The diagnosis is grim. Your doctor tells you that you have a life-threatening illness, and refers you to the hospital for care. The last thing you need to hear is that the hospital won’t accept your “limited benefit” insurance and that you must come up with tens of thousands of dollars in a certified check before your first appointment can be scheduled.
After your first appointment, you are told that you must come up with even more cash if you need to be admitted.
And worse…your follow up appointments are “blocked”. You receive no care until you go to the business office and make a payment. How much worse still, when you are in the examination room and your doctor walks in with a payment representative from the hospital’s business office whose response to financial difficulty is to recommend that you be moved to another facility.
If you are one of the million Americans with limited benefit insurance it could happen to you. Less expensive than traditional insurance policies, this individual policy is popular among those who do not have insurance through an employer. You’re not poor enough to be a charity patient - you’re just underinsured.
The bills that pile up until you qualify for better insurance they are still your responsibility. Your new insurance carrier will pay a fraction of what you were being billed under your old plan because they negotiated deep discounts or flat rate payments for people covered under their plans.
INSURANCE COMPANY OR MIDDLEMAN NEGOTIATOR?
In fact, most people don’t know that, for large employers, the health insurance companies don’t really provide “insurance” - they get paid for negotiating with hospitals, physicians, and other providers, and administering claims, while the actual cost of the claims is passed through to the employers who “self insure” as a cost of doing business. The enormous discounts that the employers get through the combined bargaining power of the insurance companies and the networks of providers willing to accept their terms more than cover the expense to the employer (and employees, through shared premiums and copay/deductibles) of having a middleman between them and the providers. It’s like booking a hotel through Hotels.com - you can call the hotel and pay full price, or you can see if Hotels.com was able to negotiate a much lower price and pass along most of the savings to you. Hotels.com keeps a middleman’s compensation that could have been passed on to you or could have been kept by the hotel, if only the hotel was willing to offer you a competitive price in the first place.
BACKLASH
Horror stories like this generally provoke political and regulatory backlash. In New Jersey, hospitals are prohibited from denying care based on ability to pay, even for non-emergency care, while the state has cut back on providing funding for charity care due to its own budget crunch. This is obviously a case of the pendulum swinging a bit far in the opposite direction, as unfunded mandates create their own problems, and many NJ hospitals are going bankrupt. Neither extreme is acceptable.
THE SYSTEM IS BROKEN
The current system of pricing at hospitals is broken, but the big players (Medicare, Medicaid, and the large health insurance companies) don’t care because they can mandate or negotiate preferential treatment. Whoever is outside the “club” is forced to bargain from a position of weakness when they receive a bill that includes charges of $20 for a pair of disposable gloves or some other item that actually costs a few cents. If a physician attempted to include such charges on a patient’s bill there would be accusations of gouging or possible criminal charges of fraud, but when a hospital does it, they rationalize it through a cost allocation formula that makes sense only to a hospital administrator.
While this pricing has benefited the budgets for these public programs, without true regard to the overhead and operating costs of the hospital, everyone else is faced with either paying distorted pricing like the $20 gloves cited earlier, or being treated as a charity case. The problem is that the big players don’t want to get into micromanagement over costs, as long as they can cut a sweetheart deal for themselves without regard for the overall cost picture.
Imagine for a moment that the baking and sale of bread was highly regulated, to the point where you could not buy bread at a grocery store and there were only 2 or 3 bakeries in each county. In this scenario, imagine that government workers and people who worked for big companies that negotiated special prices could show their ID cards and get bread for 50 cents per loaf but everyone else had to pay whatever the bakery charged. Without competitive alternatives, you could see a nightmare scenario where the bakeries might charge the public $10 for a loaf of bread. Nobody is going to die because they can’t afford bread, and at some point people will turn to alternative foods, but someone with a life-threatening condition isn’t is the position of someone who can choose to eat rice instead of bread.
Back to reality - bakeries ARE regulated, licensed by state health authorities, and subject to inspection. Any bakery that tries to put anything unwholesome in their bread will find that they will be fined, shut down, and the responsible people may wind up in jail. Competition between bakeries, delis, groceries, and other bread providers keeps the cost of bread low while providing a variety of bread choices, including fancy breads from specialty bakers.
So what alternative policies can fix the current situation?
- GOVERNMENT FIAT AND MICROMANAGEMENT
There is always a chance of state or Federal legislation that would limit the prices that hospitals could charge the general public, perhaps based on some proportion of the Medicare rates. This would leave nobody to pass along costs to, so this would need to be part of a comprehensive scheme that would need to allocate costs fairly across all players, including government, employer/insurance plans, charity care, and those with private or no insurance. The odds of this happening any time in the immediate future are slim, as the political pressures from those benefiting from the current system will be great, and I’ve yet to see a government-run healthcare system that provides a model that America would be likely to embrace.
- GOVERNMENT-SPONSORED HEALTH-INSURANCE PLANS
One popular notion that some states have explored is to open the state health insurance plans to the public, allowing them to benefit from rates that the government plans have negotiated for state workers. This extends oligopsony discount pricing to those willing to pay for insurance but who otherwise faced limited choices. The problem with this is that there are unaddressed actuarial issues when opening up what is essentially an employer group to the general public, and if a true oligopsony was created this way, the actual costs of running a hospital would have to be addressed, as discussed above. Nevertheless, we are already seeing some states experiment with this.
- FREE-MARKET ALTERNATIVES
A free-market approach that could actually lower costs Break the oligopoly system by allowing physicians to operate more competitive free-standing outpatient and inpatient facilities. The Stark rules were created with the intent of preventing price gouging by having doctors refer services to a competitive marketplace, but if that is an overpriced oligopoly marketplace, why shouldn’t a physician be allowed to offer the same or better service at a competitive price? For example, if patients could be given the choice of having blood work done at the doctor’s office or at a free-standing lab, and both the doctor and the lab were required to clearly communicate the cost, those doctors who matched or beat the lab’s prices would retain all the blood work and those who charged a reasonable premium would retain much of the business due to the convenience they offer. The public would be better served, and fair and open competition keeps everyone honest. There are still issues regarding emergency care, covered below.
- LOOKING AT EMERGENCY CARE LIKE POLICE AND FIRE PROTECTION
Admittedly, emergency open-heart surgery is not something that is likely to be done in the back room of a free-standing clinic, but there are plenty of acute but non-emergent diagnostic and treatment services that can be delivered outside a hospital setting. Ultimately, the public will need to support true emergency services just like it supports police and fire, and other essential emergency services, and all health plans should be required to contribute a fair share toward funding those services along with taxpayers. Above and beyond those emergency services, hospitals need to show that centralization and economies of scale actually result in efficiencies.
- TOO MANY MED SCHOOL GRADUATES, TOO FEW INTERNSHIPS
As one of our readers recently pointed out, part of the supply problem lies in the imbalance between the size of graduating medical school classes and the number of available internships. While interns provide labor at cut-rate cost to hospitals, intern programs represent an investment in future health care and the cost of running these programs needs to be figured into the overall cost picture and adequately funded.
Delivering quality care in appropriate settings in a competitive marketplace, with public support and fair cost allocation of essential services will serve the public interest better than the current system of oligopoly providers and oligopsony of group buyers with the rest of the public left to fend for themselves. In any other arena, the status quo would be viewed as an illegal conspiracy.
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