03/01/2013 11:48 am ET Updated May 01, 2013

Time 's Brill Persuasive but 'Bitter Pill' Misdiagnoses Health Care Ills

The Feb. 20 Time magazine article by Steven Brill highlights the very real challenges people have navigating our health system. Specifically, it highlights individuals who have no health insurance or inadequate insurance coverage. One of the primary questions the author poses is, "Why are our prices so high?"

Uwe Reinhardt wrote a great 2006 article in Health Affairs about how hospitals set prices and how they are paid. For many years, we lived in an alternate universe where chargemasters were developed to itemize those hospital services and goods and to assign prices. Insurers soon started negotiating steep discounts on hospital charges, and chargemasters rarely reflected what hospitals were actually paid for services. In the 1980's, we developed Diagnosis-Related Groups (DRGs), which bundled the costs of services for inpatient care for Medicare. DRGs were originally calibrated on the relative costliness of cases and were updated regularly for changes in technology, practice, and market forces. However, the alternative universe of the chargemaster marched on, updated for inflation and changes in practice.

The challenge highlighted in the article is this: As insurance policies become increasingly consumer-directed, our system becomes treacherous, posing great financial risk to patients. Patients with a high deductible, or those who face co-insurance payments for inpatient care or out-of network care, enter the alternate universe of the chargemaster. Suddenly those prices, essentially irrelevant to those with traditional insurance, really matter.

Brill demonizes the chargemaster, hospital CEOs, and health care industry growth in general. He has compelling anecdotes. Many of those stories helped sell the Affordable Care Act to the American public. We wanted to ensure that people did not get "bad insurance" that would only increase their risk for medical bankruptcy. But as compelling as Brill's stories are, and as persuasive, they ignore much of our publicly available information.

The Chargemaster

Let's agree that any system would be preferable to the opaque chaos of charges we currently have. Insurance companies are as reluctant to reveal their proprietary negotiated prices with providers as hospitals are to revamp their 20,000- to 40,000-item chargemasters.

Who created that monster? In 2005, MEdPAC commissioned Allen Dobson and the Lewin Group to conduct a "Study of Hospital Charge Setting Practices." They concluded that those practices are a "balance of competing objectives of balancing budgets, remaining competitive, complying with health care and regulatory standards, and continuing to offer needed services to the community."

In hospitals, most of the attention on chargemasters tends to focus on newly added procedures, devices and drugs, rather than recalculating charges for existing services. Disparities between charges and costs have grown over time because many existing charges were set before hospitals had the tools to more thoroughly break down and examine costs. Mark-ups tend to vary by service line, with high-cost items receiving a lower mark-up than low-cost items. The fact that charges are often not closely tied to costs implies the current Medicare payment systems may not be closely tied to resource utilization.

CEO Salaries, Margins, and the Growth of Health Care

Brill selectively chose compensation figures that included severance and retirement. CEO compensation is publicly available, market-driven, and reflective of the complexity and the size of these organizations, many of which employ tens of thousands of people.

Hospital margins are tracked on many public websites. Large teaching hospitals' operating margins generally are 1.5 percent less than those for non-teaching hospitals. Nationally, hospital margins have returned to their 2008 levels of 7 percent. Moody's Investors Service reported in January that its outlook for U.S. not-for-profit hospitals will remain negative in 2013. This reflects the impact of the recession on patient volumes, heightened pressure from employers and all levels of government to lower the cost of health care services, and significant changes ahead for how hospitals are paid.

Controlling costs and demand for health care services is a responsibility of both providers and patients. We need a commitment to develop new ways of evaluating cost and setting prices. Not only will this need to include economic, regulatory, and market-driven considerations but should be anchored in principles that incentivize healthy communities, reward prevention, and increase patient engagement.

We will have to make some hard choices: we have built a care system that we can't afford to grow anymore. The choice will not be who will pay, but what treatments are unnecessary and what we can do individually and collectively to prevent illness. We need to make sure that people understand their coverage choices so they are not financially vulnerable. Rebasing chargemasters and moving resources out of the health system will not get us there. We need to create transparency and engage both patients and practitioners in the process.

Cross-posted from Wing of Zock

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