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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 They say that science improves one funeral at a time, but it’s supposed to be the out of date scientists — not their patients — who do the dying.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
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).
When I was doing cardiac surgery in the 70s, the group had a global fee for coronary bypass. The reason might be the insurance company’s foolish insistence on having itemized charges.
It’s also likely a legacy from the fact that most doctors aren’t hospital employees, but rather essentially independent contractors who rent the hospital’s facilities (i.e. “visiting privileges”). So you get a bill from the hospital for the use of the hospital’s resources, one from one independent contractor, and one from another. As more and more doctors are giving up private practice in favor of hospital employment, bundling becomes easier from an accounting perspective as well.
I imagine the idea was that over time, you’d just bargain for a higher RVS instead of negotiating for every procedure?
Though that still doesn’t make much sense to me … it assumes that the costs for procedures relative to each other didn’t change, but of course they will. The necessary drug for one procedure will go generic, the new machine to do another will be double the cost of the old one, etc.
The fatal error that the medical associations made in the 70s and 80s was to press for UCR fees. That means “Usual, Customary and Reasonable fees.” It was a strong inflationary influence and killed the fee for service practice. Before that, when I first began in practice (I’m old now if you hadn’t guessed), the standard was “Indemnity Insurance” for medical. What it did was pay a flat fee for a procedure. Let’s say $500 for an appendectomy. Hospitals also tended to bill daily rates that were all inclusive. It might be $90/day or $500 for ICU. In fact ICUs came along about 1965 when I was still a student. The Mass General still did not have an ICU that year, at least for surgery. The RVS, at that time, was a guide and there was no obligation to stick to the set fee as a maximum. Of course, you had to find patients willing to pay extra if you were good.
The UCR was a disastrous change and the push to cover routine care came largely from pediatricians who were competing with Kaiser in California. I was an officer in CMA and AMA at the time. Several times I spoke out against it but it was like watching a train head for the open switch. Not that I was all that wise as I still did not see how bad it would get.
For a while, insurance would pay for things in the hospital but not if you were an outpatient. That led to abuse of the admitting system as everyone wanted their colonoscopy as an inpatient so insurance would pay. Much of this was patient driven, not from doctors. Tragedy of the Commons stuff.
Why, you might almost think that the plaintiffs’ bar is somehow involved in the thinking that made up the checklist.
Any third party payment system is set up to be gamed. That gets egregious, and so the rules change. Dealing with the growing administrative burden imposes a growing overhead, and around and around it goes.
It’s stopping soon, though. One way or another.
I would like to offer some correction to the post.
I suspect that the “vaporator” the author was referring to is the mechanical ventilator (my apologies, but that is not the way that type of medical equipment is ever called), and “vaporator-related pneumonia” is ventilator-related pneumonia (VAP). That particular complication of the multitude of critical illnesses has been vexing pulmonary and critical care community for decades. Even though measures such head of the bed elevation to 30 degrees, among others, has been shown to decrease the rate of VAP, none of the interventions that we have implemented in the last 10 years allowed for complete eradication of VAP (albeit, degreased its frequency in the institutions that have seriously focused on high quality care).
I find the post, aiming to address extremely complicated matters of hospital component of our complex healthcare system (just stating), lacking sufficient depth.
Sorry, I was trying to avoid raising any questions of whether I was using confidential information and thus violating my ethical requirements.
I used to live in Huntersville up until about a year ago. I’m in Charlotte, but right near Concord.
Ricochet makes the world smaller.
“penalizing hospitals that have too many hospital-caused complications”
This leapt out at me because the same hospital whose employee doctors gave my wife the chance to live about four years, with mostly tolerable quality of life, following her diagnosis of inoperable pancreatic cancer has been in the news for complications patients have suffered from infections following endoscopic procedures, and from failure to report “superbug” infections (terms from media reports). I would hate to see a hospital like this one and its amazing physicians less able to provide treatment or be punished because of complications arising elsewhere in the complex.
I worked in a hospital’s budget and finance office. Hospital financials are an extremely complex thing, but in the state I worked in, the hospital’s had to manage their budget to a target margin, a ridiculously tight one, like 3%-4%.
For a billion-dollar enterprise like a large state hospital, that means you have to forecast next year’s budget the year prior, to an extreme degree of accuracy. Amy mentions “profit centers”, and hopefully, I’m not reading into the idea that profits are somehow horrifying, but in the hospital, everything was labeled a cost center, which was, basically, departments. About 600 of them. Every one of them had to have its own budget estimated, annually.
What makes revenue and cost forecasting so difficult is not just the mix of procedures a hospital is likely to provide, it’s the mix of payers, and the impact of Medicare/Medicaid reimbursements that makes the payment system so freakishly insane.
It’s a longer conversation than what Amy described, and much more complex. Health care is expensive for a lot of reasons. Treatments might be overdone due to liability avoidance. People go to the ER when they don’t need to. We expect Cadillac treatment at the hospital, for everything, when we’re paying Yugo insurance premiums.
Etc. Don’t care what the CEO is thinking, though – they have a fiduciary responsibility to the institution, so of course they care about the money. If costs start exceeding revenues, on that very tight margin, and labor being the largest cost in any hospital, well, the first thing they cut are people. Who are the highest paid people in the hospital, as a bloc?
Doctors and nurses.
How will that work out for patients?
It’s not “horrifying” — as the slogan at the hospital in my case goes, “no margin, no mission.” Obviously, a hospital has to make money to exist. However, certain departments like medical imaging function as Peter being robbed to pay Paul, which means in turn that department’s patients are being overcharged to afford undercharging the patients in other departments. Given the choice, the Peters would rather go elsewhere, and thanks to cheaper outpatient imaging centers who don’t have Pauls to pay and an internet to find them, they can. This should be and is horrifying to the CEOs who have to figure out how to pay for Paul somehow. (In the state in question, this is mostly done by strict government limits on how many hospital beds and major hospital equipment can be in a geographical area, but it’s still not enough.
I’m reminded of a great exchange from “Boston Legal”:
Yes, even the doctors. :D
Recently had my first over-night hospital stay in 27 years and noted the following:
Btw, my insurance initially denied authorization of the procedure but (as usual) the doctor sends additional info to ensure that the procedure is completed. It’s such a stupid game that wastes time and money.
Maybe your insurance company is Peter, paying for Paul.
I’m glad you are ok.
I’d also add that while cost-shifting can make good business sense for the hospital, it seems like a perfect example of perverse incentives.
Take the example of my friends earlier in the thread. Beth and Dan were paying $500/month for an insurance plan with a $7500 deductible (I’m not sure how much co-insurance and their max out-of-pocket, but I think they ended up with a bill around $10K) Their $18000 vaginal delivery was in part priced so high so that the hospital could discount Laura’s caesarian down to $5K. Except … why should the couple who are doing everything right pay $16K that year to get insurance to cover $2K as a subsidy for people too poor to pay for insurance when they’re also already paying thousands of dollars in income and employment taxes that are supposed to take care of that? I don’t begrudge hospitals their profits, and I don’t begrudge their desire to be charitable, but who really wants to be the one who pays out the nose for someone else’s discount?
Here’s an interesting essay on the development and operation of the French system.
Part I
Part II
I am in Ballantyne now. CLT is fantastic.
Cringe inducing after reading DocJay’s post.
Stop watches, and even video monitoring, aren’t very good ways of figuring out what things that you already do cost. If you keep track of all the things that are done and the associated expenses from the same time period you can use statistical analysis to get a very good handle on the real-world costs of individual activities – often with minimal cost or effort. Work study has it’s place in process improvement, but should be used with caution when it comes to cost modeling. At best, work study will give you a good idea what a process could/should cost – not what it does/will cost. At worst, it will be a complete waste of time and money.
Why, you might also think there are doctors willing to sell out their colleagues to the plaintiffs’ bar and be the expert witnesses who tell juries that the standard of care demands everything on that checklist.
Really? Granted, all my engineering courses were in statics, not processes, but it seems to me like work studies would be a fantastic tool to determine what things are actually costing you. For instance, if you are so short on $10/hr orderlies that your $25/hr nurses can’t do their jobs and leave the $35/hr ultrasound techs waiting an extra ten or fifteen minutes between patients and thereby prolonging the amortization period on a multi-million dollar ultrasound machine (as a completely hypothetical example), then the actual cost of each ultrasound is going to be higher than an ideal work flow model might suggest.
This is another area where hospitals are looking to add value while managing costs — by taking advantage of comparative value, or in corporate speak: “practicing at the highest level of one’s license.”
Optimist.
I was discussing this with another IE. His opinion was “hernia equivalency is worse than random guesses is worse than time and motion studies is worse than automated data gathering.”
GOSPLAN-ing is a bad idea. Who knew?
I am so g d angry about GOP leadership in this stuff. Trump was a gift of opportunity and all we got was more RINO un-creative stupidity. The collapse of the Western bond markets is going to be glorious.
Behavior changes when being observed, so the work being studied is never the work that’s done when not studied. Also, observers only observe what they think is relevant, which is never the whole story. “Experts” anticipate these and other shortcomings make adjustments based on their training and experience. The accuracy of a work study for predicting cost are as good as the fudge factors applied by the expert. When it’s done well it will provide a good estimate, but it’s often done poorly and there’s no way for you to know the difference.
That sounds about right, and my proposal for the situation in question – assigning costs to medical procedures as they’re currently performed – is solidly in the automated data gathering category. The hospital already tracks all of the procedures it performs so they can bill somebody for them. Presumably they also track all of their expenses – payroll, insurance, utilities, supplies, etc.. If the goal is to establish rates for all the billable procedures that recover all the costs plus some customary and reasonable profit margin, an ANOVA on that data is going to give you the most accurate results you’re likely to get.
Well, yes, that’s a basic premise of both sociology and quantum mechanics. But you also can’t improve what you don’t track, and you can’t track what you don’t measure. Even imperfect data is more useful than no data at all. Particularly when basically every corporate culture I’ve known first or second hand dismisses what their employees describe as mere anecdotes.
As you’ll see in comment #55, the choice isn’t between work study and no data. The choice is between work study and better data.
Good to see you, @amyschley, and, great post! (Which of the Femme Doctors are you in the avatar pic?)
Eight, played by Paul McGann.
To second Trump was elected the GOP should’ve done a one year road show about how screwed up Health insurance and healthcare has gotten since World War II. Then there would be a chance for actual improvement via the political system. We are ruled by morons.