by T Joe Willey
"Over the past few decades, we’ve enriched the labs, drug companies, medical device makers, hospital administrators and purveyors of CT scans, MRIs, canes and wheelchairs. Meanwhile, we’ve squeezed the doctors who don’t own their own clinics, don’t work as drug or device consultants or don’t otherwise game a system that is so gameable. And of course, we’ve squeezed everyone outside the system who gets stuck with the bills." — Steven Brill. Bitter Pill: Why Medical Bills are Killing Us. Time, March 4, 2013.
When Anna Webster (not her real name) suddenly collapsed on the kitchen floor her husband Jim sitting at the table was startled, put down his newspaper and jumped up to see what had happened. He found Anna lying on the floor struggling to get on her feet. Her speech was slurred and one side of her face drooped. Anna had suffered a stroke.
Jim was a rancher living in southern Oregon and his wife had recently lost her job. Both were faithful Adventists. Over the years they heard marvelous healing stories when the annual offering was taken up for Loma Linda Medical School. So rather than take Anna to the nearby community hospital Jim decided to drive his wife to Loma Linda University Medical Center (LLUMC). Without hesitation Jim made his wife comfortable in the front seat of their pickup and drove hell-bent down Interstate 5 to southern California. They arrived a little over twelve hours later at the emergency room. Anna’s condition worsened rapidly as they neared their destination. She was having difficulty breathing. By this time Jim was panicked. A CT scan showed the lesion in her brain. Specialists from neurology and neurosurgery joined together to treat Anna. Her doctors were concerned about the life-threatening delay before she got to the hospital, now evidenced by swelling in her brain.
Doctors inserted a long thin tube through an artery and threaded it into Anna’s brain to release a drug in the hopes of busting up the clot. The doctors told Jim that his decision to drive his wife to Loma Linda had placed her at great peril. The care givers applied the latest procedures and diagnostics trying to bring her through to recovery. Sad to say, Anna passed away in intensive care two weeks later. Jim credited the hospital, nurses and doctors with having done all they could to save his wife.
Fortuitously, after Anna had lost her medical insurance when she was laid off, Jim added her to his catastrophic health insurance purchased through the American Farm Bureau Federation. The insurance came from Blue Shield through a plan called a Preferred Provider Organization (PPO). This coverage was in the Oregon PPO network. But because Jim had driven to California his out-of-network coverage co-pay costs jumped to fifty percent after the deductible. After Anna’s death Jim faced a staggering bill revealing an assortment of perplexing prices.
The total bill from the hospital was $90,608, which did not include the physician’s fees. Had Jim driven to the Portland Adventist hospital, also a nonprofit institution and a much shorter distance, the bill would have been $17,272. Many of the Portland doctors had been trained at Loma Linda University School of Medicine. Then again had Jim taken Anna to their nearby community hospital in Medford, Oregon the hospital charges would have averaged $41,168 and Anna would have gotten immediate treatment for her stroke. Going on, had Anna been five years older, and covered by Medicare, the Medford Hospital would have been paid $12,909 from the federal treasury to cover the entire amount. Under Medicare at LLUMC the government would have paid an average of $22,070 and at Portland $11,700. Prices vary widely between hospitals for the same procedures. Except when taxpayers pick up the bill through Medicare, payments are deeply discounted compared to private insurance and individuals who pay over the counter. How do you account for these different species of prices in the estuary of healthcare costs? 
Every time Anna’s blood was drawn a charge appeared, accompanied by everything else that was done to restore her to health, including drugs, lab charges, wages of the hospital nurses and staff, the use of the intensive care room, monitoring equipment, administration and overhead, etc.
The latest publicly available tax return filled with the Internal Revenue Service in 2011, for LLUMC a tax exempt nonprofit organization, had total revenues around $1.2 billion (including discounts and contracted allowances). After expenses the hospital had an operating profit of $64 million with a five percent profit margin.
According to Time magazine, medical care in this country is big business where in fact the healthcare “market is not a market at all … and patients are powerless buyers in a seller’s market where the only sure thing is the profit of the sellers.” 
Americans are spending almost eighteen percent of the gross domestic product on health care? This is fifty percent higher than any other industrial country. These escalating costs are driving up insurance premiums and some say, bedeviling the national economy?  Part of the problem is the fact that when people walk into a hospital they want a place that makes them feel good, staffed by well-trained individuals, invested with the latest diagnostic equipment. But that’s only part of the escalating costs. Patients also want to walk out of the hospital with improved health.
On May 8, 2013, for the first time, the federal government released average prices that hospitals charge for the 100 most common inpatient procedures and what the government programs (Medicaid and Medicare) reimburse for the poor and elderly. Consequently, the billing practices across American hospitals are no longer secret.  The spreadsheet summarizes economic data from more than 3,300 hospitals involving claims filed within fiscal year 2011. And the massive array of information is arranged in 63,536 rows across 12 columns of information including data showing the average costs for official prices in each hospital and what Medicare generally reimburses (see examples below).
The chart is interesting. It shows that an overall price which the private sector may pay is significantly higher than government reimbursement for the same procedure. Therefore, it is quite likely that the commercial insurers and uninsured individuals subsidize hospital losses against the costing limits imposed by Medicaid and Medicare. The recent Time exposé by Steven Brill who revealed the wildly-irrational billing schemes used by hospitals probably had something to do with the release of this giant spreadsheet by The Centers for Medicare and Medicaid Services of the Department of Health and Human Services. 
Federal officials explained that “they offered up the data with hopes that its release would administer a market corrective, forcing hospitals to take greater heed of competitors, while arming ordinary people with information they could use to seek a better deal."  The data supposedly might also spur health insurance carriers to negotiate better deals with hospitals thus driving down costs.
The giant database provoked instant headlines in many major newspapers and from news commentators. Most of the discussion centered around the huge disparities of billing charges, even hospitals that are competitive and close to each other. For example, George Washington University’s average bill for a patient on a ventilator for more than 96 hours, was $251,113 while Providence Hospital five miles to the north and chartered by Abraham Lincoln in 1861 and part of The Catholic University of America, determined that the procedure should be charged at $92,195.  In the case of George Washington Medicare paid $51,700 on average (nearly a four hundred percent decrease from the official rates). By comparison Medicare paid Providence Hospital $40,553 (or one hundred twenty seven percent less than the published rates) for the same service. Both are medical teaching hospitals and some of the variations may be due to the nature of the cases the hospital takes on or the amount of unpaid billings reported under charity.
Why is there a difference between the official rates in these hospitals and what Medicare actually reimburses? Before attempting to answer this question the readers of Adventist Today will probably want to know how LLUMC compares with similar institutions that support medical education. By the time we finish this series it should be plain to the reader that LLUMC, a faith-based institution, faces similar market and economic forces like any other hospital.
Getting back into the background of these rates, it is necessary to understand the so-called chargemaster of hospitals from which the prices for each procedure or treatment is determined. This is a master list created over time by the hospitals used in pricing the costs of medical care. According to Brill who wrote the recent disturbing article in Time magazine concerning the rising healthcare costs, the chargemaster was set “in cement a long time ago and just keeps going up almost automatically.” It is a catalog of codes and prices used in the hospital that most people never see or pay.
Keeping it simple; the Charge Description Master (CDM) or chargemaster is technically housed in the hospital computer system. It is a lengthy list of the hospital’s prices for every single procedure performed and for every supply item used in the procedure. The financial system contains many comprehensive elements that are billable to patients or healthcare insurance providers related to different procedures along with a mixture of services and costs. It is also standardized to meet Medicare average billing requirements. Beyond this simple description the cost reporting in the chargemaster gets complicated. These rates are updated frequently and the imposed regulatory requirements from the government are extensive.  Ultimately, the hospital board is responsible for ensuring the accuracy of the chargemaster. Brill drew attention to the fact that the chargemaster is generally regarded as “fiction” in some quarters and overlooked in American healthcare cost crisis in others.
However, the chargemaster is not exactly “fiction.” The rates retained in the chargemaster are the starting point for insurance and managed care negotiations. Insurance companies that can bring the most patients to the hospital generally have the most leverage in negotiating price. To put it in marketing terms, the hospital depends on patients to create revenues and consequently hospitals are willing to negotiate lower prices than the official rates found in the chargemaster if they can turn a profit, but rarely dipping below the Medicare rates.
Despite large variances in official pricing about 25 to 30 percent of hospitals in the country reportedly operate in the red each year. Many more show earning margins below the average. The American Hospital Association points out that what a hospital earns is the result of a “complicated financial juggling act among its mix of payers.” 
With so much variation in these rates the provider prices do not seem to be based on anything that can be reasonably determined. That is why the chargemaster drew so much attention when Medicare recently published the average prices. Everyone knows that insurers are not likely to pay the official prices. It is only the patients that appear at the entrance without insurance, the so-called “self pay” patients. These patients are likely to bear the brunt of the official price. In the case of LLUMC that only amounts to about five percent of the patients.  Medicare and MediCal (California's Medicaid program) represent 50 percent of LLUMC’s service revenues and insurance and managed care the rest at 45 percent.  According to the 990 tax report for LLUMC in 2011, the expense devoted to community benefit (charity care) totaled $103 million or 9.5 percent of expenses. Some of this charity is the result of poorer individuals unable to pay for hospital care or insurance deductibles. About half of this charity was also a shortfall in offsetting revenues from Medicare.
Below is a plot comparing a diagnosis-related group under “transient ischemia” (DRG 069) for LLUMC and six similar hospitals (all six are affiliated with medical schools). You will notice that code pricing is different for each hospital. And also you can see the average that Medicare reimbursed is fairly uniform between the example hospitals. Medicare reimburses direct costs, but also allocated expenses such as capital expenses, executive salaries, insurance, differences in regional costs of living and even the cost of educating medical students.  Insurers and self-pay patients will negotiate their payments between what Medicare reimburses and the official price in the chargemaster. The national average for this procedure is shown below.
If an uninsured patient has good income or assets that can cover the medical costs the hospital will attempt to bill these patients for the full amount and hound them for payment through bill collectors and courts if they fail to pay their bill.
As insurers raise their demands for cost-savings the hospital may raise its prices in the chargemaster to protect its bottom line. Trend analysis shows that prices are nearly always inflated. Using another procedure, notice the difference between these seven hospitals by comparing the price for a major joint replacement against what Medicare will reimburse. It appears in both examples a “wealthy” patient without insurance would be better off to go to the Mayo Clinic for treatment while avoiding Stanford University Hospital or LLUMC.
As a rule of thumb private insurers in the network also get discounts off the chargemaster by negotiating rates that are typically about 30 to 40 percent above what Medicare reimburses. Consequently the profit margin in the hospital is driven more by private insurers and self-pay patients than government reimbursements (theoretically set at no gains, no losses). Essentially, Medicare reimbursements assume the hospital is a nonprofit entity.
In the next report in this series we will compare revenues and expenses in these seven hospitals and attempt to determine how long-term debt is used to buoy up the revenues and support expansion.
T Joe Willey is the author of the recent Adventist Today article titled "Million-dollar Salaries in Adventist Healthcare" and "Tax-exempt Bonds and Secularization in Adventist Education."
1. For illustrative purposes the cost structures were taken from the recently release Medicare database on hospital charges.
2. Steven Brill. Bitter Pill. Why Medical Bills are Killing Us. Time Magazine, March 4, 2013. p. 54. See Stamford Advocate.com for push back on Brill’s article claiming misuse of financial information and misquotes from the Stamford representatives.
3. Brill. Ibid. p. 20.
4. Until now hospitals did not know what other hospitals were charging. Hospitals avoided researching charges at other institutions to avoid being accused of “anti-trust behavior.”
6. Hospital Prices No Longer Secret as New Data Reveals Bewildering System. Staggering Cost Difference. Huff Post Business. May 6, 2013.
7. “Rooted in the loving ministry of Jesus as healer, our organization serves all persons with joy, care, and respect, giving special attention to persons who are poor and vulnerable.” Taken from the Providence Mission Statement. About seven percent in this hospital is given to community benefits thus fulfilling its tax-exempt requirement as a nonprofit hospital.
8. J. Patrick Rooney and Dan Perrin. American Health Care Crisis Solved. Money-Saving Solutions, Coverage for Everyone. Hoboken, NJ: Wiley and Sons. 2008.
9. Uwi F. Reinhardt. What Hospitals Charge the Uninsured. New York Times, March 3, 2013.
10. Unfortunately, many self-pay accounts and insurance co-pays become delinquent. In 2011 this was about $53 million at LLUMC.
11. LLUMC financial data from the 990 tax report to the IRS in 2011.
12. Brill. p. 22.