The Hospital Business – A Consumer’s Perspective

Emergency room visits are an incredibly inelastic good, where elasticity is the degree to which the desire for something changes as its price rises. It has an elasticity of -0.04, where an elasticity of 0 means that the demand does not change with an increase in price and an elasticity of -0.04 means that demand decreases by about .04 units per one unit of price increase. Let’s say that a hospital suddenly doubles all of its emergency room bills to keep from closing. The price increased by 100%, but the demand only decreased by 4%, so they just made a lot more money. Hospitals in the United States are either private businesses, or they are non-profits which operate like private businesses. Either way, their goal is to make money, and money is revenue minus cost.

Recently the government required hospitals to publish their chargemasters, which are fake wildly inflated prices that are used as a starting point for price negotiations. In my local hospital’s chargemaster, I saw a price per Wellbutrin tablet that is just under the standard Drugs.com price per Wellbutrin tablet, but multiplied by 100. There are over 33,000 line items in that chargemaster (not including over 10,000 CPT codes and many HCPCS codes which are not listed), and nobody has time to negotiate over every single line item, so my guess is that with the chargemaster, my hospital takes the unit cost, multiplies it by 100, throw that x100 price at the health insurance companies as a “high ball” number, and then the health insurance companies throw back a “low ball” multiplier (maybe times two), and then they go back and forth until they agree to a multiplier that is somewhere in between the high multiplier and the low multiplier (maybe times 5). This all happens behind closed doors of course, but my guess is that they have some sort of “cost multiplier” and rather than arguing over each item, they basically argue over the multiplier (like I will pay 5-10% of your charge master prices). Bigger health insurance companies have more bargaining power than small ones, so they can negotiate smaller “multipliers”. In practice the prices on my local hospital’s end aren’t fixed – they can increase the price for a given CPT code in their computer, run it, and I believe it will go through on the health insurance company’s end as long as it’s within a range. Anyway, the multiplier is necessary to make sure that they make enough profit to keep the place open, and it all has to happen behind closed doors so they they can profit off of the fact that people don’t know how much they’re being ripped off. Keeping the discounts secret also stops smaller buyers of healthcare (like smaller health insurance companies and people without insurance) from asking hospitals to match the rates that they charge bigger buyers of healthcare (like larger health insurance companies and Medicare). Medicare is an outlier because Medicare forces hospitals to take their patients at a financial loss, resulting in hospitals increasing their rates on non-Medicare patients to compensate for that loss.

Every business in the healthcare industry rips off the end consumer because the end consumer is the one with the least bargaining power. What, are you going to bargain during a heart attack? Of course not – you aren’t going to do any bargaining in advance – you have no leverage. The only bargaining that you can do is after the fact, and that’s only because hospitals lose a lot of money handing bills over to debt collectors and dealing with things like the administrative overhead of long term low interest loans and taking people who don’t pay their medical bills to court, so you the consumer are able to bargain because you have these prospective monetary losses as your leverage. Most consumers don’t of course, and they don’t get to negotiate prices in advance, so as the party with no information, no leverage, and little bargaining power, they get the worst deal financially.

Simply put, the hospital prices don’t mean anything, other than maybe some sort of individual cost unit estimate multiplied by some sort of secret multiplicative factor. Frankly, I don’t believe that they should even be allowed to do this – I believe that they should be allowed to set a multiplicative factor that is high enough for them to remain open with maybe a little profit and that the rate for each item multiplied by this multiplicative factor should be the price. Not a negotiable rate or a price for a particular health insurance plan, but the price from which no negotiations may be made. For example, let’s say that the price per Wellbutrin tablet is $1 and the hospital’s price multiplier is times five. When the patient gets the bill, it will say “1 Wellbutrin tablet – $1*5 = $5”. If they have an unmet deductible greater than $5, then all of that $5 will go towards their deductible. Great, now the price for that tablet is $5, so the hospital gets $4 toward overhead expenses. If the hospital is in financial straights and needs to stay open, they can raise the multiplier. If they intentionally charge more money for things without changing the multiplier so that they can collect more money to go towards their overhead, that should be illegal, and if they add on unnecessary things to raise the bill, that’s a felony. Everyone gets to know the per unit price and everyone gets to know the current multiplier. All health insurance companies are forced to take every hospital at their rate – no negotiations. The purpose of insurance is to insure, not to wheel and deal. The doctors must be able to look up all the rates and multipliers just like everybody else because when they know the cost, they tend to leave out extra unnecessary costs like unnecessary tests. No switch to “value-based care” or “bundling” needs to happen if the doctors know how much money they’re charging their patients and take measures to avoid incurring unnecessary charges.

Of course, hospitals are money oriented businesses that seek to maximize revenue and minimize cost, so it is absolutely not in their interest to do this. Instead, they wheel and deal with everyone and in every way that they can in order to maximize their revenue minus their cost. This results in MASSIVE administrative burdens which alone make up 25% of the cost. In theory that burden could be mostly removed via automation if things were simple and unencumbered, and doctor’s pay could be cut by almost 50% before it would be in doctor’s financial interest to move to say Canada for financial reasons. That being said, as private businesses, there are all sorts of shady things that hospitals could do to manipulate costs and prices to bring in more revenue. They could come up with some horse shit which obfuscates prices even further (ex. “bundling”). They could leave out or add line items or codes. They could manipulate prices – the health insurance companies won’t stop them as long as they don’t do something big and obvious – little mistakes pass right through. Consumers don’t catch these things – most medical bills contain some sort of error and consumers don’t understand their bill because obtaining understanding requires looking up and asking people about each item, which involves a lot of time, effort, and frustration.

And what about the third parties like third party radiology and anesthesiology? Frankly I don’t even understand how they work – their pricing calculations are complicated and it’s harder for me to get prices out of them than it is to get prices out of my hospital and my health insurance company – in fact it’s impossible. What if they and the hospital that they work with start rejecting health insurance plans, “narrowing” coverage so that they are more likely to be billed out of network? Holy fuck. The prices for services like radiology and anesthesiology should be subject to the same price transparency requirements as hospitals, including making them reveal all their codes (CPT, HCPCS) and work units, the price per code/unit, and the math used to calculate their bills. If there’s a multiplier on them (let’s say the anesthesiologist bills $100 and that fee goes on to the end consumer as $120), then all that information should be public as well. Holy hell this is all very complicated and messy. The system is deeply fucked, but I believe that the more transparent and the less complicated the system, the better.

As for profits, here’s what I think. A hospital should be thankful to be open, and a doctor/surgeon should like what they do even if their salary isn’t a ridiculously high $471,100 (which is the median salary of a heart surgeon). If you only became a doctor for the money, you should never have pursued that vocation in the first place.

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