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

by Elisabeth Rosenthal

More treatment is always better. Default to the most expensive option. A lifetime of treatment is preferable to a cure. Amenities and marketing matter more than good care. As technologies age, prices can rise rather than fall. There is no free choice. Patients are stuck. And they’re stuck buying American. More competitors vying for business doesn’t mean better prices; it can drive prices up, not down. Economies of scale don’t translate to lower prices. With their market power, big providers can simply demand more. There is no such thing as a fixed price for a procedure or test. And the uninsured pay the highest prices of all. There are no standards for billing. There’s money to be made in billing for anything and everything. Prices will rise to whatever the market will bear.

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. Some of the Blues were spending far less than that a decade into the new century. The medical loss ratio at the Texas Blues, where the whole concept of health insurance started, was just 64.4 percent in 2010.

The framers of the Affordable Care Act tried to curb insurers’ profits and their executives’ salaries, which were some of the highest in the U.S. healthcare industry, by requiring them to spend 80 to 85 percent of every premium dollar on patient care. Insurers fought bitterly against this provision. Its inclusion in the ACA was hailed as a victory for consumers. But even that apparent “demand” was actually quite a generous gift when you consider that Medicare uses 98 percent of its funding for healthcare and only 2 percent for administration.

Second, now that they suddenly have to use 80 to 85 percent rather than, say, 75 percent of premiums on patient care, insurers have a new perverse motivation to tolerate such big payouts. In order to make sure their 15 percent take is still sufficient to maintain salaries and investor dividends, insurance executives have to increase the size of the pie. To cover shortfalls, premiums are increased the next year, passing costs on to the consumers.

Cigna paid its negotiated discounted rate of $68,240 and the patient had to contribute $3,018. Is that overwhelming cost really something to be upbeat about? 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 money chase was on: no one was protecting the patients.

There is an army of consultants running around hospitals. A whole phalanx of firms is there to improve revenue, improve compensation, and get a piece of the pie. Ten to 15 percent of revenue goes to billing and collection companies and contractors to do things like claims and preapproval—those jobs don’t even exist in Europe. And hospitals go to Wall Street for bond issues to build new wings, so the bankers are at the trough, too. We have so much surplus capacity, which should lead to falling prices. But instead we get the opposite: It’s a market failure, but it follows certain logic. This is not a healthcare system, it’s an industry, and at every point there’s a way to make money.

Because patients were no longer directly forking out cash or writing checks for their care, hospitals began charging more for their services.

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 that became commonplace at many hospitals.

“What disappeared was the head nurse who fiercely protected the patients on her ward and didn’t give a damn about the financials,”

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.

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.”

To squeeze more money from the purse, Deloitte advised hospitals to stop billing for items like gauze rolls, which insurers rarely or never reimbursed, and to boost charges for services like OR time, oxygen therapy, and prescription drugs. It was all about optimizing payment by raising prices on certain items.

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.

Deloitte is ranked number one by revenue in all areas of healthcare consulting—life sciences, payer, provider, and government health. In 2014 it announced record revenues of $34.2 billion, fueled by more than 17 percent growth in the sector.

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.

In 2015, 71 percent of physician practices supplemented salary with productivity bonuses. Bonuses can motivate doctors, just as they do bond traders.

“We had software for dictation, and it would even say, ‘You need to check two more boxes for level four.’”

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.

Facility fees are a unique construct of American healthcare and its business model. Hospitals in Europe don’t have them.

As departments underwent serial financial review, hospitals did away with loss leaders and enhanced their most profitable offerings: orthopedics, cardiac care, a stroke center (revenue from expensive scans), and cancer care (revenue from infusions).

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.

Bankers, who regarded the purchase as a safe investment, were approaching hospitals and offering to finance the machine.

cut costs by using poorly trained technicians to administer treatments rather than nurses. 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.

Business professionals were brought in to “turn it around.” In 2006 the hospital announced plans to close its transitional care unit

Before the 1940s hospitals paid trainee stipends by building their costs into patient charges. After World War II, the GI Bill subsidized training and then the creation of Medicare, in 1965, established that federal and state funds should “to an appropriate extent” cover the purported cost of training future doctors, which was viewed as a public service.

By 2014 hospitals received about $15 billion a year in government subsidies to support graduate medical education,

The median cost to a hospital for each full-time resident in 2013 was $134,803. That includes a salary of between $50,000 and $80,000. Federal support translates into about $100,000 per resident per year. Researchers have calculated that the value of the work each resident performs annually is $232,726. Even without any subsidy having residents is a better than break-even deal. That explains why, even though the Balanced Budget Act of 1997 placed a cap on the number of residents supported by Medicare subsidies, between 2003 and 2012 the number of residents rose by about 20 percent.

The American Hospital Association (AHA) has lobbied to hang on to this pot of money and the cheap labor and is even lobbying to facilitate the entry of foreign medical graduates since there are not enough U.S. grads to fill the Medicare-subsidized residency slots in less traditionally lucrative or glamorous specialties, such as nephrology, and in underserved communities.

Some hospitals responded by reducing educational activities, such as elective rotations and seminars, so they could have more hours of cheap labor.

even if an insurer covers a private room, we all pay higher prices and premiums in the future to fund building them.

that. “There are an infinite number of ways to spend: amenities, scanners, higher salaries,” said James Robinson, a health economist at the University of California, Berkeley. “So they build more. They’re like Four Seasons Hotels, with valet parking and chandeliers. Then they go to Congress and say Medicaid and Medicare aren’t paying us enough, my margins are low, the CEO doesn’t make much money compared to the private sector.”

Press Ganey ratings, a survey tool that rates the “patient experience” at hospitals.

Customer satisfaction is important and predicts repeat business, but it does not necessarily indicate medical quality. Studies have determined that such surveys have only a “tenuous” link with patient outcomes. Physicians hate them. But Medicare pays hospitals a bonus for performing well on patient surveys. “So if a patient asks for a test and it won’t hurt, they’ll get it,” one doctor told me.

More than two-thirds of the country’s hospitals are not-for-profit, and IRS rules state that nonprofit CEOs should receive only “reasonable compensation,”

How to keep that tax benefit while spending the least amount possible on “charity care and community benefit” has become the job of some hospital accountants and consultants in the business of medicine.

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Hospitals tend to have more high-priced legal counsel than cash-strapped cities. In addition to avoiding property taxes as well as federal, state, and local payroll taxes, hospitals can issue tax-exempt bonds for building projects. They can collect tax-deductible donations (a boon when a big donor wants to underwrite a new wing or hand over a valuable piece of art to adorn a lobby).

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.

But in 2010, despite fierce hospital protests, a provision of the Affordable Care Act started requiring the IRS to collect each hospital’s quantitative enumeration of charitable activities and their value. Every year, on a form called Schedule H (Form 990), they now have to list how much money-losing care they dispense—and how they calculate that number. They also have to list and value what they’ve done gratis to better their communities.

Three-quarters of the hospitals got more dollars in tax breaks than they spent on benefiting the communities they serve.

The easy money for Medicare patients is not in inpatient admissions. Medicare pays a bundled rate for those. But outpatient care has no similar limits—the till is open for testing.

For hospitals and insurers, observation status has benefits. For patients it is a disaster.

fee splitting (where a physician gets financial advantage from referrals).

The American Medical Association’s code of ethics has been similarly diluted. Through the 1960s and 1970s it said that physicians’ fees “should be commensurate with the services rendered and the patient’s ability to pay” (emphasis mine). But this latter exhortation did not survive into the 1980s.

While primary care doctors in the United States make about 40 percent more than their peers in Germany, American orthopedic surgeons make more than twice as much as similar German specialists. In fact, U.S. doctors who are best compensated are often not the ones who undertake the longest training or work the hardest. They are the ones who are best at the business of healthcare.

“There is a bizarre martyr complex that permeates medicine—people think they are working harder and longer for less money than everyone else in America.”

Anyway, as the numbers and salaries of hospital administrators were vaulting upward, the doctors wanted in on the profits.

For a time, as with hospitals, those Part B insurance plans paid essentially whatever was asked or nearly so, making the 1980s a Golden Age of physician payment, which is why some older doctors nostalgically hark back to that era.

Physicians collected 98 percent of the charges they billed and insurers, including Medicare, went on paying “usual and customary” fees by locality for years after—hardwiring high payments into our bills. Many still do.

In 1986 Congress, in cooperation with the American Medical Association, commissioned a respected health economist, William Hsiao of Harvard, to create what was ultimately called the resource-based relative value scale (RBRVS). The goal was to scientifically determine what each physician service was really worth.