My continued commentary on the TIME magazine article “Bitter Pill: Why Medical Bills Are Killing Us“, and it’s first section.
Section 1: Routine Care, Unforgettable Bills
I think another important distinction that is missing from this article is the difference between charge/price, cost, and reimbursement. The author makes references to this distinction but doesn’t come outright and say it.
Health care is one of the few industries where the price of goods/services provided is not the same as the reimbursement. Cost is easy – that’s the cost associated with producing a good or providing a service. Price (or charge) is also easy – that’s the amount that the person who produces the good or provides the services expects to be paid. Reimbursement is where things get a little tricky…
When I explain these concepts to medical students, I like to make the analogy to the retail and automobile industries. For example, when you walk into GAP or Abercombie & Fitch to buy a sweater, there is a price associated with purchasing that sweater. The retailer produced the sweater at a certain cost and plans to sell it to you for a price. At the end of the day, you pay whatever the price on the tag might be (whether full price or on sale – you’re still paying whatever the price is).
It’s a little different when shopping for a car. There is still a price, in this case the Manufacturer’s Suggested Retail Price (MSRP) which is ideally the price that the car dealer would like you to pay for the car. Clearly there is a cost associated with producing that car. But unlike buying a sweater, the MSRP doesn’t always correspond to what you actually pay. Most people are able to bargain down that price, and that amount is what the auto dealer gets reimbursed. So unlike in retail, where the reimbursement and the price are the same, the reimbursement in the auto industry sometimes falls somewhere in between the price and the cost.
The healthcare industry is similar to the auto industry in that there is a price, a reimbursement, and a cost to services provided. That’s about where the similarities end. Because unlike the auto industry, that knows almost to the penny what it costs to produce a car, the health care industry is virtually unaware of what its costs are on a microscopic level. To be fair, it’s a complicated process, but because the costs of services remain largely unknown, the price of those same services becomes hard to justify. As Brill points out in Section 2, “the chargemaster prices are so high and so devoid of any calculation related to cost.”
Those prices also vary dramatically from hospital to hospital (the author alludes to this when discussing the chargemaster and in Section 3). In the automotive world, the MSRP does vary somewhat from state to state and region to region but not between dealerships in the same general area. But unlike the auto industry, which clearly posts the MSRP even before the car is purchased, health care institutions generally do not post the prices of their services, leaving patients largely in the dark about the price of the healthcare services that they seek until after they’ve already “purchased” those services.
When you add in health insurance, the complexity of the situation grows substantially. Insurance throws a wrench in for a few reasons: 1) insurance largely shields patients from the price of services, 2) insurance companies must negotiate reimbursements with individual providers, and 3) those negotiations are considered “trade” secrets, meaning that hospital A has no idea what insurance company X is reimbursing hospital B (and vice-versa), but insurance company Y has no idea what hospital A OR hospital B is being reimbursed by insurance company X. This all leads to any single hospital receiving a variety of different reimbursements from each insurance company with which it negotiates. It also means that even though my insurance policy and your insurance policy from the same company may appear identical, the insurance company may be reimbursing dramatically different amounts for the same service even to the same hospital.
As if it wasn’t complicated enough, healthcare has two added wrinkles that aren’t present in the automotive industry: 1) information inequality and 2) emergency services. I’ll explain each of these.
In general, car buyers can get to choose between purchasing the standard car model or upgrading for things like enhanced sound systems, leather seats, built in GPS, etc (in addition to knowing the price of each upgrade). Patients, on the other hand, do not know which services they require for the condition with which they present to a doctor’s office or hospital. After all that’s what physicians are for, to tell us what is actually wrong with us or to order the appropriate studies to figure out our condition. But the inequality of information means that patients also can’t decide which services they DO NOT need.
Few people need “emergency” automotive services. I’m sure someone out there can come up with a convincing argument to the contrary, but compare that to having a heart attack or severe car accident – situations where you clearly need emergency medical services. Unlike buying a car, where you can go from dealership to dealership on your own time schedule until you get the price you want, you don’t necessarily have a choice of which hospital to go to during a medical emergency. There’s no bargain shopping when you have excruciating chest pain or life threatening injuries from a bad accident. And again, the inability to choose the services you need becomes even more pronounced during an emergency.
Finally, I’ll end with something in support of Steven Brill. On page 2, he speaks about the chargemaster prices, and hospital executives at Stamford Hospital retort that “few people actually pay those rates”. And that’s true, few people pay the full price for medical services, in fact almost every insurance company pays a negotiated discounted reimbursement. But the sad irony is that people without insurance, those least able to pay, DO in fact pay full price. And as Brill goes on to mention in further sections of the article, these people are either unaware that they can negotiate those prices down or encounter hospitals unwilling to bargain. It would be equivalent to forcing the most needy to buy a GAP sweater at full price when everyone else is secretly getting it on sale.