Illustration by Jan Buchczik
This article appears in the June 2024 issue of The American Prospect magazine. Subscribe here.
In 2018, the Department of Health and Human Services issued a rule on hospital pricing transparency, requiring hospitals to post prices in easily accessible form. This was done under a Republican administration, and it expresses free-market ideology: If consumers have more information, they can shop around for the best price. A better-informed consumer will in turn discipline sellers, lead to more salutary competition, and restrain costs.
The rule was strengthened in 2021 to include sanctions for hospitals that failed to comply. What followed speaks volumes about the folly of attempting to use consumer market discipline in a profit-maximizing system that is opaque and manipulative by design. In practice, most people just follow the advice of their doctors and use the hospital where their doctor practices.
Suppose you are the rare outlier who would like to shop for the best deal. If you look at the website of Mass General Hospital, you will learn that an “HC BYP FEM-ANT TIBL PST TIBL PRONEAL ART/OTH DSTL” will cost you $35,014.00. Even if you can decipher what that means, it’s just the beginning of determining the real price.
Posted price lists give hospitals wiggle room by noting that the actual price will vary with the length of stay and the patient’s condition. And a bill for a single procedure typically has multiple elements, from individual treatment aspects like sutures or anesthesia, to “facilities fees,” which have of late been added even to routine outpatient care, like consultations and ordinary screening.
Every procedure has a billing code. In recent years, there has been an epidemic of upcoding, in which the hospital bases the charge not just on the procedure that necessitated the current visit, but on every prior condition the patient has ever had.
Upcoding also undercuts one widely hyped reform that was supposed to restrain costs: so-called Prospective Payment Systems, which were introduced in the late 1980s. The idea is to pay hospitals a lump sum for treating a given condition rather than reimbursing each specific task. This was supposed to give hospitals an incentive to use the most cost-effective treatments rather than the most profitable ones. But with upcoding, two patients in adjoining beds can receive identical treatments, and the one with a medical history that becomes the basis for upcoding is more profitable to the hospital than the other. HHS audits hospitals to limit extreme abuses of upcoding but cannot audit every charge, and the penalties for flagrant abuses are slaps on the wrist.
People are skeptical of giving their data to Big Tech platforms. But they trust their doctor. Clinically, the physician needs to know their entire medical history and is professionally bound by an ethic of confidentiality. Patients expect their doctor to keep the information safe. Little do they know that this data is used to raise prices on them.
The airlines have multiple possible prices for the same seat, but hospitals have a practically infinite number of possible prices for the same procedure. Indeed, compared to hospitals, airline pricing is a model of transparency and simplicity.
ONE OF THE BIGGEST FALLACIES in treating hospital prices as consumer-determined—and why public posting is no kind of solution—is that most individual patients never actually do all the paying. Hospitals typically negotiate price schedules with insurers. Depending on the relative market power of the hospital and the insurer in a given area, the same hospital will make different pricing deals with different insurers.
In Boston, where I live, the Mass General Brigham conglomerate is both the most prestigious and the most economically powerful hospital system. Though insurers attempt to “manage” care, no insurer would dare tell a subscriber, or an employer who buys insurance for employees, that they are not allowed to use Mass General Brigham. That, in turn, gives the hospital more power to negotiate relatively higher charges with the insurer.
The insurers, in turn, have also been merging, in order to maximize their market power with hospitals. The wave of mergers in the health industry has nothing to do with greater “efficiency” and everything to do with the quest for greater pricing power.
But there is one area of convergence for these behemoths fighting over price. Both the hospital and the insurer gain to the extent that they can offload costs onto patients.
For instance, if a given procedure is not covered by insurance, the “self-pay” rate is typically several times that of the hospital’s negotiated rate with the insurer. This has nothing to do with the hospital’s costs; it simply reflects the fact that the individual patient, unlike the insurer, has no bargaining power and has not negotiated a discounted rate in advance.
Two patients in adjoining beds can receive identical treatments, and one is more profitable to the hospital.
I encountered one of the games hospitals play when my mother had an emergency admission to Mass General Hospital after a bad fall. She was admitted and treated by specialists, and was an inpatient for three days. But she was placed in a category invented by hospitals called “admission for observation.” That misclassification, for billing purposes, technically made her an outpatient.
Under Medicare, an outpatient is responsible for a 20 percent co-pay. An inpatient is not. But why does Mass General care if Medicare saves money? Because under a Medicare policy instituted under George W. Bush’s presidency, hospitals are punished if they bill Medicare under inpatient rates when they might have charged outpatient rates. So the government created an incentive for hospitals to make patients pay more.
Shifting costs to patients is a major source of profit maximization for both hospitals and insurers. Many insurers have a variety of complex requirements for authorizing treatment. The purpose is partly legitimate—to avoid medically unnecessary care—but it has the handy side effect of tripping up patients who fail to comply with some arcane technicality.
Having written numerous pieces on health care for the Prospect and having served earlier in my career as national policy correspondent for The New England Journal of Medicine, I am more sophisticated than the average patient trying to navigate the system. But in trying to determine what I needed to do to be sure that Blue Cross would cover a pending minor surgery, it took me upwards of ten hours on the phone with Blue Cross and staffers in two doctor’s offices to avoid getting caught in a trap that would have substantially increased my costs.
Blue Cross insisted that under my PPO plan, my treatment by a specialist did not require a referral from my primary care doctor. But after I saw the specialist, Blue Cross refused to pay his bill for the initial consultation, or to authorize further procedures. On what grounds? They had not heard from my primary care doctor.
After numerous calls and emails, I finally figured it out. Blue Cross has its own terminology and I wasn’t using the right words. Blue Cross does not require a referral to a specialist; but before it will approve payment, it does require pre-authorization based on a communication from the primary care doctor on the medical condition that necessitates the treatment.
If I hadn’t figured this out, I would have been liable for the specialist’s entire bill. At best, I would have to engage in prolonged wrangling with Blue Cross after the fact. The terminology game serves as a trap to confuse the consumer of health care.
None of these needless complications apply when the insurer is Medicare, an island of efficient socialized medicine amid an ocean of sharks. No referrals or “pre-authorizations” are required; there is no such thing as in-network versus out-of-network. The money saved from this endless gaming and counter-gaming goes to patient care.
Medicare Advantage is a whole other story. Despite the misleading branding, Medicare Advantage plans are run by private insurers. They are a kind of HMO, related to Medicare only in the sense that if you qualify for Medicare, the government will pay premiums on your behalf to the Medicare Advantage plan.
These plans are aggressively marketed to older Americans on the premise that they offer lower-cost and better coverage. Traditional Medicare does have some deductibles and co-pays, though they can be covered if you purchase a relatively inexpensive Medigap policy. But Medicare Advantage has no co-pays, and special perks like gym memberships and wellness programs.
That’s the theory and marketing pitch. In practice, cost-shifting to patients, gaming the Medicare program, and reducing treatment are the central components of the business model.
Medicare Advantage plans often decide that a proposed treatment, test, or medication is not medically necessary. So the patient either absorbs the entire cost or goes without. Unlike traditional Medicare, the private plans also stringently limit which doctors and hospitals a patient may see. All of this makes Medicare Advantage plans highly lucrative to insurers, at the expense of patients.
In this sense, sticker prices and promises of cheaper coverage have no relationship to what the plan actually pays, or doesn’t pay, the doctor or hospital on behalf of the patient.
SURPRISE BILLING IS ANOTHER AREA where there is an endless cat-and-mouse game between insurance industry profit maximization and attempts to protect consumers. The most common sort of surprise billing comes when a patient gets treatment from a medical provider who turns out to be out-of-network, and charges an exorbitant bill.
The No Surprises Act of 2021 prohibits the most extreme forms of surprise billing. Typically, that occurs when a medical provider whom the patient did not select, such as an anesthesiologist in a surgical procedure, turns out to be outside the insurer’s approved network, and the patient is billed after the fact for the full, nondiscounted fee.
The federal government found that 16 percent of in-network hospital stays involved at least one non-network provider. The act says that hospitals and other providers must not bill patients for more than the in-network rate if it turns out that someone on the medical team was out-of-network.
But the whole concept of in-network versus out-of-network is worth a closer look. It began in the 1970s with the arguably legitimate premise that the entire team of doctors who worked for an HMO were in close communication on a patient’s comprehensive needs. This supposedly improved care and reduced costs. The patient, therefore, needed to use a specialist who was in-network.
ANTHONY NESMITH/AP PHOTO
Conglomerates like Mass General Brigham in Boston have more power to negotiate higher prices with insurance companies.
As HMOs grew from so-called staff-model systems into networks whose only common feature was that participating doctors agreed to accept the HMO’s treatment protocols and payment schedules, providers on the “common team” treating a given patient had often never heard of each other. The point was not better communication; it was restraining the HMO’s costs and increasing its profits.
Today, in-network versus out-of-network is a pure game of gotcha. If I happen to misunderstand the complex requirements and get treatment from a doctor who is considered out-of-network by my insurance company, there is no clinical difference. The only difference is that I am stuck with a larger co-pay.
Insurers and hospitals have used the issue of which doctors are in-network to play chicken with each other, as they bargain over what the insurer will pay the hospital. In New York, UnitedHealthcare has repeatedly threatened to remove Mount Sinai Hospital and its affiliated doctors from its network of approved providers. UnitedHealth has done this because Mount Sinai was bargaining for rates more in line with what the insurer pays other New York hospital systems. Had UnitedHealth carried out its threat, tens of thousands of New Yorkers would have had to pay out-of-network charges or switch doctors.
The hospital and the insurer finally came to terms in March, but only after UnitedHealth had already classified Mount Sinai inpatients as non-network, disrupting treatment of cancer patients, among others. As part of the deal, that cynical move will be reversed. Note that this battle had nothing whatever to do with using networks to ensure quality of care. On the contrary, it degraded care. It was purely about money.
IN THE LATE 1960S, A PHYSICIAN and public-health researcher named John Wennberg began doing systematic analysis of clinically unwarranted variations in medical interventions and their costs. The results, updated annually in what became the Dartmouth Atlas of Health Care, were shocking. Wennberg’s studies, among the most widely replicated findings in health research, found that hospitals in comparable cities performed medical interventions at absurdly divergent rates and with wildly divergent costs, based not on medical necessity but on market power and profit maximization.
Wennberg died earlier this year, at 89, and his work continues. A recent summary of his findings, spanning five decades of research, reports: “Where there are more hospital beds per capita, more people will be admitted (and readmitted more frequently) than in areas where there are fewer beds per capita. Economically, it is important for hospitals to make sure that all available beds generate as much revenue as they can, since an unoccupied bed costs nearly as much to maintain as an occupied bed. Similarly, where there are more specialist physicians per capita, there are more visits and revisits.”
In other words, supply generates demand. And it gets worse. The summary adds: “Studies by Dr. Elliott Fisher et al have indicated that there is higher mortality in high-resourced, high-utilization areas than in low-resourced, low-utilization areas. One explanation for this phenomenon is that the risks associated with hospitalizations and interventions—hospital-acquired infections, medication errors and the like—outweigh the benefits.”
One of Wennberg’s most consistent findings was a crazy quilt of pricing disparities. Despite decades of supposed reforms, that pattern keeps worsening. A 2022 study of pricing for cardiovascular procedures published in JAMA Internal Medicine found: “Across hospitals, the median price ranged from $204 to $2588 for an echocardiogram and from $463 to $3230 for a stress test. The median price ranged from $2821 to $9382 for an RHC [heart catheterization], $2868 to $9203 for a coronary angiogram, $657 to $25 521 for a PCI [treating a blocked coronary artery], and $506 to $20 002 for pacemaker implantation.”
Once again, these extreme pricing disparities had nothing to do with hospital costs. The fees increased in line with the hospital’s power to do so.
THE MORE COMPLICATED THE SYSTEM GETS, the more its participants rely on middlemen to shift costs. We see this with pharmacy benefit managers and group purchasing organizations, which claim to save money on drugs and medical supplies for insurers and hospitals, but which raise costs throughout the system because of the profits they skim off the top. My Blue Cross policy uses an outside vendor to review all claims and payments, and find reasons to deny some after the fact.
One cost-containment firm called MultiPlan has attracted extensive private equity investment and a position of dominance in the practice of determining out-of-network pricing. The firm’s algorithm, Data iSight, is marketed to insurers, and recommends ways to cut reimbursements and shift costs onto patients or doctors. Sen. Amy Klobuchar (D-MN) has accused MultiPlan of being a form of algorithmic collusion, gathering payment data from across the industry and using it to inform its low reimbursement rates. “Algorithms should be used to make decisions more accurate, appropriate, and efficient, not to allow competitors to collude to make healthcare more costly for patients,” Klobuchar wrote in a letter to the Federal Trade Commission and the Justice Department.
Another middleman comes in the form of electronic medical records. These were supposed to revolutionize medical care by making it easier for doctors to access patient histories. What some would call a natural monopoly of hospital patient data was quickly taken up by Epic, a for-profit product sold by an outside vendor. But although numerous hospital systems now use Epic, doctors affiliated with one hospital typically cannot access patient records at another.
That’s because the Epic system only pretends to be mainly about providing access to computerized patient records; it’s primarily about maximizing billing. All of the upcoding I talked about earlier is facilitated through Epic. When patients are asked about their prior medical history, each keystroke can enable hospitals to add a code and raise prices. And for clinicians, it is more time-consuming than a purely clinical data system.
The more complicated the system gets, the more its participants rely on middlemen to shift costs.
Obviously, patients suffer from this in the cost of medical care. Even if they don’t feel the direct cost in co-pays and fees, they eventually have it passed through to them in higher insurance premiums as well as frazzled doctors. And that brings up another cost: how it affects the quality of care.
I see an eye doctor twice a year for a condition that requires monitoring. When my ophthalmologist retired, I was referred to a new one whose practice had been bought by the hospital. He spent about ten minutes with me, skimmed my chart, did not bother to take a history, and did a cursory examination. He had two waiting rooms, and raced between patients, almost as if he was on roller skates.
When I sent him a very polite note to express some concern, I received back a plaintive letter going into great detail about his economic situation. His net earnings were about half of what he had expected. He lived in a small apartment, and drove an old car. The only way he could make a decent living was to see what he acknowledged were too many patients. And the hospital, which took a cut of his caseload, put no limits on how many he saw.
The abuse of medical professionals is especially extreme in the area of mental health. Each insurance company has its own protocols, its own payment scales, and systems for clawing back payments if its consultants can find some excuse. Too many clinicians find the system too much of a hassle with too much personal risk, and decide not to take insurance at all. Their patients are typically rich people who can afford to pay out of pocket, while far needier people, both economically and clinically, struggle to find someone who will treat them.
NEEDLESS TO SAY, NONE OF THIS GAMING and counter-gaming around prices operates in national health systems, either in the comprehensive systems of socialized medicine on the British model, or the tightly regulated systems of true nonprofit insurers and hospitals on the German model.
In the British National Health Service, there are no prices for procedures at all. Each hospital in the system is given a global budget to serve a population of patients. The hospital allocates its budget as efficiently as it can. Doctors are salaried, based on the size and age of their patient panel. Specialists are also salaried.
We’ve seen global budget reforms attempted in the U.S., but only on a limited scale. The entire system of insurers here is parasitic on the provision of actual health care, and the industry of middlemen is a parasite on top of a parasite. Each hapless attempt at price reform only creates new openings for gaming and more opportunities for middlemen.
The fact that universal socialized systems have no counterpart to the U.S. system of price manipulation, with all of the money spent on administration and gaming, goes a long way toward explaining why the U.S. spends upwards of 17 percent of GDP on health care and the typical OECD country spends about 11 percent.
That difference—6 percent of GDP—is about $1.5 trillion a year. Just imagine what else we might do with $1.5 trillion a year. The only solution is to get rid of prices entirely by treating health care as the social good that it is.
