Hospital charge variation and Medicare equipment fraud: two forms of gaming the “non-system”

There has been extensive coverage of the recently published report from the Center for Medicare and Medicaid Services (CMS) that revealed dramatic differences in the prices charged for medical services between hospitals, not only between regions but also within the same city. “Hospital Billing Varies Wildly, Government Data Shows”, in the NY Times May 8, 2013, reports that “A hospital in Livingston, N.J., charged $70,712 on average to implant a pacemaker, while a hospital in nearby Rahway, N.J., charged $101,945…In Saint Augustine, Fla., one hospital typically billed nearly $40,000 to remove a gallbladder using minimally invasive surgery, while one in Orange Park, Fla., charged $91,00. …In one hospital in Dallas, the average bill for treating simple pneumonia was $14,610, while another there charged over $38,000.” 
Bloomberg News notes that treatment of psychoses ‘showed the greatest price discrepancies, with the most expensive hospital charging $144,523, more than 52 times its cheapest peer,’ and the ‘most common procedure in the data, treatment of simple pneumonia and lung inflammation with complications, had prices ranging from $5,093 to as much as $124,051.’” The Kansas City Star reports, in “New data reveal puzzling differences in hospital charges”, that “… the hip replacement surgery that one hospital in Ada, Okla., charges at $5,304 cost $223,373 at a hospital in Monterey Park, Calif.,” and giving a local example, “In Kansas City, charges for that surgery range from $24,874 at Truman Medical Center Lakewood to $66,268 at the University of Kansas Hospital.”  Among the many other news sources covering this are Wall Street Journal (“Data shine light on hospital bills”), USA Today, AP,  Los Angeles Times, Washington Post, and others.  The LA Times article notes that the data call “into question medical billing practices just as U.S. officials try to rein in rising costs.”
But, of course, this information should come as no surprise; it confirms something not only well-known by hospitals and physicians for a very long time, but repeated reports by investigative journalists over the last several years. These have included  Atul Gawande’s article, “The Cost Conundrum in The New Yorker June 1, 2009 (my blog coverage in Medicare Costs: “All Politics are Local”, June 11, 2009) and Steven Brill’s February 2013 Time magazine piece “Bitter Pill: Why Medical Bills are Killing Us”, which I discussed in Squeezing the needy: a truly flawed financing system for healthcare, March 2, 2013. Hospitals’ “charge masters” list “list prices” for any number of procedures and equipment which, as noted above, vary wildly. Although Medicare performed the study, in fact Medicare does not pay those prices or anything close to them; it sets its own payment schedule for these procedures which does not vary much between hospitals. However, as Gawande makes clear in “The Cost Conundrum”, there is a second problem arising from the fact that some hospitals seem to do – and bill Medicare for – a far larger number of procedures than are done by other hospitals caring for similar populations.
So why do they have these charges and why do they vary so widely? They vary because different amounts of “fixed costs”, the expenses that hospitals have that are not for the individual patient (staff, building maintenance, equipment, etc.) are loaded into these charges, as are more or less profit. They are high because there are occasional payers (fewer all the time) who do link their payments to charges, such as Worker’s Compensation. While Reutersquotes HHS Secretary Kathleen Sebelius as saying “When consumers easily compare the prices of goods and services, (providers) have strong incentives to keep those prices low. But even basic information about health premiums and hospital charges has long been hidden from consumers. These rates can vary dramatically in ways that can’t be easily explained,” it is not clear that posting the prices, or having smaller differences, would be of much help to most people. 

Large health insurers, like CMS, do not pay the posted “charges”; although they pay more than Medicare or Medicaid, their payments to hospitals are usually tied to Medicare charges as a multiple (e.g., they might pay 2 times Medicare). Of course, the group that most clearly gets screwed are people with no insurance at all, who are in fact billed for the entire list charge. They are, also of course, very unlikely to be able to pay any significant portion of those charges (minus the rare sheik or hedge fund manager who might show up). Therefore, the difference between owing $24,874 to Truman Medical Center Lakewood or $66,268 to the University of Kansas Hospital for hip replacement surgery may be largely theoretical to them, but in the meantime, it can, and frequently does, absorb their life savings, ruin their credit, and throw them into bankruptcy. And there are “middle class” uninsured families who might be able to pay off $24,874 over a few years, but for whom $66,268 is more than they could pay in a lifetime. (Fortunately, most hospitals, including I know the University of Kansas Hospital, do develop payment plans for patients, which, if they make payments that are agreed on can preserve their credit.)
Meanwhile, in “Medicare anti-fraud effort has Missouri roots” (Kansas City Star May 7, 2013), Lindsey Wise, the paper’s Washington correspondent, describes how the concerns of a St. Louis physician that she was receiving requests from medical device sellers for approval of medical equipment that she hadn’t ordered, and that it turns out her patients hadn’t requested, led her senator, Claire McCaskill, to hold federal hearings. As noted by Sen. McCaskill, “Most Americans have seen ads on TV or received calls or letters promising medical equipment ‘at little or no cost to you,’”  but, as she adds, “there is always a cost to you, because it is paid for by federal tax dollars.”  Both Dr. Kennedy’s patients and others testifying before McCaskill’s committee said they often receive several calls per day from device retailers. Investigations of two companies that had faxed unsolicited requests to Dr. Kennedy discovered, respectively, a 68% and 92% “error rate”, a euphemism for what may well be fraud.
Why mention these two separate issues, Medicare fraud by medical device companies and huge charge disparities among hospitals for the same procedures, in the same blog post? While definitely different – the device sellers, at least those who are guilty of such practices (“Please don’t convict the entire industry,” says the executive director a trade association that represents medical equipment companies), are unscrupulous and perhaps committing fraud, while the hospitals are not – they share they key characteristic of seeking profit by “gaming” the system. Medicare pays for medically necessary equipment (including scooters, oxygen, diabetes monitors, etc.) for patients who need them, and some companies selling them do aggressive direct-to-consumer marketing (as do pharmaceutical companies), to try to increase their sales. Hospitals post exorbitant “prices” for their services that bear little relationship to the cost of providing them (as proven by the wide variation) in hopes that the occasional payer will pay them, or at least pay a percentage of them (unlike Medicare’s fixed reimbursement). What they have in common is the exploitation of a nonsensical non-system of health care in which profit is pursued by taking advantage of its intrinsic disorganization.
For medical supplies, while Sen. McCaskill’s committee discovered many cases where patients did not want the equipment physicians were asked to approve, there are many others cases in which the patient is convinced that it would be good to have, say, a scooter that they don’t have to pay for —  even when the doctor thinks it is not necessary or might even be harmful (for example, when a person who doesn’t exercise because of their weight gets a scooter and does even less activity and thus gains more weight). Fraud is fraud, should be investigated, and it appears that it is being done.
For hospital charges, however, the solution is different. It would be to have a national payment system that, possibly with regional differences based on the cost of labor and other variables, pays a fixed amount for services, as does Medicare – a single payer system. It probably needs fixes (Medicare may currently pay too little, requiring private insurers to subsidize that care; certainly the law should allow the uninsured to be billed at no more than Medicare would pay), but a little rationality would go a long way.