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health / Stones & Bones / volume 10 number 1, January 2008 DOSE OF REALITY A few months back I discussed medical bills. This is such an important topic for all of us that I expand on it here, and for starters note how much things have changed over the years. Back in 1945, my friend Neal Brown had an appendectomy, spending six days in a hospital from which his parents received a bill totaling $83.15. Today, the actual cost to a hospital for such a procedure is about $5,000 to $6,000, but the billing the hospital sends out may be $15,000, give or take a few thou. What goes here? Doctors and hospitals typically, but not always, set the sticker prices for their services well above what they expect to get paid by commercial insurance companies or by Medicare or Medicaid. However, uninsured patients receiving the sticker price billings, called “actual billings,” are usually asked to pay them in full. This is one of the unfair aspects of the American health care system. The generally adopted benchmark for medical billings is the price that Medicare allows for medical procedures or hospital service. The Medicare allowance rates (debatably) constitute fair pay—in many cases they may be too low, but they are useful benchmarks, nevertheless. The Medicare allowance for a particular procedure performed by a physician—such as an office call—is intended to pay for the doctor’s time, the expense of running the physician’s office, and the cost of the physician’s malpractice insurance. Each of these three items is computed separately and then they are added together to arrive at the allowance. The allowance is also adjusted for geography, since physicians’ salaries, practice costs, and malpractice insurance costs vary with location in the United States. Medicare then pays 80 percent of the adjusted amount, leaving the patient or his supplemental insurer to pay the rest. A Medicare participating physician is not allowed to receive more than the stated allowance from all sources. However, a physician or other medical services provider can set any prices he or she wishes. If the price is set lower than what Medicare allows, then Medicare will pay only what the doctor charges, so the providers usually set their prices well above Medicare rates and leave it up to Medicare to determine the proper payment allowance. The consequence is that the providers’ sticker prices vary widely, but typically are several times the Medicare allowances. One set of ten large billings that I have examined averaged 4.4 times the Medicare allowances for the procedures, the range running from 2.2 up to a startling 26 times the allowance. I could detect no rationale in how these providers set their rates; it looked like they were just drawing random numbers out of a hat filled with numbers far larger than the Medicare allowances. Or maybe they were setting their rates at whatever they thought the market might bear, easy to do because they do not often openly state the rates. Regardless of what a medical services provider might charge uninsured patients, the payments he or she receives from private insurance companies for health care services is largely determined by the insurance companies. The rates they pay are sometimes less than Medicare allowance rates, but usually run from 100 percent to 140 percent of the Medicare allowances. Hospital billing practices are somewhat similar to that of other health care providers, but they are generally based on actual costs marked up sufficiently for the hospital to at least break even overall, or if it is a for-profit hospital, to also yield a profit for the hospital’s shareholders. These markups—for such things as operating room costs, drug costs, and medical supplies—range from no markup at all to more than ten times the actual cost; the average markup in the United States amounts to 2.44 times the cost of the services and supplies provided. Interestingly enough, Alaska hospital markups rate among the lowest in the nation. In fact, average Alaska markups rank as the lowest in the union in operating room and drug markups, and Alaska hospitals’ markup of supplies ranks in 40th place. The states with the highest average markup of operating room expenses are California with an average 4.5 times cost markup, Rhode Island with the highest drug markup at 9.37 times cost; and New Mexico, which ranks highest in markup of supplies at 8.22 times cost. (Some individual markups are out of sight; you’ve probably heard of $45 or higher hospital charges for “mucous recovery systems,” which are boxes of Kleenex.) Nonprofit hospitals such as Fairbanks Memorial Hospital and Providence Medical Center in Anchorage employ low markups relative to those of for-profit hospitals in other states. The Fairbanks hospital markup, averaging 1.53 times cost, is virtually identical to the highly reputed Mayo Foundation Hospitals, and the Providence hospital markup of 2.09 is less than the national average. Contrast these markups with the for-profit Tenet chain’s average markup of 5.67 times cost, and the 10.7 times cost markup of the nation’s most expensive hospital, Doctors Medical Center of Modesto, part of the Tenet chain. Hospitals normally award sizable discounts to private insurance companies. The nonprofit Sutter and Banner chain systems operating in the western United States give average discounts near 60 percent of the actual billings—but not to uninsured patients. That is why uninsured people are typically expected to pay more than insured ones, sometimes much more. However, the Fairbanks Memorial Hospital has such an exceptionally low markup that it gives insurance companies a discount of only 4 percent, and it gives uninsured patients a prompt-payment discount of 5 percent. Hence, its charges to insured and uninsured patients are virtually identical. Anchorage’s Providence Hospital, having a higher markup, is able to discount its billings to insurance companies by about 35 percent. If you are uninsured, it obviously pays to investigate hospital pricing structures if possible. Keep in mind that if you enter a for-profit hospital you likely are going to pay far more than you would to a nonprofit. Also be aware that the nonprofits may award sizable discounts to uninsured patients having low incomes. Especially if you are in that situation, be sure to apply to the hospital you enter for a discount. Remember that most hospitals and nonhospital medical providers rarely get paid in full for their actual (sticker price) billings. Only uninsured patients are asked to pay the full amounts. | ||
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