An American Sickness: How Healthcare Became Big Business and How You Can Take It Back

by Elisabeth Rosenthal

The original purpose of health insurance was to mitigate financial disasters brought about by a serious illness, such as losing your home or your job, but it was never intended to make healthcare cheap or serve as a tool for cost control.

WellPoint’s first priority appears no longer to be its patient/members or even the companies and unions that choose it as an insurer, but instead its shareholders and investors.

Anthem

In 1993, before the Blues went for-profit, insurers spent 95 cents out of every dollar of premiums on medical care, which is called their “medical loss ratio.” To increase profits, all insurers, regardless of their tax status, have been spending less on care in recent years and more on activities like marketing, lobbying, administration, and the paying out of dividends. The average medical loss ratio is now closer to 80 percent.

Medicare uses 98 percent of its funding for healthcare and only 2 percent for administration.

“They don’t care whether the claims go up or down twenty percent as long as they get their piece. They’re too big to care about you.”

Once acceptance of health insurance was widespread, a domino effect ensued: hospitals adapted to its financial incentives, which changed how doctors practiced medicine, which revolutionized the types of drugs and devices that manufacturers made and marketed.

THE COST OF HOSPITAL SERVICES has grown faster than costs in other parts of our healthcare system. From 1997 to 2012, the cost of hospital services grew 149 percent, while the cost of physician services grew 55 percent.

Because most hospitals are nonprofit institutions, they have no shareholders to answer to and cannot legally show a “profit”; therefore, they spend excess income on executive compensation and building Zen gardens and marble lobbies.

Healthcare has become a great way for the Catholic Church, in particular, to collect money.

Between 1968 and 1980 the number of Americans under sixty-five covered by good private insurance was at its peak (about 80 percent, compared with about 67 percent in 2007). Because patients were no longer directly forking out cash or writing checks for their care, hospitals began charging more for their services.

With lots of money rolling in, the hospital needed to hire businesspeople to manage it.

By the late 1980s, Providence had hired professional coders to translate doctors’ exams into medical bills. Physicians were given stock phrases to use to describe their exams and told what procedures to perform to ensure better revenue—instruction

The doctors began receiving statements each month that showed how much money their examinations brought in, relative to those of their colleagues.

Providence Health & Services is now the third-largest nonprofit hospital system in the United States, operating in Oregon, Washington, California, Alaska, and Montana. In 2013 it had revenues of $2.6 billion and about $2 billion in assets. Its CEO is paid about $3.5 million a year. Yet it still describes itself as “a not-for-profit Catholic health care ministry”

Medicare had initially paid hospitals their “usual and customary charges,” but in the mid-1980s it began paying according to a diagnosis related group (DRG). The payment for a hospital stay for an appendectomy or for pneumonia would be a fixed amount depending almost entirely on the diagnosis. The hospital would make money on patients who healed more quickly and efficiently—and lose money on those who did not.

hospital business departments realized if Medicare or a powerful insurer wouldn’t agree to pay a big enough proportion of the rate they wanted, they had the leverage to insist that smaller insurers—and people with no insurance—pay more.

HMOs succeeded at containing costs at least for a while.

But most hospitals dragged their heels in creating quality cost-effective care to attract managed care contracts, and these lackluster offerings tarnished the HMO concept in some parts of the country, perhaps forever.

Congress passed a law in 1974 requiring state health-planning agencies to grant approval before hospitals could build new facilities or indulge in the purchase of expensive technology.

But in 1987 that federal law was rescinded and over the next decade many states ended or watered down their review programs so that hospitals could buy or build whatever they wanted, so long as there was enough revenue to support it. Medical purchases became an “investment.”

Medicare has assigned to every hospital a specific overall cost-to-charge ratio that it deems reasonable to participate in government-sponsored insurance. Raising list prices for one thing means lowering them for another. All hospitals have a master price list—a chargemaster—and adjusting it to maximize income was the focus of Deloitte’s strategy.

For the business departments of hospitals and doctors on staff, the discovery was transformational. The billed price of an item could be completely decoupled from its actual cost. Items that had previously been included in the charge for the operating room or a hospital day could be billed separately.

In another case, a Canadian who wintered in Arizona was charged $210,000 for a failed attempt to take out a hip implant that had become infected. (That total doesn’t include the $28,000 he had to pay for an air ambulance to get him back to Canada, where a successful surgery was performed for free.)

The hospital decided it would no longer pay these physicians a fixed salary; instead, they would be compensated in proportion to the relative value units (RVUs) of the care they dispensed. RVUs are a measure of productivity used to determine medical billing.

There was financial incentive: colleagues who were coding expansively could make twice as much—over $300,000 instead of $170,000.

In 2015, 71 percent of physician practices supplemented salary with productivity bonuses.

More than 500 of the 2,400 hospitals in the database billed the two most expensive codes for more than 60 percent of patients.

Upcoding by doctors has a multiplier effect on hospital profits, because this hospital-imposed charge for the use of its rooms and equipment—the facility fee—rises with the level of service.

Because hospitals had traditionally charged a day rate for inpatients, it made some sense that insurers (including Medicare) had largely accepted their new practice of charging facility fees for major outpatient care as well by the turn of the century.

Since it was a complicated new therapy with unpredictable finances that few patients would need, Medicare reimbursed generously. In short order proton beam therapy was being used on a far wider range of tumors than had ever been intended, despite little evidence that it was superior to cheaper options. Every hospital wanted one and new machines came with billing tips as well as elaborate calculations about how long it would take to recoup the investment.

The result: The British National Health Service sends the few patients whom it deems suitable for high-energy proton beam therapy to the United States for treatment (paying for travel and eight to ten weeks of lodging).

At the other end of the care-profitability spectrum, many hospitals started outsourcing services like dialysis, which is largely financed by Medicare and therefore less amenable to billing legerdemain.

In deals brokered by consultants like Innovative Health Strategies (and backed by private equity investors), hospitals “sold” their patients for $40,000 to $70,000 per head to the big commercial players.

Residents have long been the worker bees that keep hospitals going, and debates about who should pay for their training and how much have evolved in tandem with our profitable medical system.

By 2014 hospitals received about $15 billion a year in government subsidies to support graduate medical education, a number that had been “increasing for decades.”

In fact, there is much to suggest that hospitals have turned residencies into another profitable business.

The recent growth has been particularly large in subspecialty fields where there are generally already (by many estimates) sufficient numbers of doctors, such as urology and pathology.

The Medicare Payment Advisory Commission (MedPAC) estimates the indirect subsidy hospitals receive for medical trainees may be $3.5 billion higher than deserved.

One reason why hospitals have been desperately fighting to get still more residents is that, over the past fifteen years, states and medical societies have passed laws, regulations, and recommendations curtailing the work hours of doctors in training, largely to reduce the rate of medical errors that resulted from fatigue. That may be good for everyone’s well-being, but it creates a staffing problem.

But Medicare pays hospitals a bonus for performing well on patient surveys.

Not-for-profit hospitals are now just as profitable as capitalist corporations, but the excess money flowing in isn’t called “profit”—it’s “operating surplus.”

But since 1986, hospitals that care for large numbers of low-income people have already been compensated in other ways. They buy all their pharmaceuticals at a discount, through a federal program. Likewise, Medicare gives them so-called disproportionate share payments, essentially bonuses for treating higher numbers of poor people, who tend to be sicker and less able to pay bills.

A survey of the forms conducted by the California Nurses Association concluded that 196 hospitals received “$3.3 billion state and federal tax exemptions and spent only $1.4 billion on charity care—a gap of $1.9 billion.”

But as observation has become less important for diagnosis, it has become more important as a lucrative billing construct, manipulated by hospitals, insurers, and nursing homes.

For example, Medicare penalizes hospitals if patients bounce back thirty days after discharge—the “readmission penalty.” But if they were never officially admitted but were merely under “observation” they couldn’t bounce back!

Dr. Hsiao’s team calculated a work value in a new currency called relative value units (RVUs), based on (1) the work/time spent by a doctor for the visit or intervention, (2) the overhead incurred in rendering the service, (3) the cost of training required to learn to perform the service, and (4) the malpractice expenses involved. That RVU score was then multiplied by a conversion factor that was adjusted annually and varied slightly by location to determine a dollar payment. It was an elegant but complicated algorithm and—it turned out—one ripe for manipulation.

While the RBRVS technically applied to only Medicare, many commercial insurers turned to the agency’s judgments to scale and revise their own payouts.)

Three times a year an AMA committee called the Relative Value Scale Update Committee (RUC) meets to adjust the value of codes in a highly vituperative meeting. Medicare and insurers inevitably suggest that codes are valued too generously and the doctors who perform a service inevitably protest that the valuation is not high enough.

But doctors saw new income potential, because they could charge “facility fees”—essentially room rentals for the suites where they plied their trade. With Medicare physician payments decreasing after the imposition of the RBRVS, doctors started investing in or opening surgery or other treatment centers. Each specialty gravitated to the kind of outpatient business that grew out of its practice;

The doctors sign up with insurance plans, but the centers themselves do not participate in any insurance networks, so the facility fees are not constrained by insurers’ negotiated rates.