Wednesday, July 17, 2013

A Ray of Hope? Hospitals Post Prices

I was intrigued by news stories of an Oklahoma hospital posting prices for surgery -- prices far below those offered by its competitors. Here is the article and the surprisingly low price list.  Several competitors felt the pressure to slash and post prices.

A fascinating tidbit: "Surgery Center of Oklahoma does accept private insurance, but the center does not accept Medicaid or Medicare. Dr. Smith said federal Medicare regulation would not allow for their online price menu. They have avoided government regulation and control in that area by choosing not to accept Medicaid or Medicare payments."  Well, so much for the idea that regulations encourage competition and lower prices.

This is a ray of hope -- that the sort of competitive free market health care I envisioned in "After the ACA" can emerge as people abandon the complete dysfunctionality of the highly regulated system.

I had seen the emergence of "concierge medicine," and cash and carry doctors, who step off the highly regulated insurance and government treadmill. But if you get really sick, you need a hospital. And traveling abroad isn't always an option. So the emergence of US cash and carry hospitals is interesting and encouraging.

This innovation clearly undermines the regulated system. A healthy young person knowing there are doctors who post reasonable prices and take cash, and now similarly reasonable cash and carry surgery, might be well advised to pay the Obamacare tax and skip out of the whole system. A bit of savings or a catastrophe only policy is enough. 

But before you cheer that Obamacare will die of its own weight, look hard at the other side. The government needs everyone in the system, especially the relatively healthy and solvent customers of this hospital.  It also needs hospitals and doctors to take medicare patients. The emergence of a two-track system is a financial and political disaster. So, how long can it last before the government bans it? Other countries have banned private practice to support their government health systems.  Ours will likely go down fighting, and this is the obvious move. In addition, the hospitals that don't want to compete have strong political power to shut this down, and will make the same cherry-picking complaints that airlines and phone companies used to keep their protections in place. It will not survive easily. 

Readers: I'm back from a short vacation (national gliding contest), sorry for the silence.


  1. What a novel idea: price as a signal in health-care. Albeit, the Oklahoma hospital had to side step government failure i.e. “Dr. Smith said federal Medicare regulation would not allow for their online price menu.”. Hence the some-people-system otherwise known as politicos through the mechanism of government doesn’t want you to know price as that would interfere with their prime directive: other people spending other peoples’ money on other people. One can only guess that non-price Medicare regulations is an NSA issue.

  2. Remember that there was a time when prices for both medical and legal services were forbidden to be given to the public, and individuals could not advertise. Luckily the market was allowed to work at least a little bit.

  3. For some reason this surgery center has somehow emerged into the financial blogosphere recently. In the medical world it's old news. And the title should be ""Hospital" - singular, not plural.

    There is so much wrong with the above observations and speculations it's hard to know where to begin. For starters, I'm unaware of any Medicare regulation that prohibits advertising your fees. These guys aren't accepting Medicare because the fees suck. Period. It has nothing to do with advertising. I hear all sorts of noble-sounding rationales (often wrapped in libertarian language) for not taking Medicare but in reality it always comes down to money.

    The fees aren't that great. I can't address most of the procedures but I can for my own specialty, which is pain management. Medicare pays the doctor about $75 for a lumbar epidural steroid injection done in a facility and the facility gets about $350 (it was about $105 last year but they "bundled" the fluoroscopy, which translated from bureaucratese means "we just cut your fee 25%"). This facility in OK charges $900, or more than twice Medicare rates. I can't think of any private insurers that pay anywhere close to 2X Medicare. As a solo practitioner with no market leverage I'd be thrilled to get 125% of Medicare. I can do the same procedure in my office for half what these guys charge. In fact, I'd be ecstatic to get half.

    Guess how many people, when confronted with a CO-PAY of $150 for a lumbar epidural steroid injection plead poverty? Plenty. After all, it's *almost* as much as a month of cable with a decent assortment of premium channels. Who, then, can afford those prices out-of-pocket? How many people can afford a bunionectomy for $4,000? A cervical fusion for $16,500?

    $1,700 for bilateral M&T's? That takes about 10 minutes. When I was doing anesthesia we loved M&T's. You could just bang them out all morning long and make a small fortune. Look at the price for tonsils. There are private insurance companies who pay the surgeon about $500 for a T&A. Figure another $500 for the anesthesia and $1,000 for the OR time. Is their price of more than $4,000 a deal?

    Did you read the price disclaimer? I suggest you do, because it pretty much says "Batteries not included". The advertised price of that cervical fusion doesn't include the cost of the hardware, which is considerable. They claim they don't mark up the hardware and will provide copies of the invoices but has it occurred to anyone that perhaps they have their own company that buys the hardware from the manufacturer, marks it up, and sells it to the hospital? Is this something I just made up or is it something I've seen done?

    Do a search for "Medicare global fee" and then note their disclaimer that treatment of anything other than simple postop complications is not included in the price. If your knee gets infected, the I&D is extra. Your preop tests such as blood work, xrays, etc are not included.

    In going through their procedure offerings I see they have cherry-picked the procedures and specialties that are high-yield. This is where the whole thesis runs off the track (although I note that they claim this is just a partial list). There are specialties that are mostly Medicare so no full-service hospital will be able to function without Medicare. For example, cardiology is largely Medicare. Note that they don't offer a price for cataract surgery. That's because cataract surgery is primarily done in the older population, i.e., Medicare. Cataracts are low-dollar/high volume endeavors. When we set up our specialty hospital we did the same thing. The equipment costs too much and the return is too low. We do, however, accept Medicare.

    I suspect that if people called around to local facilities and asked for a cash price they could get deals as good or better.

  4. Part 2 (split because of size restrictions)

    It's well known that many countries with single-payer socialized systems have a parallel private system. You can count on it in the US because the privileged class (which includes the congress-critters who write the health care laws) will not want to be lumped in with the hoi polloi; they will want to be seen right away and without any government encumbrances as to what can or can't be done, or how fast. If they do prohibit a private system I can guarantee that wealthy Americans will be headed to somewhere in the Caribbean to be treated by American doctors.

    Yes, primary care doctors have been able to do concierge practices but few other specialties have been able to do so. That's due to a shortage of primary care doctors and the relatively low cost of their services. The vast majority of other specialties are impeded from implementing this in some way. How many dialysis centers are cash-only? The elderly are terrified of concierge medicine. They can't afford it and it's getting harder and harder to find a family doctor who accepts Medicare. I have trouble finding family doctors for my elderly patients.

    I agree with Dr. Smith about the profit motive. About 10 years ago my partners and I started up a physician-owned hospital. We don't answer to anyone except ourselves. We don't scrimp on anything. This is not how we make our living. Anything it throws off is gravy for us. Patients absolutely love our facility and our ratings in terms of quality of care are outstanding.

    Sorry to burst your bubble but this is not the first robin of the Medical Economic Spring. There's more to say but I have to go let my blood pressure ease down.

  5. "Medicare regulation would not allow for their online price menu"

    Consider that line for just a moment. In effect, you have Medicare killing the single most effective way to control costs (namely, letting people know how much a procedure is going to set them back). It boggles the mind.

    1. Please don't be so boggle-prone, and read your fellow commenters, specifically JB McMunn, evidently himself a physician, who says

      There is so much wrong with the [story referred to in Prof. Cochrane's post] it's hard to know where to begin. For starters, I'm unaware of any Medicare regulation that prohibits advertising your fees. These guys aren't accepting Medicare because the fees suck. Period. It has nothing to do with advertising. I hear all sorts of noble-sounding rationales (often wrapped in libertarian language) for not taking Medicare but in reality it always comes down to money.

      Please read Dr McMunn's entire comment after which go ahead and vent PRN.

  6. How did you place in the National Gliding Contest?

    1. Third. Pretty good, but I was hoping for better.

  7. I'd like to elaborate on the pricing mechanism for medical care because most people have no idea how convoluted it is. I have already mentioned that the prices they quote are not bargains. The main reason for this is the private insurers. No, folks, you can't blame Uncle Sam for everything in this case.

    Let's walk through some real life examples. First and foremost you need to know that I can have only one fee schedule and I have to charge everyone the same. The only time this can change is if there is a contracted (or legislated in the case of Medicare/caid) discount. Suppose I have various contracts and the best one pays 180% of Medicare rates. If my fee schedule is set at 150% of Medicare I'm leaving money on the table, so my fees have to be high enough to capture the HIGHEST payer. Therefore, as long as I accept private insurance I simply cannot offer a rock-bottom discount price. PRICES ARE SET TO THE HIGHEST COMMON DENOMINATOR. This is why a hospital might get $2,000 for an appendectomy on an insured person and charge $20,000 to someone without insurance. Both are charged $20,000 but the insured person has a contractual write-off of $18,000 (I am going by the charges for my wife's appendectomy years ago).

    Let's try another scenario. You have private insurance and come to see me. My set rate is $150 but your contracted fee (per the contract I have with the insurance company)for the visit is $100, and per your insurance plan you owe $20 and the carrier pays the other 80%. Since you're my golf buddy I waive your co-pay. If the insurance company finds out about this they will say "Aha! Your fee wasn't really $100. It was $80. We will therefore only pay 80% of $80 and we want a refund of $16."

    I can get around this by having you fill out a financial disclosure form so I can give you a hardship waiver, but I have to do this on a case-by-case basis. I can't have a *policy* of discounting for certain groups such as the indigent, friends, relatives, colleagues, etc. In the Bizarro World of medical billing this would be fraud.

    That brings us to example #3. I am out of network for your plan so there is no contracted rate. I charge $150. Your out of network coverage is 70/30. I get 70% from the insurer, or $105. Your co-pay is $45 and you're unhappy. So I say, "I already made more than I'd get in-network just from the insurance. I'll just charge you $20 as if you were in-network". Once again the insurance company will cry foul and claim that my real fee was less than $150. The interference in pricing here is not from the government but from the private sector. I have no contract with the insurer, yet they want to interfere in a transaction between you and I.

    The insurance carriers are so fiercely committed to this battle that they are now requiring patients who see out of network doctors to fill out forms promising to report the doctors if they give the patient a discount.

    Guess what happens if I write to the insurance company and complain that the patient has not paid their co-pay , which I consider a violation of their insurance policy?

    There is no public price discovery in health care fees due to both private and public sector factors. I am prohibited from sharing my fee information with other doctors. One source of the prohibition is contractual; the insurance contracts have gag clauses. The other is regulatory. If a bunch of us got together to compare fees the FTC would land on us with both feet.

    However, health insurers are exempted from anti-trust and they maintain a database of contracted fees that can be shared among the various companies. They literally know what my contracted rates are with other carriers.

    It's their ball, their field, and their rules.

    1. Exactly. But there is a way out. Say "I don't take insurance, I don't take medicare, I take cash. Here is a reasonable price. By the way, this price does not include the cost of a massive insurance billing and haggling department." I'm curious that few hospitals do it, at least on shore. Medical tourism hospitals in Costa Rica and India do it just fine.

    2. How would a heart surgeon opt out of insurance? The model doesn't work for high-price services. You could do the surgery for free and it would still be out of reach for most people.

      If co-pays and deductibles keep rising I might be able to make it work since the higher those are the less "effective" coverage people have.

      Medical tourism hospitals do it but what is their cost of doing business? Taxes, rent, salaries, employee benefits, insurance, etc. I didn't have time to do a lot of research but look at this: The American nurse was making $44/hr while a Costa Rican nurse makes $500/month.

      How about India? Median pay is $22,000/year.

      Need a Professor of Economics? They are very inexpensive in India.

  8. Professor Cochrane, your asset pricing book is quite good, that is all I have to say about your ideas on medical care reform. The bright side is that reality is conservative so the likelihood of completely stupid revolutionary ideas to trickle down from WSJ op-eds to the real world is negligible.


  9. Hey,The people who don't have health or life insurance get sick and die in the hospital. So the outstanding bills never get paid and get calculated and redistributed to all of the other policy holders so health insurance providers can make up for the loss of revenue. For example, if an insurance company provides insurance to a hundred people and 1 of them dies with 99 dollars outstanding, the other 99 have to take on 1 extra dollar of premium to make up for it. Instead of raising the rates for everybody, they just charge it to new policyholders without them knowing. I used to work for aetna doing underwriting so yeah.Thank you!!Rebecca Lammersen....


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