The Truth Shall Set Us All Free (from Worry and Fear)

05/10/2010 05:12 am ET | Updated May 25, 2011

The healthcare reform debate is more fluid than ever before. One minute it is on the road to passage, the next minute it is dead. Whatever happens over the next few weeks as President Obama tries one last time to get this massive domestic legislation passed, it is important to dispel mistruths surrounding the current healthcare system. In order to effectively reform the healthcare industry, there needs to be a baseline understanding of how it currently works. As the news media continues the coverage of the debate, it has become increasing unclear to the public what works and does not work in our system today.

The best way to highlight the confusion is to take a look at the story of the $20 aspirin. There has been a significant amount of coverage on healthcare waste with one report in particular focused on this mysterious $20 aspirin. It is worth explaining. Most insurers and people living in the country do not actually pay these prices. It is an artifact of how insurance companies have paid hospitals over time. What is dangerous about this reporting is that it does not accurately reflect how the healthcare system is wasting money. Rather, it focuses on archaic pricing models that do not truly correlate hospital reimbursement to the specific costs they incur to provide patient care.

As everyone already knows, an aspirin is very inexpensive. Certainly a whole bottle costs less than the $20 per tablet charged by the hospital. So why does that aspirin show up on a hospital bill for that $20? It is certainly a fair question. Most hospitals set charges as a percentage of cost. So in the case of an aspirin, it would charge "X" times the cost. Over time, if the charges are not reviewed on a line item basis and the overall charges get increased every year, certain items become exceedingly expensive and above what anyone would consider normal. But hospitals are not normal places. They take care of sick people who require around the clock care. Built into the cost of aspirin, and every other medical supply provided to patients in a hospital setting is the cost of staffing the hospital, including nurses, technicians, administration, security, etc. Also included in the cost of the aspirin is the overhead; the building, the beds, the towels, the power to operate the machines, and so on. One can quickly see how these costs add up. Since hospitals are not paid for most of the supplies they provide during a patient stay on a line item basis, the only way to recoup the costs is to charge higher prices for what they can bill.

What does this mean? It means that most inpatient care delivered in this country is reimbursed though insurance contracts based on an episode of care, regardless of the costs incurred for providing that care. Hospitals that are efficient and keep overall costs low can make a profit on the admission. Hospitals that treat a disproportionate amount of sicker patients, those who tend to utilize more services and supplies, will continuously struggle to generate a profit margin.

Outpatient services in hospitals can be reimbursed by insurance companies in many different ways, including global payments as described above or based on a percentage of the total amount charged for the services and supplies provided. In the same aspirin example, a hospital would get reimbursed a percentage of the charge billed, not the full $20. Many have asked the question, why don't hospitals get paid their actual costs for services, including staff, buildings, etc. plus a mark-up that way there could be transparency in the system. The answer is: they can. But it requires a fundamental change in how the reimbursement to hospitals works today. The system in place now evolved over many decades and is controlled at both the federal and state level. Given each state has the ability to regulate hospitals (along with the federal government), we have a system whereby a hospital in one state has different rules applied from a hospital in another state, even though they are providing the same care. The point is simple, it can change if the country wants and/or decides it needs to change. Simply reporting on the $20 aspirin without explaining what really happens in the healthcare system does nothing to reform the healthcare system. There are many ways to reimburse hospitals, the one we have is what has been used for decades and it can be changed The saddest part of the story above is the only people who pay $20 for the aspirin (hospital charges) are those who are uninsured.

So one can ask, why does this all matter? It matters because until this country attempts to understand how the system evolved into where it is today, it will never get fixed. Politicians will simply say, unraveling the mysteries of the current healthcare system are too complex, too big, and too expensive. The news media plays along without explaining all sides of the story, and the public gets stuck. Yes, it is confusing, and yes, it is hard to explain but that is no excuse for doing nothing. The imbalanced reporting, for whatever reason, is making the overall population more confused.

A recent poll showed the majority of Americans in favor of healthcare reform but by starting the legislative process over. It is easy to see why people would feel this way. They are not getting the full story. Healthcare does not work in the free market. While it operates within the spirit of American capitalism, we can see that the overall healthcare delivery and payment system has not been consistently modernized and it does not work. President Obama, through the media needs to take a greater role in explaining the nuances to the American people. Leaving it up to others to tell the full story is not working and the public is frustrated.