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What Your Hospital CEO Is Thinking
I’m currently in Charlotte, NC, working as a document review attorney. My current case involves hospitals and insurance companies, and my job is to look through thousands of emails in the inboxes of various executive and operational officers. There’s the confidential information that pertains to the case (which obviously I won’t be talking about), the day-to-day minutia of running any business (“So and so is training their replacement because while diligent and hard working, they are not a model of change-friendly leadership” is a masterful bit of corporate-speak), and the personal correspondence that probably shouldn’t have been sent from one’s work email (“My real estate agent is so lazy and lacking initiative he should be a government bureaucrat!”). But there’s also plenty of non-confidential information, from Wall Street Journal articles to slides of public presentations, and that information paints a picture of the medical industry today that I found fascinating, and I think Ricochet will too.
First and foremost, hospitals are well aware that health-care is too expensive, too hard to get, opaque in its pricing, and often wasteful in its execution. Further, they recognize that their options are either to improve themselves or be replaced by more consumer-friendly options. Chief among these ideas is the idea of moving away from “fee-for-service” models, where they are paid the services performed, to a “fee-for-value” model, where they are paid for improving the patient’s situation. Part of this is by reducing complications, a trend that Medicare is pushing by penalizing hospitals that have too many hospital-caused complications.
For example, vaporator-acquired pneumonia effects ~2 percent of inpatients, and it can be completely eliminated by following proper procedures, like leaving the patient’s head elevated at 30 percent. Unfortunately for the patients, it’s a complication that is accepted as “just one of those things that happens” in far too many hospitals. One hospital solved the problem by educating every single person who dealt with patients on vaporators — not just the doctors and nurses — on how to prevent the infection, and it literally took a department proving that a zero percent infection rate could be achieved before the rest of the hospital believed it was possible. They say that science improves one funeral at a time, but it’s supposed to be the out of date scientists — not their patients — who do the dying.
Another way of providing “fee for value” instead of “fee for service” is through the use of bundling. Say that your mechanic worked like a hospital. When you got an oil change, you’d pay one bill for the shop, another for the engine mechanic, and perhaps another for the oil specialist. Bundling is the radical idea of selling the $35 oil change as one service with a fixed, up-front fee, and increasingly, insurance companies are insisting on bundling healthcare services, leaving the hospital with the risk of the cost of the procedure going out of control (which makes sense, as they’re the ones with the greatest ability to keep prices from spiraling out of control).
Of course, that brings us to another radical idea in the health-care industry: activity-based costing. Ask your hospital how much anything costs and they don’t know. There’s a “chargemaster” program that spits out numbers, but the secret is that no one pays that price, and the logic used to set it often revolves around doubling or tripling the price in order to negotiate it down. To use the oil change example, if the mechanic billed like a hospital, the chargemaster would take the $25 it cost ten years ago, multiply it by 2 percent for inflation, quadruple that to have a list price of $100, knock it down to $50-70 for the insurance companies (depending on how well they could negotiate), and if I walked in and told them I was paying cash, they’d give me a discount and charge me $40. (To finish the analogy, the profit they made on the insurance companies would make up for the losses they take when Medicare only pays them $20 and Medicaid only pays $12.) Activity-based costing is the crazy idea of figuring out how much things actually cost. This can literally mean getting guys with stopwatches to observe how long each person spends working on the procedure and how many supplies they use. And it’s completely necessary due to yet another development in the health care industry: Consumers actually paying attention to costs.
Obamacare means that many people have much, much higher deductibles than they used to, and thus they’re paying a lot more attention to the costs of procedures. This has hospitals worried. You see, some routine items of care, such as medical imaging, have traditionally been a hospital’s “profit centers” — a fancy name for charging too much in order to make up for losses elsewhere. Unfortunately for the hospitals, many of these are things that can be done in free-standing outpatient units, and the most innovative of those units are putting their bundled prices online so consumers can comparison shop. After all, who wouldn’t skip the $1000 ultrasound at the hospital when a medical imaging center can do it for $750. Because it’s not an emergency, you do that comparison shopping at home. The Expedia.com model is coming to healthcare, and it will kill the inefficient hospitals as thoroughly as it did airlines.
Now, I sort of knew most of this from my parents: an ultrasound tech and a nurse. But actually seeing how the sausage gets made has been extremely cool, and I hope y’all have enjoyed this peek into the world of healthcare.
Published in Healthcare
Great post!
I’m glad they’re aware.
These days you video tape the people doing it and then closely analyze the video tape.
Industrial Engineering. It’s a thing. Matter of fact, my supervisor got hired away by the Mayo Clinic, and just started there this week.
We are trying to get a Computer Tomography Angiogram for my wife, which is required before her neurologist can do a WADA test. The insurance company will cover the WADA, but not the CTA…
Tell me how that makes sense?
We told the patient advocate that we would pay for the CTA out of pocket (about $1000) but she doesn’t want us to.
And the moral is…stay healthy.
Thanks, Amy. It was indeed an interesting read.
to a “fee-for-value” model, where they are paid for improving the patient’s situation.
Which has the advantage of a completely subjective end point. Hospital administrators hate doctors because we are (or were) patient advocates. I once had a patient who had Crohn’s disease of the colon. As a result, she was uninsurable. An aunt died and left her some money, about $50,000 as I recall. She wanted to spend this money to get her colon taken out as it had been a chronic problem for years. She was about 40, as I recall.
We set her up for a minimum hospital stay. She did the bowel prep at home. She was an AM admit and I sent her home as soon as she could tolerate liquids.
In those days, that hospital had a whole department for at-home physical therapy. My patients would be visited by the hospital advocate as soon as they were on a diet. Then DRGs appeared (1986) and the hospital turned on a dime. The same people who had been trying to sell patients additional services were now telling them they had to go home before they were ready,.
If anyone is interested in my ideas about reform, they are here. http://abriefhistory.org/?page_id=3076.
They are a bit out of date as Obamacare has destroyed the health care system we knew, It is industrial medicine now.
I’ve busted my butt for 26 years in medicine and watched a ton of people get rich off it. Not me though , I just wanted to help people get their best outcome possible.
Hospital CEO is thinking about money. All else is a distant second.
The idea that this isn’t standard practice just amazes me, even though my dad talks about it all the time. How can you set a price for something if you don’t know what it costs?
I also meant to get into the fact that up to 50% of healthcare is duplicative or otherwise wasteful, which tracks with Dad’s stories pretty well. As an ultrasound tech at a teaching hospital, he knows that the residents don’t understand what the tests actually do, but are just following the CYA checklist. (My favorite story was the woman complaining of abdominal pain, so the doc ordered an ultrasound to check for uterine cysts … without bothering to look at the chart to see that she’d had a hysterectomy. There was a nice little bit of business to the profit center for no good reason.)
A silver lining! This is great to hear. (We are part of a health care cost sharing program, so we are comparison shopping too.)
Welcome to the Queen City, Amy!
Thanks. I have to say I do love the city, even if I wish I had my own place instead of renting a room on my own with @mramy living up in Annapolis. And I’m seriously loving what is misleadingly called “winter.”
You’d be surprised. A coworker of mine is redoing our cost model. Apparently the old version was “well, this is the number it spits out, and we know we have to multiply that by eight to get in the right range.” It’s much more accurate now.
Great post Amy. I think the reliance on third-party payers is the principal reason why so many hospitals don’t know what procedures cost. If you don’t know what a motivated user is willing to pay for a service in cash, then how can you ever know what to charge for the service?
Great post, Amy. I can identify. I recently went in for a contrast dye X-ray. I asked what the procedure cost and was told $1800. I then said that I was self-pay and would pay at the date. The price dropped to $900. This is nuts.
I had two friends give birth within a couple months of each other. One was vaginal delivery with insurance, $18K. One was a cash caesarean, $5K. Nuts doesn’t even begin to cover it.
A friend of mine for 30 years is a gastroenterologist in the community where I practiced for 30 years. He built a very complete endoscopy suite in his office when the building was built about 1986. He does all his cases there and he is the best I know. My wife had a polyp removed and we drove back to California from Arizona where w now live to have him repeat her endoscopy. He told anther friend, a couple of years ago, that he was approached by the new hospital administrator who asked him to consider doing some of his endoscopy in the hospital facility, The tone was along the lines of “Nice practice you have there. It would be a shame if something happened to it.” The hospital, after Obamacare, bought up most of the physician groups practicing there and had complete control. So he agreed to take a look.
He reported that he looked at a series of charts in the hospital endoscopy lab and found every chart had excessive and unindicated lab work ordered. Clear fraud. Who is going to complain ? The doctors are all hospital employees, now. I don’t know if he agreed to do some work there.I didn’t want to ask him.
That is very unusual. My information might be out of date but I don’t think so. Most insurance companies and Medicare, for that matter, require that the provider (doctor or hospital) offer the lowest rates to their subscribers. If I offered a Medicare patient a lower price for cash, that is a crime. If I offered an insurance patient whose carrier I had signed a contract with (When I retired 20 years ago I had 276 contracts with various entities), I would be in violation of my contract and , if caught, would be terminated.
I think cash medical practice is the solution and maybe there are provisions since Obamacare that allow, or at least don’t punish this.
I’m glad to hear that hospitals are (finally) figuring out that actual costs matter. There’s never been the incentive for them to do this (quite the opposite) and I’d worried that it wouldn’t happen even now.
Also, welcome to Charlotte! What part of town are you renting in? And this is a cold winter for here. I’ve gotten quite spoiled over the past decade. :)
The original sources of insurance included Blue Cross, which quickly became the largest, Blue Cross was begun by the Hospital Association and the payment to members was not based on cost. It was based on the total cost of subscribers to that hospital. The total was the share of the budget spent on Blue Cross members. The commercial insurers got into the healthcare business during the War as corporations began to use health “insurance” as an employee benefit.
They went to an indemnity model with prices arbitrarily set. Some (doctors) were set by the Relative Value Scale, which was a creation of the California Medical Association. That schedule was based on arbitrary units, which were then valued by doctors depending on the cost of practice in their own communities. The surgical RVS, for example, used “hernia units.” A committee of surgeons, several of whom were my partners, decided how many “hernia units” a procedure was worth. The entire RVS was then banned by the Federal Trade Commission as “price fixing,” which it was not. They demanded that all copies be sent in to the feds. Since all third parties, including Medicare, used them we had to use Xeroxed copies for years.
Then the AMA, not a friend of doctors since the 1930s, issued the Current Procedural Terminology, which was the RVS but appropriated by the AMA and charged for.
The commercial insurance companies decided they were getting gypped and demanded that all hospital bills be itemized. Since hospitals had all sorts of cross subsidies (ERs were big money losers but tended to establish community loyalties in patients) like OB and ER, they had no way to calculate true values and the result was $10 aspirin tablets.
I have a chapter in my History of Medicine book about this.
https://www.amazon.com/Brief-History-Disease-Science-Medicine/dp/0974946648
Thank you! I kept coming across references to RVSs, but as most of the documents are written for people versed in the jargon, I hadn’t come across an explanation for that acronym.
Northwest corner of 485 and 85 on the west side of town. I can find my way to work in downtown, the Costco on Tyvola, and church on Johnston (521) just north of the state line.
OK, over by the Whitewater Center then? Nice. I’m up in Huntersville, so not too far from there.
Also, how do you figure out RVSs without converting to dollars, anyway? It sounds like a reversion to bartering — a heart attacks is worth 15 hernias, and a dried up cow is worth 5 magic beans.
Great Post!
Things have to change in the medical industry or the whole thing is going to collapse. Good to hear that medical CEO’s also see the problem.
Myself, I am waiting for a cascade of bills to come in for a visit to the ER a couple weeks ago. Severe case of vertigo.* I know I am in for a big bill as I was in ER for 7 hours including 1 hour in the MRI machine. I know the ER docs were covering their butts with the MRI, but being probably the weirdest medical experience of my life I wasn’t arguing.
The left likes to point to experiences like mine as evidence that health care cannot benefit from consumer market pressures, but what they forget is that by allowing consumer market pressures to make non-critical care more price efficient, emergency care will also benefit from best practices.
*Spinning room and throwing up from motion sickness if I tried to move, spinning didn’t stop for 48 hours. I am near 100% now after a Physical Therapist who knew what she was doing diagnosed vestibular neuritis and gave me exercises that really help.
The units were arbitrary but converted to dollars by the users. When I began in practice in 1972 (the year the FTC banned the RVS) we used $100 a unit as a conversion factor. I had earlier begun as an associate with two older surgeons but was not privy to billing matters.
My theory, agreed to by my partner, was that I would rather be the busiest and cheapest surgeon in town than rely on high fees. That was the philosophy of the older guys I began with. We were in a growing community in Orange County that has continued to grow and is now all built out. We would go to the Orange County Surgical Society meetings and hear surgeons from other, richer, communities complain about their practices in which they charged twice what we did. Many of them were conducting mostly a general practice with a little surgery on their own patients. They charged $200 a unit and could not make a good enough living.
That can be related to smoking as it is often vascular in origin. Why go to an ER for a neurology consult? This is a manifestation of the Obamacare destruction of the healthcare system. My type I diabetic son and his family now use an Urgent Care as a primary care after being mistreated by a large, and hospital owned, medicine group.
I am glad I am retired.
Different side of things. Even if you know what a motivated user will pay for a chest x-ray, you’ve still got to figure out if you’re going to go broke providing them at that price.
Conversely, if you don’t know what it costs to produce a chest x-ray then you’ve got to take a wild guess, add 20% to make sure you’re on the right side of the actual cost, and then double that so the insurance company can negotiate you back down.
Take the insurance company out of that equation you’re still asking wild-guess +20% from the consumer. In a competitive market you can’t get away with that.
I have been amused for a couple of years that an unexpected side effect of the crappier insurance coverage that people get under Obamacare is that the medical system is actually getting some of the market-based input that free-marketeers have wanted for a long time.
As to bundling, as I had a knee replaced 7 years ago I wondered why there wasn’t an “all in” price. Since I had full insurance coverage, I didn’t care on a practical basis, but the piecemeal pricing of separate charges for the operating room, the recovery room, the surgeon, the staying room, the anesthesiologist, each item of equipment and medication, the physical therapy, etc.) seemed bizarre and unnecessarily inefficient.
The surgeon I chose did 3 – 5 knee replacements a day at least 2 days a week, at a hospital that probably handled 15 – 30 knee replacements a week. Surely from such a volume the hospital would have the data to be able to set a single up front price to include everything (maybe with some variations because the patient has some complicating situation).
A couple of years ago, I was between insurances for a couple of months. I went to my doctor for an office visit, and they said it would be $160. When they asked for my insurance card and I said I didn’t have any at the moment, the price went down to $125.00.
I absolutely agree. Cash based practice is growing and even cash based surgical practice is growing. The busiest hip replacement surgeon in Newport Beach CA dropped all insurance and Medicare, the only option if you are going to charge cash, and now charges what Medicare used to pay him, which was about 20% of his billed charges. I attended the Geriatric Society meeting a few years ago. I met a young woman who was the only fellowship trained geriatrician in central Iowa. Almost all Geriatrics programs are in university setting because Medicare does not pay enough to support a private practice in Geriatrics. She had been getting harassed by Medicare for seeing her elderly home-bound patients too frequently.
She dropped Medicare, which sounds suicidal for Geriatrics. She practiced for cash, Visa and Mastercard and was making a decent living.