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How We Can Stop Hospitals From Over-Billing

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On Sept. 3, 2012, Jeff Kortan was involved in a bicycle accident and was taken by ambulance to Mercy San Juan Hospital in Sacramento, Calif. Fortunately, he wasn't seriously injured. He was treated in the emergency room, where he got a CT scan, a tetanus shot and five stitches for a cut on his scalp then was sent home. His emergency room visit lasted just under an hour.

As is often the case, the problems really began for the Kortans about two months later when they received a bill from Mercy San Juan's ER for $31,613. That was just the ER bill. The ambulance and the emergency room doctor billed them separately. The Kortans don't have insurance, so they were responsible for the full bill. After a year of haggling with Mercy San Juan, they managed to have that bill reduced to about $18,000 -- for a one-hour emergency room visit and five stitches.

Stories like this shouldn't be new to anyone by now. Earlier this year TIME magazine published an article itemizing many of the extreme mark ups often seen in hospital bills, including $75 gauze pads and $25 aspirin. It isn't just the uninsured that are hit by these bills either. Last year ABC news ran a story about someone who had health insurance but ran up a $60,000 bill anyway because he went to the wrong hospital when he had an acute appendicitis. Incidentally, no one at the time bothered to tell this person he was at the wrong hospital.

Hospitals over-bill. And because hospitals routinely over-bill people's worlds can be upended over the "cost" of treating a simple cut. An insurance company would almost never be held to such an outrageous charge. In fact, much of what health insurance companies offer now isn't payment for services, but rather "protection" from over-billing.

We frequently hear of these horror stories and think, "isn't there some way to stop this?" Well, as it turns out, there is. In one state -- Maryland -- it's already been stopped, and it's been stopped for nearly 40 years now. In 1971, the State of Maryland established a Health Services Cost Review Commission. This commission has put a cap on how much Maryland hospitals can bill for any of the services they provide since 1977.

How effective has this commission been?

Let's compare (for example) the billing practices of California hospitals (where there is no cap on billing) and Maryland hospitals. In 2011, California hospitals billed a total of $289 billion for all of the services they provided. They collected $79 billion: a 366 percent mark up in billing! (figure 9)

That same year, hospitals in Maryland billed a total of $15.7 billion, and collected $12.7 billion: a 24 percent mark up in billing (page 8). In other words, California hospitals billed an average of nearly $4 for every dollar they received whereas Maryland hospitals billed an average of only $1.24 for every dollar they received that year. What's more, since the amount California hospitals over bill varies widely from hospital to hospital, some hospitals in California have billed an average of eight times what they got in payments!

What does the difference mean? Could it be that most California patients (compared to Maryland patients) are deadbeats and never cough up what they owe? Absolutely not. The fact is that California hospitals negotiate in advance with insurance companies and agree, before the bills are even mailed out, that hospitals will be getting only about 27 cents on each dollar billed.

Or does this mean that, since Maryland hospitals are capped on their billing, they're taking a hit financially? We often hear that other U.S. hospitals bill so excessively to make up for the losses they endure from underpayments and uncollected bills, right? Well first, California hospitals report their bad debt losses each year, and it averages less than 2 percent of what they bill, not 75 percent (figure 5). And Maryland hospitals aren't doing so badly. In 2011, Maryland hospitals managed to clear a healthy $847 million dollars in profit on the $12.7 billion they made that year (page 8 bottom). That's a comfortable 6.7 percent profit margin -- and they did it without having to bill anyone $31,000 for five stitches.

California hospitals, as a whole, did only slightly better. In a much bigger state with many more hospitals, they cleared $5.8 billion in profit on the $79 billion they collected: a 7.3 percent profit margin. So the state of Maryland has demonstrated pretty clearly that hospitals can get by, and even make a healthy profit, without having to bill $60,000 for an uncomplicated appendicitis.

By now you should be asking: If Maryland can do this, why can't every other state in the U.S.? I think that's a very good question. But instead of asking yourself or me, you should ask your congressman and state legislature. That's what I intend to do.

I'm sending a copy of the legislation that formed Maryland's commission, along with some of the financial statements I've linked to this article, to every member of my state's assembly and senate. I will also include in that package a letter asking why we can't do what Maryland did in our state. I ask you to do the same (unless, of course, you live in Maryland).

For years now there's been a huge national debate, and little agreement, about how we can pay for all of our skyrocketing health care costs. I think there's one thing everyone should agree on though: No matter how we end up paying for our health care, we can afford a lot more of it once we stop being overcharged so much for what we're getting.

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