Behind the hospital bill
By Edward Martin
With winter over, affluent second-home owners were returning to the wynds, as they call the narrow streets on Bald Head Island, and to Maritime Market. After slicing deli meats and helping customers all day, Robert Caser changed roles. “Everybody pitches in to help clean up,” he says. The next day, he felt a stabbing pain in his left side. Maybe he had stretched awkwardly while sweeping and mopping the produce, baked goods and seafood aisles. Tests at an urgent-care center indicated a pulled muscle, and he was sent home with a prescription for ibuprofen and a bill for $120. The pain persisted. Two days later, he’d had enough. “I came home from work and told my wife, ‘Honey, I’m going to the hospital. Maybe they missed something.’”
Caser, 55, drove the 8 miles from his home in Boiling Spring Lakes to Dosher Memorial Hospital in Southport, where emergency-room doctors told him they could give him a shot for the pain but, if they did, he couldn’t drive. “I’d have to get a cab home and then get a cab back to pick up my car the next day, so I asked how much it would be if I stayed.” He repeated the question during each test they gave him. “I never got a straight answer.” He left the next morning with the diagnosis of a pulled muscle confirmed.
He learned how much a few days later. “I came home from work and my wife was freaking out. She said, ‘What are we going to do?’” The bill was for $13,939.13. Liability concerns, Dosher administrators say, obligated the hospital to give Caser multiple tests to rule out more serious causes of the pain. Besides, doctors and nurses typically don’t know the costs. Had he known, Caser says, he would have gone home and stayed there until he recovered.
It was a jolting introduction to the mysterious world of health-care pricing, where clarity in what hospitals charge has been as elusive as cures for many of the diseases that put people in them. Cost of care traditionally has been clouded by impenetrable complexities of health-care finance, vagaries of human illness and injury and hospital policies such as Dosher’s that, well-intended or not, spark outrage among patients. Now, though, a state law Gov. Pat McCrory signed in August and, separately, a provision of the Affordable Care Act that became effective 10 months ago is prodding transparency in hospital pricing. The ACA measure opened to the public a massive database on what the nation’s 3,000 hospitals charge for 100 frequently performed operations and procedures.
Some hospitals, including those of Charlotte-based Carolinas HealthCare System, Greensboro-based Cone Health and Wake Forest Medical Center in Winston-Salem, already have mechanisms that allow patients to determine their out-of-pocket costs. The state’s largest health insurer, Chapel Hill-based Blue Cross and Blue Shield of North Carolina Inc., provides its members similar information. The two new laws, however, promise to bare hospital charges to an extent unimaginable a generation ago, with far-reaching consequences.
Consumers and employers, indoctrinated that it’s gauche to question cost when health is at stake, will find price transparency the second half of an equation that could alter fundamental hospital decisions. The first, firmly entrenched, has been a flood of information the last five years or so on hospital quality, such as Hospital Compare data from the federal Centers for Medicare & Medicaid Services, a key source of Business North Carolina’s annual hospital ratings, and the state hospital association’s North Carolina Hospital Quality Center.
Together, they could for the first time bring rhyme and reason to bills Tar Heels receive for the 4.6 million days they spend in hospitals each year. “The combination of price data and quality data can empower them and alleviate concerns that low price is associated with low quality,” says David Ridley, director of health-sector management education at Duke University’s Fuqua School of Business. A consumer advocate agrees. “There’s more information about quality, especially in hospitals, than ever available before,” says Adam Searing, director of the Raleigh-based North Carolina Health Access Coalition. “There are multiple quality measures, easy to understand.”
Complying with the new measures could cost North Carolina’s $61 billion-a-year hospital industry millions. The state’s new Health Care Cost Reduction and Transparency Act, administrators say, requires hospitals to collect more data at a time they are under increasing pressure from all sides. For instance, a decision last year by the Republican-controlled General Assembly not to expand Medicaid, which could have added 500,000 people to the government insurance program for the poor, was a factor in Greenville-based Vidant Health’s decision to close Vidant Pungo Hospital in Belhaven. Many of those poor people will wind up in emergency rooms for routine care or, if admitted, eventually written off as bad debts. Large hospitals with advanced information-technology systems might be able to comply relatively easily, but small rural ones without such luxuries will struggle.
State government’s sluggishness also is hurting hospitals. Drexdal Pratt, director of the Division of Health Service Regulations, says rules are only now being drawn up for the seven-month-old state law. That leaves hospital administrators groping for how to comply with them. What’s known from its basic framework, announced by McCrory, is that it will require them to divulge average prices for their 100 most-common inpatient operations and procedures and 40 most-common outpatient surgical and imaging procedures, such as MRIs. The state will then post them for the public. “The dynamic in any business, even nonprofits like hospitals, is that one of the most difficult things to face is uncertainty,” says Hugh Tilson, executive vice president of the 130-member North Carolina Hospital Association. “Hospitals are basically moving from uncertainty to chaos.”
Juxtaposing quality and charges is revealing for the first time the weak connection between price and quality of care in Tar Heel hospitals. As that realization grows among consumers, including employers who pay the bulk of their workers’ insurance costs, it could prompt hospitals that have resisted disclosing charges to change their marketing, much the way ophthalmologists swung from touting the wonders of Lasik eye surgery to the discounts they gave for doing it after competitors flooded the field. In aggressively competitive environments such as the Triangle, Triad and Charlotte, the effect might be even more elemental. Knowing consumers and employers can shop around could cause some hospitals to lower their prices, particularly for elective procedures.
“We’ve debated that internally and with the legislature, because we simply don’t know the answer,” Tilson says. Federal antitrust laws preclude hospitals from colluding on prices, but will transparency accomplish for hospitals what has been long forbidden — a glimpse at competitors’ prices? In Boiling Spring Lakes, Robert Caser is less concerned with legalities than with the monthly installments he’s paying for an overnight hospital stay. His bill includes charges such as $301.16 for a chest X-ray, $182.13 for an electrocardiogram and nearly $300 for metabolic tests. “I told them I don’t have insurance, so they said, ‘We’ll give you a discount.’” The hospital cut his nearly $14,000 bill to $9,000, he says. “That was the discount.”
Two foothills hospitals, similar in architecture and barely 20 miles apart in towns with strikingly similar furniture-industry heritages, underscore the push for transparency. Medicare data, last updated in 2011, shows the average bill for a knee or hip replacement was about $46,000 at Caldwell Memorial Hospital in Lenoir. At Frye Regional Medical Center in Hickory, it was more than $105,000. That’s not uncommon across the state. Diagnosing and treating what doctors call disequilibrium — dizziness — would be billed at about $7,700 at MedWest-Haywood Hospital in Clyde but at more than $20,000 at Cape Fear Valley Medical Center in Fayetteville. Treatment of a transient ischemic attack — a mild stroke — averaged $9,465 at Vidant Beaufort Hospital in Washington but almost $21,000 at Southeastern Regional Medical Center in Lumberton.
The hidden truth behind such revelations, though, is that hospital bills are like sticker prices on a new car — hardly a realistic picture of the final price. “Data on hospital charges does not accurately reflect the amount our hospital receives for providing health care to any patient,” Frye spokeswoman Michelle Shuler says. It’s a curious statement but true, say Ridley and others, among them Joe Piemont, president and chief operating officer of Carolinas HealthCare System. With nearly 7,500 beds under its umbrella, it’s one of the nation’s largest hospital systems.
“The patient’s out-of-pocket cost is not based on provider gross charges,” he says. Insurance plans have vastly different co-payments, deductibles and other costs. And Medicare uses a formula that pays a flat rate for procedures after factoring in such considerations as a hospital’s location, how many poor patients it serves, its efficiency and, more recently, data such as how many of its patients die or have to be readmitted within a month. Using such a formula, Medicare, which pays more than 60% of hospital bills, paid Frye less than it did Caldwell Memorial — $17,694, compared with $19,007 — for an average joint replacement. At WakeMed Cary Hospital, diagnosing and treating disequilibrium was billed at more than $21,000, almost three times MedWest’s charge, but Medicare paid virtually equal amounts to both — about $3,600.
“If you look closely,” Tilson says, “you’ll find that what hospitals get paid doesn’t vary nearly as much as what they charge.” Add to that attempts by hospitals to salve angry patients, such as Dosher Memorial’s offer to cut Caser’s bill nearly $5,000 because he had to pay it out of pocket. Same with Frye Regional. “For the uninsured and direct-pay patients, we provide discounts comparable to those negotiated by insurance plans,” Shuler says. Cone Health has a similar policy. “We adjust our payment expectations to what people are able to pay through our charity policy and discounts provided to all uninsured patients,” says Jeff Jones, executive vice president and chief financial officer. North Carolina Hospital Association researchers found hospitals in the state wrote off about $1.6 billion in bad debts and charity care in 2011.
If hospital list prices are a fantasy, why do they exist? Partly as starting points in the bazaar of health-care horse-trading over who pays and how much. In that regard, transparency is a step toward reality. “Large price differences can persist when there’s limited information and limited competition,” Ridley says. “So, if a hospital has little competition, the insurer has little leverage and the hospital can charge high prices. That’s why many insurers don’t want to go into some rural county where there’s only one hospital that can charge whatever price it wants. So big differences can persist when there’s limited data — limited transparency — coupled with limited competition.”
Other factors muddy the pricing picture. On warm, late-winter days, walkers stroll the greenway along Little Sugar Creek in Charlotte in the shadows of the massive Carolinas Medical Center complex. Inside, administrators are frequently locked in less tranquil pursuits — tough negotiations with insurers. What the patient pays, Piemont says, is “first determined by the contractual rate the health provider has with the employer or insurance company and, in addition, the specific insurance plan’s cost-sharing provisions for the patient.” Though exact amounts are secret, powerful insurers such as Blue Cross and UnitedHealthcare, part of Minneapolis-based UnitedHealth Group Inc., extract 50% or greater discounts from hospitals.
The new laws also will expose the cost shifting hospitals do to make up for those discounts. A typical hospital gets about 26% of revenue from commercial insurers, Tilson says. Almost two-thirds comes from Medicare and Medicaid, which already get discounts — most hospitals say Medicare pays less than their costs — leaving little room to shift costs to anyone other than the less than 10% who, like Caser, have no insurance. Hence, their shockingly high bills.
Insurers complain that hospital consolidation — Carolinas HealthCare System has 900 locations and an annual budget of more than $8 billion — has weakened their negotiating power, but hospitals claim they’re the underdogs. In North Carolina, where Blue Cross insures about half of the state’s more than 9 million people, starting with a high base price provides hospitals more negotiating room. Eventually, though, there’s a point at which the issue of transparency always becomes clear: when the bill reaches the mailbox.
Last year in Mooresville, Eric Ferguson was taking out the trash when he felt a stab of pain in his foot, looked down and found two small pinpricks. At Lake Norman Regional Medical Center’s emergency room, doctors told him what he already knew — snakebite. They pumped anti-venom into him, but when his bill arrived, he felt another painful bite. It totaled nearly $90,000 for less than a day in the hospital, including more than $80,000 for drugs.
That’s the bill he would have been asked to pay — equal to the price of a small house in some communities — had he not been insured by Blue Cross. Medicare says the anti-venom should have cost no more than $9,400. Blue Cross, with its negotiated discount, paid the hospital about $20,200. Even so, with deductibles and other costs, Ferguson’s visit cost him more than $5,000.
Like shopping for a flat-screen television, the patient of the future will browse hospitals for the best care at the best price. Hospitals, in turn, will have specials and cut their prices to attract his business. That’s the picture of price transparency painted by politicians. “It gives patients and their doctors pricing information so they make informed financial decisions with regard to their health care,” McCrory said when signing the new state law. Unfortunately, say health-care economists, hospital administrators and others, that picture is mostly wrong.
“Individuals who have their own health plans or pay their own bills have the least amount of bargaining power in hospital charges,” says Searing, director of the health-access coalition. To understand why, consider a company such as Charlotte-based Duke Energy Corp., whose 27,000 employees are covered by the utility’s self-insured health plan, administered by UnitedHealthcare. Pitted against such negotiating power, transparency or not, patients like Caser and Ferguson have little impact on hospital charges. Searing offers a rule of thumb. “One reason it’s hard for individuals to move the system is that about 10% of the people are responsible for about 80% of the health-care costs,” among them the elderly and chronically ill. “They run through their deductibles and co-insurance very quickly each year. So after that, you can jack costs through the roof.” They choose hospitals based on convenience and other factors. Cost doesn’t matter to them.
Tilson offers another formula. While hospitals might be sympathetic to patients who pay their own way, offering discounts and, in extreme cases, even write-offs, they can’t engage in price wars like corner gas stations. “Most of the time, prices are locked in either through government payments for two-thirds of our patients — Medicare and Medicaid — or by long-term contracts.” Those contracts with commercial insurers typically are for two or three years. “So our ability to adjust pricing on the fly is significantly limited.”
Employers such as Duke Energy, on the other hand, wield a big stick. “Hospitals are more likely to respond if a major employer in their region or, especially, Medicare and Medicaid start using price transparency in a way they don’t now,” Searing says. “They can, for instance, do something called reference pricing. You look at a certain service, like hip replacement, and find out which hospitals in your area are doing it at the lowest price with the best outcomes. If you use transparency that way, it’s a powerful way to insist on certain quality at a certain price.”
Other factors muddle transparency. For instance, most insurers have networks that might not include all hospitals, and doctors, who admit patients, have their preferences. Even human nature is a factor. Peter Ubel, a doctor who is a professor of business administration and medicine at Duke University, cites studies that show consumers equate higher costs with higher quality and might be skeptical about choosing a hospital that charges less, regardless of its quality data. So is transparency overrated?
By no means, say experts who note it has become increasingly important to individual health-care consumers. “One reason we haven’t had more of a consumer-oriented market has been a chicken-or-the-egg problem,” Ridley says. “We didn’t have consumers searching hospital prices because there wasn’t a lot available, and there’s not been a lot available because very few people were searching.” That’s about to change, he says, with dramatic shifts in employer-provided health care. “In general, people with employer-provided health insurance still have fairly generous insurance. Now there’s a movement toward defined-contribution plans rather than defined-benefit plans like most have. My employer will be giving me a defined amount of money for my health insurance and allowing me to shop around for how I spend it.”
Among others, the North Carolina Chamber of Commerce has advanced such plans to its 35,000 members, who employ nearly a fourth of the state’s workforce, as a means of coping with the uncertainties of the ACA and reducing employers’ health-care costs. Analysts say such plans will dominate the market within 10 years. “One trend in health care is, whether you’re getting your insurance through your company or buying it in the individual marketplace, there’s going to be more cost sharing,” Searing says. “When there’s more cost sharing, you can bet people are going to be more sensitive to price.”
Robert Caser already is. “Bottom line, they were going to give me a shot and send me home. Instead, they ran up a $14,000 bill on me.” He pauses from fixing a balky clothes dryer at his home on a wooded street to leaf through three pages of itemized tests and charges from Dosher Memorial. “Even gas stations have to post their prices, don’t they?”
Click here to view Business North Carolina‘s 2014 list of the state’s Best Hospitals