Poor Health

Seven reasons health care in the United States is costly and irrational

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The U.S. health care system is neither a true market system, nor a government managed system. It’s complicated and hard to navigate. The same forces that make it a bloated drain on the economy drive it out of poor neighborhoods where it’s sorely needed.

Princeton University health economist Uwe Reinhardt compares the system to one where employees are told they’d be reimbursed for clothing deemed “necessary” and “appropriate” for the job, but are forced to shop blindfolded, stuffing items into a cart without knowing what they cost or what they look like — and only informed months later whether they’d be reimbursed.

This is what makes the system expensive and inefficient:

1. A twisted focus

Health care is dominated by nonprofits that receive tax exemptions in exchange for providing community benefits. Such benefits can include research and medical education as well as free or low-cost service to the poor. But charitable care is so loosely defined that many hospitals focus on profitable patients — those in higher-income brackets with private insurance — to the detriment of care of the low-income patients who justify the tax-free status.

A 2013 New England Journal of Medicine study found that, on average, 7.5 percent of nonprofit hospitals’ operating expenses go toward IRS-defined community benefits. Many hospitals contribute around 2 percent to actual charitable care.

Yet only a small number of hospitals have had their tax-exempt status challenged or revoked on the grounds that the community benefits they provide are inadequate to justify the tax exemption.

Graphic: Health disparities in the United States
(Click image for larger version)

2. Loss of local tax revenue

At the local level, municipalities and school districts don’t get property taxes from health care organizations, which are often major landowners.

The Pittsburgh Post-Gazette calculated in 2012 that UPMC, the major health care provider in southwestern Pennsylvania, avoided paying about $42 million in property taxes on its $1.6 billion in property in Allegheny County. UPMC properties outside the county would have added approximately $4 million more. The city misses out on tax revenue from entities that benefit from city services such as infrastructure, and the institution profits from the tax breaks despite the fact that it focuses on profitable rather than nonprofitable patients.

In Milwaukee, Mayor Tom Barrett launched a payment in lieu of taxes plan in 2004, making a push to get major hospitals and other nonprofits to contribute to the city. He said that the city would have taken in $7.1 million more that year had hospitals contributed. By 2006 the city was only receiving $321,000 in payments from a handful of organizations; today no hospitals are contributing.

3. Third-party payers

Rarely does the consumer pay the sticker price — or anything close to it — since most Americans are insured by their employer or the government.

And if insurance is paying the cost of a surgery beyond a deductible, most patients don’t care whether it costs $50,000 or $70,000.

“It’s very hard to make health consumers sensitive” to prices, said Martin Gaynor, E.J. Barone professor of economics and health policy at Carnegie Mellon University. “You can’t get them to shop for health care like they would shop for gasoline.”

4. Prices are artificial

U.S. hospital prices are high and artificial. Health care systems set prices for procedures based on complex and usually secret processes. The so-called “chargemaster” price is not reflective of costs, reimbursements or what the procedure would cost in a real marketplace.

Data from the federal Centers for Medicare and Medicaid Services show the variations in what the approximately 3,000 hospitals that accept Medicare charge for common inpatient and outpatient services, and how the amount charged compares with what is actually paid.

For example, the average submitted charge for a cardiac echocardiogram is $4,381.64; what’s typically paid is $744.58. The submitted charges range from two to seven times higher than what is paid.

5. Poor reimbursement

Medicaid reimburses hospitals and doctors at the lowest levels, with private insurers generally providing the highest reimbursements, followed by Medicare. This means poor people (who are generally either on Medicaid or are uninsured) are expensive.

In some cases, large systems subsidize hospitals and clinics in poor areas with proceeds from richer hospitals. But often they jettison the poor performers.

6. Procedures pay

Reimbursement is heavily tilted toward tests and procedures done by specialists, such as surgeons or cardiologists. This drives more medical students to choose to become specialists because that’s where the money is (two-thirds of doctors are now specialists).

The reimbursement system also drives health care systems to perform more tests and procedures rather than lower-cost types of practice such as prevention, basic care and counseling.

A primary care physician who spends 45 minutes going over measures that could help a pre-diabetic keep from developing diabetes is not reimbursed for the time at anywhere near the level of the ophthalmologist who does cataract surgery for a diabetic patient.

The standard rates paid by Medicare show how the system rewards specialists. Under Medicare reimbursement rates, primary care physicians would make $101 an hour, surgeons would make $161 an hour and specialists doing nonsurgical procedures would make from $193 (radiologists) to $214 (dermatologists).

7. Bigger systems = more market power

Through mergers and acquisitions, hospitals have created large networks that can negotiate high payments from insurers.

A number of health economists have studied consolidation in the health care industry. Though arguments for consolidation are that it allows health systems to take advantage of efficiencies and can provide better, cheaper service, the data over decades indicates that’s not usually the case.

“After consolidation, prices hospitals charge for services have gone up in the range of 3 percent to 56 percent,” according to an October 2013 Robert Wood Johnson Foundation report that examined studies looking at hospital mergers between 1990 and 2008. “Studies that examine consolidation among hospitals that are geographically close to one another consistently find that consolidation leads to price increases of 40 percent or more.”


Lillian Thomas: lthomas@post-gazette.com or 412-263-1921. Marquette University student Eric Oliver contributed to this article.

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