nearly as
much to maintain as an occupied bed. Similarly, where there are more
specialist physicians per capita, there are more visits and
revisits.”

In other words, supply generates demand. And it gets worse. The
summary adds: “Studies by Dr. Elliott Fisher et al
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indicated that there is _higher_ mortality in high-resourced,
high-utilization areas than in low-resourced, low-utilization areas.
One explanation for this phenomenon is that the risks associated with
hospitalizations and interventions—hospital-acquired infections,
medication errors and the like—outweigh the benefits.”

One of Wennberg’s most consistent findings was a crazy quilt of
pricing disparities. Despite decades of supposed reforms, that pattern
keeps worsening. A 2022 study of pricing for cardiovascular
procedures published in JAMA Internal Medicine
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“Across hospitals, the median price ranged from $204 to $2588 for an
echocardiogram and from $463 to $3230 for a stress test. The median
price ranged from $2821 to $9382 for an RHC [heart catheterization],
$2868 to $9203 for a coronary angiogram, $657 to $25 521 for a PCI
[treating a blocked coronary artery], and $506 to $20 002 for
pacemaker implantation.”

Once again, these extreme pricing disparities had nothing to do with
hospital costs. The fees increased in line with the hospital’s power
to do so.

THE MORE COMPLICATED THE SYSTEM GETS, the more its participants rely
on middlemen to shift costs. We see this with pharmacy benefit
managers and group purchasing organizations, which claim to save money
on drugs and medical supplies for insurers and hospitals, but which
raise costs throughout the system because of the profits they skim off
the top. My Blue Cross policy uses an outside vendor to review all
claims and payments, and find reasons to deny some after the fact.

One cost-containment firm called MultiPlan has attracted extensive
private equity investment and a position of dominance in the practice
of determining out-of-network pricing. The firm’s algorithm, Data
iSight, is marketed to insurers
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and recommends ways to cut reimbursements and shift costs onto
patients or doctors. Sen. Amy Klobuchar (D-MN) has accused MultiPlan
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being a form of algorithmic collusion, gathering payment data from
across the industry and using it to inform its low reimbursement
rates. “Algorithms should be used to make decisions more accurate,
appropriate, and efficient, not to allow competitors to collude to
make healthcare more costly for patients,” Klobuchar wrote in a
letter to the Federal Trade Commission and the Justice Department.

Another middleman comes in the form of electronic medical records.
These were supposed to revolutionize medical care by making it easier
for doctors to access patient histories. What some would call a
natural monopoly of hospital patient data was quickly taken up by
Epic, a for-profit product sold by an outside vendor. But although
numerous hospital systems now use Epic, doctors affiliated with one
hospital typically cannot access patient records at another.

That’s because the Epic system only pretends to be mainly about
providing access to computerized patient records; it’s primarily
about maximizing billing. All of the upcoding I talked about earlier
is facilitated through Epic. When patients are asked about their prior
medical history, each keystroke can enable hospitals to add a code and
raise prices. And for clinicians, it is more time-consuming than a
purely clinical data system.

Obviously, patients suffer from this in the cost of medical care. Even
if they don’t feel the direct cost in co-pays and fees, they
eventually have it passed through to them in higher insurance premiums
as well as frazzled doctors. And that brings up another cost: how it
affects the quality of care.

I see an eye doctor twice a year for a condition that requires
monitoring. When my ophthalmologist retired, I was referred to a new
one whose practice had been bought by the hospital. He spent about ten
minutes with me, skimmed my chart, did not bother to take a history,
and did a cursory examination. He had two waiting rooms, and raced
between patients, almost as if he was on roller skates.

When I sent him a very polite note to express some concern, I received
back a plaintive letter going into great detail about his economic
situation. His net earnings were about half of what he had expected.
He lived in a small apartment, and drove an old car. The only way he
could make a decent living was to see what he acknowledged were too
many patients. And the hospital, which took a cut of his caseload, put
no limits on how many he saw.

The abuse of medical professionals is especially extreme in the area
of mental health. Each insurance company has its own protocols, its
own payment scales, and systems for clawing back payments if its
consultants can find some excuse. Too many clinicians find the system
too much of a hassle with too much personal risk, and decide not to
take insurance at all. Their patients are typically rich people who
can afford to pay out of pocket, while far needier people, both
economically and clinically, struggle to find someone who will treat
them.

NEEDLESS TO SAY, NONE OF THIS GAMING and counter-gaming around prices
operates in national health systems, either in the comprehensive
systems of socialized medicine on the British model, or the tightly
regulated systems of true nonprofit insurers and hospitals on the
German model.

In the British National Health Service, there are no prices for
procedures at all. Each hospital in the system is given a global
budget to serve a population of patients. The hospital allocates its
budget as efficiently as it can. Doctors are salaried, based on the
size and age of their patient panel. Specialists are also salaried.

We’ve seen global budget reforms attempted in the U.S., but only on
a limited scale. The entire system of insurers here is parasitic on
the provision of actual health care, and the industry of middlemen is
a parasite on top of a parasite. Each hapless attempt at price reform
only creates new openings for gaming and more opportunities for
middlemen.

The fact that universal socialized systems have no counterpart to the
U.S. system of price manipulation, with all of the money spent on
administration and gaming, goes a long way toward explaining why the
U.S. spends upwards of 17 percent of GDP on health care and the
typical OECD country spends about 11 percent.
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That difference—6 percent of GDP—is about $1.5 trillion a year.
Just imagine what else we might do with $1.5 trillion a year. The only
solution is to get rid of prices entirely by treating health care as
the social good that it is.

_Robert Kuttner is co-founder and co-editor of The American Prospect,
and professor at Brandeis University’s Heller School._

_Used with the permission © The American Prospect, Prospect.org
[[link removed]], 2024. All rights reserved. _

_Read the original article at Prospect.org.:
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