Decoding Health Care

Hospitals

Most people like (their) hospitals. It’s where you have your baby, get stitches, have your broken bone set. It’s where you had your appendix out. It may be where Grandpa died. Your friends and family probably work there. They have a big fund-raising gala once or twice a year and all the local celebrities (especially politicians) attend. But if you ask a random sample of physicians, you won’t get such positive feedback. Physicians do not have this romantic notion of what a hospital is. I certainly do not.

In the next several posts I will discuss the cost problem in American health care, and hospitals are a good place to start. Hospital based care is responsible for about one third of all health care costs. And this is not because Americans spend a lot of time in the hospital; quite the contrary, they spend less time than folks who live in other developed countries. It’s because American hospitals are a lot more expensive than those in these other countries, double on average.  Hospitals are big business.

The history of hospitals in America is an interesting one. For an excellent summary, I refer you to Dr. Barbra Mann Wall’s fascinating review on the UPenn Nursing web site (https://www.nursing.upenn.edu/nhhc/nurses-institutions-caring/history-of-hospitals/). Hospitals have existed forever, often in support of military activity. The modern Western hospital really dates from the late 1700’s. At the beginning, there were two types of hospital, the public hospital and the private, usually faith-based (usually Christian). Public hospitals served mostly the poor and often did more than medical care; they took care of orphans and the disabled, as well as the chronically ill like those with tuberculosis and mental illness. Faith based hospitals managed acute medical illness but were staffed by volunteers (like nuns) and were philanthropic efforts. If you had money, you received medical care at home.

A couple of things changed this. The first was modern medical science. Incredible advances like anesthesia, antisepsis, and x-rays (just to name a few) made hospitals a good place to receive care, not just a place to go to die. Nursing practice matured into a professional, skilled discipline. And America needed a place for young doctors and nurses to be educated. But these advances came with a cost, and so the second major development was a way to pay for medical care. This has previously been described in my posts on employer sponsored health care and Medicare and Medicaid.

After WWII, health care exploded. Suddenly there just weren’t enough hospital beds. And in response, a new type of hospital, the community hospital developed. These were acute care centers for working people. In order to meet the need for these hospital beds, Congress passed the Hill Burton Act which provided a mechanism to pay for building these hospitals. And so the growth in medical services and accordingly the growth in medical spend really started. Hospitals were the center of this medical universe.

More medical facilities invariably means more medical care will be delivered. And it became very clear that hospitals could make a lot of money. Partially this was because hospitals had the financial reserves to invest in technology. They bought CT scanners, and then MRI machines and then PET scanners. And a payment methodology evolved that rewarded them handsomely. As we have previously discussed, Medicare pays for both inpatient and outpatient care on a national fee schedule. And this fee schedule does not adequately reimburse for the cost of care being delivered. But commercial health plans pay hospitals for either inpatient or outpatient care quite differently. Let me introduce you to the charge master.

I am certain everyone has heard about the itemized hospital bill that had a $10 charge for an aspirin or a $20 charge for a band aid. Everything in the hospital has a price attached to it. Sometimes the price is buried in a more bundled or “global” fee, like an operating room charge. It is almost impossible to really understand these charges. But they are very important for a hospital, because in many cases they are the starting point to determine how much an insurance company will pay. This is because the insurance company frequently pays a percent of how much the hospital bill is, rather than negotiating for each individual medical service. It doesn’t matter that these prices have little or no basis in the real cost of goods or labor. The hospital charge master is a means to an end, and that end is reimbursement to the hospital that is a multiple of what Medicare pays (so called cost shifting, which we have previously described).

On average, commercial payers pay 190% of what Medicare does. This means that people with insurance (and especially employers) are subsidizing the cost of medical care for everyone else. You see this in your health insurance premium and in your deductible and copayment. But heaven help you if you do not have any insurance. In that case, you get a bill based on the charge master prices. Wow. And there are countless stories in the media of hospital efforts to collect on these bills.

The exact math for payment based on “percent of billed charges” is a negotiation between a health insurance company and a hospital. Leverage matters. If you are the only hospital in town, you have leverage. If you are in a competitive health care market and the health insurance plan can walk away from a contract with you (i.e. leave you out of network), they have leverage. Leverage explains why hospital prices are so inflated and also why prices may vary so much from market to market.

Today’s hospital comes in three basic flavors. The first is not for profit; the second is for profit; and the third is public. Public hospitals make up only about 15% of hospitals; they are charity or city hospitals, often owned by the government. Not for profit hospitals make up about 50% of all hospitals and for profit make up about 35%. This distinction needs some explanation. Not for profit hospitals are NOT charity hospitals and they certainly are not “for loss” or “break even”. Being not for profit simply means that you do not have investors that share in the profits.

Not for profit hospitals are intended to be resources and contributors to the communities they serve. In a non-profit hospital, any net revenue is to be reinvested to the benefit of those communities. This might mean educational programs, health fairs, or paying for care delivered to those with no health insurance. But exactly how this money is to be allocated is not precisely defined. We know that in the not for profit hospital world the median contribution of operating expenses devoted to charity care is only 1.4%. We also know that the average CEO in these hospitals makes $700,000 (for profit hospital CEO’s make even more). And hospital CEO pay has increased 90% over the last 10 years. Good work if you can get it. In exchange for these community benefits, these hospitals pay no taxes. None. This amounts to a multi-billion dollar tax write-off.

In the case of both not for profit as well as for profit hospitals, true “stand alone” hospitals are increasingly uncommon. 56% of hospitals are part of a “chain”, i.e. a health system with three or more hospitals. Almost 20% are part of a chain with more than 50 hospitals. These hospitals are both for profit (the biggest is HCA) and not for profit (the biggest is CommonSpirit, a Catholic hospital system). These large hospital networks provide leverage both within and across markets.

Consolidation is one of the major themes in health care today. We will revisit this again and again in upcoming posts. One type of consolidation, the merger and acquisition of similar health care entities (or competitors), is called horizontal integration. It is really no different than one supermarket chain buying and merging operations with another. There are numerous examples in the hospital space. For example, the hospital I practiced at in Albany, NY was acquired by Trinity (the second largest not for profit chain).

Why does this matter? If you ask these hospital systems, they will say that with size comes operating efficiency as well as standardization of care to improve health outcomes. If you ask a health plan, they will say it gives these hospital systems leverage. There are now a lot of studies that agree more with the health plans than the hospitals. Consolidation means higher cost without increase in quality. And this has gotten the attention of the Department of Justice (DOJ). The DOJ has largely been hands off in these type of business deals until fairly recently; now they are scrutinizing them much more aggressively through an anti-trust lens.

A second type of consolidation is vertical and involves the acquisition of entities that are key to the supply of goods or services but are distinct. An example might be for an electric vehicle manufacturer to purchase a company that makes batteries. In healthcare, the classic examples involve hospitals purchasing surgicenters, imaging centers, urgent care centers, and most importantly physician practices. Acquiring a physician practice is advantageous to a hospital for several reasons. The most straightforward is the ability to bill commercial health insurance companies based on the charge master and percent of billed charges as opposed to the practice’s previously negotiated rates. There are countless examples of patients seeing their bills for chemotherapy or an echocardiogram go up by 100% or more when their oncologist or cardiologist is acquired by a hospital.

This vertical integration has other benefits to hospitals. For one thing, the acquired practice can be forced to refer their patients exclusively to hospital owned services like radiology or laboratory, or to other employed physicians like surgeons. Or the employed physicians can be required to adhere to a hospital formulary which may be driven by hospital financial interests. In these relationships, the physician is employed and paid a salary. Typically, the initial post acquisition salary is fairly generous. However when salary renegotiation occurs the honeymoon is often over. These heavy handed hospital behaviors are a big part of the bad blood between physicians and hospitals today.

Executing these complicated contracts and processes is not a simple matter, which brings us to the second reason that doctors dislike hospitals. Since 1970, it is estimated that the number of hospital administrators has increased 3200%. It is also estimated that there are now 10 administrators employed by hospitals for every physician. And it is safe to say that they have a different vision of the hospital’s mission compared to the physicians who work there.

This hospital focus on the bottom line is only starting to be recognized by the general public. Most newspapers have eagerly published reports of not for profit hospitals sending uninsured patients to collection agencies, seemingly a slap in the face to the communities that have given them generous tax breaks. Every year contentious negotiations between health insurers and hospital systems over their reimbursement rates put patients in a terrible position. And the government has not helped.

The health care industry spends more on lobbying than does any other industry. Although pharma spends the most by far, hospitals are always in the top ten. These lobbying dollars buy influence. It is also frequently observed that almost every congressional district in America has a hospital and it is often the number one employer (this is actually true in only 56% of congressional districts). These two factors have significant influence on how likely it is to have legislation passed that negatively impacts hospitals.

Legislation has also generally benefited hospitals in less direct ways. In our last post we discussed the Affordable Care Act and the creation of CMMI (the Center for Medicare and Medicaid Innovation). One of their pet projects has been Accountable Care Organizations, provider organizations that are held “accountable” for the cost and quality of care delivered to a population of patients. The vast majority of organizations that have participated in these ACO pilots have been hospital based. This is easy to understand; the models consider total cost of health care delivered, and hospitals are a big part of that cost. As vertically integrated organizations hospitals can also direct referrals and influence other physician behaviors that impact cost. Perhaps unwittingly, pilots like the ACOs actually promoted consolidation.

So what are we to do? We clearly need hospitals. But hospitals evolved in an era where health care was hospital based. Today, almost everything we do is designed to limit the need for hospital based services. A big step in the right direction would be to expose the ridiculous price gouging that some hospitals are engaged in. During the Trump administration, legislation was passed that required public reporting of prices. But the penalties for non-compliance weren’t stiff enough. In addition, hospitals engaged in all types of shenanigans to obscure what the prices actually were for (you would think there was only one way to spell appendectomy but you would be wrong). This transparency would allow employers to shop based on price. It might shame some of the more egregious offenders into getting more in line with their competition.

 Another big step would be to adopt site neutral payments. This means that hospitals don’t get paid more for the same services just because they are hospitals. Although this historically has really only referred to Medicare, it needs to be applied also to commercial insurance. Fair payment for care provided should guide pricing. And the payment needs to be indexed to the service provided, not to the charge master.

Hospitals which are not for profit should really benefit communities, and how they provide these benefits should be precisely defined. This is especially true when it comes to charity care. Maybe devoting something like 10% of your operating expenses to charity care would be fair. I’ll even take 5%.

Finally the DOJ needs to be much more aggressive in assessing the monopolistic impact of hospital mergers.

It is unfair to lump all hospitals in the same bucket. Rural Hospitals and Disproportionate Share Hospitals (those that care for a high percentage of indigent patients) are constantly in financial peril. Covid reinforced how much we need hospitals, and life has been made much more complicated since the pandemic due to hospital labor shortages. But we could do with fewer hospital administrators. Hospitals need a renewed focus on their primary mission of providing quality health care.  

Next we discuss everyone’s favorite scapegoat , health insurance companies.