Continuing coverage of Section 1: Routine Care, Unforgettable Bills in “Bitter Pill: Why Medical Bills Are Killing Us“.
Author Steven Brill likes to compare how much Medicare would reimburse for a test or procedure and compare it to what the patient is charged. He goes on in section two (page 4) to explain how Medicare actually pays for hospitalizations, but delaying this explanation and relying on how much Medicare would pay for single line-items is problematic. I’m not arguing that the hospital charges are not outrageous (I agree they are), but comparing Medicare reimbursements to fee for service charges/prices is about the same as comparing apples to broccoli. Comprehending why this doesn’t make sense requires a basic background knowledge of how Medicare pays different players in the system and what fee for service actually means.
Fee for service (FFS) is the easier place to start. For every service a doctor or hospital provides, a charge is generated which ultimately leads to a reimbursement. If I perform 100 gallbladder operations in a month, I get paid separately for each gallbladder operation. Similarly, if I see 30 patients in the office in a day, I get paid for each patient visit. FFS is by far the most common way that physicians are paid in this country – both by private insurers and by Medicare. It is also how most hospitals are paid by private insurers, but not by Medicare.
Proponents of FFS claim that this is the most fair method of payment because it reimburses providers for what they ACTUALLY do. For example, you pay a plumber each time the plumber comes to your house to fix a new problem. You pay him/her for the labor cost (his time and skill) as well as any parts he/she has to fix. Proponents say that FFS is the same way – you are paying for a labor cost (nursing, physician, etc) and the parts (medications, supplies, instruments, etc). Therefore, the itemized bills that the patients in Brill’s article receive are the same as the itemized bill you might get from the plumber. Makes sense right? Why should a physician or hospital be paid differently than a plumber? Proponents also point out that being paid for each patient visit encourages providers to see more patients – thus increasing access to health care services.
Critics of FFS, however, point out that this amounts to a hidden incentive to encourage providers to increase services in order to make more money. For example, consider the surgeon who is seeing a patient with an asymptomatic hernia – a hernia that isn’t causing any symptoms. Research evidence and practice guidelines state that asymptomatic hernias should not be operated on until they become symptomatic and start causing problems. But under the FFS system of payment, the surgeon has a perverse incentive to operate anyway because another operation means higher income. Certainly in the case of the hernia, the risks of surgery are relatively low. Another example would be a primary care physician ordering a few more blood tests than what are absolutely necessary – after all, the patient is already having blood drawn. Critics claim that the FFS system leads to unnecessary testing and procedures, and may even lead to unnecessary follow up visits – all of which result in additional payments to the physician. Waste in the system is generated by these sometimes duplicative and unnecessary tests and procedures.
Medicare realized that paying hospitals by the FFS payment scheme was financially unsustainable for the government. In an effort to save money and control health care costs, Medicare instituted the Inpatient Prospective Payment System in 1983, which pays hospitals not for each service provided, but by what are known as diagnosis related groups (DRG). The system has changed overtime, although those details aren’t terribly important. Medicare uses categories developed by researchers at Yale to describe all of the types of patient care in a hospital setting. Patients are assigned to these categories based on the principal diagnosis for which they are receiving care; only one DRG can be assigned per patient stay. Instead of paying for each service, Medicare pays hospitals a lump sum for all of the care provided for a specific DRG, regardless of the actual cost of care. Therefore, if Patient A and Patient B are admitted to the hospital and assigned the same DRG by Medicare, the hospital receives the same payment for both patients even if Patient A requires many more services than patient B. Medicare uses a complicated formula to determine the one-time payment for DRGs (there are numerous adjustments for geographic location, overhead costs, how sick the patient is, etc.)
There are proponents and critics of this system as well. Proponents claim that Medicare’s reimbursements are much closer to the actual cost of care and therefore a more reasonable payment. The thinking is that these payments force hospitals to closely monitor costs and reduce waste to lower costs – although there is little evidence to support that has actually happened. Critics claim that the DRG system encourages providers to do less and to discharge patients from the hospital sooner – after all, the hospital doesn’t get paid for additional days of care.
There is ample evidence to show that the average hospital length of stay has decreased over time. Coincidentally, the number of admissions to hospitals have skyrocketed – as hospitals discharge patients sooner, empty beds become money losers instead of money generators, and hospitals have scrambled to fill beds (another criticism of the DRG system).
Comparing Medicare hospital reimbursements to traditional fee for service is precisely why Brill’s analysis is off. Medicare does not reimburse hospitals for individual line items like CT scans and blood tests, but rather reimburses one lump sum for all of the services provided between patient admission and discharge. Therefore, parceling out what Medicare would reimburse for a particular item is nearly impossible at the hospital level.