Healthcare economics – Medical billing: an arcane, problematic system

There is an article in the NY Times today discussing healthcare costs. The topic is complex, such that it’s admittedly challenging to write a story that is accurate and succinct. Even recognizing these challenges, I think the NY Times story has some notable inaccuracies.

I’ve written in the past about healthcare economics (see here and here). Below are some thoughts as to where the NY Times article is flawed in its discussion of bills for medical procedures.

The majority of payments to doctors and hospitals come from insurance providers, either private HMOs, Medicaid (state-sponsored insurance for the indigent), or Medicare (federally-sponsored insurance for the elderly). For hospital visits, such reimbursement from insurers is generally based on a DRG system (disease-related group) in which a given diagnosis prompts a comprehensive payment amount. For example, a patient who is admitted to the hospital for pneumonia would have a specific diagnosis code which would trigger a defined sum. Payments still have variability, as patients can have multiple diagnoses and because hospitals can identify ‘severity’ factors that can be applied to modulate the reimbursement. The actual amount that the hospital charges as seen on the bill is largely irrelevant . . .  as long as someone has insurance. A bill for $30,000 might result in the hospital being paid $5,000 by the insurer. Further, hospitals do not perceive that they are paid inadequately. These payments for services are negotiated in advance until they are deemed acceptable (to both the hospital and the payer).

So why are hospital bills so high? The system of medical billing is arcane and has a complex history. Some patients who are either very sick or who suffer unexpected complications incur extreme outlier costs. Insurance plans, especially Medicare, recognize that this happens and makes catch-up payments to compensate. The reimbursement system used to be based on the bills submitted by hospitals. At one point, hospitals were incentivized to raise prices to egregiously high levels in order to create the illusion of high outlier charges. This practice was an inappropriate, arguably illegal, gaming of the system and has been corrected. However, old habits die hard. Medical providers still charge at unrealistically high prices despite expecting payments of far lower amounts.

The current practice of billing unrealistic prices has the greatest impact on those who are uninsured. For very low income individuals or the indigent, the bills might be less relevant  – these individuals might disregard the bills, and hospitals/providers are unlikely to pursue collections from individuals with no income or assets. For middle income individuals who may already be facing their own challenging economic situations, these bills can be devastating. For all of the flaws of the healthcare reform law, it is the benefit to this population of middle income uninsured where I expect the law to have the single biggest impact and the greatest good.

The NY Times article does correctly point out that medical costs run at about 18% of GDP here in the US, which is much higher than most other developed countries. This begs the question as to where the money goes. The answer is complex and multifactorial, and difficult to identify with any precision. Having said this, here are the factors:

  1. Overuse of the system – Insurance is expensive. Once people have it, there is not-uncommon mentality that people should use it, especially since they have paid for it. This may manifest itself as having a very low threshold for seeking medical care.
  2. Bad care – There is a tremendous amount of bad care that exists. Examples (just to name a few) include many spine surgeries, overuse of branded drugs when generics are available, and excessive lab tests and procedures.
  3. Bureaucracy – About 82% of money spent on healthcare is actually spent on medical care. Ten to15% of healthcare dollars are spent on the administration (billing, checking, oversight). An additional few percent (roughly one to five percent of insurance premium dollars) is kept by insurance companies as profit. Further, of the 82% that is spent to pay for actual care, a significant part of this is spent on the provider side for their own administrative efforts. It is not possible to eliminate administration and oversight, but the amount of waste is frustrating and excessive.
  4. Redundancy – Patients often seek second and third opinions, especially for expensive or more significant health issues. The cost of these visits, coupled with redundant lab and diagnostic tests, adds up. Healthcare IT will still take years to implement but the process is strongly underway. This should be a major driver of fixing this particular problem.
  5. End of life care – We all die eventually. As one approaches the end of life, decisions take on a heightened emotional weight. It is difficult for family members to let a loved one die when there is more that can be done. However, aggressive intervention is not necessarily kind. Further, as a society, we need to determine how much cost is acceptable for a finite benefit. Is spending one hundred thousand dollars to prolong the life of someone with cancer financially viable? By default, the current societal answer is ‘yes’ (we [society in the U.S. at large] pay such costs for currently available therapies). That may be fine and appropriate, but currently it is more a decision of default. At some point, this issue should be debated at a societal level in a fully informed setting.



As a complete digression, the NY Times article discusses how the family at the center of the article (used to personalize the story) is cost conscious as exemplified by the observation that they buy their bottled water in bulk to cut down the unit cost. Seriously?? If they are so cost-conscious, drink tap water!


source: The $2.7 Trillion Medical Bill (NY Times)

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