Time Magazine contributor Steven Brill has created a bit of a sensation due to his recent, February 20, 2013, article and Time Magazine cover story entitled, Bitter Pill: Why Medical Bills Are Killing Us: http://healthland.time.com/2013/02/20/bitter-pill-why-medical-bills-are-killing-us/#ixzz2LkTuy5lv.  Mr. Brill caused controversy both due to the length of the article, 26,000 words, and his revelations about the high prices and seemingly arbitrary pricing methods in our so called healthcare system.  His article has prompted a number of other reporters to pick up the themes and provide both points and counterpoints to his article.  One such story is Steven Brill’s 26,000-word health-care story, in one sentence, by Sarah Kliff published in the Washington Post Wonk Blog: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/23/steven-brills-26000-word-health-care-story-in-one-sentence/.

The supposition is that America’s healthcare costs are high and that the problem is that the government doesn’t regulate prices, as it does in other countries, or that we do not have government sponsored healthcare, so called single payer, or universal care.  Their data points support the thesis and they make convincing arguments that some form of regulation is needed to fix the problem.  The problem is that hidden inside the data in the report is actually the root of the problem, and the reason why the articles lead to the wrong conclusion.
This is not a simple problem of greedy hospitals and doctors conspiring to have confiscatory prices to rob consumers.  It is also not that the insurers are much better at negotiations and therefore they can drive bargains that individual consumers cannot.  Also, it is not quite accurate to think that our cost of care is significantly higher than other countries and that the outcomes for dollars spent in the US are woefully poor.  Finally it is also a bad assumption to think that some form of regulations will cure the issue.  The reasons for these statements are not to attack any of these writers nor their research.  The reason is to point out that there are many more things at work in the disjointed, dysfunctional, and disaffected self-predatory industry we call healthcare that are causing this problem.
Why this issue is so complicated, and how it became to be this way is also so complicated that I had to almost write my last book, “The History and Evolution of Healthcare in America: The untold backstory of where we’ve been, where we are, and why healthcare needs more reform,”  just to explain it for myself.  The first problem with the supporting data is that it is actually on its face correct.  You can look at any hospital bill and see an unbelievable disconnect between the invoice price and the amount reimbursed from Insurance companies, TriCare, Medicare or Medicaid.  For any normal person, this looks just like what both Mr. Brill and Ms. Kliff report it to be, that uninsured individuals are getting raped by hospitals, and the healthcare system, while those with buying power get better prices.  The problem with this assumption is rooted in the history of how our expectations from the healthcare system evolved, how indemnity insurance and employer sponsored insurance evolved and how an already self-predatory disjointed set of competing industries evolved to maintain their viability.

Why Healthcare Bills are so high

There are many, many, significant factors that are driving up the cost of care.  Again, my book discusses most of these in some detail but for this discussion we will focus on two that cause problems with the current systematic solutions.  The first is that high prices evolved not as a way to over-charge consumers but as a method to keep pace with the ever shrinking reimbursement rates from insurers and the government as indemnity insurance evolved into PPO, HMO and other forms of coverage. In the past thirty years, hospitals and other providers were faced with a billing system endemic in the practice of healthcare that was originally adopted during the days of indemnity coverage.  As the system moved on, the basic practice stayed the same.  As more was demanded under coverage by employers and consumers, policies were expanded, and the rates for reimbursement to hospitals and providers began to drop.  Hospitals and others took a simple in-system approach.  As Sponsors (people paying for care like insurance companies and the federal government) began to dictate lower and lower reimbursement percentages, each year the Providers (hospitals and other providers) increased their billing rate in order to net the same amount.

As a side note, I know of what I speak because for a time in my career, I ran a decision support group (DSS) in a hospital. One of the largest parts of our job was to analyze these rates and prospected changes and reassess our billing rates to maintain the needed level of reimbursement. 

Here is how this worked in practice…

False Price Invoicing

Hospitals have a variety of contracts with insurers and other payers.  At each contract renewal, Sponsors negotiated—you can read dictated—a lower reimbursement rate and, in order to get paid the same amount the hospital increased the invoiced amount.  So to use a historically accurate example, Hospital X in 1995 charged approximately $10,000.00 for a non-perforated laparoscopic child’s appendectomy.  The reimbursement rate from all the Sponsors of care ranged from 28 cents on the dollar to 22 cents on the dollar with the average across all Sponsors, not including the self-payers—which are the root of the issue today—at 25 cents on the dollar invoiced.  The hospitals DSS group predicted that in the next contracting cycle Sponsor Y was going to reduce their reimbursement rate from 25 cents per dollar to 22 cents per dollar. So DSS recommended that the billing rates would increase to provide the same amount of dollars reimbursed.  In other words, if Hospital X received $2,500.00 in reimbursement for the current $10,000.00 invoice price; they now needed to charge $12,820.51 to get the same $2,500.00 reimbursement—not adding anything in for inflation.
The problem with this method, as both the authors point out is that the individual uninsured, self-payer, got presented with increasingly larger bills.  For a while hospitals made it easy, but not public, for people that could not afford these services to not pay the full price invoiced.  For a time, this lack of collection was easily subsidized through government programs that provided funds for uncollectable amounts.  Additionally, some smart lawyers began to challenge the high bills and some hospitals lost cases based on the argument that the consumer needed to pay what was the usual and customary rate of reimbursement not the inflated invoice price.  This is when things got messier.
If you fast forward today, and if you were to reexamine the invoice vs. reimbursement rate issues you would find that in today’s dollars, accounting for the disproportionate inflation of healthcare—which is another big piece of why healthcare costs so much—you will find the same child’s non-perforated, laparoscopic appendectomy would be billed out today as high as $42,000.00 and the hospital was reimbursed about $8,500 from Sponsors, on average.  This is a rate of about 20 cents on the dollar.  Regardless, the individual payer is getting hosed if they actually pay the invoice.

Govt. Mandated Rebate Programs

The second big driver of unrealistic costs, particularly with medications, is in the issue of rebates.  If you thought the previous discussion was complicated, this one gets even more so.  I am going to stay very simple for this discussion.  All medications flow through a distribution system that includes multiple steps and destinations to get the product from the manufacturer to the end user—the patient.  The steps include at a minimum, distributors, pharmacies (either independent, chains, or in provider pharmacies) and in some cases direct through Prescription Assistance Programs, aka Patient Assistant Programs, both called PAP programs in the industry.  At every step of the process there are rebate programs that have evolved over time.  There is nothing unusual about these rebate programs.  Rebate programs exist in almost every product based system.  The problem is not as much this system as it is in another mostly hidden part of the system; rebates to government entities and states.
As part of the initiatives to continue to drive down costs over the past years, the government through Medicare, Medicaid, Tricare and others have been leveraging federal program spend to drive down costs, Manufacturers who based their ability to make profit on economies of scale learned decades ago discounts on the front often do not realize the expected increases in volume to gain the economy of scale to support the lower price so they reverted to rebates that came after the volume was achieved.  So called fair trade laws that have been established over time also contributed to the trend of rebates after volumes were achieved as well.  When the feds and states began mandating rebates for program purchases Pharmaceuticals companies were in effect forced to comply.  These rebates can be as much as 50% of the program costs that after being paid to Pharma are then rebated back to Medicare, Medicaid, Tricare and the states.  The effect of these programs is a more than significant increase in the cost of medications.  If you look at one example.  The state of California Aids Drug Assistance Program (ADAP) spends about $500,000,000.00 per year on prescription drugs for HIV/AIDS patients.  Almost one-half of this amount is provided to the state in the form of rebate funds from the drug manufacturers due to the mandatory rebate programs.  So for every dollar that is spent on the drug under the ADAP program about one-half is provided back to California by the drug manufacturer. Effectively, this does not mean the price is raised by one half, the price is actually doubled.  California, is one of the states that shepherds these monies well and provides them specifically back to the patients in the form of more medications.  Many states do not. They take these funds into the state’s general fund and they can be used for almost anything they want.  They become a kind of black budget.  Unfortunately, there are a lot of people in governments that do not want changes to these funding sources to occur. Again, this is by no means the complete story.  It is here to illustrate the interconnectedness and systemic nature of the problems. The end result is a highly confusing pricing system that is based on fundamentally flawed pricing.  The actual pricing of sponsors and providers gets more confusing as some reimbursement rates are not set to manufacture cost or retail price but, to an arbitrary cost that is an estimated average Wholesale Acquisition Cost (WAC). This is a change from the last one which was called AWP or Average Wholesale Price which was so equally obfuscating and arbitrary a judge ordered the change to the current WAC which is little more than the same bad date with a new bad die job.
There are a number of other factors that are causing our high invoiced medical bills.  There is a disproportionate allocation of new money that has flowed to healthcare, again due to the systemic nature of how new money has been created and how the federal government spends in these categories, there has been a significant increase in costs of care due to an ever increasing level of expectations from us as consumers, that have driven employers to continually demand more coverage for their employees at the same policy costs, and we increasingly are relying on technology and biochemical methods to survive as we also live longer and sicker–all simultaneously raising costs. Add to this that none of the providers in this non system can predict what they will get paid, or reimbursed. There are many other significant factors as well. To discuss these here would be much more than the 26,000 words Mr. Brill needed.

Why Historical Context is Important in This Discussion

I have no criticism of Mr. Brill’s nor the other articles on the points they are raising.  Healthcare invoices are ridiculous and due to a number of other historical factors, the self-payer no longer is faced with a benevolent voice in the billing department winking and nodding that if they don’t pay, the unpaid bill will eventually be forgotten and the hospital will not pursue the debt.  Today despite what appears in the articles, many hospitals are not realizing the kind of money they need to keep the doors open from their reimbursements percentages. In the appendectomy example above, Hospital X needed 22% to keep apace not including inflation which in that year was significant–close to 8%.  Today, if all payments were at the reimbursement rate paid by Sponsors, hospitals would not survive.  Despite the statement that Medicare is a percentage over costs, this does not work in reality.  Hospitals have been relying on what is called cost shifting for years to make up the difference between declining government sponsored reimbursement and insurance companies EIS plans.  All the while it has been the uninsured self-payer getting caught up in the same mess with disastrous personal consequences.
Finally, to keep this article relatively short, even the amount of spending reported for the U.S. is suspect–last year $2.9 trillion.  This figure is collected from a large number of reports and sources and has a fundamental flaw.  It includes both invoice rates in some cases and reimbursement rates in others.  We simply do not know exactly how much our national healthcare is costing.  Since most people reporting on these numbers inure to the largest number for a variety of reasons, it is likely that if you could see the actual payments for services, the total U.S. spend is significantly less, perhaps as much as one-third less if not more.  If you then compare U.S. actual spending to that of other countries you find that we are often on par with them, in some cases slightly less and in others slightly more.  This is what should be expected in a system that due to our free market economy should provide a safety net for the helpless—filtering out the clueless and fraudsters, low cost care and choice for some to pay for more.

Closing

Let me say again, I am not faulting neither Mr. Brill nor Ms. Kliff for their reporting.  They have done an excellent job of identifying the issues facing uninsured, self-payers in this market. Yet, they unknowingly are addressing the symptoms not the causes of a much broader systemic problem, with a series of interconnected drivers that needs to be unwound and reconfigured into an effective and efficient real system of the provision of care. Unless we look at the historical context and understand what these historical decisions that led to this mess were solving for, simple governmental actions today will do what they have done for years, bring numerous and potentially catastrophic, in every sense of the word, unintended consequences. All the while directing us to focus on laying blame on some who are not actually causing the problem.
If you want to know more, buy my book!  The History and Evolution of Healthcare in America: The untold backstory of where we’ve been, where we are, and why healthcare needs more reform