The Alchemy of Hospital Billing

March 7, 2013

7 Mar (LEW ROCKWELL) – I thought it might be a good time to revisit topics no one in health care management at the hospital, government or insurance level wants discussed or understood.  I find it interesting that for all the talk of “health care reform” none of what I am about to outline is addressed in the Unaffordable Care Act.  That the following is not addressed by this “reform” is compelling proof, I think, that the health care legislation oozing out of Washington is like most of the rest: a pay to play scheme, one characterized by bribery and favors, as Murray Rothbard made so clear in his writings.

by G. Keith Smith, MD

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The diagram I have put together is by no means complete. This scaled-down version has been useful to me, however, to keep the players and how they benefit, straight. Not shown is how the government is complicitous in this arrangement. Tricky Dick Nixon’s 1972 HMO Act and the continually maintained perversion of the tax code that provides for the deductibility of health insurance premiums by employers and not for employees play a huge role in propping up this dysfunctional system, a role, the magnitude of which is hard to estimate. This preferential tax treatment is a huge gift (in essence a subsidy) to the insurance companies, as they can write one policy covering thousands, rather than thousands of policies to cover thousands. Every opportunity to change this has presented itself, the most conspicuous being the period of time the so-called, small government Republicans controlled both houses and the white house.

A local legislator recently remarked on Aetna’s introduction of a bill in Oklahoma to introduce a new insurance product, the E.P.O., or exclusive provider organization. He said, “it’s a free market, they should be able to offer whatever product they like.” On the contrary. PPO’s (preferred provider organizations), ostensibly set up to control costs and maintain quality, have performed the function the insurance companies hoped they would: the cartelization of health care, an arrangement that limits the entrance of new competitors and one where “arrangements” beneficial to the cartel members are much easier to control and manage. I maintain that the breakup of this cartel, whose back is broken by price transparency, is not only necessary and desirable but is the only way to harness the free market power to transform the pricing (lower) and the quality (higher). Breaking up the cartel requires that we first understand it.

In the diagram to the right, the benefits of a Giant Hospital Bill (GHB) are shown. On the left are the benefits to the hospital, on the right, the benefits to the insurance company that is “paying” the bill. Explanations follow to explain the terminology to those unfamiliar.

a) Uncompensated Care: this is the “rebate” the hospitals receive in the form of “DSH” payments, or disproportionate share hospital payments. Basically, the hospital subtracts what they collected from what they billed and throw this number at the feds and get the taxpayers to “compensate” them for all that they otherwise couldn’t collect. It is clear that the existence of this scheme provides a huge incentive to the hospitals to exaggerate their bills, particularly to those patients who do not have the means to pay at all.

b) The profits of the large hospitals must be offset with fictional losses in order for them to maintain their “not for profit” status. This status is maintained through gigantic salaries and benefits packages to key administrative staff and from the “losses,” that is, that part of the GHB that they can’t or don’t claim to collect.

c) Brokerages utilize fewer resources and fewer brokers by having ten accounts, each of which covers thousands of “lives.” One broker can cover 10 accounts, whereas if the individuals were buying these insurance products, 100’s of brokers would be required. This helps to maintain the profitability of the brokerages and the insurance companies whose products they represent. GHB’s cause a fear that most individuals take seriously, a fear mollified by belonging to a larger “group” of insureds. Insurance companies, therefore, benefit from the GHB in this way, as an effective “corralling” of clients results.

d) PPO Repricing: This scheme is very important to understand as it is at the heart of the benefit derived by the insurance company from the GHB. Insurance companies proudly report to their clients the “savings” the clients have realized as a result of the PPO’s repricing of a claim. The GHB might be $20,000, but the insurance company pays $8,000, thus resulting in a savings to the health plan of “$12,000.” Incentives are present in most plans to reward insurance companies for aggressive repricing, as this “saves” the plans money. Right? Wrong. Insurance companies make billions on these incentives, so much that they would rather craft deals with high priced hospitals (whose bills they “reprice”and profit from) than less expensive providers whose reasonable pricing eliminates this “repricing” opportunity. Transparent pricing represents the ultimate nightmare for those scabs benefitting from “repricing.”

e) This is self-explanatory as are some of the other boxes, but I wanted to add that as more and more large companies seek the “self-funding” or “self-insured” option, the commissions of the insurance brokerages will vaporize. Brokerages work very hard to discourage their clients from the self insurance option, not because this is a bad idea for their client, so much, as it is a nightmare for the agent and their brokerage.

I know that this is a mammoth blog, but I wanted to say one more thing. As Professor Robert Higgs states in his book Crisis and Leviathan, the distinction between a free economy and a “command” economy is price transparency. Hiding the costs of the market is critical to maintain a “command” economy, and this cartel diagram, I think, indicts the current health care economy as a cartel, whose success depends on hiding many of the costs and profit-seekers. I think this further supports my contention that what ails the American medical economy is not a failure of the free market, but rather the lack of a free market in medicine.

Reprinted with permission from the Surgery Center of Oklahoma.