Rising medical costs affect all of us. Health insurance prices are through the roof, drug prices are through the roof, the price of medical services is through the roof. My concern is that we have no easy remedy for any of it.
The Problem of Martin Shkreli
Rising medical costs: ethics vs the free market.
In 2015, Martin Shkreli acquired the rights to the drug Daraprim, and quickly increased the price from $13.50/pill to $750. The drug is used to treat a number of parasitic diseases, particularly toxoplasmosis, a rare infection in the developed countries, but common among AIDS patients.
The media and Congress went wild. Shkreli is currently on trial for other things, but I’m not sure what Congress could do about his price gouging. Shkreli may be unsavory, he might even be a sociopath, but we have no mechanisms, nor even paradigms, to deal with unethical business activities, even when they involve critical problems such as rising medical costs.
The Free Market
In our system of government, I can’t see how the law should be involved. We live under a governmental strategy which says that one can charge whatever the market will bear. Microsoft sells software packages for up to tens of thousands of dollars, when the product cost is essentially zero after the first one. Chewing gum and bottled water cost pennies to make, but the retail price is upwards of a dollar a unit. People in various financial sectors make billions of dollars in ways that most of us simply do not understand, for doing nothing but moving money – our money, at that – from one place to another.
Rising Medical Costs
That doesn’t mean that rising medical costs aren’t a severe problem which badly need remedy. And you may not be affected with AIDS, but price gouging is going on everywhere in medicine. There are drugs we use in the ER – drugs which are no longer under patent, mind you – that have recently gone through the roof.
Consider vasopressin, which cost $4 a dose four or five years ago. It now runs $110. Nitroprusside is another emergency drug, recently costing $8, now $800. There is hydrocortisone; the pills cost 15¢ apiece. The suppositories however, which any pharmacist can quickly compound from the pills, cost $38 apiece. Vitamin K tablets very recently cost $1 apiece, they are now $50; unfortunately it’s much worse than that, because pharmacies can only buy bottles of 100 pills, for $5K. Since many hospitals rarely use the pills, they tend to expire, further driving up consumer costs. Even worse is ketorolac, the generic for Toradol, a fancy Advil; in 2012 the pills cost $15 apiece. Now they cost $179 each, but only come in bottles of 100, giving a price tag of about $18K per bottle; those also tend to expire before being used. These two final examples bring us to how dates for drug expiration are set, which is another questionable aspect of drug pricing: every day the shelf-life is shortened generates an increase in profits for the industry.
Drug companies offer all sorts of reasonable-sounding explanations and defenses for their prices, of course.
So does Martin Shkreli.
Profits over Professionalism
The problem with these sorts of pricing cancers is that they quickly metastasize throughout the industry. There is a bedside test for hidden blood in the stool, that is considered a part of the physical exam. I put a sample on a card, add a reagent, and immediately know if there is something more that has to be done. In the old days, I would simply mark it as negative on the chart, or take further action if it were positive.
Then some sharp-elbowed accountant realized that hospitals were losing potential profits on the bedside test. So today, hospitals withhold the reagent from the doctors, so that the cards must be sent to the lab. What was once included in the cost of responsible medical care, is now billed at $30 or more. Here’s the sad thing: once the hospital pays for all the associated costs – it now must be securely bagged, labeled, transported to the lab, tracked, entered into the electronic system, billed for, and oh yes, everyone who handles the sample or the bag must wear gloves, handwash with expensive soaps, then apply sanitizers and moisturizers – what does the hospital actually make?
$5?
The Profit Motive
The most concerning thing about all of this is that there is absolutely no motivation for any of the responsible parties to lower costs. Everyone complains about rising medical costs, but remember, charges are typically a fixed percentage of cost. So as medical costs rise, everyone involved makes more money: hospitals, doctors, administrators, insurance companies, wholesalers, everyone.
Even patients are partly to blame. When a loved one is sick, nobody wants the Kia. Everybody wants the Cadillac, or even the Rolls.
Economics Isn’t
I have mentioned before that money and economics fail to deal with important aspects of the human condition. That’s our problem: the bottom line isn’t the bottom line. A bit tongue-in-cheek, I even suggested a new, fairer tax strategy based on this conflict. Not too many people liked it, even though it is firmly designed upon simple economics concepts and the primacy of the free market.
It is said that you can’t legislate morality, which is true. Our dilemma is that morality is nevertheless critical. We need to be able to trust that the people we deal with are investing in a long-term relationship, and looking out for our mutual best interests. Without that trust, much of our way of life falls apart.
So what’s the solution?
I hinted at one possible response in a post about how Bernie Sanders could be more effective outside of government, than inside.
I’ll come back to that, but first there are other topics we will need to consider.
‘Drugs’ courtesy of Images Money via Flickr.
The medical industry will bring the aging middle class in our society in the next couple of decades to their financial knees with ever-rising medical costs! It is highly unfashionable to call it what it is; GREED! But there it is!
Jack Ferstel
What you have left out of this article is where the problem with rising medical costs begins in a hospital setting. So this will be somewhat long, but I will try to keep it as short as possible.
1. Excessive administration cost run up by rising salaries for CEO’s and other administrators that used to make 5-6 times an RN and now make 50-60 times what an RN makes.
2. 24-7-365 staffing in departments regardless if there is a patient or not. The ER, Lab, Radiology etc all have to have minimal staffing to cover and “expected” workload. In some cases, this may not materialize, but the cost is still there.
3. Healthcare is 60-70 percent salaries and benefits and shortages of key staff members create a rising salary level.
4. Providers have to provide the latest technologies to attract qualified physicians and to cover the asses when an insurance claim comes up. “Is that the acceptable medical treatment provided by most all providers?” If it is not, the claim becomes greater.
5. Acceptable margins after discounts and expenses is usually 5% which is used to replace plant and equipment.
6. And this is the main culprit of idiotic medical bills. The government, through the Medicare cost report, requires the hospitals to bill for services on a line item basis. This is then used to determine the cost to charge ratio by department and that is then used to determine how much it “cost” to provide services to Medicare and Medicaid patients. Over the many years this has been required, every provider has looked for anything they can that is chargeable to increase revenues. And the kicker is Medicare and Medicaid have not reimbursed providers by the cost determined on the cost report since the mid 80’s for inpatients and 90’s for outpatients.
7. Any attempt to bill patients on a flat rate system where the bill is based on the discharged diagnosis (ie Normal Delivery $XXXX.XX or Hip replacement $XX,XXX.XX) will be rejected by CMS and the provider will be told to continue with the line item billing.
So instead of a hospital being able to determine what each diagnosis group costs and then add 5% or each ambulatory payment group costs plus 5%, hospitals will continue to bill like car companies used to charge for autos in the 60’s.
And this will promote “some sharp-elbowed accountant” identifying more items that providers can charge for in order to generate the profits to pay for equipment that physicians require to do their jobs with the latest and greatest technology.
Simply stopping by to say that a family member’s Part D coverage leaves thousands of dollars of prescription medications uncovered.
Any of you out there planning on retiring and counting solely on Part D to make it work are in for a stunning shock.
One real problem is that there is no real ability for a consumer to compare prices. What costs $100 at one hospital costs $1000 at another. And there is no published list of services with prices that a consumer can compare.
Capitalism works well when the consumer can pick and choose services based on cost and quality.
That goes right back to the way government requires hospitals to bill. I tried when I was finance director at a medium sized NC hospital to get our billing on a one line item basis. Everything packaged with all test bundled into one charge. Patients could call as ask how much and we could say $XX.XX. Medicare said NO!!!! You have to bill for each service utilized, so one patient with one doctor had certain procedures and another patient had different doctor who used different procedures. And some patients with the same doc’s had different procedures, Depended on the patient’s needs, but there was no way in hell to tell anyone how much their hip operation would cost or their normal delivery would cost. All we could do was estimate and then when it was higher than the estimate, the patients was pissed off. Complain to CMS, Medicare, your congressional rep and senators and specifically identify CMS’s requirement for line item billing by department as the problem!!!!
Well, here we get into fuzzy information. We are enamored of mass production and identical products and services (which is never completely true; I find it fascinating that Detroit still struggles to stamp out identical sheet metal parts). Google ‘cosmetic surgery gone wrong’, and then reflect on the fact that everything about medical care is custom-made. So ‘What is the cost?’ is one problem. ‘What is the value?’ is another which really defies many economic principles.
I understand that something as complex as a knee replacement cannot have a fixed, published price. But, there is no reason that prices cannot be published for a chest x-ray, an MRI (yes, I know there are many flavors), a Tylenol, et al. There ARE many products and services that are pretty much fixed for any type of patient.
Actually, the prices shouldn’t vary much in a market, the insurance companies see to that. To my mind, the central problems are a) the quality of the care, and b) the commitment to reducing costs. Good data is hard to collect, hard to find, hard to analyze.
And that is a argument that I failed to use with DURL concerning flat rate billing. All insurance companies pay based on a discharge diagnosis so why not bill the same way?
Yes, cost analysis can be tricky. Some providers have excellent cost analysis tools to determine their cost of services by diagnosis, doctor, etc and others are still stuck in the 80’s technology because they refuse to invest in technology that will provide them with that information. And then we have the issue with staff to run those systems and when you mention increasing FTE’s to a hospital CEO, they about stroke out.
DURL..why can’t knee replacement have one charge? You do a cost analysis of many replacements over a period of time and determine your average cost for that service. Then you add to that whatever you need as “profit” (in a non-profit Net revenue over Expenses) and that is your charge. And the charge is based on the discharge diagnosis so those with complications are calculated at a different rate than one without complications.
Why do we have to charge for each item or service used by the patient? You do not see an auto invoice with every nut, bolt, steering wheel, seats, tires, rims, engine, radiator, etc etc so when someone has something done in a hospital, why do they have to bill that way?
It SHOULD! I was just trying to give the Bookscrounger some room since he seemed to think that costs for everything can’t be fixed since people are different.
I can see that a generic term like “Brain Surgery” would be inadequate as some are quick and easy and others are very complex and time consuming.
But more commonplace things like a knee replacement, a bone set and cast, a Tylenol administered in a hospital room, etc. SHOULD be fixed AND available to a consumer who wants to shop for their medical services.
Durl…There are around 500 inpatient groupings based on the diagnosis and condition of the patient, If my memory serves me correctly, there are 10-12 different diagnosis groupings for brain surgery. This is one of those that have multiple diagnosis compared to orthopedic procedures that have no more than two for specific body parts. (One for patients with complications such as heart problems or diabetes and one for patients without complications).
My point in this monstrosity of charge masters in hospitals that contain over 10,000 charges for a medium sized facility and more for larger facilities is the fact that the government is the one screwing up the system. Insurance companies long ago began paying on groupings and not individual charges for inpatients and many of the outpatient procedures. Even medicare pays based on discharge diagnosis, not charges. They just have thousands working in Baltimore reviewing a yearly report that all hospitals have to complete and that report is no longer used for anything significant other than keeping government workers employed.
And the discharge diagnosis that is used for reimbursement by insurance companies is that which is assigned by the coders in medical records, not the ones assigned by the clerks in departments throughout the hospitals that are High School graduates trained on the job to search for one of those 10,000 charges that applies to the service performed in their department. That is one of the reasons for such high error rates in charging. If the bills were based on medical record coding, the error rates would be significantly less since that is based on medical data and not revenue data.