Tuesday, November 19, 2019

Free market health care

and transparent pricing are  possible. 

Russ Roberts has a great econtalk podcast, interviewing  Keith Smith of the Surgery Center of Oklahoma Click on that link, roll over the areas of your body that hurt, and find out exactly how much it will cost to fix them.

No insurance. Pay a preset transparent surprisingly low price. Get surgery. A great piece of news is that this is actually possible -- you won't go to jail (yet) for just running a hospital like any other business.

Russ and Keith had one particularly good interchange on why regular hospital pricing is so screwed up. I have made the point several times that our government wants to cross-subsidize indigent care, medicare and medicaid, and the insanity of hospital and insurance billing is mostly a reaction to that. I went on to speculate that the government is also restricting competition to uphold these cross subsidies. The existence of the surgery center of Oklahoma says to some extent I am wrong about hospitals, though it raises the question why the model is so scarce.

Russ: A friend of mine recently had back surgery at an academic institution, a nonprofit regular hospital, a very good one with a good reputation. The surgery... was $101,673.77. Seriously. Now, my listeners know that macroeconomists have a sense of humor. We know they do because they use decimal points. But it turns out hospital finance offices do too. ...That is not--repeat--not--what the hospital collected from the insurance company. But that list price, that weird, enormous list price of $100,000--a little over 100,000--was on the form. 
The surgery facility... got $13,000 from the insurer. You charge for that same surgery, I looked it up, a little under [$10,000]. So, they're 30% more than you for what they collect and they're 10 times what you charge on the list price. 
My first question is why did they write down that goofy number of $100,000 on the bill, even though the insurance company only pays [$13,000]? ... 
Keith Smith: Well, I'll back up in time. I was at a meeting where there was some hospital people and they were very angry with me because we put our prices online.... and this angry hospital administrator lost his cool....he asked me what percentage of my revenue at the Surgery Center of Oklahoma was uncompensated care.... that question haunted me, because that is a very bright, very articulate person. And he does not misspeak. I thought very carefully about what he actually said. What percentage of my revenue is uncompensated care?  
[JC, in case you're skimming read the literal words. Normally, uncompensated care might be a big fraction of your costs, but sort of by definition zero percent of your revenue]
...So, I did some checking and indeed hospitals are paid to the extent that they claim that they were not paid. And this is a kickback... Hospitals are paid to the extent that they claim that they were not paid. 
Russ Roberts: So, explain. 
Keith Smith: So, a $100,000 bill, the hospital collects $13,000. They claim that they lost $87,000. 
This $87,000 loss maintains the fiction of their not-for-profit status, but it also provides the basis for a kickback the federal government sends to this hospital in the form of what's called Disproportionate Share Hospital payments. 
So, when you hear uncompensated care, that is the $87,000 that your friend saw written off on the difference between hospital insurance and what insurance paid.
So, the fact is, the hospital made money on that case. But they claimed that they lost $87,000. 
And then that fictional loss provides the basis for a kickback from the federal government, called--it's uncompensated care or DSH, Disproportionate Share Hospital payments. So, as I thought about this, I began to realize that there's a lot of people in on this scam. Including the insurance companies. I mean, why would an insurance company agree to play along with this hospital? Well, the insurance company actually wants an inflated charge because then, for employers they work with, they can show that the savings that dealing with that particular insurance company generates is very, very large.... 
Now, what the insurers actually do is ask the hospital administrators, 'Can you do a brother a favor and actually charge $200,000 for that, so that our percentage savings actually looks larger?'
It goes on like this. A definite must-listen.

In related news, "the Trump Administration Releases Transparency Rule in Hospital Pricing" reported by Stephanie Armour in the Wall Street Journal. The subhead is "legal challenges are likely!"
The final rule will compel hospitals in 2021 to publicize the rates they negotiate with individual insurers for all services, including drugs, supplies, facility fees and care by doctors who work for the facility. 
The administration proposed extending the disclosure requirement to the $670 billion health-insurance industry. Insurance companies and group health plans that cover employees would have to disclose negotiated rates, as well as previously paid rates for out-of-network treatment, in file formats that are computer-searchable, officials said.
The requirements are more far-reaching than many industry leaders had expected and could upend commercial health-care markets, which are rife with complex systems of hidden charges and secret discounts. The price-disclosure initiative has become a cornerstone of the president’s 2020 re-election health strategy, despite threats of legal action from the industry. 
Hospitals and insurers typically treat specific prices for medical services as closely held secrets, with contracts between the insurers and hospital systems generally bound by confidentiality agreements. 
All well and good, and a testament to lots of the good  regulatory reform work going on under the radar screen in Washington. In some sense the headline chaos is quite useful. And my personal kudos to the market oriented health economists working on this effort.

But... You have to ask, just why do we need another layer of price-transparency regulations? Why are hospitals choosing such devious schemes, while grocery stores don't? Or, a better analogy, tax lawyers, contractors, car repair, pet repair, lasik surgeons, or anyone else performing complex personal services does not do this sort of thing? Are hospital administrators uniquely devious? Of course not. They are good hard-working men and women trying to do the best they can in a screwed-up regulatory and legal system.

So as long as hospitals and insurers want to play these games, as long as the strong incentives are there to play these games, so long as many arms of the government want to play these games to support medicare, medicaid and indigent care that governments don't want to pay for, I'm less than sanguine about their inability to get around a set of transparency rules. It seems about like bank risk regulation, a game of cat and mouse. It would seem more effective to reduce the government-provided incentive to screw things up in the first place. I guess that if transparency is politically hard and headed to legal challenges, reforming a system that so many people have so much vested interest in -- intellectual as well as financial -- might be even harder.

But, as long as the Surgery Center of Oklahoma is not driven out of business -- which its many competitors would surely like -- maybe there is hope. Free market, cash and carry, competitively priced health care might just upend the ossified current system.

Imagine if there were two Surgery Centers of Oklahoma, competing on price and quality...


  1. "Why are hospitals choosing such devious schemes, while don't?"

    Obvious answer, isn't it? All those other services you lsited are direct-paid by the consumer, who shops for the best price. Health care, on the other hand, generally costs the consumer exactly the same regardless of level of service: the co-pay. So the consumer doesn't care.

    And then, as you described, industry revenue is effected by goverment influence/subsidies in the background (and the consumer still doesn't care).

    The result? Reindeer games.

  2. In the comments, a hospital administrator explained why the hospital they worked at had much higher costs. It was because they had to use those costs to subsidize other parts of the hospital that were financial sinkholes because of Medicare and Medicaid or mandates by the government

  3. "You have to ask . . . [w]hy are hospitals choosing such devious schemes, while . . . tax lawyers . . . [do] not do this sort of thing?"

    Actually they do! There are three levels of pricing used by most large tax firms: (1) the "standard" hourly rate card; (2) the "discounted" hourly rate card; and finally (3) the actual pricing for a given project, which is often not based on rates at all.

    There are reasons for this. Not all clients and situations are equally price sensitive. Partners in the same firm often have ENORMOUSLY different market values, but the internal politics (and marketing strategy!) of many firms makes this awkward to formally acknowledge on the rate card. Etc.

    Of course this in no way undercuts your argument: tax attorneys serve a very different sort of market (i.e., experienced repeat players with expertise in the field) than hospitals. But being a tax attorney, I just couldn't help myself from picking on the example a bit ;)

  4. Thank you for the interesting article. This looks like sensible policy that helps the marketplace function in a better way:

    "Insurance companies and group health plans that cover employees would have to disclose negotiated rates, as well as previously paid rates for out-of-network treatment, in file formats that are computer-searchable, officials said."

    Perhaps I misunderstood the article, but it gave me the impression that it was a bad thing to require pricing information?

  5. The gist I get here, is that there are genuinely talented health care policy guys working behind the scenes in the Trump Administration with the right intentions, they are moving in the right direction, but they will probably have very little impact in changing the overall momentum of things. And the Surgery Center of Oklahoma is a noble and inspiring example of functioning beneficial market health care.

    I suspect Cochrane has good policy ideas and maybe good entrepreneurship ideas, but he definitely isn't talking about them. Has he lost interest in talking about good policy ideas? Is that futile given the political landscape?

    If I had a health care policy background and I had confidence in policy moves, that would be worth advocating/championing, doing lots of op-eds and public debates. Why does Cochrane not show interest in this?

  6. In April of this year I had a total hip replacement. The bill was $47,500 to the insurance provider. They wrangled and they settled at 23K. I asked the physician what I would pay if I was uninsured. He said between five and ten thousand and he would arrange a payment plan. One 47 billion dollar industry has figured this out.There are fourteen veterinary facilities within a 10 mile radius of our small town in North Georgia. They take payment directly from pet owners. Service prices are prominently displayed and our provider offers discounts to military personnel. BTW. Our dog Dudley loves his vet and actually gets excited when we go there.

  7. He didn't say price transparency was a bad thing, he said he suspected that the players involved would find a way to get around the new rules, and it would be better to remove the incentives (government kickbacks) that encourage the pricing inflation in the first place...

  8. As long as a hospital does not provide emergency room services, the hospital is not required to accept all comers--the hospital can reject patients it does not want to care for. If that is the case for a given hospital, the hospital cannot expect to receive payments for uncompensated care except to the extent that it waives fees for indigent or charitable patient care.

    A hospital's posted fee schedule, likened to a 'price list' for manufacturers published by a distributor of widgets, is merely an invitation to tender. An insurer will open with an offer of a competing reimbursement schedule. The hospital will counter with a schedule of discounts of its fee schedule and the insurer will counter the counter, etc., until a meeting of the minds occurs leading to an agreement on the price and terms. This is a straightforward business negotiation on an arms length basis. The discounts apply only to care provided to the insurer's policy holders.

    In the case of John Q. Public who has no insurance but requires hospitalization, his best bet is to take his chances in the emergency room where he cannot be turned away, e.g., in the publicly-owned hospital of a major metropolitan center, or a teaching hospital.

    "Obama-care" did away with inexpensive catastrophic care insurance policies that provided a means to access discounted fees for health care. The connivance of government actors with private industry interests against the public interest of one sector of the populace for the interest of another sector is amply illustrated in this legislation.

    As to Medicare, that insurance scheme is replete with carve-outs that provide private hospital and medical service providers with incentives to set high posted fee schedules. For example, Medicare B is a insurance scheme with deductibles and co-payment provisions. In order to access the benefits of Medicare B, the patient must first ascertain whether or the service provider accepts "assignment". If the provider does not, then Medicare does not cover the service. Medicare B covers out-patient surgical procedures; Medicare A does not. Out-patient procedures cover a surprisingly large proportion of insured patient healthcare services today, including Medicare patients. A high posted fee level schedule maximizes medical provider revenue in the face of low Medicare compensation rates.

    Despite the political hay being made by certain politicians, Medicare is not a single-payer health insurance program for medically-necessary health services (cf., "Medicare for All"). American politics is a conjurer's art form in which the more things change the more they stay the same--the new old thing.

    Dr Cochrane is to be commended for raising this issue and testing the bounds society is forced to work within.

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  10. Dr. Miller is incorrect about the 'kickbacks' for over-billing. The federal Disproportionate Share Program allocates about $20 billion a year based roughly on how many indigent patients a hospital accepts. A wealthy suburban hospital that overbills back surgery by $87,000 gets no benefit from the DSP program.

    However Dr Miller is right about everything else. This was a great podcast, and Dr Miller also has an hour with Accad and Koka on their podcast series.

    The Oklahoma Surgery Center is not that large, however -- less than 2,000 surgeries a year, I believe. Medical tourism has not grown that fast in the USA, even as price gouging gets worse and worse. Why is that?

    Well, not all surgeries are shoppable. I have had three crises myself in the last 20 years and all them had to be resolved in the Emergency Room or at least the next day.

    Also, some people do not want to travel for health care. They bond with their doctor and will go wherever he or she recommends.

    Plus, for the millions with Medicare and a supplement, surgeries are virtually free in the current system -- why shop around?

    If medical care was a commodity like steel, or semi-skilled labor like call centers, it would have been outsourced long ago. Dr Rev Chetty who does heart surgery for $2000 in India would be running our system.

    Hospitals will be very hard to dislodge. In many cities they are the largest high-wage employers, and politicians will by and large let them charge what they want and drive patients into bankruptcy.


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