Hospitals Ripping Us Off

Today’s WSJ has a fascinating story about a man given a $1.2 million hospital bill that contains a huge amount of “bill padding”.  The article points out much of what’s wrong with the health care system in the United States.


Hospitals have three types of patients: Medicare/Medicaid, Private Insurance, and un-insured.  Typically, the hospital will bill Medicare or the private insurance company an amount far in excess of what they actually expect to get paid. 

As an example, I recently reviewed a hospital bill sent to my grandfather from Suburban Hospital in Maryland.  The hospital charged Medicare $30,000 but Medicare only “allowed” a charge of $10,000 for the specific services provided.  So $10,000 is what the hospital got paid.  For patients with private insurance, the process works in much the same manner because insurance companies negotiate with hospitals.  People who are uninsured get screwed because hospitals have no incentive to negotiate prices with them.

The reason the bills are so high in the first place is because of “bill padding”, a perfectly legal practice that almost all hospitals use to allocate their operating costs to patient bills.  From the WSJ article: 

Another issue is the widespread practice of bill padding by hospitals and other health providers. While hospitals say bill padding is their only defense against the aggressive cost-reduction efforts of insurers and government programs, the end result is that individuals can, with little warning, be left stuck with wildly inflated medical bills.

For instance, CPMC charged Mr. Dawson $791 for stockings designed to improve blood circulation. The same pair can be purchased on the Internet for as little as $12.

Allan Pont, CPMC’s chief medical officer, acknowledges that the charges on Mr. Dawson’s bill are “Disneyland numbers” that health insurers and government programs like Medicare and Medicaid never pay. But he says they reflect the hospital’s operating costs, such as paying for doctors, nurses and medical equipment, as well as markups to compensate for the fact that CPMC collects only a fraction of what it bills every year.

Charging a patient $791 for $12 socks cannot be justified under any circumstance.  The fact that inflated bills such as this one can force patients into bankruptcy is absurd!

This anecdote is not at all unusual in the US, and it is a great case in point about why our healthcare system needs a complete overhaul.  Healthcare is a major issue in the 2008 election but so far I have not heard many constructive ideas set forth by the candidates.  

 In the end, we’ll either end up with a socialist system like that of Canada or England, or a market-based solution.  I am strongly in favor of the market based solution and I plan to detail my ideas in an upcoming post.

5 Responses to Hospitals Ripping Us Off

  1. Andy says:

    I’d like to hear your proposal.

    Have you tried to get a quote for a medical procedure? You know the price before hand when you buy groceries, a car or a house but noone wants to give you an estimate for medical. I think lawyers may often be similar but fortunately don’t have much experience there.

  2. Will says:

    Hi Andy — thanks for the comment.

    You have hit on the fundamental problem: most of us simply do not care how much our healthcare costs. I work for a company which provides health insurance for me. All I pay when I visit the doctor is the copay. So it matters not a bit to me if the doctor wants to check my toe, even if the reason I went in was for an ear-ache. Meanwhile, “free” healthcare like that drives up the costs for everyone, and makes it even harder for uninsured people to get insurance.

    One thing we absolutely need to do is to get individuals to care about how much their healthcare costs. There are ways of doing this but they all involve drastically changing the current system.

    We need our politicians to focus on fixing this problem instead of pleasing their lobbyist friends.

  3. Billy says:

    Hi Will!

    As a previous healthcare lobbyist, I can say, the problem is (of course) complicated.

    Because, Medicare/Medicaid will only pay designated amounts (ultimatum for provider being not to participate in the programs – which no healthcare provider will do) many times providers will lose money on procedures on those under Medicare/Medicaid. If you are a hospital or pharmacy in a diverse area – you will be fine. However, if you practice in an area heavily populated by the elderly or poor (urban areas), a majority of your bills will be underpaid by Medicare/Medicaid – so you try to make up for it in other ways.

    In my opinion two things need to happen:
    In the short term. The government needs to require implementation and compliance of electronic patient files. One of the major reasons healthcare costs are SOARING is because Mr. Smith goes to Dr. A when his stomach hurts. So as any good doctor would, he performs a litany of expensive tests. Well, 6 months later, Mr. Smith wants to go to Dr. B because a fancy new office was built (or goes to the hospital because his Dr’s office is closed for a holiday) and what does Mr. Smith care, his insurance is paying. This time his stomach or maybe his throat, or who cares, is hurting. The point being, because information is not available procedures are constantly being duplicated. Unbelievably costly procedures. The same thing happens with prescription drugs and drug stores (who by the way operate on a 3-4 percent profit margin). By implementing an electronic database you can avoid all this without going to a socialized system.

    In the long term. The best way to get everyone in the US healthcare insurance without moving toward a “socialist” system is to get out of employer-based insurance. Do you know we are one of the only industrialized country that has employer-based health insurance? This goes back to WW II and government freezing wage hikes… long story. It’s a mess, and not just for the old and poor. The average time an American stays at a job is like 1.7 years. Switching healthcare plans that often is absurd. Not to mention these plans have no incentive to cover preventive care and employees rarely have a choice of their insurance provider. The best example right for what the US needs right now is Israel. I am oversimplifying but Israel deals with healthcare insurance like the US deals car insurance. The government requires everyone to have an insurance plan (like states require drivers to have car insurance). The market creates a certain amount of programs, under government guidelines, and basically the public can choose between a selected number of plans. There are cheap plans – there are expensive plans. What observers are finding is that people generally stay with their healthcare plan for their entire life – giving insurance companies incentive to invest and cover preventive medication/therapy, etc. The government would have to get involved, subsidize, and regulate these programs – but they would still be market based, and the public would have options on the quality of their program. I think it is the best answer to our current situation.

  4. Will says:

    Hi Billy,

    Thanks for your excellent comment! I love your ideas — especially the one about getting employers out of our healthcare.

    Here are my ideas for how healthcare could work in this country. Would appreciate your thoughts:

    To begin with, two things need to happen:

    1) End the deductibility of employee health care premiums for corporations (As you know, when your employer pays your health insurance premium, it is an expense to your employer. Unlike other forms of compensation though, this does not count as income to you. This amounts to a huge subsidy for corporations by the Federal Government. Unemployed and some self-employed people get no such tax break, which to me, is outrageous.)

    2) Completely de-regulate the national insurance market — let insurance fall under the Interstate Commerce Clause of the Constitution. As a resident of NY, I should be able to buy a policy from Nevada or South Dakota if I want to.

    My Plan:

    My plan places all the choice (and the cost) at the individual level, where it should be in the first place. Just like your idea, everyone will be required to buy some form of insurance — at a minimum this will be indemnity insurance. Along with this indemnity insurance, individuals can set up “pre-tax” Health Savings Accounts. Employers can contribute to this fund each year up to a specified amount and can deduct that amount as an expense. Individuals will have the incentive not to spend this money because it will grow for life and can be converted into an IRA at a certain age.

    With this plan, the majority of healthcare expenditures will be directly paid for by the individual. This should do a lot to start reducing healthcare costs — your doctor can no longer x-ray your toe when you are there for a stomach ache. More fundamentally though, in my opinion, routine health care should not be paid for by insurance. Insurance is meant to protect you against the unexpected…. a yearly physical is hardly unexpected. It will cost me a couple hundred bucks and I will use the money in my HSA to pay for it.

    The government would then setup a reinsurance operation which would step in to cover people with truly serious and expensive medical issues. For example, an individual could buy indemnity insurance which covers him or her for yearly expenses greater than $5,000 per year. The insurance company would be liable for the next $195,000. Anything over $200,000 would be covered by the government sponsored plan. I can assure you that the cost of this government sponsored reinsurance scheme will be WAY less than the current subsidy to corporations.

    ** I realize that this plan is simplistic and ignores a lot of issues. For one thing, the current insurance system works to some extent because young, healthy people subsidize older and sicker people. If everyone paid for themselves, healthcare for young people would be super cheap and healthcare for older or chronically sick people could be prohibitively expensive. Also, we certainly wouldn’t want to discourage people from having babies so there would have to be a program to subsidize that.

  5. […] Hospitals Ripping Us Off Part II Today my friend Billy from DC wrote a great comment to my post: Hospitals Ripping Us Off: […]

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