[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
PRICING PRACTICES OF HOSPITALS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 22, 2004
__________
Serial No. 108-49
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio EARL POMEROY, North Dakota
JERRY WELLER, Illinois GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
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C O N T E N T S
__________
Page
Advisory of June 15, 2004, announcing the hearing................ 2
WITNESSES
Adventist Health System, Richard Morrison........................ 107
American Hospital Association Board of Trustees, David Bernd..... 98
Center for Studying Health System Change, Paul B. Ginsburg....... 17
The Commonwealth Fund, Karen Davis............................... 28
Hal Cohen, Inc., Harold A. Cohen................................. 111
Harvard Business School, Regina E. Herzlinger.................... 53
Harvard School of Public Health, Department of Health Policy and
Management, Nancy Kane......................................... 13
Pacific Business Group on Health, Peter V. Lee................... 22
Southern Medical Health Systems, Inc., Randy Sucher.............. 105
SUBMISSIONS FOR THE RECORD
Catholic Health Association of the United States, Michael D.
Place, statement............................................... 134
Community Catalyst, Boston, MA, statement and attachment......... 136
Mitchell, Geoffrey C., Columbus, OH, statement................... 138
Palmer, Pat, and Johnson, Nora, Caldwell, WV, statement.......... 142
VHA, Inc., statement............................................. 144
PRICING PRACTICES OF HOSPITALS
----------
TUESDAY, JUNE 22, 2004
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
room 1100, Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
June 15, 2004
OV-14
Houghton Announces First Hearing in a Series on
Tax Exemption: Pricing Practices of Hospitals
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold the first in a series of hearings on tax
exemption issues. This hearing will examine pricing practices of tax-
exempt and other hospitals. The hearing will take place on Tuesday,
June 22, 2004, in the main Committee hearing room, 1100 Longworth House
Office Building, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives from a variety of health care
groups and outside experts.
BACKGROUND:
Overall there are more than 300,000 reporting tax-exempt 501(c)(3)
entities. Hospitals represented a small proportion (1.9 percent) of
total reporting charitable 501(c)(3)s but, in 2001, constituted 41
percent ($337 billion) of total expenditures. Under current law,
hospitals are considered tax exempt because they promote the health of
a class of persons broad enough to benefit the community as a whole.
Such community benefit is deemed to be a charitable purpose. Another
approach is to view tax-exemption as a subsidy for the costs that the
Federal Government would otherwise incur, such as charity care.
Hospitals bill for all the charges for items and services used by a
patient after a hospital stay. Many hospitals increase their charges to
shift the costs of treating the indigent onto public and private
payors. In 2002, hospital charges exceeded their average costs by 118
percent (Centers for Medicare and Medicaid Services (CMS)). Because
they do not have a contract with a hospital, individuals without health
insurance are billed full charges. Thus, the uninsured are liable for
charges which were inflated to cover the costs of indigent medical
care. In addition, taxpayers subsidize the $22 billion in costs of the
indigent through $23 billion a year in special Medicare Part A payments
and other government subsidies.
Hospital charges are not transparent. So consumers, including the
uninsured, do not have access to information on the costs of medical
treatment across hospitals. Some advocate empowering consumers with
information on hospital costs and quality will increase competition and
slow medical cost inflation.
In announcing the hearing, Chairman Houghton stated, ``The rising
cost of health care is a concern. This is on everyone's mind. So what
can we do to help? One thing is to look at ways to make hospital prices
more transparent. Anything we are able to do to increase the amount of
information available on health care so users can better make up their
minds would, to my mind, help reduce costs.''
FOCUS OF THE HEARING:
The hearing will examine the current hospital pricing system and
focus on the lack of transparency in hospital charges, which hinders
consumers from making informed choices about where they get care and
the options for increasing information about hospital pricing.
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Chairman HOUGHTON. Good morning, everybody. Thanks for
being here today, an important meeting. During our hearing
today we will look at nonprofit hospitals and also the larger
issues of hospital pricing. I particularly want to thank the
members of the panel for being here this morning. As we all
know, or most of us know, there are 300,000 501(c)(3)
organizations ranging from universities to blood donor
organizations. Hospitals make up a significant part of total
expenses in this category. As a part of our oversight agenda,
it is important that we review topics such as tax-exempt
hospital prices, charity care, quality of care, and the
services offered by for-profits versus not-for-profits.
Relating to the financial situation by hospitals in my
district, just to give you an example, Standard & Poor's has
recently reported that New York hospitals still have some of
the weakest access to capital in the Nation, attributed in part
to the former government-mandated rate regulation. Despite
their finances, our local hospitals also provide charity care,
and I am sure this is true in many other hospitals in different
parts of the country. At Arnot Ogden Medical Center in Elmira,
New York in upstate New York, the Community Care Program
provides discounts up to 300 percent of the Federal poverty
level. Information on the policy is publicly posted.
Another example, F.F. Thompson Hospital in Canandaigua has
a sliding fee policy that provides discounts up to 100 percent
for persons with wages below 200 percent of the Federal poverty
level. Still another example, at Jones Memorial Hospital in
Wellsville, a small town in our area, a financial aid counselor
will confidentially visit patients who are admitted with no
health insurance, to make sure the patient knows that free or
discounted care is available for patients in need. One topic we
are going to be exploring today is hospital pricing. I have
before me what is called a ``charge master.'' This makes for
fascinating reading.
[Laughter.]
I thought the Tax Code was complicated, but it is nothing
like this. Hospitals seem to be stuck with a broken billing
system and no one knows the cost of services in advance. So,
people receive bills for services where the charges appear too
high for a hospital gown or even an aspirin, and they do not
understand that these amounts are not what insurance is going
to pay for. People without health insurance individually
negotiate payment with hospitals, a process that creates
anxiety and a lot of uncertainty. If we could do it all over
again, I am sure this is not a system that anyone in his right
mind would dream up.
Appearing before us today on the first panel are experts
who can describe how we got where we are, and what we might do
to change. On the next panel we have distinguished
representatives from hospitals, as well as an expert on
government pricing, who are able to bring real world experience
to bear on this very difficult problem. I welcome you all.
Thank you for being here, and I look forward to your testimony.
I am now pleased to yield to our ranking Democrat, my
distinguished associate, Mr. Pomeroy.
[The opening statement of Chairman Houghton follows:]
Opening Statement of The Honorable Amo Houghton, Chairman, and a
Representative in Congress from the State of New York
Good morning. During our hearing today we will look at non-profit
hospitals and at the larger issue of hospital pricing. There are many--
over 300,000--501(c)(3) organizations ranging from universities to
blood donor organizations. Hospitals make up a significant part of
total expenses in this category. As a part of our oversight agenda, it
is important that we review topics such as tax-exempt hospital prices,
charity care, quality of care, and the services offered by for-profits
versus not for profits.
I am familiar with the financial situation faced by hospitals in my
district. Standard and Poors, the bond rating agency, recently reported
that New York hospitals still have some of the weakest access to
capital in the nation, attributed in part to the former government-
mandated rate regulation. Despite their finances, my local hospitals
also provide charity care. For example:
At Arnot Ogden Medical Center in Elmira the Community
Care Program provides discounts up to 300% of the federal poverty
level. Information on the policy is publicly posted.
Similarly, F.F. Thompson Hospital in Canandaigua has a
sliding fee policy that provides discounts up to 100% for persons with
wages below 200% of the federal poverty level.
At Jones Memorial Hospital in Wellsville a financial aid
counselor will confidentially visit patients that are admitted with no
health insurance to make sure the patient knows that free or discounted
care is available for patients in need.
One important topic we will explore today is hospital pricing. I
have before me what is called a ``charge master'' for a small hospital.
Now I thought the tax code was complicated, but much in these 200 pages
does not make sense.
Hospitals seem to be stuck with a broken billing system. No one
knows the costs of the services in advance. People receive bills for
services where the charges appear too high for a hospital gown or an
aspirin. They don't understand that these amounts are not what their
insurance will pay. People without health insurance individually
negotiate payment with hospitals, a process that creates anxiety and
uncertainty. If we could do it all over again, this is not the system
that anyone--employers, insurers, consumers and hospitals--would dream
up.
Appearing before us today on the first panel are experts who can
describe how we got here and what we might do to change the system. On
the next panel, we have distinguished representatives from hospitals as
well as an expert on government pricing, who can bring some real world
experience to bear on this very difficult problem. I welcome you all
and look forward to your testimony.
I am now pleased to yield to our ranking Democrat, Mr. Pomeroy.
Mr. POMEROY. Mr. Chairman, thank you very much, and I am
delighted to be participating in today's hearing. I do think
that our work might have been achieved perhaps more
successfully had the focus of this morning's hearing been a
little more straightforward. I am not entirely clear whether we
are exploring tax-exempt status or whether we are exploring
hospital pricing practices, and I believe they are somewhat
distinct points of inquiry. I think each represents an
interesting area for us to explore, but to look at the pricing
practices of tax-exempt hospitals seems unnecessarily
confusing, leaves open the question of whether or not we are
concerned about the pricing practices of non-tax-exempt
hospitals, and leaves us somewhat wondering where this is going
in the first place.
I think that, as I mentioned, there are some interesting
things we can pull out of it. Transparency in pricing has got
great value, and not just for hospitals. Actually, we have to
think about that a little more, in government as well. I voted
for a Medicare prescription drug bill (P.L. 108-173) I thought
cost $400 billion. Come to find out it cost $536 billion. You
know, some might think I should not have voted for that bill. I
just wished I had known the price, and made a determination in
light of the true price, not the price that was represented,
that maybe some representing it knew wasn't the actual price.
So, transparency in pricing is an important business.
I also think the business of how we establish pricing
specifically in hospitals is quite interesting, because most of
the people accessing hospital services have some kind of third-
party coverage. Obviously, Medicare sets prices for the part
covered by Medicare. Private insurance companies negotiate
prices for the people that access care under their health
insurance coverage, for the portions of copays are now Health
Savings Accounts (HSAs) first-tier exposure. They will still
get the discounts negotiated by their insurance companies, and
then that leaves the uninsured, Mr. Chairman, as you note,
without someone negotiating those discounts, and they are
subject to the charge master. I think that for a second, 1
second, for anyone to suggest that the problems of the
uninsured are really pricing practices misses the point. It is
not whether there is transparency behind those prices, it is
the reality that if you are uninsured you have pretty
significant prospects. You cannot afford the cost of medical
care in this day and age, and the problems of the uninsured
deserve its whole additional focus.
The pricing issue, in and of itself, is a creation of the
fact that we have several different ways people are covered for
health insurance, and some not covered at all. If we are going
to really get to the bottom of that one, we might want to take
it back to the Subcommittee on Health, the Subcommittee
jurisdiction on this matter, and proceed an investigation of
the uninsured. That might have some significant value as well.
These are all kinds of questions swirling around in my
mind. The tax-exempt status is another issue. If there is
indeed a significant record to establish that institutions,
charitable in construct, tax-exempt in status, are not meeting
what is expected of them under the Code to achieve that status,
that is an inquiry I think would have broad interest across the
full Committee on Ways and Means, and I look forward to getting
to the bottom of that. Again, trying to get to the bottom of
that in a hearing on pricing practices, to me puts us on a
circuitous route to that important question. In summary, Mr.
Chairman, even though I feel like I am kind of climbing in a
car I don't know where it is going, I am not even entirely sure
why we are taking this trip, as long as I know you are along,
Mr. Chairman, I am happy to be along for the ride. I yield
back.
Chairman HOUGHTON. That is a pretty weak reed to lean on, I
can tell you that. Mr. Thomas, the Chairman of the Committee on
Ways and Means, would you like to make a statement?
Chairman THOMAS. Just briefly, Mr. Chairman. Thank you for
the beginning of what I hope is a long process, since this is
the Subcommittee on Oversight, the Subcommittee correctly
charged with reviewing for the Committee issues and items
already on the Code, or the manner in which we should change
differences in the Code.
I listened with interest to my friend from North Dakota,
Mr. Pomeroy, and the verbal statement that he delivered as his
opening statement deviates from his written statement in
referring to the $400 billion versus $500 something billion
from the Administration. I guess that was necessary to insert
in this hearing, but it really does underscore why hearings
like this need to take place.
The $400 billion was the number determined by the
Congressional Budget Office (CBO). Those individuals and
institution under the law, which we are required to rely on to
provide us with estimates, not once, but twice. After reviewing
the legislation, CBO said that it was going to cost $400
billion. The gentleman is referring to another branch of
government, the executive branch, which makes its own
estimates, and I find it ironic that at times when they are
arguing about particular policies or budgets, they prefer to
hang on to CBO, rather than Office of Management and Budget
(OMB). In this instance somehow, OMB is now the yardstick, and
CBO is not. I find that when people choose different partners
at different dances, it tells me something.
In addition, I invite all of you to read the article in The
Hill newspaper on Thursday, June 17, only to illustrate that it
is possible to be consistently wrong over time. The gentleman
who writes the article refers to me and my relationship on this
issue to the late nineties. Someone needs to know I have been
involved with this since the early eighties, and it seems to me
that once every 20 years is not outlandish to review an area of
government policy that involves billions of dollars.
If you will go back and look at the history of the 501 or
so-called charitable or nonprofit portion of the Tax Code, you
see significant shifts in the 'thirties and in the 'fifties,
and really no significant difference since the 'fifties.
I have asked Chairman Houghton, and I hope the gentleman
from North Dakota will be a willing partner, to investigate the
entire 501(c) section. When examining the entire 501(c)
section, it seems prudent that you would look at those areas
that involve themselves most extensively in the expenditures
which occur under 501(c). Hospitals comprise 41 percent of the
expenditures in this area. Why wouldn't you start with the
group that gets the biggest, largest break?
The second reason I think it makes sense to go with
hospitals is that when you look at other activities that are
covered under 501(c)(3), there probably isn't as good an
example, although 85 percent of the hospitals in the United
States are not-for-profit. If I blindfolded you, took you into
a hospital, took the blindfold off you and led you around to
look at the hospital, you would be hard pressed to determine
whether it's a 501(c) not-for-profit or a for-profit. In other
words, here are two institutions structured fundamentally
differently in the Tax Code, carrying out virtually identical
duties, the responsibilities and functions as a hospital. The
Chairman, in his opening statement, illustrated some things
that not-for-profits do, which used to be called charitable--
now it is called community benefit--in nature. We don't know if
for-profits do that either, and if in fact there are as many
for-profits that can be shown to give a break to low income as
not-for-profits, then that is not really a difference for
receiving that tax benefit. What is it that they do differently
than people who pay taxes? We owe it to the taxpayers to
explore that question.
When we were debating Medicare, a portion of Medicare that
we talked about and got to know real well is a portion called
bad debt. It is payment to hospitals in lieu of hospitals not
being able to collect money from people who can't pay.
Hospitals can't collect their bills, so taxpayers pay the
money. If you pay the same amount to for-profit as not-for-
profit since not-for-profit gets a tax break that for-profits
don't which is supposed to be under a community or charity
concept? We don't know. I do not understand the resistance in
the community to getting some knowledge to the Members of
Congress who are charged with the responsibility of overseeing
the Tax Code, and that if this hearing does not provide us with
sufficient understanding of how someone who in one situation is
not-for-profit and the other one is for-profit, and there is no
real difference between the two, why the expenditures? If there
is a difference, where is the difference? How is it a
difference? How, in going through the rest of the 501(c) can we
begin to build a case to see if others merit, if in fact not-
for-profit hospitals do, the differential that is in the Tax
Code?
Mr. Pomeroy, your concern about the pricing goes right to
the heart of our problem to differentiate between not-for-
profits and for-profits, because you would at some time and
under some circumstances, the not-for-profit aspect would
display a different behavioral profile than the for-profits,
and that is basically what we are going to try to do. We
started with hospitals because they are the biggest chunk. They
also give us an example to compare, ostensibly, to similar
operations that are structured significantly differently under
the Tax Code. So, I think it is most appropriate that we start
with this area. One of the most confusing areas of hospitals,
whether they are for-profit or not-for-profit is the pricing.
So, if you are going to investigate how they are different or
similar, it makes all the sense in the world to begin to talk
about pricing.
With those opening statements, Mr. Chairman, I want
everyone to know that this is the beginning of a very long
series of hearings dealing incrementally, moving down the tax
expenditure amount structure, to a number of institutions that
are in direct competition with for-profit institutions in this
society for which they receive significant tax benefits under
the 501 category, and what is it that taxpayers are getting for
the billions of dollars that are forgiven because of the
categorization one way or another. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you, Mr. Thomas. Mr. Stark, would
you like to make a statement?
Mr. STARK. Thank you, Mr. Chairman. Thank you for inviting
me to join with you today. I too am confused. I have reviewed
the testimony, and there is nobody that talks about the
difference in prices except Ms. Davis, who happens to be our
witness, and I am not sure she has any charts. So, if this is a
hearing to determine whether there is a difference in pricing
between profits and nonprofits, we should send the witnesses
home and ask them to come back with some examples.
There is a lot we could do to improve our health system,
but I think we need to talk more about coverage for 44 million
uninsured, not how to lower hospital bills. I think it is a
given that patients don't select hospitals, their doctors do.
Even if you had price transparency it would be foolish for
people to choose a hospital on price alone without information
as to what the quality of care is, and what happen--and most of
us who are not physicians, don't have the foggiest idea of what
is going to happen to us when we enter a hospital, so we
wouldn't know what to ask or how to compare. It is one thing to
compare a Chevrolet with a Ford with the help of the Internet,
I suppose, but I would ask any of you to tell me what the
difference is in a pap smear or a proctoscopic examination
unless you have gone through it. Until we can determine the
quality of services and combine that with cost, it seems to me
we are wasting our time.
As to whether or not we ought to give tax exemption to
hospitals, that seems to me to be a whole other issue and I
would suggest that the real burden is to define, which we have
been unable to do, certainly in the 30 odd years I have served
on this Committee and the previous experience on the Committee
on Banking, which used to have jurisdiction over the
nonprofits, there is no definition of charity care for
hospitals that a Certified Public Accountant (CPA), that
Financial Accounting Standards Board (FASB) has. Is it a bad
debt forgiven or is it a scholarship when you walk in the front
door? Absent that, which happens to drive the disproportionate
share of discounts, it is an important thing for us to know.
I would hope, Mr. Chairman, that we could look at that some
more, so that we were able to define as to who gives charity
care and who just doesn't have such good debt collectors, and
that would be very useful to us in the future, but I hope maybe
we can, in questioning, elicit some of that on some suggestions
as to how we proceed from the witnesses. Again, thank you for
allowing me to join you.
Chairman HOUGHTON. Thanks, Mr. Stark. Mrs. Johnson, would
you like make a statement?
Mrs. JOHNSON. I thank you, Mr. Chairman, and indeed, I
congratulate you on this hearing, and I am starting out on this
thoughtful trek in terms of what does nonprofit status, which
is a tax subsidy, gain us for those who enjoy it, and what is
the relationship between those institutions that enjoy a
privileged tax status and other institutions that provide like
services that don't enjoy a privileged tax status.
I am here not because I am a Member of the Subcommittee on
Oversight, but because I am Chairman of the Subcommittee on
Health, which has a different responsibility. One of our
responsibilities that we are having great difficulty managing
was well reflected in the Medicare Modernization bill. It asked
for a number of studies and efforts for experts to better
define that the information that we rely on in setting rates,
and indeed, this afternoon we have a seminar of our
Subcommittee with the Medicare Payment Advisory Committee (Med
PAC) on their first report of how difficult it is to find data
that will tell us what your financial circumstances are, and
this issue of your having a defined amount that you charge
people, that then varies all over the place, is one of the
reasons it makes it very hard for us to figure out what your
financial circumstances are. There is enormous conflict between
what we call the Medicare margin and your total margin. This
conflict has been so great, you can't make logical policy any
more without better understanding these differences.
We are going to be taking on a lot of the issues associated
with how do we evaluate whether or not our hospitals are
financially stable, doing well, and fairly rewarded, and part
of that is the nonprofit benefits for those that are nonprofits
versus the for-profits. So, this is a different angle on
something we are interested in. We do not have time nor
researchers to do it. I am glad they are doing it. I am here to
listen to that. There are going to be many aspects to hospital
financing that we are going to look at, and the reason we are
going to look at them is that if we don't community hospitals
are going to be destroyed by the public and private
reimbursement systems that are supposed to support them.
You look at what surgi-centers have done to hospitals in
terms of taking out the simple programs, the simple cases. You
look at what boutiques hospitals are positioned to do. You look
at what competition for lab services are positioned to do, and
you can't believe that community hospitals will be here for
charitable or any other purpose if we don't get more honest and
clear headed about what it is we are paying for and under what
circumstances.
So, this hearing, to begin to sort out what is the
nonprofit subsidy that goes to hospitals and what is it related
to, and what do we think of it, and what is it costing us, is
all a very, very important piece of the program, and then we
need to look at not only hospitals as nonprofits but the
nonprofits across the board. I don't know what other Members
are finding, but I am deluged with applications for 501(c)(3)
status, and we need to understand as a tax writing Committee
what is the effect of the nonprofit tax subsidy structure that
we put in place many years ago with a very simple rationale,
but which has absolutely exploded in multiple directions.
I commend Chairman Houghton and Mr. Pomeroy for starting
out this series of hearings which I think is extremely
important for our tax writing Committee, and I am pleased to be
here as the Chair of the Subcommittee on Health because these
issues are always interrelated. I thank the Chairman for the
courtesy of being able to make this comment on the record.
Thank you.
Chairman HOUGHTON. Thanks, Mrs. Johnson. Unless anybody has
a burning desire to make an opening statement, I think we will
go right to the panel.
Mr. KLECZKA. Mr. Chairman, I don't have a burning desire
except to insert two articles into the record at this point.
Mr. Chairman, I would ask unanimous consent to put this hearing
into perspective, that two articles be entered into the record.
The first is The Hill article dated June 17, and it is
entitled, ``Congressional Inquiry Triggers Hospital Angst.''
The second is a BusinessWeek article from June 7, and the
article is entitled, ``Making Hospitals Cry Uncle.''
Chairman HOUGHTON. Fine. We will put them in the record.
Thanks very much, Mr. Kleczka.
[The information follows:]
Congressional inquiry triggers hospital angst
By Bob Cusack
In a move that has attracted attention on K Street, a powerful
House lawmaker with a long memory has launched an investigation into
the financial practices of the hospital industry.
Hospital lobbyists fear that the scrutiny could eventually lead
Congress to make changes to the industry's tax-exempt status.
Some healthcare experts believe it is no coincidence that House
Ways and Means Committee Chairman Bill Thomas (R-Calif.), who is
spearheading a broad review of all 501(c)(3) tax-exempt entities,
picked hospitals as his first target.
Thomas and the hospital sector have had a complicated, roller-
coaster-like relationship. In the late nineties, Thomas protected the
industry from proposed Clinton administration cuts in Medicare
reimbursements.
But in 2002, the relationship soured after a draft of the House
Medicare reform bill was leaked to the media. Thomas believed then--and
believes now--that hospital Medicare payments have become bloated and
need to be curbed.
Hospital groups rallied against the 2002 measure, claiming that it
could slash billions of dollars they receive from Medicare. The intense
lobbying effort worked, and an infuriated Thomas was forced to rewrite
the legislation.
At the time, sources close to Thomas vowed that the lawmaker would
get his way eventually--most likely in a nonelection year.
``Thomas remembers everything,'' an industry lobbyist said, adding
that hospital groups are nervous that Thomas is laying the groundwork
to scale back hospital payments next year.
``He may tell [hospitals], either accept Medicare payment changes
or lose your tax-exempt status,'' the lobbyist said.
A hospital lobbyist agreed, saying, ``That's Thomas's style.''
On Tuesday, the largely inactive Ways and Means Oversight
Subcommittee will hold the first of a series of hearings on tax-exempt
issues. In announcing the hearing, the Committee took some veiled shots
at the industry: ``Hospital charges are not transparent. So consumers,
including the uninsured, do not have access to information on the costs
of medical treatment across hospitals.''
The release cited Medicare figures, claiming that ``hospitals'
charges exceed their average costs by 118 percent.''
There are more than 300,000 reporting tax-exempt 501(c)(3)
entities. Hospitals represent 1.9 percent of total reporting charitable
501(c)(3)s, but accounted for 41 percent ($337 billion) of total
expenditures, according to the Ways and Means panel.
ne healthcare expert estimated that 80 to 85 percent of all
hospitals are tax-exempt.
Thomas last month defended the inquiry, saying that taxpayers
deserve to know what they are paying for. He told reporters, ``I know a
lot of people don't want me asking these questions, but we are talking
about billions of dollars.''
Earlier this year, the hospital industry suffered a public-
relations hit when it claimed that government regulations were causing
it to charge uninsured patients higher-than-normal prices. In a rare
move, the Bush administration in February released the full text of its
response letter to the American Hospital Association (AHA) disputing
the contention government rules dictate hospital charges for the
uninsured.
Hospital lobbyists are anxious that Ways and Means aide Deborah
Williams is taking the staff lead on the investigation. Williams, who
helped draft the new Medicare drug law, is very familiar with the ins
and outs of the hospital sector, having previously worked for AHA.
But to the industry's dismay, Williams is a vocal proponent of
slowing the growth of hospital reimbursements.
______
Making Hospitals Cry Uncle
Has insurer J. Patrick Rooney found an unorthodox way to turn up the
heat?
Conservative millionaire J. Patrick Rooney is on a mission from the
Almighty: Bring down crushing and ``ungodly'' health-care costs. For
more than a decade, he has worked to replace traditional insurance with
tax-free health savings accounts (HSAS), which people can use to pay
for their own medical care. ``I'm doing the right thing, and I think
the Lord will be pleased about it,'' he says.
Using his fortune to open doors in Washington, Rooney has
relentlessly preached his gospel. Last year, Congress saw the light:
GOP lawmakers inserted a $6.4 billion tax break for HSAs into a
Medicare prescription-drug bill. And a recent survey by Mercer Human
Resource Consulting says 75% of employers are likely to offer the
accounts by 2006.
A courtly 76-year-old, Rooney has never hidden the fact that he
stood to profit from his crusade. After pioneering HSA sales with his
old company, Golden Rule Insurance, he sold out to UnitedHealth Group
Inc. (UNH) for $893 million just before Congress passed the tax break.
He promptly founded Medical Savings Insurance Co. to sell more HSAs.
PR HARDBALL
But Rooney isn't relying on just the power of his ideas and
political connections to make his company profitable. The Indianapolis-
based insurance entrepreneur also is backing a nonprofit group that
uses hardball tactics to get hospitals to cut prices. The nonprofit,
called Consejo de Latinos Unidos, campaigns on behalf of uninsured
Hispanics.
Last year, Consejo pressured the nations' No. 2 hospital system,
Tenet Healthcare Corp. (THC), to cut rates for uninsured patients and
revamp its collection practices. At the same time, Rooney's Medical
Savings won about $2 million in debt forgiveness from Tenet.
Now, Consejo's leader, Republican strategist K.B. Forbes, has
turned his attention to Florida. Hospitals being pilloried there say
Rooney's company owes them millions in unpaid bills, too. And Rooney
has suggested that a new Consejo target--HCA Inc. (HCA), America's
largest hospital operator--could take a lesson from Tenet and shake its
bad press by cutting a deal to forgive Medical Savings' debts.
Rooney, who pledged seed money to Consejo and hired a Washington
public relations firm to draw attention to its cause, says he doesn't
control Forbes. ``K.B. has to paddle his own canoe,'' Rooney says.
Besides, says Rooney, his drive to cut health-care costs, especially
hospital fees, is about more than money: It's a moral crusade. As such,
he makes no apologies for unorthodox methods.
ARM-TWISTING?
That includes backing Forbes, a onetime Medical Savings employee.
``Forbes presents himself as an advocate of the consumer,'' says Linda
S. Quick, president of south Florida Hospital & Healthcare Assn. But
Consejo ``seems to be initiated and financed by Rooney and others
selling individual insurance.''
With his folksy demeanor, Rooney comes across as an endearing do-
gooder. He is also one of the most powerful voices on the Right. Since
he pioneered HSAs in 1990, Rooney, his family, and employees have
poured more than $5 million into Republican causes.
Rooney's new model of health coverage, which has won support from
President George W. Bush, replaces traditional insurance with tax-free
health savings accounts and high-deductible policies. The argument: If
patients must pay out-of-pocket for, say, the first $1,000 in bills,
they will seek more cost-effective care. That, Rooney maintains, will
unleash market forces to hold down costs. Big insurers, including Aetna
Inc. (AET) and many regional Blue Cross Blue Shield Assn. plans, began
rolling out HSAs this year.
For hospitals, the plans pose a threat: bad debts. Patients
accustomed to first-dollar coverage find they must pay before insurance
kicks in, and many don't. In April, HCA blamed a rising tide of unpaid
bills for its soft first quarter.
It's not just patients who aren't paying. Medical Savings routinely
marks down its policyholders' hospital bills by as much as 80%. ``Yes
indeed, we're making unilateral decisions,'' Rooney says. ``But by God,
we have to hold the hospitals down to a reasonable price.'' Medical
Savings tells providers to accept its checks as full payment--or
collect from patients.
But as Forbes has demonstrated, hospitals pursuing low-income
patients are vulnerable to attack. Last year, Consejo stoked press
coverage of poor patients being hunted down by bill collectors.
``Nobody wants these cases where someone was sick and the big, bad
hospital is suing them,'' says Richard Morrison, a vice-president at
Orlando's Adventist Health System, which says Medical Savings owes it
some $1 million.
Consejo zeroed in on Tenet in 2001 after Forbes uncovered examples
of bare-knuckle collection practices--such as a lien on a Louisiana
patient's beat-up mobile home. His timing was perfect. Tenet was trying
to acquire hospitals in four cities and had drawn fire from the feds
over its Medicare billing. At critical junctures, Forbes would trot out
patients to portray Tenet as intent on gouging the poor. Tenet lost
three of the acquisition deals.
Behind the scenes, Tenet was in talks with Medical Savings over its
unpaid bills. In January, 2003, Tenet caved. It forgave nearly all of
Medical Savings' debt and lowered prices for the uninsured. In return,
Consejo dropped 10 lawsuits. The deals with Consejo and Rooney were
``contemporaneous and simultaneous,'' a Tenet executive says.
Like Tenet, HCA has sought a truce. In mid-2003, Chairman and chief
executive officer Jack O. Bovender Jr. set up a meeting with Rooney to
explain HCA's discount policy in hopes that Rooney would persuade
Forbes to back off. But prior to the meeting, Rooney forwarded a memo
to Bovender from Medical Savings President Randy Suttles that drew
parallels between HCA's situation and Tenet's. In the memo, which HCA
made available to BusinessWeek, Suttles notes that Tenet had shaken
some of its bad press after making a deal with Medical Savings. ``HCA
is in similar circumstances,'' Suttles wrote. A livid Bovender canceled
the meeting.
When asked about the e-mail to Bovender, Rooney says: ``The one
thing hospitals can't afford is a loss of public trust.'' And he isn't
afraid to get in their faces. ``If we go to the hospital and beg,
they'll say: 'We'll give you 20% off,''' says Rooney. ``Well phooey--
that's still an outrageous price. And we're not going to pay it.''
Indeed. More than 20 Florida hospital groups--including HCA--are suing
Medical Savings for some $7 million in overdue payments.
HCA and other Florida hospitals figure they have better odds of
bucking Forbes and Rooney than Tenet did: They're not under serious
regulatory scrutiny, and they're moving to help the uninsured. Rooney
paints a different picture, saying hospitals are lining up to deal:
``Tenet is not the only one.'' Both he and Forbes--independently, of
course--predict victory.
By Lorraine Woellert in Washington
Now, going to the panel. Nancy Kane, Professor at the
Harvard School of Public Health in Boston; Paul Ginsburg,
President of the Center for Studying Health System Change;
Peter Lee, President of the Pacific Business Group on Health in
San Francisco; Karen Davis, President of the Commonwealth Fund;
and Regina Herzlinger, the Nancy McPherson Professor at the
Harvard Business School in Boston. Please begin your testimony,
and Dr. Kane, would you start?
STATEMENT OF NANCY KANE, PROFESSOR OF MANAGEMENT, DEPARTMENT OF
HEALTH POLICY AND MANAGEMENT, HARVARD SCHOOL OF PUBLIC HEALTH,
BOSTON, MASSACHUSETTS
Ms. KANE. Thank you. I just want to correct. I am a
Professor at the Harvard School of Public Health, not the
Harvard Business School. Mr. Chairman and Members of the
Committee, thank you for inviting me to come and talk about
medical bad debt and hospital tax exemption under the guise of
hospital pricing practices.
I think I wanted to start by talking a little bit about
medical debt because it is a growing public health problem.
Besides causing an enormous financial burden on some of our
most vulnerable citizens, including personal bankruptcy and the
loss of their homes, and the garnishment of their wages, it
causes these people to be at an enormously greater health risk.
The people who incur medical debt do not follow up on life
threatening conditions such as getting the lump out of their
breast for breast cancer and then not going back for the
chemotherapy or the radiation therapy. People with less
critical conditions don't go to the physician and do not fill
needed prescriptions, and people who have incurred medical debt
don't let their children participate in sports and do not
undertake physical activity for fear of incurring an injury
that might add to their medical debt. If we are concerned about
obesity in this country, it doesn't help to have people afraid
to undertake physical activity.
Medical debt is related to the fundamental flaws in our
health care financing system, which is both voluntary and
extremely expensive, and increasingly out of the reach for a
growing number of people in this country. Hospital pricing
practices make a flawed system even worse by charging people
who are self-pay, and therefore usually uninsured or at risk
for a deductible or a coinsurance, it charges them the highest
prices available. The hospital pricing system is now based on
market-based negotiations, and the self-pay are not in a very
good bargaining position when they arrive at the hospital door,
or when they try to seek information on the Web, they are not
asked what they would like to offer for that care when they are
seeking care.
So, the self-pay and only a few indemnity carriers are left
paying on the basis of hospital charges, the charges are set
indeed to cover the negotiated discounts of everyone else.
Historically that made some sense, back when the discounts were
around 16 percent, back in 1982, and many more payers were
indeed paying on the basis of charges, and in fact, many
hospitals were encouraged to do that by the rate setting
systems in various States. However, rate setting has
disappeared and negotiated pricing has taken place.
Negotiated pricing now has brought those discounts up to 46
percent in 2002--that is the median, by the way, not the
average, which is probably higher--therefore, the markup of
charges over hospital costs has grown from about 120 percent of
cost to 180 percent, and again, that is the median. Fifty
percent of hospitals are at or below, and 50 percent are above
180 percent markup of their hospital charges over cost.
Obviously, charges are wildly unrelated to cost, and other
activities that hospitals undertake to specifically set charges
to discriminate against either charge payers or Medicare
outliers has made the charges even more wildly unrelated to
cost.
Now to talk a little bit about the medical bad debt and the
free care. Free care is only about 1 percent of hospital
charges. That is the amount that is forgiven by hospitals. The
determination of who is eligible for free care is generally up
to the hospital's board and the hospital's management. A few
States regulate a minimum amount of eligibility in terms of a
person's income level, and I believe one of the Members
described some of the range in eligibility--actually, I think
it was the Chairman. It is wildly variable from State to State
and hospital to hospital whether an individual will be eligible
for free care. You can be at 100 percent of Federal poverty
level and still not be eligible for free care in some States
and in some hospitals. Even if you are eligible, you may not be
aware that free care is available.
Bad debt is another 3 or 4 percent of hospital charges, and
from the information I have gotten on some small surveys,
definitely not a national database, about half of the bad
debtors in hospitals are insured people trying to deal with
high deductibles and coinsurance and copayments. The tax
exemption, as I have just heard from the Members of the
Committee, hasn't been reviewed in a long time, and clearly is
not tied to the provision of charity care of community benefit,
and it led to the kind of attitude that I got back in the years
that I have been involved with local communities charging tax-
exempt challenges, a former hospital chief executive officer
(CEO) informing me that it is just as charitable to serve a
rich man as a poor man.
Most of the challenges are coming from State and local
authorities. The Federal government, the Internal Revenue
Service (IRS) is really pretty weak in terms of encouraging
greater charitable on the part of nonprofit hospitals. I see my
time is up. In terms of transparency of pricing, you can see I
don't think it is going to have a huge impact on the uninsured.
Many of them are not allowed into the hospital until their care
is an emergent condition. Therefore, shopping around for a
price is really not going to help them, and I will end there.
Thank you.
[The prepared statement of Ms. Kane follows:]
Statement of Nancy Kane, Professor, Harvard Business School, Boston,
Massachusetts
Medical Bad Debt--A Growing Public Health Crisis
Mr Chairman, Committee Members: Thank you for the opportunity to
comment on pricing practices of hospitals, particularly in regard to
their contribution to the growing public health problem caused by
personal medical debt in the United States. Medical debt is the second-
leading cause of personal bankruptcy.\1\ Medical debt deters debtors
from seeking needed medical care on a timely basis. It.also causes them
to change their lifestyle in unhealthy ways, such as restricting their
children's participation in sports for fear of an injury, not saving
money for future retirement, and dealing with daily stress due to
harassment of aggressive debt collection agencies who may put liens on
their home or garnish their wages.\2\ Even insured people incur medical
debts; low-income insured people, like low-income uninsured people, do
not fill needed prescriptions, skip follow-up treatment for life-
threatening diseases like breast cancer, and do not see a physician
when suffering acute illnesses.\3\
---------------------------------------------------------------------------
\1\ Jacoby MB, Sullivan TA, and Warren E. ``Rethinking the debates
over health care financing: Evidence from the bankruptcy courts.'' New
YorkUniversity Law Review, Volume 26 (2), May, 2001.
\2\ Daly HFT, Oblak LM, Seifert RW, Shellenberger K. ``Into the red
to stay in the pink: the hidden cost of being uninsured.'' Health
Matrix: Journal of Law-Medicine. CaseWestern ReserveUniversitySchool of
Law. Volume 12 (1), Winter 2002.
\3\ Commonwealth Fund Quarterly, Summer 2002, p.8
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Hospital Pricing Policies--Background
As you have become aware, hospitals charge self-paying patients
based on their ``list prices'', known in the industry as gross charges.
Hospital gross charges evolved in a different payment era, 30-40 years
ago, when many more people were covered by commercial insurance under
``indemnity'' products that allowed people total freedom of choice of
provider; the insurer paid for unbundled units of service like lab
tests and the recovery room. Charge masters were inches-thick books
listing hospital charges for thousands of individual items. Because the
patient could go anywhere for care, most commercial insurers did not
have a meaningful context for contracting with a network of providers
for discounted prices. Charges were set at a level for the hospital to
recover ``shortfalls'' related to non-charge-paying insurers (Medicare,
Medicaid, some Blue Cross Plans) and to patients who couldn't or
wouldn't pay their bills. In the late 1970's and early 1980's many
hospitals developed software that identified which hospital services
were most heavily used by charge-payers, so that they knew where it was
most profitable to raise charges; this ``revenue-maximization'' method
of setting charges for individual units of service contributed to
prices that today can be wildly unrelated to cost.
In the 1990's, as privately-insured patients were driven into PPO
(preferred provider organization) and HMO products with restricted
networks, insurers were able to negotiate hospital payment terms based
on bundled service units such as DRGs, all-inclusive per-diems, and
capitation contracts, although some still use fee schedules and
discounted charges particularly for outpatient care. Unfortunately,
with no large insurers to represent them, self-paying patients were
left paying on the basis of hospital gross charges. With fewer patients
paying charges, many hospitals raised charges even higher above cost to
cover ever larger contractual shortfalls. The median markup (the ratio
of hospital gross charges to total cost) was only 120% in 1982, but
gradually rose to 180% by 2002. At the same time, the median
contractual ``discounts'' rose from 16% in 1982 to 46% of charges in
2002.\4\
---------------------------------------------------------------------------
\4\ 1982 from Cleverley, WO, Hospital Industry Analysis Report,
1979-1983; 2002 data from the Almanac of Hospital Financial
Performance, Ingenix, 2004.
---------------------------------------------------------------------------
Many self-pay patients do not have the resources to pay those
bills; on average, patients classified into the bad debt and free care
categories (``uncompensated care'') pay only about 20% of the cost (not
charges) of their care.\5\ However, depending on how those patients
were classified at the time they received their care--as bad debt or as
free care recipients--their lives after receiving hospital care are
dramatically different.
---------------------------------------------------------------------------
\5\ See hospital payment-to-cost ratios by payer in the MedPAC June
2000 Report to Congress, Table C12; bad debtors fall into the
``uncompensated care'' payer category.
---------------------------------------------------------------------------
Charity Care versus Bad Debt--Implications for the Patient
If the patient is deemed eligible for ``charity'' or free care
under the hospital's guidelines for eligibility, then the charges are
not billed and the hospital does not attempt to collect from the
patient. Policies determining eligibility for charity care are
determined by individual hospitals in most states, although a few
states regulate minimum standards. State or hospital eligibility
guidelines range from a family income at or below 100% of federal
poverty level to family incomes as high as 300% of federal poverty
level; sometimes a sliding scale for discounts off hospital charges is
available for families with incomes above some minimum, eg between 100
and 300% of poverty level.
If a person does not qualify for charity care, and is unable to pay
the bills either because s/he is uninsured and not wealthy, or is
insured but has copayments, deductibles, or coinsurance that are beyond
his/her means, then the person becomes a medical debtor. Some hospitals
turn late medical bills over to highly aggressive debt collection
agencies, whose tactics have been well documented recently in the
press. The bill to the uninsured bad debtor is based on hospital
charges unless the hospital has a program of sliding scale discounts to
assist patients who cannot afford their medical bills but are not
eligible for charity care. The amount that insured patients owe
reflects their insurance plan's deductible and copayment or coinsurance
policies; policies with coinsurance and deductibles as high as $15,000
are becoming popular in the individual market as deeper coverage
becomes impossible to afford.
Medical bad debt is a growing problem for both insured and
uninsured families and individuals. In a recent survey of hospitals in
Maine, for those hospitals that kept track of the source of bad debt by
insurance status, 40-50% of the bad debt was owed by people with
private health insurance. According to one study, 80% of families in
bankruptcy due in part or in whole to medical bills had medical
insurance.\6\
---------------------------------------------------------------------------
\6\ See footnote 1, above
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Hospital Tax Exemption and the Provision of Uncompensated Care
The provision of charity care or a sliding scale discount for
patients deemed ``bad debtors'' is not a requirement for hospital tax-
exemption at the federal level. Some state and local taxing authorities
have challenged hospitals that fail to provide a ``reasonable'' level
of charity care to patients, but most states have been reluctant to
specify a quantity of charity care that hospitals must provide in order
to retain their state and local exemptions. Research done by myself and
others in the mid-1990s indicated that the quantifiable value of
hospital tax exemptions greatly exceeds the average cost of charity
care provided. In my research sample in 1995, 75% of hospitals enjoyed
tax benefits in excess of the average cost (not charges) of charity
care provided. Even when the average cost of bad debt was included in
my analysis, roughly one-third of hospitals in my national sample of
521 hospitals had excess tax benefits.\7\
---------------------------------------------------------------------------
\7\ See Kane NM and Wubbenhorst WH, ``Alternative Funding Policies
for the Uninsured: Exploring the Value of Hospital Tax Exemption.'' The
Milbank Quarterly, Vol 78 (2). 2000.
---------------------------------------------------------------------------
Multiple Transparency Issues
The transparency problem in charity care is that many people who
would have qualified for charity care didn't know that it is available
because the hospital did not publicize it. Failure to inform patients
of the availability of charity care is one of several reasons for
recent lawsuits and tax-exemption challenges against Yale-New Haven
Hospital and Provena Health in Illinois, among others.
From a health policy perspective, a related transparency failure is
the lack of a publicly available national data base on hospital free
care, bad debt, and the other financial elements needed to estimate the
value of hospital tax-exemptions. This committee would be doing a great
public service if it were to recommend the creation of such a national
data base, which could be relatively easily done through improved
reporting on the Schedule G of the Medicare Cost Report.\8\
Policymakers at both state and federal levels would be better able to
reform tax exemption policies or to challenge hospital practices if
they could document current levels of bad debt, free care, and the
value of tax exemption.
---------------------------------------------------------------------------
\8\ See Report to the Congress, June 2004, Sources of Financial
Data on Medicare Providers, Medical Payment Advisory Commission; also
KaneNM and Magnus S. The Medicare Cost Report and the Limits of
Hospital Accountability: Improving Financial Accounting Data. Journal
of Health Policy, Politics, and Law, Feb. 2001:Vol 26 (1):81-105.
---------------------------------------------------------------------------
Transparency of hospital charges would add some value to uninsured
patients facing the possibility of medical debt--especially if prices
can be stated meaningfully rather than in the form of a traditional
hospital charge book. Already some medical information companies have
developed web-based information tools for consumers to ``shop'' for
specific, well-defined procedures and medical conditions for which
consumers have time and incentives to do comparison pricing,
particularly if they are at risk for co-insurance or the whole bill.
For the uninsured, however, hospital price transparency may be of
limited value except for predictable and urgent events like childbirth
(which is a common reason for incurring bad debt among the uninsured).
Many hospitals have a stated policy of not providing charity care and
not extending credit to uninsured patients for non-urgent conditions;
uninsured patients must pay cash up front before receiving ``elective''
treatment. The line between urgent and elective is subject to some
interpretation, especially with the growing burden of chronic disease
present in our society. In any case the result is that uninsured people
avoid seeking care until the need is urgent or life-threatening,
because the hospital must treat them, and some would then qualify for
charity care. This pattern of behavior limits their options to
hospitals in close proximity that are not on emergency diversion status
at the time of their urgent medical need. Pricing considerations are
not likely to influence where one ends up under these circumstances.
Summary
Transparency in hospital pricing would be a useful supplement to
stronger policies that reinforce the safety net for the uninsured. One
such policy would be to strengthen the tie between hospital tax
exemption and the provision of medical services to the uninsured.
Hospitals could be required to demonstrate how they ``earn'' the value
of their tax exemption, with higher priority, safety-net activities
counting for more than those activities that primarily benefit insured
populations, the hospital's competitive position, or the general
public. Incentives for hospitals to provide preventive, primary, and
chronic care to vulnerable uninsured populations could both save money
and greatly reduce human suffering.
Thank you for the opportunity to speak.
Chairman HOUGHTON. Thanks very much, Ms. Kane. Dr.
Ginsburg, you may begin your testimony.
STATEMENT OF PAUL B. GINSBURG, PRESIDENT, CENTER FOR STUDYING
HEALTH SYSTEM CHANGE
Mr. GINSBURG. Mr. Chairman, Mr. Pomeroy, and Members of the
Subcommittee, I appreciate the invitation to be here to present
testimony on hospital pricing issues. I am President of the
Center for Studying Health System Change, which is an
independent nonpartisan health policy research organization
funded principally by the Robert Wood Johnson Foundation.
After a respite in the nineties, health care costs are
rising rapidly again. In 2003 hospital price increases were an
important factor behind the increases in costs faced by those
who were privately insured. Employers have been changing their
health benefit plans to emphasize patient financial incentives
to use less care and to be sensitive to prices. With hospital
pricing extremely complex, it is fortunate that at least
insured people have more effective mechanisms to purchase
hospital care than by attempting to compare incredibly complex
hospital charge masters for the services that they are likely
to be provided when they are hospital patients. Uninsured
people do not have such advantages and unless the hospital
offers a lower price on the basis of the patient's income, they
pay the highest prices, as Nancy Kane pointed out.
Consumers who are insured benefit enormously from relying
on an intermediary to (a) negotiate prices with hospitals, and
(b) analyze differences in negotiated prices among competing
hospitals. Managed care plans negotiate prices with hospitals
through formation of a network of hospitals that have agreed on
rates. When the number of people enrolled in managed care plans
expanded during the 19nineties, managed care plans were able to
negotiate more favorable prices from hospitals. Pressure for
broader hospital networks, increasing hospital concentration
and capacity constraints have weakened plans' negotiating
position with hospitals in recent years.
In order to engage market forces while maintaining broad
hospital networks, health plans have developed a new product,
tiered hospital networks. Some of the hospitals in the network
are labeled as preferred, and consumers are given financial
incentives, usually lower copayments, to use them. High priced
hospitals risk the loss of some patients, increasing incentives
to agree on a lower price. This mechanism reflects a more
refined device to incorporate patient financial incentives than
say, deductibles, because tiered network incentives are aimed
at situations at which patients have choices. Tiered networks
accommodate both consumers who do not want their provider
choice restricted, as well as those who want to avoid large out
of pocket expenses. Nevertheless, tiered network products have
grown slowly due to the complexity of the products, hospital
resistance, and employer caution.
Consumer-driven plans and HSAs have similar issues
concerning hospital pricing. In most situations hospital prices
are handled by Preferred Provider Organization (PPO) mechanisms
through negotiation. Health savings accounts, I expect, will
have networks of hospitals with negotiated prices, and these
negotiated prices will apply to the deductible as well, which
will be very important to those enrolled in HSAs and consumer-
driven plans.
When coinsurance is used, there is a need for the plan to
communicate to its enrollees the relative costliness of
hospitals. Some plans have been pioneering this by providing
ratings like Zagat's ratings of how expensive different
restaurants are. For example, California Blue Cross giving from
one to five dollar signs for each hospital in its network.
Rating hospital costliness is better than revealing negotiated
prices. For one thing they are easier for consumers to use, and
second, I am concerned that disclosure of negotiated prices
will lead to higher prices because of how hospitals will use
that information.
The bottom line for consumer-driven health plans, as well
as for Health Maintenance Organizations (HMOs) and PPOs is that
consumers are better off using their insurer as an intermediary
to negotiate lower prices and inform them of the financial
implications of choosing Hospital A over Hospital B.
A closing thought: making consumers more sensitive to
prices and providing better information on prices and quality
can contribute to slowing health care costs, but we should not
oversell the potential. In the long run we know that new
medical technology is the dominant driver of increasing health
care costs. Much of the new technology is terrific, but the
lack of careful consideration of clinical effectiveness of new
treatments in relation to existing ones leads to more waste and
poor outcomes than should be the case. Increased public
resources for developing information on effectiveness is
critical to the long run slowing of cost increases. Thank you.
[The prepared statement of Mr. Ginsburg follows:]
Statement of Paul Ginsburg, Ph.D., President, Center for Studying
Health System Change
Mr. Chairman, Representative Pomeroy and members of the
Subcommittee, thank you for the invitation to testify before you today
about hospital pricing issues. My name is Paul B. Ginsburg, and I am an
economist and president of the Center for Studying Health System Change
(HSC). HSC is an independent, nonpartisan health policy research
organization funded principally by The Robert Wood Johnson Foundation
and affiliated with Mathematica Policy Research.
We conduct nationally representative surveys of households and
physicians and site visits to monitor ongoing changes in the local
health systems of 12 U.S. communities. We also monitor secondary data
and general health system trends. Our goal is to provide members of
Congress and other policy makers with unique and timely insights on
developments in health care markets and their impacts on people. Our
various research and communication activities may be found on our Web
site at www.hschange.org.
Rising Health Costs
After a respite in the mid-1990s, health care cost trends are
rising rapidly again, leading to growing health insurance affordability
problems for employers and consumers. At the moment, rising prices for
hospital care are an important factor in spending increases for health
care covered by private insurance.\1\ Although rising input prices,
especially for labor, are a factor in rising hospital prices, increased
hospital consolidation and consumers' desire for broad hospital choice
have enhanced hospital bargaining power with health plans. Engaging
consumers through market forces to make more cost-conscious choices
about hospital care offers the potential to slow this trend.
---------------------------------------------------------------------------
\1\ Strunk, Bradley C., and Paul B. Ginsburg, ``Tracking Health
Care Costs: Trends Turn Downward In 2003,'' Health Affairs, Web
exclusive (June 9, 2004).
---------------------------------------------------------------------------
In recent years, employers' main strategy to slow cost growth has
been to give consumers financial incentives to use less health care and
to be sensitive to prices for services. The most important changes for
the health care system have involved changes in the benefit structure--
primarily increased patient cost sharing--for the health maintenance
organization (HMO) and preferred provider organization (PPO) products
that most privately insured people have, but consumer driven health
plans (CDHP) and health savings account (HSA) plans, which push this
approach further, have received more attention. Choosing hospitals on
the basis of price, quality and amenities is potentially an important
component of this approach. My testimony today focuses on the first--
helping consumers incorporate price considerations into their choice of
hospitals.
Because of the bewildering complexity of hospital pricing and the
uncertainty of what services a patient will need, health plan network
designs offer more effective opportunities to engage consumer-driven
market forces than extensive publication of hospital price lists.
Putting Price Into the Consumer-Hospital Equation: Theory vs. Reality
In theory, empowered consumers armed with precise information about
what care they need would compare information about each hospital's
quality, amenities and costs in relation to the benefit structure of
their insurance. Their physician, who understands what services they
will need, would advise them about what those services will cost at
each hospital and quality differences among hospitals.
The reality involved in these choices today is far from the theory.
Information on what hospital care will cost is available only in forms
that are so complex that even the most sophisticated consumers would be
overwhelmed. Hospitals charge on a fee-for-service basis that is highly
detailed--down to charges for each aspirin. Patients all have different
needs, so developing an estimate of what the charge would be for any
patient is something that hospitals have not been willing to do.
Indeed, many patients are hospitalized to determine what is wrong with
them and to determine what treatment is needed.
A number of practical impediments concern the role of physicians.
Doctors today know very little about either their patients' insurance
coverage or hospital prices. They may have some sense of hospital
quality, but this tends to be based on perceptions rather than
objective data. Of course, if more of their patients had substantial
financial incentives to choose lower-cost hospitals and if information
technology were able to put the patient's insurance benefit structure
at their fingertips, doctors might become better advisers on these
issues.
But doctors often do not practice in all of the hospitals that
might be viable options for the consumer. This not only introduces a
conflict of interest into the relationship of the physician acting as
the patient's agent, but also poses to the patient the reality that
choosing certain hospitals will require a change in physician. Indeed,
with the increasing presence of physician-owned specialty hospitals,
these conflicts are becoming more significant.
Consumer Choice Under Managed Care
Under managed care, health plans serve as an intermediary between
the consumer and hospitals to negotiate lower prices for hospital care.
This is done not by providing the consumer with a great deal of price
information, but instead by forming a network of hospitals that have
agreed to a price schedule with the plan. So all managed care enrollees
need to do concerning costs is decide whether to limit themselves to
hospitals in the network. If consumers use a network hospital, they
will in most cases know exactly what it will cost--often a fixed-dollar
amount (sometimes zero)--for the hospital stay.
In the 1990s, when most managed care plans had relatively
restricted networks of hospitals and physicians, plans were successful
in negotiating prices that were substantially lower than they would
have been in the absence of managed care. But the lack of provider
choice and suspicion that plans placed too heavy an emphasis on cost in
developing networks contributed to a powerful backlash against managed
care. Employers and consumers demanded broader provider networks, and
managed care plans, which are essentially agents of employers,
responded by broadening their provider networks. The mechanism of a
network remained the same, except that consumers--and their doctors--
were happier about the broader choice and plans lost bargaining clout
with hospitals because they could no longer credibly threaten to
exclude hospitals from plan networks because hospital prices were too
high. Tighter hospital capacity and increased hospital consolidation
also contributed to declining plan leverage with hospitals.
Nevertheless, managed care plans still maintain substantial discounts
from what hospitals charge patients with traditional indemnity
insurance or those without insurance.
The managed care backlash and the loss of bargaining clout with
hospitals from broader networks has led health plans to search for
mechanisms that rely more on using financial incentives to steer
consumers to lower-cost hospitals. The most important product that has
evolved to date is the tiered-hospital network. Within their broad
networks, health plans label some hospitals as ``preferred.'' Patients
pay less if they choose a preferred hospital but their payments are
still relatively modest if they choose nonpreferred hospitals in the
network. This provides more bargaining leverage to health plans because
hospitals that are not in the preferred tier will lose some volume.
What is attractive about this development is that it can
accommodate both consumers who will not accept restrictions on their
choice of provider as well as those who are willing to make trade-offs
between choice and out-of-pocket expense. Tiered networks are
consistent with the newest directions in the use of patient financial
incentives, which involve targeting incentives on care decisions where
patients have alternatives.\2\ For a number of reasons, these tiered-
network products have developed slowly,\3\ but they eventually may
become significant.
---------------------------------------------------------------------------
\2\ Trude, Sally, and Joy M. Grossman, Patient Cost Sharing:
Promises and Pitfalls, Issue Brief No. 75, Center for Studying Health
System Change, Washington, D.C. (January 2004).
\3\ Mays, Glen, Gary Claxton and Bradley Strunk, Tiered-Provider
Networks: Patients Face Cost-Choice Trade-offs, Issue Brief No. 71,
Center for Studying Health System Change, Washington,D.C. (November
2003).
---------------------------------------------------------------------------
Hospital Choice and Consumer-Directed Health Plans
The large deductible that is a defining characteristic of CDHPs may
serve to discourage some hospitalizations, but once a patient is
admitted, the deductible will almost always be exceeded. So having a
large deductible does not provide much of an incentive to choose a less
expensive hospital. Once the deductible has been satisfied, CDHPs
typically function like a PPO, with similar incentives to use network
hospitals. When there is cost sharing beyond the deductible, it can
take the form of a fixed-dollar amount per admission or per day
(copayment) or a percentage of the amount that the health plan pays the
hospital (coinsurance). It is too early to get a sense of what benefit
structures will prove most popular for health savings accounts linked
to high-deductible policies, but I would expect them to also function
like PPOs so that enrollees can take advantage of health plans' ability
to analyze complex hospital price data and negotiate favorable
discounts.
Getting hospital price data to the consumer is most important in
insurance products that use coinsurance (patient pays a fixed
percentage of the bill). If the patient is paying 20 or 30 percent of
the bill, prices are relevant, although price differences are diluted
by 80 or 70 percent. Blue Cross of California has many products with
substantial coinsurance and provides enrollees with hospital cost
information using a rating system--from ``$'' to ``$$$$$''--to give
patients an idea of how much they will have to pay out of pocket. Such
information, which is based on what the plan pays per episode of care,
can be a major asset to consumers faced with these types of financial
incentives.
Price Transparency vs. Lower Prices
When managed care plans negotiate prices with hospitals, both
parties typically agree to keep prices secret. Each side is aware of
the possibility that they can get a better deal if their counterpart
can keep it secret from others in the marketplace. Whether this leads
to higher or lower hospital prices on average in a community depends on
whether the health plan or hospital side of the market is more
concentrated. Transparency can benefit the more concentrated side of
the market because it facilitates taking into account how competitors
will respond to prices and aids any collusion. Since hospitals are
often more concentrated than health plans at the market level, then
transparency would tend to lead to higher prices for hospital care and
thus higher health insurance premiums.
The combination of the complexity of dealing with hospital prices
and the pitfalls of making negotiated prices public argues for
consumers depending on their health plans to negotiate contracts with
hospitals and present them with information as to which hospitals will
cost them more. This can be conveyed to consumers through differences
in copayments (e.g. you will have to pay $300 more to be admitted to
hospitals in group A than to hospitals in group B) or communicating
which hospitals will result in larger amounts of coinsurance.
A potentially even more powerful tool would be a return to hospital
networks that provide less choice, such as the step that the California
Public Employees Retirement System (CalPERS) announced on June 16. Some
consumers--but not all--would be willing to sacrifice some provider
choice to keep their out-of-pocket costs lower. My organization's
surveys of consumers have shown a consistent result over time that a
majority of consumers are willing to make these trade-offs.
Deja vu All Over Again
In closing, I would be remiss in not pointing out that today's
insurance benefit structures increasingly are returning to coinsurance
models similar to traditional indemnity insurance structures. The
failure of that insurance model to control costs led to the wide
adoption of managed care practices, including restricted choice of
providers and tighter administrative oversight of care use. There's no
reason to believe that increased patient cost sharing will be
substantially more successful this time around in significantly slowing
health care cost trends, even if consumers miraculously had
understandable price and quality information to help guide their
decisions.
Over the long haul, advancements in medical technology are far and
away the biggest factor in rising costs. And our current financing
system facilitates the rapid diffusion of expensive new technologies by
paying most of their cost--even in the absence of careful consideration
of their clinical effectiveness relative to existing treatments.
Fundamental change in this dynamic would require support for improved
and more frequent evaluation of new technologies prior to decisions
about coverage, as well as carefully differentiated incentives built
into the financing system that encourage both providers and patients to
evaluate the clinical effectiveness of a given course of treatment
against its cost.
Chairman HOUGHTON. Thanks very much, Mr. Ginsburg. Mr. Lee?
STATEMENT OF PETER V. LEE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, PACIFIC BUSINESS GROUP ON HEALTH, SAN FRANCISCO,
CALIFORNIA
Mr. LEE. Thank you very much, Mr. Chairman, and Members of
the Committee for having me join you today on behalf of the
Pacific Business Group on Health, which represents some of the
Nation's largest purchasers of health care. Our members
represent over 3 million Americans in our efforts to both
improve health care quality while moderating cost.
Rising hospital costs are a problem nationally, but events
in California have underscored that there are three
industrywide issues that reinforce Chairman Thomas's note about
the blindfolded nature of walking into hospitals, we can't
necessarily tell the experience between nonprofit or for-
profit. The three issues are first, staggering cost increases,
second, huge variations in cost and quality of hospital care,
and, third, the failure of the market to address these issues
effectively.
While there are multiple issues for the reasons for rising
cost, two in particular are the lack of transparency
differentiating hospital quality and efficiency, and hospital
consolidation, which in many markets has stifled competition.
We see variations in cost between and within communities that
defy any rational explanation and signal insufficiently
competitive markets for hospital services. Gall bladder and
heart surgery costs three times as much in Sacramento as it
does in San Diego. Cesarean sections cost twice as much in
Sacramento as in Los Angeles. The problem is not just high
cost. It is also there is a total disconnect between cost and
quality. There is no indication that cost differences have any
relation to quality. A patient is about twice as likely to have
a wound infected in the bottom 25 percent of hospitals as in
the top 25 percent; a similar likelihood for getting pneumonia
after surgery. Other avoidable complications, and there is no
correlation between those quality indicators and cost.
Purchasers do look to their health plans they contract with
to ensure that the hospitals are not getting overpaid, and are
being rewarded for performance, but also that they provide
valid tools so consumers can make better informed choices.
Nationally we should have the same expectation of the Center
for Medicare and Medicaid Services (CMS) and its administration
of Medicare, and I think the good news is we have seen CMS step
up to this challenge in important ways. There are four things I
think that we need to look at to improve hospital quality and
the efficiency with which our care is delivered in our Nation's
hospitals.
First we have to expand the availability of standardized
performance information. We currently have a Tower of Babel of
conflicting and incomplete measures to report on hospital
performance. The path to resolve this problem is to support and
accelerate the efforts of the National Quality Forum. At the
same time, CMS should be not only applauded for its focus on
the importance of transparency, but urged to accelerate its
efforts to make sure that there is usable information on
hospitals and physician performance, and that the information
is in the hands of consumers, purchasers and providers. One key
element of that transparency is that we must have standards for
measuring the relative efficiency with which care is delivered,
looking beyond mere unit price to assess the full associated
health insurance cost or the longitudinal efficiency with which
care by hospitals and doctors is delivered. That is a key
measure to be able to understand the difference between for-
profit and nonprofit hospitals.
Second, we need to reward better hospital performance.
There are large-scale pay-for-performance initiatives in the
private sector for medical groups and physicians, and CMS has a
new initiative for incentives at the hospital level. Those
efforts are promising. Center for Medicare and Medicaid
Services (CMS) should not only continue that innovation, but
should look actively at how to innovate in partnership with
private and State-based public purchasers.
Third, information must be provided along with incentives
to consumers to make better choices. Across the country there
are a growing array of tools and insurance products provided to
health care consumers to help them choose and understand the
differences between hospitals, physicians, and treatment
options. Consumers want and need this information. Our task is
to make sure that that information is valid.
Finally, we have to allow the market to function. We need
to be sure that comparative performance information can be used
in local markets. There is a danger that in communities that
have had hospital consolidation, such efforts will be hindered.
Hospitals creating networks is great if that consolidation will
help the market to work. It is dangerous, however, if
conglomerates of hospitals prevent individual hospitals from
having their quality and efficiency show through separately.
Conglomerates are dangerous if they prevent separate
contracting arrangements with individual hospitals in local
communities. I will just note that consumers need to have the
information to make informed treatment choices. They don't.
Providers need to be paid differently for better performance.
Today they aren't. Without those two changes, we will never
have a working market to reform hospital delivery. Thank you.
[The prepared statement of Mr. Lee follows:]
Statement of Peter V. Lee, President and CEO, Pacific Business Group on
Health, San Francisco, California
Thank you for the opportunity to speak on behalf of the Pacific
Business Group on Health, which includes many of the nation's largest
purchasers of health care. PBGH represents both public and private
purchasers who cover over 3 million Americans, seeking to improve the
quality of health care while moderating costs. The members of PBGH
range from large public and private purchasers such as Bank of America,
CalPERS and FedEx, to thousands of small businesses in California that
we serve through our small employer purchasing pool--PacAdvantage. I
welcome the opportunity to speak to you about how leading purchasers
are working with consumers and providers to create market solutions for
a very troubled health care system.
The Problem of Rising Hospital Costs and Quality Shortfalls
Rising hospital costs are a problem nationally, but California has
been in the news recently on two fronts related to hospital pricing and
the impact on consumers and purchasers. Last year, the big story was
the pricing and patient selection practices for cardiac care of a Tenet
hospital in Redding, California; more recently the news has been about
the action of one of our members, CalPERS, to exclude some high cost
hospitals from one of its HMOs offered to beneficiaries. Both stories
underscore the need for change and dramatize three industry-wide
issues--staggering cost increases, huge variations in the cost and
quality of hospital care, and failure of the market to address these
issues.
In California, hospital costs are growing at almost twice the rate
of the national average. Expenditures for inpatient services in
California rose at an annual rate of 11.3%\1\ from 1998 to 2001, the
second highest rate in the nation, almost twice the average of 5.9%\2\
and nearly four times the general inflation rate of 2.9%. The picture
is even worse for employers and their employees with commercial
insurance--they have faced hospital cost increases of up to 20% as
cost-shifting from uninsured or underfunded public programs hits
employers and their employees.
---------------------------------------------------------------------------
\1\ Hay, Joel. Hospital Cost Drivers: An Evaluation of State-Level
Data. University of Southern California. October 15, 2002. Page 14.
\2\ Ibid. Page 1.
Staffing costs, especially the shortage of nurses
combined with a staff ratio mandate;
Need for investments in infrastructure and new
technologies--driven in part by need for seismic retrofit, but also by
a period of underinvestment in 90s;
Increased admissions and lengths of stay;
Hospital consolidation, which has stifled market
competition; and
Lack of transparency differentiating hospital quality and
efficiency.
Why are high costs a problem? Health care consumers, our members'
employees, are footing the bill, whether through increased cost-
sharing, larger contributions to their employer's premium or a smaller
paycheck. Hospital consolidation and the rapid acceleration of hospital
cost trends not only impacts affordability, but access. Rising hospital
costs drive a cycle of cost-shifting: as hospitals and doctors raise
rates to recover the cost of unpaid or under-paid services. As we see
cutbacks in support for public programs, the commercial market picks up
a disproportionate share of hospital cost increases. Subsequent cost
shifting onto premium-paying employers and consumers accelerates a
vicious, self-perpetuating cycle as large employers struggle to
maintain comprehensive coverage and some small employers drop coverage
altogether, leading to higher rates of uninsured. Again, this is
particularly true in California, where Medi-Cal--our Medicaid program--
has one of the lowest reimbursement rates in the nation.
The problem is not just high cost--it is the variation in cost, and
the fact that there is a total disconnect between cost and quality of
care. We see variations between and within communities that defy a
rational explanation and signal insufficiently competitive markets for
hospital services. Gall bladder or heart surgery costs three times as
much in Sacramento as in San Diego; Caesarian-section costs twice as
much in Sacramento as in Los Angeles.\3\
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\3\ Rapaport, Lisa. Region feels pain of high hospital bills.
Sacramento Bee. November 10, 2002.
---------------------------------------------------------------------------
Reasons for California's growing hospital costs include:
We also see enormous cost variations within a single community.
According to data collected by the state and reported by HealthShare
Technology--based on billed charges:\4\
---------------------------------------------------------------------------
\4\ Sacramento Hospital Comparison: Full Year 2000 Inpatient Data.
HealthShare Technology, Inc. November 14, 2002.
The average charge in Sacramento (before insurer
discount) for a hysterectomy ranges from $13,921 at the lowest-charging
hospital to $43,931 at the highest;
For gall bladder surgery, from $17,826 to $61,095;
For kidney transplant, from $115,096 to $184,183; and
For bypass surgery, from $131,735 to $225,678.
And, there is no indication that these cost differences have any
relation to different levels of quality of care. Wide cost variations
reveal insufficient market competition and the gap is just as large
when we look at hospital quality:
A patient is about twice as likely to have a wound
infected in the bottom 25% of hospitals as in the top 25%;\5\ a similar
likelihood exists for getting pneumonia after surgery and other
avoidable complications;
---------------------------------------------------------------------------
\5\ Kane, Nancy M. Siegrist, Richard B. Understanding Rising
Hospital Inpatient Costs: Key Components of Cost and the Impact of Poor
Quality. August 12, 2002. Page 30
---------------------------------------------------------------------------
We now have a limited set of hospital outcomes data, such
as for heart surgery, which also shows wide variation in quality;
And we know that the extent to which hospitals have in
place systems to avoid medical errors, such as having adequate
intensivist coverage in intensive care units or computer physician
order entry, varies dramatically and is generally insufficient.
Consumers and purchasers need--and are beginning to demand--
transparent cost and quality information on individual hospitals and
doctors. We want to know whose care leads to better clinical outcomes.
We want to know whose care leads to how much total spending for a
hospital procedure or a years' chronic illness care, and why. We need
to be able to know when high hospital or physician fees enable lower
total health insurance spending over an episode or year of illness and
when they merely ``pile on'' or exacerbate higher total health
insurance spending.
Solving the problem of hospital cost and quality variation will
require participation by all parties. Hospitals and physicians must
embrace a culture of accountability in which their payable charges,
``longitudinal efficiency'' with respect to total health insurance
spending, and quality are transparent to consumers. Purchasers must
create an environment where hospitals compete on and are paid for
performance excellence.
The Market is Failing to Assure Excellence by Hospitals and Physicians
Large employers and consumer organizations agree with the Institute
of Medicine's reports in 1998, 1999 and 2001 that there is a wide gap
between the health care that Americans are getting and what health care
could and should be. The following figure summarizes current research
and expert opinion on the approximate percentage point size of the gap.
[GRAPHIC] [TIFF OMITTED] T9670A.001
Large employers also agree with the Institute of Medicine that
closing the gap requires that purchasers and insurers correct serious
flaws in the market for doctor and hospital services via two actions:
(1) creating precise streams of public performance measurement of
doctors and hospitals; and (2) rewarding doctor and hospital excellence
via performance-based payment; and/or insurance plan designs which
encourage consumer selection of better performing providers.
To accelerate these two foundations of a market solution to weak
health care industry performance, large American employers launched two
linked ``pro-competitive'' initiatives: the Consumer and Purchaser
Disclosure Project (``the Disclosure Project''); and the Leapfrog
Group.
The Disclosure Project is an informal partnership of large
employers, business coalitions and consumer advocacy and labor that
includes AARP, General Motors, Motorola, the Pacific Business Group on
Health, the AFL-CIO, the Employer Health Care Alliance Cooperative
(``The Alliance'') in Madison, WI, the American Benefits Council, and
the National Partnership for Women and Families. These groups share a
commitment to health care performance accountability and the Disclosure
Project's goal that ``by January 1, 2007, Americans will be able to
select hospitals, physicians, integrated delivery systems and
treatments based on public reporting of nationally standardized
performance measures for clinical quality, patient experience, equity
and efficiency.''
The Disclosure Project is promoting the National Quality Forum's
(NQF) multi-stakeholder consensus process to define valid and feasible
standardized performance measures and assure routine reporting by
doctors and hospitals. If NQF-mediated progress proves insufficient,
Disclosure Project members are committed to pursuing other options for
performance reporting. The personal and economic consequences for
consumers and purchasers of continued performance-blind selection of
hospitals, doctors and treatments have become intolerable.
The Leapfrog Group is a private, non-profit organization of more
than 130 of America's largest private and public employers and unions
which provide over $56 billion in health benefits annually. Members
commit to encouraging their employees to select, and/or their insurers
to reward, better-performing hospitals, doctors, and treatment options.
The ``Frogs'' initially focused on identifying and rewarding hospitals
that excelled in three important patient safety features. The Leapfrog
Group is now expanding its focus beyond patient safety and aligning its
market rewards with doctor and hospital excellence across all of the
performance domains advocated by the Disclosure Project.
The Disclosure Project and the Leapfrog Group are creating the
national groundswell that is being translated into real first steps for
both consumers and providers. I heartily recommend MedPAC's June
report, which not only highlights innovative strategies undertaken by
purchasers, but underscores how Medicare--like much of the private
market--falls short by providing few incentives to providers or
consumers; and does too little to encourage efficient delivery and
organization of care.
Solutions To Reforming the Market
Purchasers look to the health plans we contract with to ensure that
hospitals are not being overpaid, are being rewarded for better
performance, and to provide valid tools so consumers can make better
informed choices. Nationally we should have the same expectation of CMS
in its administration of Medicare. And, the good news is that in recent
years we have seen CMS step up to this challenge in important ways. The
four elements needed to promote higher quality and more efficient care
delivery in our nation's hospitals are:
1. Expand the Availability of Standardized Performance Information
We currently have a Tower of Babel of conflicting and incomplete
measures to report on hospital performance. The path to resolve this
problem is to support and accelerate the National Quality Forum's
efforts to identify consensus performance standards. Core funding for
the National Quality Forum's efforts should come from the federal
government. At the same time, CMS should not only be applauded for its
focus on the importance of performance transparency, but urged to
accelerate its efforts to insure that useable information on hospital
and physician performance gets into the hands of consumers, providers
and purchasers.
The National Quality Forum has endorsed 39 measures for hospital
performance, as well as a set of 30 patient safety practices. The
National Quality Forum has also endorsed 15 nursing sensitive measures
and 28 serious reportable events, such as wrong-site surgery. Ten of
the NQF's measures of hospital performance are currently being used for
the National Voluntary Hospital Reporting Initiative (currently
addressing three conditions--heart failure, pneumonia and acute
myocardial infarction). States are also embracing these standards--lead
by Minnesota which requires all hospitals to publicly report on NQF's
serious reportable events.
To move beyond the Tower of Babel we need to:
1. Rapidly adopt a standardized hospital patient experience survey
and quickly get H-CAHPS into the market--building on the independent
good works done by CMS and AHRQ;
2. Expand endorsed hospital measures that provide better global
pictures of hospital quality, such as surgical infection rates;
3. Develop standards for measuring the relative efficiency with
which care is delivered. While this hearing is titled ``Hospital
Pricing''--we need to get beyond looking at mere unit price, to assess
the full associated health insurance costs or ``longitudinal
efficiency'' with which care by hospitals and doctors is delivered.
Such a measure would reflect not only the price charged for an
admission or procedure, but also costs related to readmission,
complications and post-hospital care; and
4. Make routinely available to the private sector, patient
identity-encrypted version of the full Medicare claims data base, so
private health plans can more precisely measure hospital and physician
performance over longitudinal periods of illness (which most private
sector plans do not have sufficient data with which to do on their on).
2. Reward Better Hospital Performance
There are large scale pay for performance programs that are
starting to change the market by rewarding better performance of
individual physicians and medical groups. The Integrated Healthcare
Association's pay-for-performance initiative in California brings
together seven health plans with purchasers and over two hundred
medical groups--with an estimated $100 million in bonus payments based
on common measures of clinical performance, patient experience and IT
reengineering. Another example is the Bridges to Excellence program--a
collaborative of national employers and some health plans, that uses
nationally standardized certification projects from NCQA to reward
better performing physicians in the areas of diabetes and cardiac care,
as well as for their overall office practices.
At the hospital level, the Leapfrog Group has lead the way in
identifying better performing hospitals based on valid comparative
information--these Leapfrog measures are increasingly one of the core
elements of health plans' efforts to include quality dimensions in
hospital tiering or design of narrow networks--as has been done
numerous health plans, such as Blue Shield of California, PacifiCare
and Health Net.
Nationally, CMS's Premier Hospital Quality Incentive Demonstration
is important both because it will reward hospitals based on their
performance related to six common and expensive conditions, but also it
is setting the stage for sharing with consumers information that they
can and will use. The recent efforts of CMS point to a promising future
if CMS continues to not only innovate and explore how best to reward
higher value providers, but does so in concert with private and state-
based public purchasers.
3. Provide Information and Incentives to Consumers
Across the country there is a growing array of tools being provided
to health care consumers to help them make better choices. Many members
of the Pacific Business Group on Health, such as Wells Fargo, the
University of California and Intel, provide their employees with health
plan chooser tools. These tools help consumers weigh the financial
impact of their choosing a particular plan--based on their likely
health care utilization--along with physician availability information,
and plan quality. In addition, many employers are looking to their
health plans to provide tools to help consumers choose and understand
treatments.
In the hospital arena, we are using first generation tools that
give consumers information on how hospitals meet Leapfrog standards and
provide other information such as patient experience data, when
available, or complication rates. At the same time, CMS is testing how
it can best convey comparative hospital performance information to
consumers. Consumers want and need this information; our task is to
ensure that these tools provide valid reflections of hospitals'
performance--either globally or by particular treatment.
While we develop the full dashboard of performance information--
purchasers must be working today to bring together cost and quality
information for their employees. We cannot pretend that all hospitals
are delivery the same performance. CalPERS, a member of PBGH that is
the third largest purchaser of health care in the United States, is
continuing its leadership in health care by recently making the
decision to exclude 38 hospitals across California from their Blue
Shield HMO based on these facilities being substantially higher cost
than comparable available hospitals--considering a dozen quality
indicators in their determination. Through this action, CalPERS created
a ``virtual tiering'' since beneficiaries that wanted these higher cost
hospitals could still get them through their PPO--but they would pay
more.
4. Allow the Market to Function
Finally, we need to be sure that comparative performance
information can indeed by used to help consumers make better choices
and to reward better performing hospitals. There is a danger in many
communities that hospital consolidation will hinder these efforts.
Hospitals creating networks for their joint purchasing and negotiating
is fine IF those consolidations allow the market to work. A working
market means:
Allowing individual hospitals within a network to be
priced differently, whether through tiers or coinsurance. Conglomerates
should not be able to prevent separate tiering by quality and
efficiency;
Conglomerates of hospitals should not be able to use
their market power to prevent health plans from using their data to
better define higher value hospitals;
Conglomerates of hospitals should not be able to set one
rate for all of their hospitals--different quality and cost should be
able to show through; and
Conglomerates should not be able to require inclusion of
all hospitals in their network as a condition for accessing any of
them.
Sadly, the examples of intensified market competition catalyzing
hospital performance breakthrough remain the exception rather than the
rule. For those American's fortunate enough to have health coverage,
the vast majority are totally disconnected from the true costs of care
and are making life and death choices with virtually no information.
They have neither incentives nor information with which to make better
hospital choices. Similarly, hospitals--like other health care
providers--are not recognized or rewarded if they deliver higher
quality care more efficiently.
We are still almost performance blind. The market's invisible hand
requires standardized performance information for hospitals across the
six IOM performance domains--safety, timeliness, effectiveness,
efficiency, equity and patient-centeredness. The good news is that we
are making progress and much of the credit for this lies with CMS'
engaged commitment, demonstrated through their work with the National
Voluntary Hospital Reporting Initiative; developing the national
standard patient-experience survey--H-CAHPS; testing consumer
presentations of quality information; and promoting pay for performance
demonstrations.
Most consumers today don't have the information to make informed
decisions about treatments or providers. Most providers are paid the
same whether they deliver the highest quality or the lowest quality
care, irrespective of their cost-effectiveness. The only solution to
reforming health care over the long term is to change these two
dynamics--consumers must have the information and incentives to make
the best choices for them; and providers need to be rewarded for doing
a better job. Thank you for the opportunity to be with you today.
Chairman HOUGHTON. Thank you, Mr. Lee.
Ms. Davis?
STATEMENT OF KAREN DAVIS, PRESIDENT, THE COMMONWEALTH FUND, NEW
YORK, NEW YORK
Ms. DAVIS. Thank you, Mr. Chairman. Hospitals play a
pivotal role in making health care accessible to those who
cannot pay, but they also need to be financially viable.
Nonprofit hospitals do charge patients less and collect lower
payment rates than for-profit hospitals. I cite in my testimony
a meta-analysis that summarizes all of the studies over the
last 40 years, and they do conclude that net collected prices
are lower in nonprofits.
Nonprofits admit more uninsured patients and they provide
more uncompensated care than for-profit hospitals. Pricing
uncompensated care and bill collection practices do vary widely
across nonprofit hospitals, and the financial stability of
hospitals also vary widely. About a third are in serious
financial difficulty, a third are on the margin, and a third
are doing well. Hospitals that do the best are not necessarily
the most efficient or the highest quality. They are the ones
providing the most uninsured care.
On the issue of price transparency, some witnesses on the
panel today support it because they think it will improve cost
conscious behavior by consumers. I agree that the real issue is
not individual prices, but longitudinal efficiency, as Mr. Lee
has said. It is the total cost over your hospital stay, really
over the episode of your illness. That is what you want to
know, not how much it is per day of intensive care.
I am more skeptical than my fellow panelists about whether
consumer financial incentives can really drive improved quality
and efficiency performance, but I think there are other
compelling rationales for transparency in health care financing
and reasons why we need information on quality and efficiency.
For example it would help providers improve. It is hard to
improve if you don't know how you stand. It would help, as Mr.
Lee says, for purchasers to financially reward hospitals,
health systems, and group practices that provide higher quality
care more efficiently, and I think it is important for public
accountability.
Why am I skeptical about consumer-driven health care? One
form of this, for example, is called tiered cost-sharing. What
that means: if you are burned in a major fire, or if you have a
heart attack, if you have a stroke, and you go to the wrong
hospital--you don't go to the cheapest hospital or the best
hospital, you go where you are taken--you can be charged $400 a
day extra for every day you are in that hospital. That is not
humane, and it is not going to make those hospitals higher
quality or more efficient.
Having said that, I think there are solutions to trying to
make care higher quality and more efficient. We can look at
international examples. We can look historically at what has
been tried in the United States, and the basic lesson that
comes from those experiences is that government leadership
matters. When government establishes a payment framework for
purchasers and uses collective purchasing power to obtain
better prices from providers, the rise in hospital costs is
slowed, there is greater equity and there is better access to
care for the uninsured.
The greatest promise for improving the performance of the
health care sector lies in public information of quality and
longitudinal efficiency, so I am very much for Medicare. The
Federal government needs to take a leadership role and really
put together the information on longitudinal efficiency over
time, over the course of an illness in the following categories
(by provider, by hospital, by medical group, by health system,
and by private and public purchasers). As a result, Medicare,
Medicaid, and private insurers have incentive payments that
reward hospitals and other providers who demonstrate superior
quality and efficiency. Purchasers are in a far better position
to promote better quality and efficiency than are patients.
It also might be considered to set at least limits or bans
on how much discounted prices can vary across payer source or
patient. Certainly, it is reasonable not to charge uninsured
patients more than other patients. I think it is important to
preserve and strengthen a predominantly nonprofit hospital and
health care sector, and think it would be reckless to undo tax
preferences for nonprofit hospitals, given that they are a
major source of uncompensated care and community benefit.
I think we need more creative ideas about how to create new
financial incentives for the provision of charity care such as
the idea of a Hill-Burton Act to provide capital funds for
information technology in exchange for charitable care or
better targeting of disparate proportionate share allowances.
Ideally what we would have is a system of automatic and
affordable health insurance coverage for all. Thank you.
[The prepared statement of Ms. Davis follows:]
Statement of Karen Davis, President, The Commonwealth Fund
EXECUTIVE SUMMARY
When a family member is seriously ill, we all expect that the
benefits of modern medicine will be available to provide the finest
care possible. Yet, the cracks in our fragmented health care financing
system are jeopardizing the health and financial security of millions
of Americans. Hospitals play a pivotal role in making care accessible
to those who cannot pay, but they also need to be financially viable.
It is especially important to scrutinize hospital financing and pricing
practices in the current environment. Hospital costs are accelerating.
At the same time, 71 million Americans are experiencing problems paying
medical bills or are paying off accrued medical debt. Access to care
among the uninsured and underserved in this country is threatened, and
pricing practices at selected hospitals are placing vulnerable patients
at financial risk. We need major reforms to improve the performance of
the health care sector.
Hospital Pricing Behavior
Nonprofit hospitals charge patients less than for-
profit hospitals (including effective net prices after
discounts).
Nonprofit hospitals admit more uninsured patients and
provide more uncompensated care than for-profit hospitals.
Prices bear little relationship to the actual cost of
care. Some specialized services, such as burn units and
neonatal intensive care are ``money losers''; others, such as
cardiac surgery and radiological imaging services, are highly
profitable.
Pricing, uncompensated care, and bill collection
practices vary widely across nonprofit hospitals. The burden of
caring for patients who cannot pay is unevenly borne; academic
health center hospitals provide more uncompensated care than
community hospitals.
The financial stability of hospitals varies widely.
Some are in serious financial difficulty, others are on the
margin, and others are doing well. Hospitals in the best
position are not of the best quality or the most efficient,
while those doing the worst are largely shouldering a
disproportionate share of charity care.
The Market for Hospital Services Is Different
Hospital care is not like consuming other goods and
services.
Key differences include lack of information,
limited choice, complexity and life-critical importance of
health care treatment decisions, physicians' decision-making
role, and the need for insurance to protect financial security.
Trying to make the market work by shifting costs to
patients will inflict greater financial burdens on the sickest
and most vulnerable people. Doing so does not lead to better
decisions about seeking ``appropriate'' or ``inappropriate''
care and will not solve the fundamental problems of access,
quality, and efficiency in the health care system.
Consumer-Driven Health Care
High deductibles, cost-sharing tiering, or premium-
tiering are unlikely to be effective in improving health system
performance. They run the risk of increasing financial burdens
on the most vulnerable patients.
Tiering, or varying cost-sharing according to
hospitals' quality and efficiency, requires detailed
information on cost and quality at the hospital or diagnostic
level. For the most part, these data are not systematically
available. Even were such data available and accurate, this
presumes that very ill hospitalized patients are able to
evaluate cost and quality tradeoffs, have a wide range of
options about where to go when hospitalized, and are able to
make cost-conscious choices. Furthermore, the administrative
costs of such a system would be high.
International Experience
The United States has much higher hospital costs than
any other country. The cost per day is three times the OECD
median country cost per day, and cost per capita is twice the
OECD median country.
Other countries have a greater role for government in
establishing hospital budgets or payment rates. They have also
done more to rationalize care through disease management, cost-
effectiveness reviews of drugs and procedures, and regional
hospital authorities, and have much lower administrative costs
because they have one system of payment.
The Commonwealth Fund 2003 International Health
Policy Survey of hospital CEOs in five countries found that:
The United States is the only country where
respondents cited the cost of indigent care and care for the
uninsured as major problems.
U.S. hospitals are more concerned about stand-alone
diagnostic or treatment centers and about freestanding
ambulatory care centers that ``cream'' profitable patients.
U.S. hospital CEOs are less open to public
reporting of quality information than CEOs in other countries.
Hospital CEOs in all countries would make it a high
priority to invest in information technology if resources
became available to do so.
Historical Perspective on How We Got Where We Are
Hospital costs grew at a slower rate during the Nixon
Economic Stabilization Program, legislative consideration of
the Carter hospital cost-containment bill, enactment of the
Medicare DRG payment system, and, during the mid-1990s, under
the threat of health reform and expansion of managed care.
Hospital costs grew most rapidly during periods when
prices were determined by health care providers rather than
purchasers.
All-payer strategies, especially those by selected
states in the 1970s and 1980s, were effective in slowing cost
increases, ensuring access to care, and improving equitable
payment across patients and insurance sources.
The basic lesson from these experiences is that
government leadership matters. When government establishes a
payment framework for purchasers--whether Medicare, Medicaid,
or employer health plans--and uses that collective purchasing
power to obtain better prices from providers, the rise in
hospital costs is slowed, there is greater equity, and there is
better access to care for the uninsured.
Large purchasers such as Medicare, national managed
care plans, and large employers can also obtain good deals on
their own, but they are less effective both in controlling
overall cost increases and in ensuring equitable payment and
access.
Achieving a High-Performance Health Care System
Given the resurgence in health care costs, the
increasing numbers of uninsured, abundant evidence that the
quality of care is not what we could have and have a right to
expect, and the fact that administrative costs are now the
fastest rising component of health care expenditures, it is
time to consider a leadership role for the federal government
in promoting efficiency and quality in the health care system.
The greatest promise for improving the performance of
the health care sector lies in:
Public information on quality and longitudinal
efficiency (i.e., total cost of care over an episode of
illness) of all health care providers.
Private and public insurance incentive payments
that reward hospitals and other providers demonstrating
superior quality and efficiency. Purchasers are in a far better
position to promote better quality and efficiency than are
individual patients.
Limits or bands on how much prices can vary
depending on payer source. Net charges to uninsured American
patients should not be higher than discounted charges to
insured patients.
Preserving and strengthening a predominantly
nonprofit hospital and health care sector. It would be reckless
to undo tax preferences for nonprofit hospitals, given that
they are a major source of uncompensated care and community
benefit. Such hospitals may reasonably be asked not to charge
uninsured patients more, to work out feasible repayment plans,
and not to employ unreasonable collection tactics.
Investing in the capacity to adopt modern
information technology and systems to ensure safe care. It
might be useful to consider a new ``Hill-Burton'' act--perhaps
one that, in exchange for a new charitable patient care
obligation, provides grants and loan capital funds for
investment in information technology and systems to ensure
patient safety.
A system of automatic and affordable health
insurance coverage for all.
HOSPITAL PRICING BEHAVIOR AND PATIENT FINANCIAL RISK
Karen Davis
Thank you, Mr. Chairman, for this invitation to testify on the
issue of hospital pricing practices. When a family member is seriously
ill, we all expect that the benefits of modern medicine will be
available to provide the finest care possible. Yet, the cracks in our
fragmented health care financing system are jeopardizing the health and
financial security of millions of Americans. Hospitals play a pivotal
role in making care accessible to those who cannot pay, but they also
need to be financially viable. A strong hospital system--well equipped,
professionally staffed, and ready to be of assistance in any
emergency--is essential to a strong nation. To the extent that a flawed
financing system undermines the financial security of the hospital
sector, we are all at risk.
It is especially important to scrutinize hospital financing and
pricing practices in the current environment. Hospital costs increased
at an annual rate of 9.5 percent in 2002, accounting for the largest
share of increases in total health expenditures.\1\ Managed care has
reduced the ability of hospitals to cross-subsidize care for the poor
and uninsured through higher charges to privately insured patients.
Hospital rates vary widely by patient and by source of insurance
coverage. In fact, uninsured patients may be charged higher prices than
better-off patients who are covered by private employer health
insurance. In response to rising insurance premiums, employers are
shifting more costs to employees, and patients are at greater financial
risk.\2\ A recent Commonwealth Fund survey found that 71 million
American adults under age 65 are experiencing problems paying medical
bills or are paying off accrued medical debt.\3\ Not surprisingly, the
public is very concerned about the affordability of health care.\4\
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\1\ K. Levit et al., ``Health Spending Rebound Continues in 2002,''
Health Affairs (January/February 2004): 147-159.
\2\ Kaiser Family Foundation/Health Research and Educational Trust,
Employer Health Benefits 2003 Annual Survey, September 2003.
\3\ The Commonwealth Fund Biennial Health Insurance Survey (2003).
\4\ Sara R. Collins et al., The Affordability Crisis in U.S. Health
Care: Findings from The Commonwealth Fund Biennial Health Insurance
Survey, The Commonwealth Fund, March 2004.
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Today, I would particularly like to address current concerns about
hospital pricing practices as they affect patients; review why the
market for hospital care is fundamentally different from that of other
goods and services; place the U.S. hospital cost experience in an
international context; and provide a historical perspective on how we
got where we are today. I would also be pleased to share some thoughts
on issues regarding price transparency, pay-for-performance pricing,
pricing guidelines, the importance of the safety net provided by
nonprofit hospitals, and health care financing. In particular, the
greatest promise for improving the performance of the health care
sector lies in:
public information about the quality and efficiency of
all health care providers;
private and public insurance incentive payments that
reward hospitals and other providers demonstrating superior quality and
efficiency;
preserving and strengthening a predominantly nonprofit
hospital and health care sector;
investing in the capacity to adopt modern information
technology and systems to ensure safe care; and
a system of automatic and affordable health insurance
coverage for all.
HOSPITAL PRICING BEHAVIOR
Thirty-five years ago, I wrote an economics doctoral dissertation
on the economic behavior of nonprofit hospitals.\5\ It was the first
systematic examination of this issue in the newly emerging field of
health economics. In my paper, I concluded that nonprofit hospitals
have more complex motivations than simply providing care to the
community while breaking even. Rather, these hospitals attempt to
generate surpluses on some services so that they can expand, add new
facilities and services, and attract practicing physicians to their
staffs. In short, they want to be the best, biggest, and most well-
equipped facilities possible, while remaining financially viable. For-
profit hospitals, on the other hand, are more strongly motivated by
profit-maximizing goals and returns to owners or investors. The
resulting difference is that nonprofits are more willing to provide
care that is marginally profitable or loses money in order to advance a
broader mission of excellence in patient care, medical education, and
cutting-edge research.
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\5\ Karen Davis, A Theory of Economic Behavior in Non-profit,
Private Hospitals, doctoral dissertation in economics, Rice University,
May 1969.
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In the intervening years, numerous studies have confirmed these
basic conclusions. A recent meta-analysis of studies on payments for
care at for-profit and private not-for-profit hospitals from the mid-
1960s to the early 2000s concluded that nonprofit hospitals tend to
charge less and collect lower payment rates from patients than for-
profit entities do.\6\ For-profit hospitals have higher profits and
administrative expenses.\7\ A meta-analysis has also shown that quality
of care is better in nonprofit hospitals, resulting in lower risk-
adjusted mortality rates.\8\
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\6\ P.J. Devereaux et al., ``Payments for Care at Private For-
Profit and Private Not-for-Profit Hospitals: A Systematic Review and
Meta-Analysis,'' Canadian Medical Association Journal, 170(12):1817-
1824, June 8, 2004.
\7\ J.M. Watt et al., ``The Comparative Economic Performance of
Investor-Owned Chain and Not for Profit Hospitals,'' New England
Journal of Medicine, 314(2):89-96, January 9, 1986.
\8\ P.J. Devereaux et al., ``A Systematic Review and Meta-Analysis
of Studies Comparing Mortality Rates of Private For-profit and Private
Not-for-Profit Hospitals,'' Canadian Medical Association Journal,
166(1):1399-406, 2002.
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Despite the recent publicity about selected cases of nonprofit
hospitals' billing and collection practices for uninsured patients,\9\
it remains the case that nonprofit hospitals are more likely to care
for uninsured patients than for-profit hospitals.\10\ Further, academic
health centers are more likely to care for such patients than community
hospitals.\11\ In recent years, care for the uninsured has been
increasingly concentrated in fewer institutions willing to provide that
care. Public academic health center hospitals provide the highest
levels of charity care among all hospitals, while private nonprofit
academic health centers provide twice as much free care as other
private hospitals.
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\9\ Reed Abelson and Jonathan D. Glater, ``Nonprofit Hospitals Said
to Overcharge Uninsured,'' New York Times, June 17, 2004; Wall Street
Journal Staff Reporters, ``Lawsuits Challenge Charity Hospitals on Care
for Uninsured,'' Wall Street Journal, June 17, 2004; Carol Pryor et
al., Unintended Consequences: How Federal Regulations and Hospital
Policies Can Leave Patients in Debt, The Commonwealth Fund, June 2003;
Carol Pryor and Robert Seifert, Unintended Consequences: An Update on
Consumer Medical Debt, Commonwealth Fund, June 2004.
\10\ L.S. Lewin, T.J. Eckels, and L.B. Miller, ``Setting the Record
Straight: The Provision of Uncompensated Care by Not-for-Profit
Hospitals,'' The New England Journal of Medicine, 1212-1215, May 5,
1988; Bradford H. Gray, ``Conversion of HMOs and Hospitals: What's at
Stake,'' Health Affairs, 29-47, March/April, 1997; Gary Claxton, Judith
Feder, David Shactman, and Stuart Altman, ``Public Policy Issues in
Nonprofit Conversions: An Overview,'' Health Affairs 9-28, March/April
1997; David Shactman and Stuart H. Altman, ``The Impact of Hospital
Conversions on the Healthcare Safety Net,'' in Stuart H. Altman, Uwe E.
Reinhardt, and Alexandra E. Shields (eds.), The Future U.S. Healthcare
System: Who Will Care for the Poor and Uninsured? Health Administration
Press; Institute of Medicine Committee on Implications of For-Profit
Enterprise in Health Care, Bradford H. Gray (ed.), For-Profit
Enterprise in Health Care, National Academy Press, 1986.
\11\ Commonwealth Fund Task Force on Academic Health Centers, A
Shared Responsibility: Academic Health Centers and the Provision of
Care to the Poor and Uninsured, Commonwealth Fund, April 2001.
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Also troubling is that hospital charges bear little relationship to
the actual cost of care--some services are very profitable and others
are not. Specialized services such as burn units and neonatal intensive
care are ``money losers,'' while cardiac surgery and radiological
imaging services are highly profitable.\12\ Not surprisingly, ``niche
providers,'' such as heart hospitals, orthopedic hospitals, surgical
hospitals and ambulatory surgery centers (ASCs), cancer hospitals and
centers, dialysis clinics, pain centers, imaging centers, and
mammography centers, have been created to provide only those services
that are highly profitable. This further reduces the ability of ``full-
service'' hospitals to cross-subsidize care that is unprofitable.
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\12\ Commonwealth Fund Task Force on AcademicHealth Centers, Health
Care at the Cutting Edge, Commonwealth Fund, July 2000.
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In addition, managed care has made it more difficult for
institutions that provide care to the uninsured to cross-subsidize
uninsured care from payments for insured patients. Hospitals charge and
collect very different prices for the same service depending on the
source of insurance--in-network commercial insurance, out-of-network
commercial insurance, negotiated contracts with different insurers and
managed care plans, Medicare, or Medicaid--or the lack of any coverage.
This practice might be viewed as equitable if net prices (after
discounts) were systematically lower for poor patients and vulnerable
elderly patients. However, uninsured patients are sometimes charged
higher prices than privately insured patients, and some insurers get
better breaks than others regardless of their enrollees' income. This
is one factor in the higher premiums charged for small businesses than
for large businesses for the same benefits.\13\
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\13\ Jon R. Gabel and Jeremy D. Pickreign, Risky Business: When Mom
and Pop Buy Health Insurance for Their Employees, Commonwealth Fund,
April 2004.
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The financial stability of hospitals also varies widely. Some are
in serious financial difficulty, others are on the margin, and others
are doing well. In a 2003 Commonwealth Fund survey, 30 percent of
hospital CEOs reported that the current financial situation in their
hospital was insufficient to maintain current levels of service; 38
percent reported it was sufficient to maintain current levels of
service; and 32 percent said their financial situation allowed for some
improvements or expansion of care.\14\ Those hospitals in the best
position are not necessarily the best-quality or most efficient ones.
Instead, the hospitals that are faring worst financially are largely
those shouldering a disproportionate share of charity care without
adequate compensation for fulfilling this responsibility.
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\14\ Robert J. Blendon et al., ``Confronting Competing Demands to
Improve Quality: A Five-Country Hospital Survey,'' Health Affairs
23(3):119-135, May/June 2004.
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THE MARKET FOR HOSPITAL SERCICES IS DIFFERENT
It is easy to say patients should act like consumers, choosing
among various hospitals on the basis of cost and quality. Hospital
care, however, is not like other goods and services. Key differences
include:
lack of information
lack of choice
the complexity and life-critical importance of health
care treatment decisions
physicians' decision-making role in health care
the need for insurance to protect financial security.
Simply stated, patients do not have the information to make
informed choices in health care. Information on the total bill for a
hospital stay is almost never known in advance, nor are the associated
charges from physicians caring for the hospitalized patient. Even less
is known about the quality of care for the condition for which the
patient is being admitted.
Patients also often have little choice about where to go for care.
Many communities are served by only one hospital. In emergency
situations, patients may arrive by ambulance at the nearest equipped
facility. For elective procedures, patients can be admitted only to
hospitals where their physicians have privileges.
Decisions about care are often made at a time of great stress
(e.g., heart attack, stroke, diagnosis of breast cancer, trauma). The
acuity of illness of hospitalized patients has increased markedly in
recent years as hospital stays have shortened and discretionary care
has shifted to outpatient care. Most inpatients are very sick, and they
and their families are hardly in a position to make rational economic
calculations. Hospital care is not bought frequently like groceries,
for which trial and error can lead consumers to find the best value for
their dollars. In fact, most decisions about care are made by
physicians. Doctors decide whether patients are admitted to a hospital,
where they go, and what is done to them while there.
The presence of health insurance also makes the market for health
care fundamentally different. Hospital care is typically covered by
insurance, subject to deductible or coinsurance amounts. Protection
against most of the cost of hospital care is essential to achieve one
of the basic goals of insurance--to ensure financial security in the
event of a serious illness or injury. Increasing how much patients have
to pay out-of-pocket puts the patient at greater financial risk and may
undermine the basic purpose of having insurance. Furthermore, cost-
sharing for hospital care puts greater financial burdens on the sickest
and most vulnerable people who have the least discretion in their use
of care.
Increasing the out-of-pocket cost of hospital care is not likely to
lead patients to seek care at more efficient or higher-quality
hospitals. Most health care expenses are incurred above a dollar
threshold exceeding most caps on out-of-pocket liability. For example,
5 percent of patients account for 55 percent of all health care
outlays, and all of these patients have high total expenses (in excess
of $8,000 in 1997).\15\ Nearly all of these patients would exceed
insurance deductibles, and most would exceed maximum out-of-pocket
liability limits.
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\15\ A.C. Monheit, ``Persistence in Health Expenditures in the
Short Run: Prevalence and Consequences,'' Medical Care 41, supplement 7
(2003): III53-III64.
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Nor are higher deductibles the answer. One-third of insured
hospitalized patients with a deductible of $1,000 or more would spend
more than 10 percent of their income out-of-pocket.\16\ This is a
financially burdensome exposure; it effectively leaves people
underinsured.
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\16\ S. Trude, Patient Cost Sharing: How Much is Too Much? Center
for Studying Health System Change, December 2003.
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There is growing evidence that health care is unaffordable today
for many Americans, both those who are uninsured and the increasing
numbers of people who are underinsured. The Commonwealth Fund Biennial
Health Insurance Survey in 2003 found that two of five adults under age
65 are experiencing problems paying medical bills or have accrued
medical debt.\17\ Undoubtedly, hospital costs are playing a significant
role. This is not just a problem for the uninsured. Among those with
medical bill problems or accrued medical debt, 62 percent reported
those bills were generated when they were insured. Even among people
who are insured all year, over a third are experiencing medical bill
problems or accrued medical debt. Raising patient cost-sharing would
exacerbate the growing unaffordability of care due to already
inadequate insurance protection.
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\17\ Sara R. Collins et al., The Affordability Crisis in U.S.
Health Care: Findings from The Commonwealth Fund Biennial Health
Insurance Survey, The Commonwealth Fund, March 2004.
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CONSUMER-DRIVEN HEALTH CARE
The United States is again flirting with a ``new'' private market
strategy for controlling health care costs called ``consumer-driven''
health care. This takes several forms: large-deductible insurance plans
combined with health savings accounts or health reimbursement accounts;
``tiered'' cost-sharing, with patients paying more when they obtain
care from a higher-cost hospital, physician, or other provider; or
tiered premiums that let consumers pick their own package of benefits
and networks of providers, with varying premiums based on
comprehensiveness of benefits and costliness and/or quality of
providers.
The high-deductible form of consumer driven health care is
predicated on the notion that health care services are overutilized,
and that giving financial incentives to patients will reduce use of
services that are marginal or of no value. But the U.S. already has
relatively low hospital admission rates and short length of stays
compared with other countries. While there is certainly evidence of
overutilization of some services, underutilization appears to be a far
greater problem.\18\ Patient cost-sharing, moreover, is not an
effective mechanism for differentiating appropriate and inappropriate
care but tends to lower use of both kinds of care.\19\
---------------------------------------------------------------------------
\18\ E.A. McGlynn et al., ``The Quality of Health Care Delivered to
Adults in the United States,'' New England Journal of Medicine,
348(26):2635-45.
\19\ K.N. Lohr et al., ``Use of Medical Care in the RAND HIE,''
Medical Care 24, supplement 9:S1-87, 1986; Karen Davis, ``Consumer-
Directed Health Care: Will it Improve Health System Performance,''
Health Services Research, forthcoming, August 2004.
---------------------------------------------------------------------------
Most preferred provider organization plans (PPOs) that offer high-
deductible plans also extend their negotiated rates to services
received before the deductible is met. As long as patients obtain care
from in-network providers, they receive the discounts that have been
negotiated by their plan. Such deductibles, however, may reduce use of
preventive care and may lead patients to forgo filling prescriptions
for medications required to keep their conditions under control.
Several recent studies, in fact, have found that tiered cost-sharing
for prescription drugs has caused patients to simply not fill
prescriptions written by their physicians.\20\
---------------------------------------------------------------------------
\20\ R. Tamblyn et al., ``Adverse Events Associated With
Prescription Drug Cost-Sharing Among Poor and Elderly Person,'' JAMA
285, no. 4 (2001): 421-429.; H.A. Huskamp et al., ``The Effect of
Incentive-Based Formularies on Prescription Drug Utilization and
Spending,'' New England Journal of Medicine 349(23):2224-32.
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The real problem, though, is that the deductibles themselves add to
patient financial burdens. Only about 7 percent of privately insured
individuals, or 8 million adults under age 65, now have deductibles of
$1,000 or more.\21\ Increasing such deductibles would add considerably
to medical bill problems and accrued medical debt, which already affect
two of five Americans.
---------------------------------------------------------------------------
\21\ Sara R. Collins et al., The Affordability Crisis in U.S.
Health Care: Findings from The Commonwealth Fund Biennial Health
Insurance Survey, The Commonwealth Fund, March 2004.
---------------------------------------------------------------------------
Consumer-driven health plans are still in their infancy and not a
great deal is known about them.\22\ Fewer than 3 million people were
enrolled in such plans in 2003, out of more than 160 million enrollees
in employer health plans. In general it appears that enrollment is
relatively limited when such plans are offered as an option; healthier
and higher-income individuals are more likely to enroll; and those who
do enroll are relatively satisfied with the choice and reenrollment
rates are high.\23\
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\22\ James C. Robinson, ``Hospital Tiers in Health Insurance:
Balancing Consumer Choice with Financial Incentives,'' Health Affairs
Web Exclusive, W3-135-146, March 19, 2003; Jon R. Gabel, Anthony T. Lo
Sasso, and Thomas Rice, ``Consumer Driven Health Plans: Are They More
Than Talk Now?'', Health Affairs Web Exclusive, November 2002; J. R.
Gabel, H. Whitmore, T. Rice, and A. T. Lo Sasso, ``Employers'
Contradictory Views About Consumer-Driven Health Care: Results of a
National Study,'' Health Affairs Web Exclusive (April 21, 2004): W4-
210-W4-21
\23\ Karen Davis, ``Consumer-Directed Health Care: Will it Improve
Health System Performance,'' Health Services Research, forthcoming,
August 2004.
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Tiered cost-sharing plans are particularly problematic.\24\ They
require detailed information on cost and quality at the hospital or
diagnostic level--data that for the most part are not systematically
available. Even were such data available and accurate, this presumes
that very ill hospitalized patients are able to evaluate cost and
quality tradeoffs, have a wide range of options about where to go when
hospitalized, and are able to make cost-conscious choices.
Administrative costs would be high, as hospitals would need to vary the
amount they collect from patients, depending on the particular plan in
which they are enrolled. A hospital may not be equally efficient or
high quality on all kinds of diagnoses or conditions, leading to the
need for detailed disaggregated data on each service or kind of
patient.
---------------------------------------------------------------------------
\24\ Robert Steinbrook, ``The Cost of Admission: Tiered Copayments
for Hospital Use,'' New England Journal of Medicine 350(25):2539-2542;
Thomas M. Priselac, ``The Erosion of Health Insurance: The Unintended
Consequences of Tiered Products by Health Plans,'' Health Affairs Web
Exclusive, W3-158-161, March 19, 2003; Marjorie E. Ginsburg, ``Hospital
Tiering: How Will it Play in Peoria,'' Health Affairs Web Exclusive,
W3-154-157, March 19, 2003.
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Tiered premiums have advantages over tiered cost-sharing in that
they require decisions at the time of insurance enrollment rather than
hospital admission. However, they have many of the same information
requirements and would need to be structured in a way that does not
penalize those who cannot afford a higher-quality, but higher-cost,
provider.
INTERNATIONAL EXPERIENCE
It is not the case that high out-of-pocket spending is necessary to
control health care costs. Other countries manage to spend considerably
less on health care and have little or no patient cost-sharing. Nor has
managed care in the U.S. provided a magic bullet to control health care
spending. U.S. health expenditures over the 1990s went up the same as
the average for all industrialized nations (3.1 percent annually in
real terms in the U.S. vs. 3.0 percent for the median OECD
country).\25\ Canada and Germany had markedly slower health expenditure
growth rates between 1991 and 2001 (2.1 and 2.4 percent annual real
growth, respectively).
---------------------------------------------------------------------------
\25\ Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson,
``U.S. Health Spending in an International Context,'' Health Affairs,
May/June 2004.
---------------------------------------------------------------------------
In particular, the U.S. has much higher hospital costs than any
other country. But this is not because Americans get more hospital
care. In fact U.S. hospital admission rates are below the average of
all industrialized nations, and lengths of stay are shorter.\26\ Yet,
in the U.S., hospital cost per day is very high--three times the OECD
median cost per day--and overall the U.S. spends twice the OECD
hospital cost per capita.
---------------------------------------------------------------------------
\26\ Gerard F. Anderson, Varduhi Petrosyan, and Peter S. Hussey,
Multinational Comparisons of Health Systems Data, 2002: Based on Data
from the Organization for Economic Cooperation and Development, The
Commonwealth Fund, October 2002.
---------------------------------------------------------------------------
The difference is that in all other countries, the government has a
major role in setting hospital budgets or payment rates. Other
countries also regulate the supply of hospital capacity, specialized
facilities, and specialist physicians. The U.S. has more specialist
physicians, and they are compensated more highly. U.S. specialist
physicians are typically paid on a fee-for-service basis, whereas
specialists in other countries are typically salaried under negotiated
agreements and work full-time for a hospital. Other countries also have
much lower administrative costs, because they have a single system of
payment with a single set of rules and payment rates for all
patients.\27\
---------------------------------------------------------------------------
\27\ Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson,
``U.S. Health Spending in an International Context,'' Health Affairs,
May/June 2004.
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Other countries also have done more to rationalize care, through
disease management, cost-effectiveness reviews of drugs and specialized
procedures, and regional hospital authorities.\28\ This is not to say
that it is desirable or feasible to adopt all of the features of other
systems. Most Americans, for example, would be unwilling to accept the
longer waiting times for elective procedures typical in budgeted
systems. But we could learn from international innovations and benefit
from that experience.
---------------------------------------------------------------------------
\28\ See for example, Reinhard Busse, ``Disease Management Programs
in Germany's Statutory Health Insurance System,'' Health Affairs, May/
June 2004. Steven Morgan et al., ``Outcomes-Based Drug Coverage in
British Columbia,'' Health Affairs, May/June 2004.
---------------------------------------------------------------------------
It is also not the case that spending more on health care
necessarily leads to higher quality care.\29\ A recent international
comparison of quality indicators found that quality of care is not
systematically better in the U.S. The U.S. is in the mid-range on many
health outcome and quality of care indicators--better than other
countries on some measures, worse on others.\30\ For example, five-year
survival rates following kidney transplants are 13 percent better in
Canada than in the U.S., while five-year survival rates for breast
cancer are 14 percent better in the U.S. than in England.
---------------------------------------------------------------------------
\29\ Karen Davis, et al., Mirror, Mirror on the Wall: Looking at
the Quality of American Health Care through the Patient's Lens, The
Commonwealth Fund, January 2004.
\30\ Peter S. Hussey et al., ``How Does the Quality of Care Compare
in Five Countries?'' Health Affairs, May/June 2004; The Commonwealth
Fund International Working Group on Quality Indicators, First Report
and Recommendations of the Commonwealth Fund's International Working
Group on Quality Indicators: A Report to Health Ministers of Australia,
Canada, New Zealand, the United Kingdom, and the United States, The
Commonwealth Fund, June 2004.
---------------------------------------------------------------------------
A recent survey of hospital CEOs in five countries provides
interesting insight into how U.S. hospitals compare with those of other
countries.\31\ The Commonwealth Fund 2003 International Survey of
Hospital CEOs found that:
---------------------------------------------------------------------------
\31\ Robert Blendon et al., ``Confronting Competing Demands to
Improve Quality,'' Health Affairs, May/June 2004;David Blumenthal, et
al., A Five-Nation Hospital Survey: Commonalities, Differences, and
Discontinuities, The Commonwealth Fund, May 2004.
U.S. hospital CEOs are much more negative than their
counterparts in Australia, Canada, New Zealand, and the U.K. about
their nation's health care system
The U.S. is the only country where hospital CEOs cite the
cost of indigent care and care for the uninsured as major problems
U.S. hospitals are in somewhat better financial position,
on average, than hospitals in other countries, but this varies across
hospitals
U.S. hospitals are more likely to experience emergency
room diversions and turn patients away
U.S. hospitals are more concerned about stand-alone
diagnostic or treatment centers and freestanding ambulatory care
centers ``creaming'' profitable patients
U.S. hospital CEOs are less open to public reporting of
quality information than CEOs in other countries
Hospital CEOs in all countries would place a high
priority on investing in information technology should resources become
available to do so.
HISTORICAL PERSPECTIVE ON HOW WE GOT WHERE WE ARE
While other countries have long been comfortable with a more
activist role for government in health care financing, the U.S. has had
only sporadic, mostly short-lived attempts to shape the health care
sector through governmental policy.\32\ Instead, we have primarily
relied on private markets to determine hospital prices and hospital
capacity. Only for patients covered by public insurance programs--
Medicare and Medicaid--has government had a major role in establishing
payment rates.
---------------------------------------------------------------------------
\32\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P.
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990;
Karen Davis et al., ``Is Cost Containment Working?'' Health Affairs,
4(1):81-94, Fall 1985; Drew E. Altman and Larry Levitt, ``The Sad
History of Health Care Cost Containment as Told in One Chart,'' Health
Affairs, January 23, 2002
---------------------------------------------------------------------------
Yet, the historical record of government intervention in hospital
pricing, when it has happened, has been positive for the most part. The
first major intervention occurred under President Nixon with the
establishment of economy-wide price controls under the Economic
Stabilization Program (ESP) from August 1971 to 1975. In the period
prior to ESP, hospital expenses were increasing considerably faster
than overall price inflation.\33\ When hospitals and other providers
autonomously set prices, the average real annual rate of increase in
community hospital expenses from 1950 to 1965 was 8.3 percent, fueled
by growth in private insurance paying hospitals on the basis of charges
set by hospitals. From 1966 to 1971, real hospital expenses increased
11.6 percent annually, spurred upward by introduction of Medicare and
Medicaid. Even though Medicare and Medicaid reimbursed on the basis of
costs, hospitals were assured reimbursement for incurred expenses. By
contrast real hospital expenses grew by ``only'' 6.1 percent during the
ESP period. When controls were lifted, hospital costs again
accelerated, averaging a real increase of 8.7 percent over 1975 to
1977.
---------------------------------------------------------------------------
\33\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P.
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990.
---------------------------------------------------------------------------
The second attempt by the federal government was the proposed
Carter Hospital Cost Containment Act, which was considered by Congress
from 1977 to 1979. The legislation would have placed a limit on the
rate of increase in payments to hospitals tied to market basket
inflation. But the legislation failed when the hospital industry
mounted a ``Voluntary Effort'' to control costs. During this period,
increases in hospital costs adjusted for economy-wide inflation rose
3.1 percent annually. But defeat of legislation ended the ``Voluntary
Effort'' and hospital costs subsequently rose 7.8 percent in real terms
in the 1981-1983 period.\34\
---------------------------------------------------------------------------
\34\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P.
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990;
Karen Davis, ``Recent Trends in Hospital Costs: Failure of the
Voluntary Effort,'' testimony before U.S. House of Representatives,
Committee on Energy and Commerce, Subcommittee on Health and the
Environment, hearing on ``Increase in Hospital Costs: Is the Voluntary
Effort Working?'' December 15, 1981.
---------------------------------------------------------------------------
The rise of hospital costs when the threat of controls was
removed--and particularly the implications for Medicare budgetary
outlays--led to enactment of the Tax Equity and Fiscal Responsibility
(TEFRA) legislation in 1982. TEFRA established Carter-like limits on
increases in hospital payments only for Medicare. This was followed by
legislation in 1983 creating the Diagnosis-Related Group (DRG) method
of Medicare prospective hospital payment. Again hospital costs
stabilized, increasing by 3.2 percent annually in real terms in the
immediate post--Medicare PPS period (1984-86). One major effect was a
sharp decline in average length of stay--undoubtedly related to the
shift in Medicare payment methods from cost to a fixed rate for
hospital stay.\35\
---------------------------------------------------------------------------
\35\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P.
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990.
---------------------------------------------------------------------------
But holding down Medicare payment rates did not succeed in
controlling costs to private insurers, leading to a resurgence in total
spending. The Clinton Health Security Act legislation in 1993 again
proposed a major role for government in controlling health care costs.
In the wake of its failure, employers turned to managed care plans to
ameliorate health care cost inflation. In the mid-1990s, the threat of
health reform, combined with the expansion of managed care, led to a
marked slow-down in health care spending, most notably in hospital care
spending.\36\ Managed care plans used their negotiating power to obtain
discounted payment rates from hospitals, physicians, and other
providers. The discounted rates reduced physician real incomes and
hospital margins, but they proved to be unsustainable.\37\ A pushback
by providers led to a resurgence of health care costs in the early
2000s.\38\
---------------------------------------------------------------------------
\36\ Drew E. Altman and Larry Levitt, ``The Sad History of Health
Care Cost Containment as Told in One Chart,'' Health Affairs, January
23, 2002
\37\ Karen Davis and Barbara S. Cooper, American Health Care: Why
So Costly? Testimony for the Senate Appropriations Subcommittee, June
2003.
\38\ Karen Davis and Barbara S. Cooper, American Health Care: Why
So Costly? Testimony for the Senate Appropriations Subcommittee, June
2003
---------------------------------------------------------------------------
Several state governments also stepped forward to fill the void in
federal policy, particularly in the 1970s and 1980s. The most prominent
of these were ``all-payer rate setting'' programs, particularly those
in Connecticut, Maryland, Massachusetts, New Jersey, New York, and
Washington. While in effect, these states experienced increases in
hospital costs three to four percentage points a year lower than other
states.\39\ Between 1976 and 1984, the rate of increase in hospital
expenses per adjusted admission was 87 percent less in rate-setting
states than in non-regulated states.\40\ The programs also helped
stabilize hospital finances and contributed to fairly equitable payment
rates across patients insured by different insurers. Many created
mechanisms for explicitly cross-subsidizing hospitals providing
uncompensated charity care. Yet, the anti-regulatory mood of the era
led to the repeal of these efforts, with the notable exception of
Maryland.
---------------------------------------------------------------------------
\39\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P.
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990;
Karen Davis, ``Recent Trends in Hospital Costs: Failure of the
Voluntary Effort,'' testimony before U.S. House of Representatives,
Committee on Energy and Commerce, Subcommittee on Health and the
Environment, hearing on ``Increase in Hospital Costs: Is the Voluntary
Effort Working?'' December 15, 1981.
\40\ Carl J. Schramm, Steven C. Renn, and Brian Biles,
``Controlling Hospital Cost Inflation: New Perspectives on State Rate
Setting,'' Health Affairs, 5:22-33, Fall 1986.
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The basic lesson from this historical experience is that government
leadership matters. When government establishes a payment framework for
purchasers--whether Medicare, Medicaid, employer health plans--and uses
that collective purchasing power to set or negotiate prices from
providers, the rise in hospital costs is slowed, there is greater
equity by income of patients and across different sources of coverage,
and better access to care for the uninsured. Large purchasers--
Medicare, national managed care plans, large employers--can also obtain
good deals on their own, but they are less effective both in
controlling overall cost increases and in ensuring equitable payment
and access. A fragmented financing system, with each payer setting its
own rules, also inflicts a toll in the form of higher administrative
costs. On the flip side, if purchasers join together to exact steep
discounts, this system may undermine the financial stability of the
hospital sector, dampen investment in innovation such as information
technology, and undermine important social missions, including the
promotion of cutting-edge research, education, and excellence in
patient care.
PUBLIC POLICY OPTIONS
Given the resurgence in health care costs, the increasing numbers
of uninsured, abundant evidence that the quality of care is not what we
could have and have a right to expect, and the fact that administrative
costs are now the fastest rising component of health care expenditures,
it is time to consider a leadership role for the federal government in
promoting efficiency and quality in the health care system.\41\ Many
health care market participants are now willing to consider strong
governmental intervention to repair the health care system.\42\ Neither
the market reforms of the last two decades nor consumer-driven health
care provide the needed impetus for fundamental change in the quality
and efficiency in the U.S. health care system.
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\41\ Karen Davis, ``Achieving a High Performance Health System,''
Commonwealth Fund 2003 Annual Report, January 2004; Stephen C.
Schoenbaum, Anne-Marie J. Audet, and Karen Davis, ``Obtaining Greater
Value from Health Care: The Roles of the U.S. Government,'' Health
Affairs, November 2003; Karen Davis, Cathy Schoen, and Steve
Schoenbaum, ``A 2020 Vision for American Health Care.'' Archives of
Internal Medicine, December 2000.
\42\ Len M. Nichols et al., ``Are Market Forces Strong Enough to
Deliver Efficient Health Care Systems? Confidence is Waning,'' Health
Affairs 23(3):8-21, March/April 2004.
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My own view is that the greatest promise lies in a combination of
improved information on quality and efficiency, pay-for-performance
purchasing by private and public insurers, and investment in the
capacity to modernize the health care system. Most fundamentally, we
need a streamlined, automatic health insurance system that ensures all
Americans have access to affordable health care.
Price Transparency
It is hard to improve if you have no idea how you are performing or
the results that others are achieving. While I am skeptical about the
ability of consumer financial incentives to bring about fundamental
change in health care, I do think that information on quality and
efficiency at the individual provider level is absolutely essential if
health care organizations are to improve their performance.
What is needed is not so much information on prices of individual
hospital or physician services--which are often meaningless--but
information on the total cost of care over an episode of illness or
period of time. If a patient goes to a hospital where he or she will be
seen by 10 different physicians and spend a long time in the intensive
care unit, it is the total bill for hospital, physician, and other
services that is of concern to the patient, not the daily room rate or
the charge for a day of intensive care. Further, if a hospital
discharges a patient quickly but fails to help the patient learn
effective self-care techniques, the patient may be quickly readmitted.
So it is not the price per service or the total hospital bill for a
stay that is relevant, but the total charges for all services over a
period of time for the kind of condition and complexity faced by the
patient.
John Wennberg and colleagues recently demonstrated that use of
hospitals, intensive care days, physician visits, number of physicians
involved in care, and use of hospice care in the last six months of
life varied widely for the 77 leading U.S. hospitals.\43\ Days in
hospital per decedent ranged from 9.4 to 27.1; days in intensive care
ranged from 1.6 to 9.5; number of physician visits ranged from 17.6 to
76.2; percentage of patients seeing 10 or more physicians ranged from
16.9 percent to 58.5 percent, and hospice enrollment ranged from 10.8
percent to 43.8 percent. In short, it is ``practice style'' that leads
to wide variations in the use of health care resources. Patients have
almost no ability to know how they will be treated, what services they
will need, or what the total bills will be when they experience a life-
threatening condition. Generating information on provider
``longitudinal efficiency''--that is, the total cost of care over an
episode of illness or over a period of time--could begin to shed light
on ``best practices and lead hospitals to emulate the practices of
high-performing organizations.
---------------------------------------------------------------------------
\43\ John E. Wennberg et al., ``Use of Hospitals, Physician Visits,
and Hospice Care During Last Six Months of Life Among Cohorts Loyal to
Highly Respected Hospitals in the United States,'' British Medical
Journal 328:607:1-5, March 13, 2004.
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But efficiency is not the only important dimension. Quality is
equally important. Steven Grossbart at Premier, Inc., recently
demonstrated wide variation in both cost and quality across Premier
hospitals.\44\ For example, he found a five-fold variation in poor
outcomes adjusted for complexity for coronary artery bypass graft, and
a two-fold variation in cost per case, similarly adjusted for case-mix
complexity.
---------------------------------------------------------------------------
\44\ S. Grossbart, Ph.D., Director, Healthcare Informatics,
Premier, Inc., The Business Case for Safety and Quality: What Can Our
Databases Tell Us,'' Fifth Annual National Patient Safety Foundation
Patient Safety Congress, March 15, 2003.
---------------------------------------------------------------------------
One of the difficulties with generating this information is the
absence of a multi-payer claims data base with unique provider
identification. One important step would be for Medicare to lead in
forging a collaboration among Medicare, Medicaid, and private insurers
to assemble such a multi-payer claims database and make it widely
available to researchers and providers. After improving the accuracy
and validity of the data, public information on provideuld be a very
strong motivator for improvement. A thoughtful middle ground has been
proposed that would:
engage providers as ``coauthors'' working to improve the
quality of the tools and to ensure that appropriate caveats about
weaknesses in the analyses are on prominent display;
include a multidimensional approach to reporting on
quality to help ensure that various dimensions and attributes are
considered;
not tying consumer copayments to tiers;including both
quality and cost in financial rewards for providers;
transparency to purchasers, providers, and
patients;physician data aggregated at the physician group level; and
collaboration among payers, purchasers, patients, and
providers in development of systems of public accountability.\45\
---------------------------------------------------------------------------
\45\ Thomas H. Lee, Gregg S. Meyer, and Troyen A. Brennan, ``A
Middle Ground on Public Accountability,'' New England Journal of
Medicine 350:23:2409-2412, June 3, 2004.
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Pay for Performance
The natural desire of physicians and other health care leaders to
provide high-quality care may be adequate to stimulate improvement once
such a database is created. However, it would also be important for
purchasers (Medicare, Medicaid, private insurers) to reward high
performance hospitals that demonstrate better quality and efficiency,
as well as high-performance integrated health systems and accountable
physician group practices. Purchasers are in a far better position to
promote better quality and efficiency than are individual patients.
There are more than 75 pay-for-performance programs across the U.S.
including those that are provider-driven (e.g., Pacificare), insurance
driven (Blue Cross/Blue Shield in Massachusetts), and employer driven
(Bridges to Excellence).\46\ The new Medicare Modernization Act also
calls for demonstrations to provide bonuses to physicians on a per-
beneficiary basis when quality standards are met. Several states have
built performance-based incentives into Medicaid contracts, including
Iowa, Massachusetts, Rhode Island, Utah, and Wisconsin.
---------------------------------------------------------------------------
\46\ Leapfrog Group, draft report to The Commonwealth Fund, 2004.
---------------------------------------------------------------------------
The U.K.'s new contract with general practitioners also includes
bonuses pegged to quality performance.\47\ Up to 18 percent of
physician practice earnings will be at risk. Physicians were heavily
involved in selecting the 146 performance measures.
---------------------------------------------------------------------------
\47\ Peter Smith and Nick York, ``Quality Incentives: The Case of
U.K. General Practitioners,'' Health Affairs May/June 2004.
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Pricing Guidelines
The current system of hospital pricing is clearly inequitable and
administratively inefficient. A major effort should be mounted to
identify ways of reducing providers' administrative costs and
simplifying payer rules and pricing practices.
It will also be important to address in some way the wide
disparities in prices faced by different sets of patients. It would be
reasonable to consider limits or bands on how much prices can vary
depending on payer source (perhaps pegged to a percentage of Medicare
DRG payment rate). Given urgent concerns about the financial burdens on
uninsured and low-income underinsured Americans, net charges (after
discounts) to such patients certainly should not be higher than those
charged insured patients.
We should also remember that all-payer rate-setting worked well in
the past. It was much simpler administratively than our current system,
much more equitable, and more effective in controlling costs. It may
need to be revisited if upward cost pressures and financial instability
in the hospital sector persist.
Preserving and Strengthening the Safety Net
In the current environment, nonprofit hospitals that provide
uncompensated care to the uninsured and fulfill other vital social
missions should be preserved and strengthened. It would be reckless to
undo tax preferences for nonprofit hospitals. They are a major source
of uncompensated care and community benefit. The current community
benefits standard is broader than just charity care--some hospitals
make a contribution through provision of high-cost ``unprofitable''
services such as burn care and trauma care; others make a contribution
through medical education and training health professionals.
It may be reasonable to refine expectations about what nonprofit
hospitals should contribute to their community. It is reasonable to ask
that the uninsured not be charged more than other patients, and that
hospitals work out feasible repayment plans and not employ unreasonable
collection tactics. Certainly if there is a major emergency, whether a
fire in a nightclub or a terrorist attack, we want hospitals to open
their doors to all victims regardless of their ability to pay.
At one time, hospitals had an obligation to provide charity care in
exchange for grant and loan capital funds received in the past. It
might be useful to consider a new ``Hill-Burton'' act, perhaps one
that, in exchange for providing charitable care, would make available
grants and loan capital funds for investment in information technology
and systems to enhance patient safety.
Alternatively, the disproportionate share allowance for hospitals
could be better targeted, for example, providing payments at some
percentage of the Medicare DRG payment rate for each uninsured patient
served. Some portion might be specified for investment in modern
information technology or systems to prevent medical errors.
These measures are not just important in the short term. Even as we
move to improve insurance coverage, it is important to preserve the
safety net to ensure that health care is open to those who are
difficult to insure--immigrants, the homeless, the mentally ill--and
that all patients can receive patient-centered, culturally competent
care.
We also need to ensure that our nation's academic health centers
are able to continue their vital social missions of investing in
cutting-edge research, providing specialized care that may not be
profitable but is nonetheless valued by society, and training new
generations of medical leaders and health professionals.
Insurance Coverage and Access to Care for Vulnerable Populations
We will never have an efficient and equitable system so long as
millions of Americans go without health insurance coverage. Over 85
million Americans are uninsured at some point over a four-year
period,\48\ and millions more are underinsured. Two of five Americans
are struggling with medical bill problems or paying off medical debts.
Tinkering with hospital prices and cost-sharing will do little to solve
this problem. A bolder strategy is urgently needed. Fundamental reform
requires automatic and affordable insurance coverage for all. Thank you
for the opportunity to be here today.
---------------------------------------------------------------------------
\48\ Pamela Farley Short, Deborah R. Graefe, and Cathy Schoen,
Churn, Churn, Churn: How Instability of Health Insurance Shapes America
's Uninsured Problem, The Commonwealth Fund, November 2003.
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Chairman HOUGHTON. Thanks very much. Dr. Herzlinger.
STATEMENT OF REGINA E. HERZLINGER, NANCY R. MCPHERSON
PROFESSOR, HARVARD BUSINESS SCHOOL, BOSTON, MASSACHUSETTS
Ms. HERZLINGER. Thank you so much. I am honored to be here.
It is very nice to see you again, Chairman Houghton. I last saw
you at the 2000 Harvard Army Reserve Officer Training Corps
induction ceremonies, and you gave a very moving and eloquent
speech there, and my son, Captain Alexander Herzlinger, is now
with the 101st Mountain Division in Iraq.
I would like to talk about how we get to this position. In
most of our economy prices continually go down, quality
continually goes up, and people have good access, so whether
you are Jane Doe or a Member of this Committee, the elite of
the United States, you have the same kind of access.
Why don't we look at those sectors and compare them to
health care and see what they have that health care does not?
Let's look at the automobile sector where prices have gone
down, quality has gone up, and even poor people can buy very
good automobiles. What happened?
First of all, consumers are in charge so the market is
tailored to them and not to intermediaries like insurers.
Second, providers are free to price as they want. Right now,
for example, it is a good time to buy an Impala because the
Chevrolet company has over produced its Impalas and it is
cutting the prices. Thirdly, those markets have terrific
information, so even though Congressman Stark may have ease in
buying an automobile, I find it terribly complicated, but I
have great information about the quality of cars that comes
from sources like Consumer Reports and J.D. Power.
What happens when we have this kind of consumer-led system
in health care? There are great things for the uninsured. For
example, there is a company called Health Allies, which is a
subdivision of United, which is the largest health insurer in
the United States. Health Allies offers insurance from $500 to
$3,000 for the uninsured, and the insurance is very good
insurance. It is called essential coverage, and Health Allies
negotiates on behalf of its individual members, and it gives
them the market power that big insurers bring to their
enrollees.
Congressman Stark asked why there were no data on prices.
In fact, getting the price of a hospital procedure is akin to
getting the battle plan for Iraq, it is very difficult right
now, but there are private sector companies like Ingenix that
make such data available. It is again a subdivision of
UnitedHealthcare.
So, what is the role of government in solving the problem,
the terrible problem that people who lack health insurance face
when they enter hospitals? I think it is to enable a consumer-
driven system that makes it possible for everybody to be on the
same footing. Through the leadership of Congressman Thomas and
Congresswoman Johnson, we have gotten HSAs and tax credits.
Those are huge benefits for uninsured people, and give them tax
support to buy health insurance. The providers must be free to
price just like other providers in the United States are free
to price, and the micro-management that we now have of provider
pricing can't be anything but harmful.
The third and most important is to shed some sunlight in
this market. A very good model is the Securities and Exchange
Commission. When President Franklin Delano Roosevelt was
elected President there was no transparency in the capital
markets. There were no annual reports. There was no information
that shareholders had. President Franklin Delano Roosevelt was
urged, like you are, by various Members of this Committee, to
regulate the business community more closely. He very wisely
and presciently demurred, and what he chose to do was foster
the Securities and Exchange Commission Act, and he said,
approximately, ``Sunshine is the best disinfectant.''
What does the Securities and Exchange Commission do? It has
fostered the lauded transparency and efficiency of our capital
markets. It does not dictate what is to be measured. It does,
however, require disclosure and dissemination of data. I hope
and urge you that this model is followed in health care because
sunshine is the best healer.
[The prepared statement of Ms. Herzlinger follows:]
Statement of Regina E. Herzlinger,* Nancy R. McPherson Professor,
Harvard Business School, Boston, Massachusetts
Consumer-driven markets succeed when good price and quality
information is available. Consumers reward those who provide good
values for the money and penalize the others.
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* Professor Regina E. Herzlinger, the Nancy R. McPherson Professor
of Business Administration at Harvard Business School, is the author of
the best-selling Market-Driven Health Care (Cambridge, MA: Perseus,
paperback, 2000) and Consumer-Driven Health Care (San Francisco, CA:
Jossey-Bass, 2004).
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Thus, when, in the 1970s, Consumer Reports began its favorable
ratings of Japanese cars, the American manufacturers controlled 90%
plus of the market. By 2003, Japanese cars, which continued to dominate
the best-value-for-the-money ratings, had a 35% market share. But the
Americans improved. By 2000, U.S. cars equaled European ones in
reliability. The Japanese cars had only a small edge. Quite a change
from 1980, when U.S. cars were three times as unreliable as Japanese
ones and twice as unreliable as European vehicles.\1\
---------------------------------------------------------------------------
\1\ ``Twenty Years of Consumer Reports Surveys Show Astounding
Gains,'' Consumer Reports, April 2000, p. 12.
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Last, automobile prices are currently the lowest in two decades. In
1991, for example, the average family required 30 weeks of income for
the purchase of a new vehicle; but by 1999, a new vehicle required only
24 weeks of their income--a 20% decline.\2\ Simultaneously, automobile
quality is at an all-time high. The range of choices is better too, as
the quality differences between the best and worst manufactures have
declined.
---------------------------------------------------------------------------
\2\ Auto Affordability Index, accessed August 21, 2003.
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Why does the car market work so well--increasing quality,
widespread ownership, decreasing price--in contrast to the health care
markets, whose cost increases substantially outstrip income; whose
quality is unknown; and where the uninsured pay much higher prices than
others?
1. Consumers are the buyers.
2. Manufacturers can freely vary prices in response to changes in
their production and sales. For example, they currently are slashing
the prices of cars with large inventories, such as the Impala.
3. Consumers have access to excellent information on both prices
and quality from private sector organizations, such as Consumer Reports
and J.D. Power.
All of these attributes are missing in the hospital market:
1. The hospitals sell mostly to third-party insurers, not to
individual consumers. As a result, consumers lack market power. In
2000, more than 90% of expenditures for hospitals came from third-party
payers.
2. Hospitals cannot vary their prices to these third parties as a
result of changing market conditions during the course of the year.
Because prices are determined annually, hospitals cannot cut their
prices during periods of low occupancy to attract patients who need
nonemergency services.
Further, because many of the third-party insurers demand
discounts off list prices, hospitals raise the prices to
convince the insurers that they are receiving substantial
discounts. For this reason, hospital charges have risen three
times faster than their costs from 1995-2002. These list prices
are then typically charged to individual uninsured consumers
who lack market power.
3. Price information is very difficult to obtain and quality data
are virtually nonexistent.
The Solution to Price Gouging of the Uninsured
To help the individual, uninsured hospital customer to be as
capable of receiving good value for the money as a car buyer requires
replicating its essential characteristics in the health care sector.
1. Consumers buy insurance for themselves in an individual market.
Tax-credits and HSAs are critical to this transformation.
2. Providers are free to quote their own prices and to change them
as circumstances vary in the individual market.
3. Information on health care prices and quality is freely
available.
Band-Aid solutions to Price-Gouging of the Uninsured
Other well-intended solutions to the problems of the uninsured are
unlikely to be as effective as a consumer-driven health care system.
Transparency--Many would require hospitals to post price
information prominently. But what use is information in the absence of
consumers' market power?
Charity Care Reminders--Others would require hospitals to inform
uninsured patients that charity care is available. The proposal creates
nightmarish auditing requirements and does not help the uninsured who
are not poor enough to qualify for charity care.
Rate Setting--Yet others would extend governmental power to setting
all hospital prices. This proposal extends the present micromanagement
and further limits productivity-enhancing innovations.
How Consumer-Driven Markets Work
How do consumers cause products to be better and cheaper? After
all, the average person is not an expert about most purchases and
represents only one buyer.
One reason that average people can reshape whole industries is that
markets are guided not by the average consumer, but by the marginal
one. In English, this economic jargon means that producers respond to
their last customers, not to their average customer. Typically the last
ones to buy drive the toughest bargain; they are the show-me crowd.
These hard-nosed buyers are the heavy consumers of information who are
most adept in interpreting and using it. Below I will illustrate this
mechanism in the automobile and finance sectors.
The Automobile Sector
To understand how this market mechanism works, consider my purchase
of a car. I confess: I have only the dimmest notion of how a car
functions. After all, a car is a high-tech device, studded with
microchips. My notions of the mechanical compression and ignition of
gasoline that lead to an explosion whose energy ultimately rotates the
wheels of a car are as dated as my first car, the 1957 Dodge that I
purchased in 1966. It got seven miles to the gallon, rivaled a stretch
limo in length, and belched pollutants.
I do not think that I am alone in my ignorance. When I see someone
in an automobile showroom peering under the hood of a car, I think to
myself, ``What the heck are you looking at?'' Nevertheless, like all
Americans, I can now readily find the kind of car I want at a price I
am willing to pay. Two ingredients are crucial.
One is information. It enables me to be an intelligent car shopper,
despite my ignorance.
How does it work? It's simple. I review the rating literature to
look for a car that embodies the attributes I seek: safety,
reliability, and price. Thus, when I studied Consumer Reports for cars
with these attributes, two brands caught my eye: Volvo and Buick. I
confess. I skipped the earnest reviews of how the engines work, the
fuel-efficiency, the comfort, the handling, the styling, etc. Safety,
reliability, and price--that is what interests me. And objective
information about the attributes in which I am interested is easily
available to me.
I opted for the Buick. Although it was not as reliable as the
Volvo, it was cheaper and had more of the heft that I associate with
safety.
But many of those who shared my views of a car's desired
characteristics opted for the Volvo. It grew from being an obscure
Swedish brand to a substantial one with sales of 100,000 cars in
2001.\3\ During this growth period, Volvo's rivals understood that a
meaningful number of their customers were interested in safety and
reliability and introduced these qualities into their cars. In the
quest for safety, some of them acquired rival brands, such as Ford's
1999 acquisition of Volvo.\4\ Other automobile manufacturers improved
their reliability.\5\
---------------------------------------------------------------------------
\3\ Ward's Automotive Yearbook (Detroit, MI: Ward's Reports, 2002),
p. 202.
\4\ Kathleen Kerwin, ``At Ford, the More Brands, the Merrier,''
BusinessWeek, No. 3675 (April 3, 2000), p. 58.
\5\ ``Twenty Years of Consumer Reports Surveys Show Astounding
Gains,'' Consumer Reports, April 2000, p. 12.
---------------------------------------------------------------------------
So that is how cars became better even when the consumer is a
doofus like me.
Information makes dumb people like me smart.
But what stops the car manufacturers from refusing to cut their
prices?
After all, I am only one person.
At a high price, there are only a few buyers who are more-or-less
indifferent to price. The good news is that they are willing to buy at
a very high price. The bad news is that there are only a few of them.
As providers reduced their prices, they attract more and more
customers. The increased volume of customers more than compensates for
the cut in price. Providers continue to reduce their price until they
hit a brick wall: the last picky, tough-minded customers who set the
price. At this price, the extra revenue the providers generate from
sales to the hard-bargain drivers is roughly equal to the extra cost of
manufacturing their purchases. All the rest of us benefit from the
assertiveness of the last-to-buy crowd.
This relatively small group of demanding consumers seek out the
suppliers who will reduce price and improve quality. For example, a
McKinsey study showed that a small group, only 100 investors,
``significantly affect the share prices of most large companies.'' \6\
---------------------------------------------------------------------------
\6\ Kevin P. Coyne and Jonathan W. Witter, ``What Makes Your Stock
Prices Go Up and Down,'' The McKinsey Quarterly, No. 2, 2002, pp. 29-
39.
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In the auto market, and most others, these three characteristics--
information, a group of picky consumers, and the ability of
manufacturers to quote prices freely--enable the rest of us to obtain a
good product at a good price.
Average Janes and Joes and the Health Care Market
When they have good information and freedom to choose health care
plans and providers, consumers optimize in classic Economics 101
fashion. For example, the consumer-control, providers freedom to price,
and satisfaction data collected by the Twin Cities' employer coalition,
the Buyers Health Care Action Group, helped to cause a nearly 20% drop
in high-cost/low-satisfaction plans and a 50% increase in low-cost/
high-satisfaction plans.\7\ Information exerts powerful effects even in
the absence of consumer control. When New York provided standardized
measures of the open heart surgery performance of hospitals and
surgeons, for instance, statewide death rates dropped.\8\ Low-
performance providers exited and others improved. Market share growth
was inversely related to the mortality statistics.\9\
---------------------------------------------------------------------------
\7\ Slide presented by Steve Wetzell of the Buyers Health Care
Action Group in a February 1999 meeting of the American Medical
Association in Palm Beach, Florida.
\8\ Mark R. Chassin et al., ``The Urgent Need to Improve Health
Care Quality,'' Journal of the American Medical Association, vol. 280,
no. 11 (September 16, 1998), p. 1003.
\9\ Dana Mukamel and Alvin I. Mushlin, ``Quality of Care
Information Makes a Difference,'' Medical Care, vol. 36, no. 7 (July
1998), pp. 945-954.
---------------------------------------------------------------------------
Nevertheless, some policy analysts argue that a consumer-driven
health care system cannot work because average consumers will be
stymied by the process of selecting among differentiated health
insurance products. Instead, the process must be increasingly
centralized into their able hands. Notes one: ``The approach of trying
to give people the purchasing power to operate in the current insurance
market assumes too much about individual purchasing abilities.''\10\
---------------------------------------------------------------------------
\10\ New York Business Group on Health Care (NYBGH), Conference
Proceedings, ``The Nation's Health Insurance System'' (New York: NYBGH,
1992), p. 61.
---------------------------------------------------------------------------
Although it is hard to understand why we should continue to entrust
the selection of health insurance to those who have made such a hash of
15% of our GDP to date, critics like this raise an interesting
question: how do average consumers fare when they buy other complicated
products, such as cars and mutual funds?
As discussed above, information and a group of assertive consumers
are key. Yet another critical element is the changing face of the
American consumer. Current generations of Americans are much better
educated than prior ones. In 2000, 25.6% of the population had attained
a college education or more and 84.1% were high school graduates. In
1960, in contrast, fewer than half the people were high school
graduates and only 7% had a college education.\11\ Higher levels of
educational attainment increased their ability to obtain and interpret
information at least as much as their self-confidence. One example of
this change is manifested by the Christians who increasingly stand
rather than kneel at church, likely to express their notion that a
service provides an opportunity for a personal encounter with God,
rather than for reverential worship. About 80% of the pews ordered from
the country's largest manufacturer now come without kneelers.\12\
---------------------------------------------------------------------------
\11\ U.S. Census Bureau, Statistical Abstract of the United States
: 2001 (Washington, DC: Government Printing Office, 2002), Table No.
215, p. 139.
\12\ ``An Uprising in the Pew,'' USA Today, April 16, 2001, p. 1.
---------------------------------------------------------------------------
Affluent Web surfers also typify the characteristics of this
group--they spend much more time than others searching for information
on the net before making a purchase and are much more likely to buy,
once they have found a good value for the money.\13\ Those who focus on
their affluence miss the point. Affluent or not, they eat the same
bread, buy the same appliances, wear the same t-shirts, and use the
same gasoline and oil as we. Their activism improves these products for
the rest of us.
---------------------------------------------------------------------------
\13\ Forrester Research, ``The Millionaire Online'' (Cambridge, MA:
Forrester Research, May 2000), p. 11.
---------------------------------------------------------------------------
Do not get me wrong. If I were Queen, I would push hard to insure
universal literacy. But markets function well in the absence of these
characteristics, as long as they contain information and a small group
of smart, picky, I-want-what-I-want-when-I-want-it-at-a-rock-bottom-
price consumers who force providers of goods and services to offer many
choices from which they can select.
Health care consumers who typify these characteristics abound. Some
express their activism directly by mastering medical skills, such as
CPR and the use of external defibrillators.\14\ Others search for
information, such as the 1.8 million people who spent an average of 20
minutes at the government's National Institute of Health web site,
studded with arcane medical journal articles.\15\ A 2002 report found
that 73 million people in the United States used the Internet for
health information, 6 million of them daily.\16\
---------------------------------------------------------------------------
\14\ ``Just Another Day at the Office,'' USA Today, April 16,
2001, pp. 1-2b.
\15\ PricewaterhouseCoopers, HealthCast 2010 (New York:
PricewaterhouseCoopers, November 2000), p. 22; Scott Reents, Impact of
the Internet on the Doctor-Patient Relationship: The Rise of the
Internet Health Consumer (New York: Cyber Dialogue, 1999), p. 4.
\16\ Susannah Fox and Lee Rainie, How Internet Users Decide What
Information to Trust, May 2002.
---------------------------------------------------------------------------
The assertiveness and self-confidence that typify American
consumers are even more strongly evident in the health care Internet
users. They agree more than average U.S. adults with the following
statements: ``I like to investigate all options, rather than just ask
for a doctor's advice'' and ``people should take primary responsibility
and not rely so much on doctors.''\17\ Their pragmatism is apparent
too. They do not search idly. More than 70% want online evaluations of
physicians,\18\ and when they obtain the information, they use it.\19\
Nor is consumer assertiveness limited to the United States. For
example, 70% of Canadian doctors note that their patients are briefed
by Internet information.
---------------------------------------------------------------------------
\17\ Scott Reents, Impact of the Internet on the Doctor-Patient
Relationship, op. cit., p. 4.
\18\ Ibid., p. 2.
\19\ Thomas E. Miller and Scott Reents, The Health Care Industry in
Transition: The Online Mandate to Change (New York: Cyber Dialogue,
1998).
---------------------------------------------------------------------------
Opponents of Consumer-Driven Health Care Systems
The Technocrats
Technocrats who favor centrally controlled systems often doubt the
intellectual prowess of anyone other than themselves. They feel
obligated to oversee consumers because, in their eyes, consumers are
too weak-minded to respond appropriately to information and too timid
to help themselves.\20\
---------------------------------------------------------------------------
\20\ David Burda, ``What We've Learned from DRGs,'' Modern
Healthcare, October 24, 1993, p. 42; ``Wrestling with Medicare Doc Fee
Schedules,'' Modern Healthcare, October21, 1996, p. 88.
---------------------------------------------------------------------------
Health Policy Perennial Favorite: The Stupidity of Health Care
Consumers
We live in an information age, surrounded by ubiquitous newspapers,
televisions, telephones, computers, radios, magazines, and books,
available worldwide, round-the-clock, that address three of our
senses--sound, vision, and, for the vision--and hearing-impaired,
touch. The ubiquity of information clearly responds to people's
desires. When there is no demand, there is no supply.
People use information to inform and amuse. The best information
sources combine the two: Morningstar's cute little stars help them buy
mutual funds. The pithy reviews in Zagat's restaurant guides help them
find restaurants. J.D. Power's powerful brand name helps them select
automobiles and airlines. And Consumer Reports' accurate, comprehensive
ratings help them buy virtually everything.
Those who do not like these sources can find many others. If they
judge Morningstar excessively terse, the SEC's EDGAR system contains
much more information about publicly-traded corporations.\21\ If Zagat
is too trendy, they can turn to the Boston Globe's ``Cheap Eats''
section, or its equivalent in their own hometown paper. If they
question J.D. Power's objectivity, they can turn to the federal
government's data about cars and airlines, such as those provided by
the National Highway Traffic Safety Administration and the Federal
Aviation Administration.\22\ And, if they feel the Consumer Reports'
articles are biased against American cars, they can turn to other
sources of consumer information, such as Car & Driver Magazine and
Consumer's Digest.
---------------------------------------------------------------------------
\21\ (EDGAR stands for ``Electronic Data Gathering, Analysis, and
Retrieval'' system.)
\22\ See, for example, safety data for cars at and for planes at.
---------------------------------------------------------------------------
People use information to improve themselves too. In 2004, Bill
Gates was the world's richest man because he helped people to become
more productive by organizing and processing their information easily
and efficiently. Michael Bloomberg became a billionaire because his
Bloomberg provided information that helped people to invest in
financial instruments with confidence.\23\ The endless line-up of self-
help gurus, from Dale Carnegie, author of How to Win Friends and
Influence People, to Steve Covey, of The Seven Habits of Highly
Effective People fame, helped themselves to a tidy fortune, too, as
they helped people to help themselves become more effective.\24\
---------------------------------------------------------------------------
\23\ Felicity Barringer and Geraldine Fabrikant, ``Coming of Age at
Bloomberg L.P.,'' The New York Times, March 21, 1999, p. 1.
\24\ Dale Carnegie, How to Win Friends and Influence People (New
York: Simon & Schuster, 1937). Stephen R. Covey, The Seven Habits of
Highly Effective People (New York: Simon & Schuster, 1989).
---------------------------------------------------------------------------
When it comes to health care, the health care-equivalents of J.D.
Power and the Zagats can provide the useful, pithy ratings that people
crave. And health care entrepreneurs in the Bloomberg and Gates mold
can help people to help themselves.
But some of the health care policy crowd have their doubts. They
question whether average Americans can use health care information to
help them help themselves.
The reason?
Well, to put it bluntly, the average American is not nearly as
smart as they.
Then, too, they doubt that good information can be provided. To
them, the effect of health care, unlike all other human activities,
cannot be adequately measured.
Does the Health Care Market Work Like Other Markets?
The Federal Reserve's chairman, Alan Greenspan, would likely be
surprised by this dour assessment of the intellectual ability of the
average American. For one thing, the percentage of workers with post-
high school education has risen 15% in the past two decades.\25\ And in
Congressional testimony, Greenspan attributes the surge in the U.S.
economy's productivity to Americans' remarkable interest in education:
``The average age of undergraduates in school full time has gone up
several years. Community colleges have burgeoned in size and on-the-job
training has gone up very substantially. They are pressing very hard
for higher levels of education and capacity and ability. (Education)
has induced a significant increase in their real incomes.''\26\
---------------------------------------------------------------------------
\25\ ``Blunt Portrait Drawn of U.S. Work Force in 2000,'' The New
York Times, August 30, 2002, p. C4.
\26\ ``State of the Economy,'' Federal News Service,January 20,
1999.
---------------------------------------------------------------------------
Further, the technocrats' critique implies that professionally
trained people are more capable of interpreting complex information.
But the technocrats who pooh-pooh others' abilities are not necessarily
wizards when it comes to information. For example, in a simple algebra
test, only 53% of health care providers--doctors, nurses, and Ph.d.'s--
could answer all the questions correctly.\27\ After all, if the experts
who control the health care system are so wonderful, how did we get
into the present mess?
---------------------------------------------------------------------------
\27\ Carlos Estrada, Vetta Barnes, Cathy Collins, and James C.
Byrd, ``Health Literacy and Numeracy,'' Journal of the American Medical
Association, Vol. 282, No. 6 (August 11, 1999), p. 527.
---------------------------------------------------------------------------
Yet, many studies demonstrate the consumers' ignorance of the ABCs
of health care. A perennial favorite in the health policy press is a
paper devoted to the subject. The writers cluck about the American
public's ignorance of the most rudimentary aspects of health care. For
example, in 1995, the experts tsk, tsked that 60% of the public were
found to think that the health care system was changing slowly or not
at all, in direct contradiction to the experts' view of the subject; in
1997, researchers found that many could not explain the terms ``HMO''
and ``managed care'' to their satisfaction;\28\ and a 2001 report
updated this perennial favorite topic with findings that ``fewer than
one-third of all consumers accurately reported all four health plan
attributes.''\29\
---------------------------------------------------------------------------
\28\ Robert Wood Johnson Foundation, Community Snapshots Consumer
Survey (Princeton, N.J.: Robert Wood Johnson Foundation, 1995);
Princeton Survey Research Associates, National Survey of American
Views' on Managed Care (Princeton, NJ: Princeton Survey Research
Associates, 1997), p. 44.
\29\ Peter J. Cunningham, Charles Denk, and Michael Sinclair, ``Do
Consumers Know How Their Health Plan Works?'' Health Affairs, Vol. 20,
No. 2, March/April 2001, p. 159.
---------------------------------------------------------------------------
How would you perform on these tests?
In the eyes of these experts, consumers are not only ignorant but
also obdurate, failing to heed useful health care information. For
example, consumers' are legendarily indifferent to the health plan
performance data contained in HEDIS, a survey by the industry's quality
enforcer, the NCQA, that tracks process measures, such as the health
plan's rates of immunizations and mammograms.\30\
---------------------------------------------------------------------------
\30\ Jon R. Gabel, Kelly A. Hunt, and Kimberly M. Horst, KPMG Peat
Marwick, When Employers Choose Health Plans (New York: The Commonwealth
Fund, 1998).
---------------------------------------------------------------------------
To my mind, these judgments ignore the fundamental tenet of
information-seeking behavior:
Consumers seek only the information that is directly pertinent to their
needs.
I cannot describe exactly how cars work. Nevertheless, I am an
intelligent buyer of cars because I seek the information that assesses
those qualities of an automobile in which I am interested.
Similarly, health care consumers are most interested in provider
outcome data for medical conditions similar to their own, treated in a
population they consider as peers.\31\ Thus it should come as no
surprise that Americans cannot describe an ``HMO'' to the questioners'
satisfaction, or that they are uninterested in data about their health
plans. Consumers clearly attribute health quality to their providers,
not to their health plans.\32\ And they are much more impressed by
outcome data than by reports on process measures. Indeed, NCQA rankings
had no correlation with consumers' assessments of care by their health
plans.\33\
---------------------------------------------------------------------------
\31\ See, for example, Judith H. Hubbard and Jacqueline Jewett,
``Will Quality Report Cards Help Consumers?'', Health Affairs, Vol. 16,
No. 3 (May/June 1997), pp. 218-228.
\32\ See, for example, Pacific Business Group on Health, Report on
Qualitative Research Findings: California Health Care Smart Shopper
Public Education Campaign (San Francisco, Calif.: Pacific Business
Group on Health, March 1998).
\33\ Bruce E. Landon, Alan M. Zavlosky, Nancy Dean Beaulieu, James
A. Shaul, and Paul D. Cleary, ``Health Plan Characteristics and
Consumers' Assessments of Quality,'' Health Affairs, Vol. 20, No. 2,
March/April 2001, p. 274.
---------------------------------------------------------------------------
Is the lack of use of the available information an indictment of
consumers or an indictment of the poor quality of the data provided?
Two authors concluded that the fault lies largely with information
which frequently is not sufficiently comprehensive and relies
excessively on the process of care (e.g., mammograms received), rather
than its outcome (e.g., breast cancer mortality statistics by
provider). And when outcome data are available, they are ``so broadly
aggregated that the results may be of only limited value to
consumers.''\34\ Further, many users do not trust the data and cannot
readily access it; for example, Pennsylvania's risk-adjusted cardiac
surgery outcomes by hospital were mailed out only once.\35\ Last, most
consumers cannot act on the data because they lack choice and control.
---------------------------------------------------------------------------
\34\ David W. Bates and Atul W. Gawande, ``The Impact of the
Internet on Quality Measurement,'' Health Affairs, November/December
2000, p. 106. For an expanded discussion of this topic see also Regina
E. Herzlinger and Seth Bokser, ``Note on Health Care Accountability and
Information in the U.S. Health Care System,'' Harvard Business School
Case No. 302-007 (Boston, MA: Harvard Business School Publishing,
2001).
\35\ Bates, ibid.
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The Quality of Health Care Quality Information
The most serious objection is voiced by those who point out that
quality measures will not be as accurate in 2002 as in 2020.\36\ First,
the very language for measuring performance has yet to be defined.
Second, the risk-adjusters that would make it possible to compare the
performance of high-risk specialists to those who treat less-severely
ill patients are in an early state of development. Third, the raw data
are flawed. For example, the U.S. General Accounting Office found
severe flaws in the federal government data bank of the adverse actions
taken against physicians and dentists.\37\
---------------------------------------------------------------------------
\36\ Joseph P. Newhouse, ``Risk Adjustment: Where Are We Now?''
Inquiry, Vol. 35, No. 2 (Summer 1998), pp. 122-129.
\37\ Susan J. Landers, ``Physician Data Bank Records Found
Inaccurate, Incomplete,'' American Medical News, Vol. 43, No. 47,
December 18, 2000, pp. 1-2.
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These are substantial issues. In the absence of solutions, quality
measures will be seriously distorted. For example, a study that
compared the rates of caesarian sections in hospitals, with and without
adjustment for the patient characteristics that affect the likelihood
of needing the procedure, found that risk adjustment caused the
performance of five of the twenty-one hospitals in the study to change
dramatically; among other changes, two hospitals originally classified
as outliers were reclassified as normal and some that were classified
as normal were reclassified as outliers.\38\ The impact of imperfect
measures extends to providers too. Physicians may be dissuaded from
caring for very sick patients because of their concern that their
outcome measures will not correctly reflect the severity of illness.
---------------------------------------------------------------------------
\38\ David C. Aron, Dwain L. Harper, Laura B. Shepardson, and Gary
E. Rosenthanl, ``Impact of Risk-Adjusting Caesarian Delivery Rates When
Reporting Hospital Performance,'' Journal of the American Medical
Association, 279 (4), June 24, 1998, pp. 1968-1983.
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Measurement issues like these can be solved with time. Among
others, prescient employers in Florida and payors in Washington have
already used risk-adjusters successfully.\39\ The continually evolving
measures of performance of investment management--such as generally-
accepted accounting principles and beta, the measure of risk of
different investments--provides a good example of how difficult
measurement problems are solved. Beta has been continually refined
since it was first suggested in 1952. Similarly, the system used by
Morningstar to rate the investment performance of mutual funds evolved
over time. Moreover, as the refinement of these measures of financial
performance continues, investors have had access to ever-better data
with which to evaluate the performance of their mutual funds and
stocks.
---------------------------------------------------------------------------
\39\ Regina E. Herzlinger, Consumer-Driven Health Care, op. cit.,
see papers by Becky Cherney, ``Demanding Quality for Health Care
Consumers: The Half-Billion Dollar Impact of Information about
Quality,'' pp. 457-474; Lisa Iezzoni, ``Risk Adjustment and Three Case
Studies,'' pp. 242-261; and Vickie Wilson, Jenny Hamilton, Mary Uyeda,
and Cynthia Smith, ``Health-Based Premium Payments and Consumer
Assessment Information as Tools for Consumer-Focused Purchasing,'' pp.
298-308.
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Patients who put their health on the line deserve no less. As
former U.S. Representative Thomas Bliley (R-Va.) noted, the best way to
improve the quality of these data is not to suppress them, but, rather,
to open them to the public.\40\
---------------------------------------------------------------------------
\40\ Landers, op. cit.
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How to Obtain Consumer-Driven Health Care Information
Absent governmental involvement that requires dissemination to the
public, information that evaluates providers will not be forthcoming.
Most voluntary efforts are typically duds--employers simply are not
that interested in the data and unclear about how to interpret it and
powerful providers may try to suppress it.
The Failure of Voluntary Action
Consider the case of the voluntary Cleveland Coalition to collect
hospital performance data. The effort was widely lauded. For example,
one hospital claimed that the decrease in its rate of Caesarian
Sections from 30% of all births to below 20% were ``purely driven by
the Cleveland Health Quality Choice.''\41\ One evaluation concluded
that reductions in risk-adjusted mortality rates and lengths of stay
were linked to the performance reports.\42\ Nevertheless, the effort
collapsed when the Cleveland Clinic left the group, allegedly because
it did not like the performance ratings it received. Notes a local
doctor ``What the Clinic really didn't like is that they weren't shown
to be the best at everything.''\43\ The employer community that
sponsored the effort did not actively use its results. For example, the
only hospital to achieve better-than-expected ratings hoped that the
results would yield many new patients as employers referred their
enrollees there; but the predicted surge never materialized. Notes one
employer, ``We weren't that aggressive.''\44\
---------------------------------------------------------------------------
\41\ ``Project's Collapse Shuts Off Information on Hospital Care
Quality,'' The Plain Dealer, August 23, 1999, p. A1.
\42\ Carl A. Sirio and Dwain Harper, ``Designing the Optimal Health
Assessment System: The Cleveland Quality Choice Example,'' American
Journal of Medical Quality Care, 11 (1), Spring 1996, pp. S66-S69.
\43\ ``Operation that Rated Hospitals Was a Success, but the
Patient Died,'' The Wall Street Journal, August 23, 1999, p. A1.
\44\ Ibid.
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As for the voluntary, industry-led mechanisms for accountability,
they are so weak that, for example, Modern Healthcare, the industry's
leading journal, has repeatedly demanded the resignation of Dennis
O'Leary, the head of JCAHO, the national hospital-accreditation group
whose governance is dominated by providers. Notes the editorial:
``O'Leary and JCAHO have . . . repeatedly failed at initiatives
designed to judge hospitals and other healthcare providers based on
their performance--how well they take care of sick people. The projects
always are announced with much fanfare and heady names such as ``Agenda
for Change.'' And they're invariably scrapped, watered down or
delayed.''\45\ An evaluation headed by University of Michigan Professor
John Gifford found no correlation between JCAHO scores and outcome
measures, including mortality and complications, for the hospitals
studied.\46\
---------------------------------------------------------------------------
\45\ ``Another Provider Files Antitrust Suit,'' Modern Healthcare,
December 10, 2001, p. 34.
\46\ ``Good Scores Don't Equal Good Care,'' Modern Healthcare,
January 14, 2002, p. 7.
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Organizations conducting voluntary efforts also frequently dilute
their reports to consumers. In Cleveland, for example, the data
revealed to consumers were not nearly as precise as those provided to
payers. The hospitals agreed not to use them in advertising. As one
Cleveland Clinic official noted, ``They could confuse the public.''\47\
Finally, industry--focused efforts rarely reflect the diverse
perspectives of all the participants in the system; but these can
differ significantly. Consider, for example, the evaluation of
Washington, D.C. HMOs that found Kaiser rated near the top by
employers, in the middle by users, and near the bottom by doctors.\48\
---------------------------------------------------------------------------
\47\ ``Operation that Rated Hospitals Was A Success, but the
Patient Died,'' The Wall Street Journal, August 23, 1999, p. A1.
\48\ Watson Wyatt, ``Purchasing Value in Health Care'' (Bethesda,
Maryland: Watson Wyatt, 1997).
---------------------------------------------------------------------------
One of the most important reasons for the absence of provider
performance ratings may lie with the providers' considerable political
power. ``We don't do anything to make providers mad,'' explained an
official about his state's ban on publishing such data.\49\ Similarly,
the executive director of a Cleveland business council felt that the
Cleveland Clinic opted out of an areawide process of measuring hospital
outcomes because ``they could. They do have a third of the hospitals in
Northeast Ohio.''\50\
---------------------------------------------------------------------------
\49\ ``Data Needs for Measuring Competition and Assessing Its
Impact,'' News & Progress (Washington, DC: Health Care Financing &
Organization, July 1999), p. 3.
\50\ Regina McEnery and Diane Golov, ``Project's Collapse Shuts Off
Information on Hospital Care,'' The Plain Dealer, August 23, 1999, p.
1A.
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Information as a Public Good
In any consumer-driven system, the government typically plays three
crucial roles: overseeing the solvency and integrity of the
participants; providing transparency in the market; and subsidizing the
purchase of needed goods or services for those who cannot afford them.
These are critical for consumer-driven health care.
But the role of government in providing accountability is
surprisingly controversial when it comes to health care. Many complain
about the absence of good consumer quality information. For example, in
a poll performed by a Democratic think tank, nearly 60% of the
respondents agreed with a statement that ``health care companies and
doctors should disclose how well they perform so consumers can judge
where to spend their money.''\51\ The wired generation is even more
demanding--80% of respondents noted that the absence of quality
information was the most negative aspect of ehealth plans.\52\ But not
all agree on the role of government in providing it.\53\
---------------------------------------------------------------------------
\51\ ``Health Care Is Back,'' Blueprint, Spring 2000, p. 71.
\52\ Bradford J. Holmes, ``HMOs' eHealth Plan Threat,''
Techstrategy Report, Cambridge, MA: Forrester Research, January 2001,
Figure 2.
\53\ No less an observer than the Nobel laureate economist George
Stigler argued against a governmental role in providing data. In his
view, the truth will out in markets as competitors expose each others'
weaknesses or market analysts dig it up. (See, for example, Stiglitz,
J.E., Jaramillo-Vallejo, J., and Park, Y.C. ``The Role of the State in
Financial Markets.'' World Bank Research Observer, 1993, pp. 16-61;
Dutt, J. ``Unlikely Adversaries: Top Regulators in Dispute over Plan to
Change Accounting Rule on Derivatives.'' Washington Post, Aug. 24,
1997, p. H1.) Stigler's analyses concluded that government regulation
of information disclosure was not essential to the efficiency of
markets. In this view, if information is beneficial to the firm, its
managers will advertise it; if it is detrimental, the firm's
competitors will trumpet it; and if it exists, whether good or bad,
analysts will ferret it out. No need for government. (John Carey, The
Rise of the Accounting Profession (New York: American Institute of
Certified Public Accountants, 1970), pp. 1-16.)
As is usual with works of such significance, Stigler's analysis and
similar research were widely tested. (Joe Seligman, The Transformation
of Wall Street (Boston: Houghton-Mifflin, 1982), p. 41; Regina E.
Herzlinger, ``Finding the `Truth' About Managed Care,'' Journal of
Health Politics, Policy, and Law, 24 (5) (October 1999), pp. 1077-
1093.) Yet, the abundant, intelligent empirical research examining the
necessity of government action to ensure an efficient market has not
yet settled the question.
---------------------------------------------------------------------------
The debate must fundamentally be resolved on a theoretical basis:
government's presence in the information market relies on the fact that
information disclosure is a public good in the sense that it enables
free riders. Because disclosers cannot charge all users for the
benefits they derive, they lack incentives for full disclosure. Absent
government regulation, the quantity of publicly available information
may be undersupplied or issued selectively, favoring some recipients
and excluding others.\54\
---------------------------------------------------------------------------
\54\ Eventually, of course, all users could share the same
information, but some would gain temporal advantage because they
learned special information earlier than others; however temporary,
this advantage violates our national notions of equity.
---------------------------------------------------------------------------
The Promise of Government: The SEC
Every interest group that has been required to measure its outcomes
has likely claimed that its work is so diffuse that its impact cannot
be measured. Such claims delayed the measurement of the performance of
business enterprises until the mid-1930s. The delay is surprising
because accounting, the measurement tool of business performance, has
existed since the middle of the fifteenth century when double-entry
bookkeeping was first codified.\55\ But, executives' claims that
accounting could not accurately measure company performance and that
the cost of measurement exceeded its benefits prevented the widespread
measurement of the economic performance of the firms they led.
---------------------------------------------------------------------------
\55\ Michael Chatfield, A History of Accounting Thought
(Huntington, NY: Robert E. Krieger Publishing, 1997), p. 32.
---------------------------------------------------------------------------
U.S. President Franklin Delano Roosevelt (FDR) finally forced their
hand when he promulgated the laws that created the U.S. Securities and
Exchange Commission (SEC). Bucking powerful business opposition,
inconsistent state involvement, and his own advisors' counsel that he
grade the firms in the security markets, FDR instead created the SEC to
compel audited disclosure, using generally accepted accounting
principles (GAAP), about the performance of publicly traded firms. The
SEC requires regular compilation of financial statements and their
broad dissemination by publicly-traded firms.\56\
---------------------------------------------------------------------------
\56\ Joel Seligman, The Transformation of Wall Street (Boston:
Houghton-Mifflin, 1982), p. 41.
---------------------------------------------------------------------------
Governmental regulation of securities is nothing new. As early as
1285, King Edward I required licensure of London brokers.\57\ But FDR's
SEC differed from traditional regulation that relied on authorities to
evaluate the worthiness of a security. He opted for sunlight. As he
noted: ``The Federal Government cannot and should not take any action
that might be construed as approving or guaranteeing that . . .
securities are sound. . . .'' Rather, his SEC was a ``truth'' agency to
insure full disclosure of all material facts. In Roosevelt's words,
``It puts the burden of telling the truth on the seller.''\58\
---------------------------------------------------------------------------
\57\ Fred Skousen, op. cit., p. 2.
\58\ Joel Seligman, op. cit., pp. 54-55.
---------------------------------------------------------------------------
As in health care, there was plenty of truth waiting to be told.
Requirements for listing securities on the stock exchange were minimal
and there was no source of generally accepted accounting principles. In
1923, only 25% of the firms traded on the New York Stock Exchange
provided shareholder reports.\59\
---------------------------------------------------------------------------
\59\ Joel Seligman, op. cit., pp. 43-48.
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To put teeth in its mission, the SEC was given the power to enforce
``truth in securities'' and to regulate the trading of securities in
markets through brokers and exchanges. While the SEC requires
disclosure, the promulgators of GAAP have been housed in private,
nonprofit, standard-setting organizations, such as the Financial
Accounting Standards Board (FASB). The successful European Union model
for setting standards in health, safety, environment, and consumer
protection follows a similar public-private structure.\60\
---------------------------------------------------------------------------
\60\ Walter Mattli, ``Global Private Governance for Voluntary
Standards Setting: National Organizational Legacies and International
Institutional Biases,'' Regulatory Policy Program Working Paper RPP-
2001-06, Center for Business and Government, John F. Kennedy School of
Government, Harvard University (May 2001).
---------------------------------------------------------------------------
Like all human endeavors, the SEC is not without faults. The
accounting and governance problems of Enron--a firm that, by 2002, was
the nation's largest bankruptcy--were exacerbated by laxity in SEC
enforcement.\61\ Nevertheless, the transparency created by the SEC
enabled the celebrated broad participation of average Americans in the
securities markets and their legendary efficiency.\62\
---------------------------------------------------------------------------
\61\ Bethany Mclean, ``Why Enron Went Bust,'' Fortune, Vol. 144,
No. 13 (December 24, 2001), pp. 58-68.
\62\ See, for example, Joel Seligman, The Transformation of Wall
Street (Boston: Northeastern University Press, 1995), pp. 561-568.
---------------------------------------------------------------------------
Accounting was not nearly an accurate a measure of performance in
1934 as it is now. And no doubt accounting will become much better
still in the future. That is the way it is with all measuring tools:
they improve with use. In 1687, Newton first measured gravity. By 2000,
physicists could measure the minute energy of a tau-nutrino buried deep
within an atom.\63\ In 1953, Crick and Watson first measured the
structure of DNA. By 2001, biologists could measure the structure of
individual genes.\64\
---------------------------------------------------------------------------
\63\ Bertram Schwarzschild, ``The Tau Neutrino Has Finally Been
Seen,'' Physics Today, Vol. 53, No. 10 (October 2000), pp. 17-19.
\64\ Leslie Robert, ``A History of the Human Genome Project 2001,''
Science, Vol. 291, No. 5507 (February 16, 2001), pp. 1195-1200.
---------------------------------------------------------------------------
So too, with health status measures. Epidemiologists can now create
relatively crude measures of health quality. But, with practice and
patience, they will refine those measures of outcomes and relate them
more accurately to their causal agents.
Private Sector Sources of Health Information
Surprisingly, much of the information that lies at the heart of the
efficiency of the markets wells not from the SEC but from three private
sector groups: the firms, FASB, and accounting profession. The
interaction among these groups promotes fuller consideration of diverse
points of view. Unlike a government agency, they do not sing out of one
hymnal. And their private-sector nature requires the political and
financial backing of supporters for their continued existence. The
predecessors to the FASB collapsed because their GAAP pronouncements
could not find such broad-based supports.
The independent accountants who audit the financial statements are
usually professionals who must pass examinations and fulfill stringent
educational requirements.Many work in one of the large accounting firms
that audited nearly 80% of the publicly traded firms.Accounting firms
may be held legally liable for negligence, fraud, and breach of
contract.
Initially, in abdicating some of its authority to set accounting
standards to the private sector, the SEC recognized the following
advantages:\65\ (1) Practicing accountants were closer to the firms and
thus could more accurately identify emerging issues; (2) private sector
involvement encouraged greater compliance than government mandates; and
(3) the SEC could more readily audit the work of the private sector
information disclosers than its own, thus resolving a conflict of
interest. But the accounting abuses that emerged in 2001 and 2002
caused a shift in this stance. It appeared that the financial
statements of massive firms, such as Enron and Global Crossing, did not
accurately reveal their underlying economic status, despite audits by
leading accounting firms and reviews by the Audit Committee of the
Board of Directors.\66\ In Enron's case, for example, much of the
company's debt was lodged in special-purpose entities that were not
consolidated in the financial statements.
---------------------------------------------------------------------------
\65\ Richard E. Baker, ``Accounting Rule-Making--Still at the
Crossroads,'' Business Horizons, vol. 19, no. 5, October 1976, p. 66.
\66\ Steve Pearlstein, ``The Whole Story?'' The Washington Post,
May 12, 2002, p. H01.
---------------------------------------------------------------------------
Many blamed the structure of the accounting firms for these
debacles, citing the conflict of interest created by their
simultaneously offering lucrative consulting and low-profit auditing
services to their clients. Past SEC attempts to bar accountants from
offering consulting contracts were stymied by the Congress.\67\ This
time around, the SEC relied on its internal rule-making authority to
reclaim some of its powers. In 2002, it introduced rules to prompt
faster, more complete disclosure and to create a new entity to oversee
the accounting professionals.\68\ Similarly, the rule-making Financial
Accounting Standards Board hoped to simplify and streamline its
occasionally complex rules.\69\
---------------------------------------------------------------------------
\67\ ``SEC Chief to Impose `Stringent' Rules on Accountants,'' The
Buffalo News, May 24, 2002, p. A9.
\68\ ``SEC Seeks Reform in Financial Disclosure and Auditor
Oversight,'' Chemical Market Reporter, March 4, 2002, p. 18; Jonathan
D. Glater, ``SEC Proposes a New Board to Oversee Auditors,'' The New
York Times, June 21, 2002, p. C1; Richard Simon & Walter Hamilton,
``Accounting Reform Bill Gets a Boost; Regulation: Senate Panel
Approves Measure That Would Create Oversight Board and the SEC Pushes
Parallel Proposal,'' Los Angeles Times, June 19, 2003, part 3, p. 1;
and John Labate, ``Plan Supports Proposals by SEC Chairman Harvey
Pitt,'' The Financial Times, March 8, 2002, p. 7.
\69\ ``FASB: Rewriting the Book on Bookkeeping,'' BusinessWeek, May
20, 2002, p. 123.
---------------------------------------------------------------------------
The Health Care SEC
The U.S. securities markets have precisely the characteristics that
health care consumers want: (1) prices are fair in the sense that they
reflect all publicly available information; (2) buyers use this
information to reward effective organizations and penalize ineffective
ones; and (3) information and competition continually reduce costs.
If these characteristics were present in health care, they would
achieve an important social goal: They would divert resources from
health insurers and providers that offer a bad value-for-the-money to
those that offer a good one. Poor-value-for-the-money insurers and
providers would shrink or improve. Good-value-for-the-money insurers
and providers would flourish.
Currently, health care consumers have better information about the
price and quality of the jar of tomato sauce they buy than for the
surgeon who will operate on their breast or prostate cancer.
Publication of price and quality data for individual providers, as
measured by generally accepted health care outcome principles and
audited by certified, independent appraisers of such information, will
help ameliorate this problem. Eventually, independent analysts will use
this information to compile readily accessible ratings of providers,
just like Morningstar's excellent system for classifying and rating
mutual funds.
New York State experience illustrates the results when government
requires meaningful health care information. Using his clout, in 1989
New YorkState's commissioner of public health requested data about the
risk-adjusted death rates of open-heart surgeries performed by
different surgeons and hospitals. As a result, by 1992, the state
achieved the lowest risk-adjusted mortality rates in the country.\70\
Physicians and hospital executives with low-performance scores
typically revamped their protocols in response to these data.\71\ Most
studies found that the fears that surgeons would abandon sick patients
to improve their performance ratings to be unfounded: To the contrary,
the severity of illness among New York patients having coronary artery
bypass graft (CABG) surgery increased.\72\ Although one excellent study
concluded that the ratings led to ``a decline in the severity of
illness'' of CABG patients, it cautioned: ``Our results do not imply
that report cards are harmful in general. . . . [R]eport cards could be
constructive if designed in a way to minimize the incentives and
opportunities for provider selection.''\73\
---------------------------------------------------------------------------
\70\ Edward L. Hannan, Albert L. Siu, Dinesh Kumar, and Mark R.
Chassin, ``The Decline in Coronary Artery Bypass Graft Surgery
Mortality in New York State,'' Journal of the American Medical
Association, Vol. 273, No. 3 (1995), pp. 209-213; S.W. Dziuban, ``How a
New York Cardiac Surgery Program Uses Outcome Data,''Annals of Thoracic
Surgery, Vol. 58, No. 6 (1994), pp. 1871-1876.
\71\ Mark R. Chassin, ``Achieving and Sustaining Improved Quality:
Lessons from New York State and Cardiac Surgery,'' Health Affairs, Vol.
21, No. 4 (July/August 2002), pp. 40-51.
\72\ E.D. Peterson, E.R. DeLong, J.G. Jollis, L.H. Mulbaier, and
D.B. Mark, ``The Effect of New York's Bypass Surgery Provider Profiling
on Access to Care and Patient Outcomes in the Elderly,'' Journal of the
American College of Cardiology, 32 (8), October 1998, pp. 993-999.
\73\ David Dranove, Daniel Kessler, Mark McClellan, Mark
Satterthwaite, ``Is More Information Better? The Effects of `Report
Cards' on Health Care Providers,'' National Bureau of Economic
Research, working paper w8697, January 2002.
---------------------------------------------------------------------------
Similar results were obtained in other instances of required
performance disclosure. When Minnesota's state government required all
insurers who served state employees to be evaluated by their enrollees
in a report card, some plans restructured significantly to improve
their quality ratings.\74\ Similarly, the Pennsylvania hospitals whose
performance data were measured and disseminated by a public agency used
the results to change their patient care and governance to a greater
extent than neighboring New Jersey hospitals whose performance data
were not released. The important changes included Board reviews of the
data and reworkings of the patient care procedures.\75\ And all these
results were obtained in the absence of consumer control.
---------------------------------------------------------------------------
\74\ ``Health Plan Report Cards May Influence Insurers More than
Consumers,'' Findings Brief, Health Care Financing & Organization, Vol.
3, No. 3, April 2000.
\75\ J. Margin Bentley and David B. Nash, ``How Pennsylvania
Hospitals Have Responded to Publicly Released Reports on Coronary
Artery Bypass Graft Surgery,'' Journal on Quality Improvement, 24 (1),
January 1998, pp. 49-49.
---------------------------------------------------------------------------
How To Make It Happen
The key to achieving these desirable characteristics in health care
is legislation that replicates these essential elements of the SEC
model:
1. Registration: The SEC requires firms that trade their
securities in interstate markets and all such market-makers to register
with the agency. A corresponding health care agency would oversee the
integrity and require the public disclosure of information for health
insurers and providers, the policies they issue, and the interstate
markets in which such insurance policies and services are sold. It
would be armed with powerful penalties for undercapitalized and
unethical market participants.
2. Private Sector Disclosure and Auditing: The SEC relies heavily
on private sector organizations. The new health care agency would
delegate the powers to derive the principles used to measure the
performance of insurers and providers to an independent, private
nonprofit organization that, like the FASB, represents a broad
constituency. The agency would require auditing of the information by
independent professionals, who would render an opinion of the
information and bear legal liability for failure to disclose fairly and
fully.
3. Private Sector Analysis: The evaluation process is primarily
conducted by private sector analysts, who disseminate their frequently
divergent ratings. To encourage similar private sector health care
analysts, the new agency would require public dissemination of all
health insurance prices, related transaction costs, and the
characteristics of the policies and providers, such as clinical
measures of quality.
Private Sector Sources of Analysis
Will private sector intermediaries emerge to provide the
information that consumers need? Some examples of the entrepreneurial
health care quality information providers who already exist are
described below.
Andy Slavitt is an early-thirties California type and an MBA all-
star, with Wharton and HarvardBusiness School degrees and a spell at
McKinsey's famed Los Angeles health care practice.
Slavitt was propelled by a personal loss into founding a firm that
empowers health care consumers with information. His inspiration came
when a friend's wife turned to Slavitt for help after her husband died
of cancer. She was surrounded by mounds of medical bills, whose bulk
was matched only by their incomprehensibility. Slavitt, the MBA all-
star, was a sensible choice to help her plow through the paper. But
Slavitt, the social activist, was an even better choice. He is as
intense about his societal interests as his business ones. For example,
Slavitt traveled to El Salvador to help build housing in that war-
ravaged country.
These two sides of his being meshed as he organized her medical
bills. On the social side, Slavitt wondered if the bills' lack of
transparency and sheer volume seemed to be designed to take advantage
of a vulnerable, grieving person. On the business side, he was outraged
by charges to an individual that vastly exceeded the charges for the
same services to large groups. And, try as he might, Slavitt could not
link the charges to the actual care received.
If Andy Slavitt, all-star MBA and health care analyst, could not
analyze these questions, who could?
HealthAllies, the firm Slavitt created for uninsured or
underinsured people, helps answer these questions. For one, it empowers
its users by providing information about the prices for medical care
alongside the credentials of those providers. It also offers them
discounts on health care prices similar to those obtained by large
groups. And consumers can obtain prices for bundles of care, rather
than a la carte services. For example, a pregnant woman can obtain a
discounted fee for the entirpe maternity and birth process from her
choice of providers through HealthAllies. Last, the website provides
links to information about providers.
Had the HealthAllies site been available to the wife of Slavitt's
friend, she would have received one bill for the bundle of care given
to her husband, rather than hundreds of individual ones; she could have
easily compared her price to those charged by other providers, and she
could have obtained the same discounted rate as large group buyers.
Consider the following illustrative case:
A woman who needs a hip transplant inquires about the charge at
an academic medical center. She is quoted a price of $35,000. (In
hotels, this kind of price is known as the ``rack rate'' quoted to
individual customers who lack the bargaining power of a group.) She
then logs on the HealthAllies site to search for a better hip-
transplant price. In response to her specifications about the type of
providers she wants (for example: a surgeon who has performed more than
75 hip transplants and who operates in an academic medical center that
has performed more than 500 hip transplants last year and that is
located within 30 miles of her home), she chooses a hospital that
quotes a price of $25,000. Ironically, it is the same hospital that
initially quoted the $35,000 price.
To insure that its interests are squarely lined up with the user,
HealthAllies' revenues are derived from savings it creates for the
consumers and their em-
ployer.\76\
---------------------------------------------------------------------------
\76\ Michael Sherman and Regina E. Herzlinger, ``Health Allies,''
Harvard Business School Case No. 302-019, Rev. September 2002 (Boston,
Mass.: Harvard Business School Publishing, 2001).
---------------------------------------------------------------------------
In 2003, United Healthcare purchased HealthAllies. It now offers
essential health coverage policies at prices ranging from $500 to
$3,000 to the uninsured in the costly New York market.
Ingenix, another subsidiary of United, has total cost estimators
that represent the average annual treatment cost for chronic diseases
and conditions, as well as length-of-episode treatment for acute
diseases and conditions with drill down capability, by zip code. The
cost ranges represent aggregated and scrubbed billed charges as they
appear on claim forms submitted by the health care professional or
facility, as well as net of reductions for invalid or ineligible
charges, such as non-covered consumers, services, etc. Costs are
displayed as point estimates using relative and actual charge data,
along with allowed charges. In-Network averages are calculated at the
50th percentile of allowed charges and Out-of-Network averages are
calculated at the 80th percentile of billed charges. Ranges indicate
the inherent variability in health-care costs.\77\ Acton,
Massachusetts-based HealthShare has similar data for 30 health plans.
---------------------------------------------------------------------------
\77\ Ingenix, communication to author, June 18, 2004.
---------------------------------------------------------------------------
As of yet, firms do not offer their data to consumers because of
the high cost of customer-acquisition. But a consumer-driven health
care would open up the entire, large U.S. insurance market to them. In
the United Kingdom, similar services are already marketed to self-pay
patients who wish to avoid the NHS waiting lists. They include
HealthCare Navigator and Medical Care Direct, firms similar to
HealthAllies.\78\
---------------------------------------------------------------------------
\78\ ``The Good Hospital Guide,'' Sunday Times, April 6, 2003 and
``Private, I?'', accessed June 20, 2004.
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Other Health Care Information Services
Many other sources of information exist. Indeed, clinical health
information sources are so easy to find that they are virtually
unavoidable. They appear regularly on radio and television, typically
in patronizing lectures from your local blank-eyed, blow-dried hair,
reading-off-the-Teleprompter ``Health Beat'' type of announcers (ugh);
in newspaper features (good); and in magazines devoted solely to the
topic (better still). For example, Prevention sold more than 3 million
copies a month in outlets such as the check-out area in a supermarket
in 2001.\79\ Many authoritative health care books are available as
well, including best sellers such as Mayo Clinic Family Health
Book.\80\
---------------------------------------------------------------------------
\79\ Audit Bureau of Circulation (ABC), published on AdAge.com,
January 17, 2003.
\80\ David E. Larson, Mayo Clinic Family Health Book (New York:
William Morrow, 1996).
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The web is a major source of health information. It not only
enables mass-customization of information, but also facilitates
consumers' feedback about the quality of their health care experiences.
This kind of information is much valued. For example, a KPMG survey of
almost 15,000 employees of the Fortune 1000 revealed that they placed
the highest trust in information received from friends and family.\81\
---------------------------------------------------------------------------
\81\ ``A New Direction for Employer-Based Health Benefits,'' KPMG,
LLP, publication 99-12-05, November 1999.
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Nevertheless, substantial market needs remain largely unserved. A
2000 survey revealed that the information that consumers sought most
was largely unavailable.
While most of the available information focuses on diseases, over 50%
of respondents wanted additional information: evaluations of doctors,
hospitals, and insurers, e-mail reminders, and personal medical
reports.\82\ A 2002 review of 40 physician directory websites found
many incomplete, inaccurate, and out-of-date.\83\
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\82\ Scott Reents, Impact of the Internet on the Doctor-Patient
Relationship: The Rise of the Internet Health Consumer (New York: Cyber
Dialogue, 1999), p. 5.
\83\ The Commonwealth Fund, ``Accessing Physician Information on
the Internet'' (New York: Author, January 2002).
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A number of web sites serve the general ``rating'' market. For
example, consumers can post their reviews of products and retailers on
Epinions.com, BizRate.com, and ConsumerReview.com. There are even
professional raters of the raters. For example, a New York Times
article critically evaluated the sites that rated cars, including the
web site of the Kelley Blue Book, lycos.com Auto Section, and the
ultimate winner of that evaluation, the venerable
consumerreports.org.\84\ The felicitously named Quackwatch.com is among
those which perform this review function for health care. Formed by a
retired psychiatrist, it features more than 100 doctors on its board.
The organization cooperates with the National Council Against Health
Fraud and Consumer Reports.\85\
---------------------------------------------------------------------------
\84\ Michelle Slatalla, ``Turning the Tables to Rate the Raters,''
The New York Times, March 23, 2000, p. D4.
\85\ ``Quack Patrol At Your Service,'' Los Angeles Times, March 23,
1998, p. S1.
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Nevertheless, good sources for health care information are hard to
find. As the old blues song noted of men, you always get the other
kind.\86\ Sure, plenty of data are available; but absent requirements
to disclose it, information about the quality of health care providers,
which is what people want and need to make intelligent decisions,
remains notable for its absence.
---------------------------------------------------------------------------
\86\ Dagmara Scalise, ``Who's Rating You?'' Hospitals & Health
Networks, December 2001,
pp. 36-40.
---------------------------------------------------------------------------
How Not to Make It Happen
Unfortunately, many well-intended proposals undermine one or more
of the essential characteristics of the SEC. All-too-often, they
require that the health care regulator(s) evaluate and micromanage
health insurers and providers and the markets in which they
operate.\87\ One proposal, for example, blurs the distinctions between
information and evaluation, between oversight and micro-management: Its
FASB analogue evaluates quality and its SEC analogue evaluates health
care benefits and coverage problems. But the real FASB does not assess
the quality of the output produced by corporations, nor does the real
SEC evaluate whether the markets for the products that corporations
sell yield effective, efficient outputs. Instead, they ensure the
provision of reliable, useful information that private sector
intermediaries analyze and present to other investors.
---------------------------------------------------------------------------
\87\ See, for example, ``Bush Is Said to Be Set to Back Patient's
Bill,'' New York Times, June 7, 2002, p. A16.
---------------------------------------------------------------------------
Other proposals create conflict-of-interest by requiring that
existing governmental purchasers measure quality. In recent testimony,
for example, the head of AHRQ, the HHS agency charged with researching
quality, presented a bone-chilling description of Federal government
efforts not only to measure but also to design the information highway
on which quality data would travel. Everybody knows that Medicare's
actions are soon followed by the other insurers. Her description thus
amounted to allowing the single largest payer to dictate the components
of health care quality and the IT system that transmits it. No
competition, lots of politics--is this anyway to run a market?\88\
---------------------------------------------------------------------------
\88\ Carolyn M. Clancy, ``AHRQ: A Tradition of Evidence,'' Health
Management Technology,
Vol. 24 (8), August 2003, pp. 26-31; Patrick S. Romano, Jeffrey J.
Geppert, Sheryl Davies,
Marlene R. Miller, et al., ``A National Profile of Patient Safety in
U.S. Hospitals,'' Health Affairs, Vol. 22 (2), March/April 2003, pp.
154-163; and Barbara Morris, ``AHRQ's New Prevention Quality
Indicators,'' International Journal of Health Care Quality Assurance,
Vol. 15 (2/3), 2002: 1-2.
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The much-abused U.S. uninsured health care consumer needs, and
wants, quality health care at an affordable price. We know that the SEC
model works in providing such information to investors. We just need to
take advantage of it in a consumer-driven health care system.
Chairman HOUGHTON. Thank you very much, Dr. Herzlinger. I
would like to yield to Mr. Thomas.
Chairman THOMAS. Thank you very much, Mr. Chairman. Dr.
Kane's statement is just classic, that it is just as charitable
to charge a rich man as a poor man, which may be the theme of
why we are looking at pricing under the 501(c) section of the
Code.
Ms. Davis indicated that she could quantifiably
differentiate between a not-for-profit and for-profit in terms
of charitable activities. I am going to ask each of you if you
believe you have seen sufficient data in which you can create a
clear separation between not-for-profit and for-profit
hospitals broken along a charity of a community service line.
If you don't have that information, that is fine. I just need
to know if everyone agrees with that particular position based
upon the data and the evidence that you are familiar with. Dr.
Kane, yes or no?
Ms. KANE. Yes, I have seen a difference. Generally the
nonprofits do provide more free care, although the
uncompensated care totals can be quite similar. The problem
with nonprofit, it is hard to generalize about them. I think
there are quite a few more of them, and so you will see a wider
range in behavior.
Chairman THOMAS. I agree, and I have additional questions
to follow up on that. Dr. Ginsburg, yes or no, in terms of a
differentiation, in terms of charitable or community service
between not-for-profits and for-profits?
Mr. GINSBURG. Yes. My recollection of the research
literature is similar to Dr. Kane's, that we do see charitable
care by for-profit hospitals, but we see more by nonprofits.
Chairman THOMAS. Mr. Lee.
Mr. LEE. Defer to my research experts up here. It is not an
area that we have looked at closely.
Chairman THOMAS. That is fine. Dr. Herzlinger?
Ms. HERZLINGER. I think the question is: do nonprofits give
enough charitable care----
Chairman THOMAS. That is my next question.
Ms. HERZLINGER. To render their tax exempt----
Chairman THOMAS. That is exactly the next question.----
Ms. HERZLINGER. I think that is--Ms. Davis is quite
correct. Nonprofit hospitals do give more charitable care, but
of course they should. They are tax exempt. We give them major
tax subsidies to provide charitable care. We don't give those
to for-profit hospitals.
Chairman THOMAS. Doctor, thank you for the bridge. That is
exactly the question that I now need to ask, because all of you
felt fairly comfortable, and one of you deferred to the others
on the information that is available, that there is a
difference between the not-for-profits and the for-profits.
My next question, obviously, then is: do you think it is
measurable enough to deal with the significant difference in
the way not-for-profits and for-profits are handled under the
Tax Code? I will start again with Dr. Kane. Yes, no, or not
enough information to make a decision?
Ms. KANE. Could you rephrase your question, please?
Chairman THOMAS. If in fact we all agree that not-for-
profits do carry out charitable or community services that give
us an ability to differentiate, perhaps not across the board,
but substantially between the not-for-profit hospital group and
the for-profit hospital group. Do you believe we have
sufficient information, or are you comfortable in saying, yes,
you can differentiate between the two, and the not-for-profit
status of the 501(c) tax-preferred status of the not-for-
profits is therefore appropriate, given the difference in the
charitable services of the not-for-profits versus the for-
profits?
Ms. KANE. You don't have enough information. First of all,
I don't think you can even tell what the value of tax-exempt
status is for a lot of these hospitals, and then again, the
transparency issue, the lack of reporting and information,
makes it very difficult right now to tell. In the research I
have done, most nonprofit hospitals do not earn the value of
their tax exemption through the provision of charity care. They
do provide other community benefits. It is differential. It
varies a lot across the population. We do not know how to
properly value some of those services, so we don't have the
information.
Chairman THOMAS. Dr. Ginsburg.
Mr. GINSBURG. I don't have anything to add to what Dr. Kane
said.
Chairman THOMAS. Mr. Lee.
Mr. LEE. I don't have an answer relative to the specific
qualification, but I would add one other element to your
question if I could, Mr. Chairman, which is to consider not
just the relative contribution to charity care, but also how
nonprofit hospitals play in the market as they too, may act as
over-consolidated entities which look very similar to for-
profit entities, and that is another element to consider.
Chairman THOMAS. I can assure the gentlemen we are going to
get there.
Mr. LEE. Okay.
[Laughter.]
Chairman THOMAS. Ms. Davis.
Ms. DAVIS. There is evidence that charity care is being
increasingly concentrated in fewer and fewer hospitals, not all
of them do it. Certainly there is evidence on other community
benefits that are provided in the form of standby capacity
like----
Chairman THOMAS. The focus of the question was do you have
enough information to say you feel comfortable that the
difference between the tax treatment of not-for-profits and
for-profits is justified based upon the charity or community
work they do?
Ms. DAVIS. We do have quantitative estimates of community
benefits for medical education, standby capacity and charity
care.
Chairman THOMAS. In your opinion, is it enough to justify
the tax difference?
Ms. DAVIS. Yes, on the whole.
Chairman THOMAS. Okay doctor, I understand where you are.
Very quickly. On page 6 of your testimony, Dr. Ginsburg, I do
have to fundamentally disagree with you, where you say that
over the long haul advancements in medical technology are far
and away the biggest factor in rising costs.
One of the difficulties I have had is assuming that somehow
medical technology is always a cost driver and not a cost
saver. I really believe the problem is that you are introducing
medical technology in fundamentally a cost plus structure. In a
cost plus structure, medical technology will always cost more,
but if you deal with a comprehensive payment in which you have
accepted responsibility and your profit is what is left over,
that cost structure is a significant driver to use medical
technology to save money, i.e., increase your profit, and so I
am very concerned that people automatically dismiss medical
technology as though medical technology itself was the problem.
It is not.
In my opinion, it is the payment structure in which medical
technology is introduced. I just wanted to clarify that because
people so often say medical technology is the reason costs are
going up. No, it isn't. It is the structure and the mechanism
by which we pay and utilize medical technology.
Mr. GINSBURG. I would differentiate between the capitated
environment which has the incentives to use only valuable
technology, and the fee-for-service environment, which
unfortunately is our dominant payment mechanism, which tends to
accept almost all technology.
Chairman THOMAS. Doctor, I accept that correction, but your
statement is a stand-alone flat-out statement. That is all, and
I just said that I would have some concern with that statement
as a stand-alone statement.
Mr. GINSBURG. I think the other point I want to make is
that there is so much dynamic in medical care, so that the
services that people are getting over time are changing. People
are getting more medical care, much of it valuable, and this is
the key reason why spending per person increases.
Chairman THOMAS. I agree. Increased usage isn't necessarily
medical technology. It is awareness, availability, education.
All of those are factors that have dollar values to them. I was
just focusing on the medical technology statement that you
made.
I also have to say that your statement, disclosed prices
will lead to higher prices, is about the most anti-market
statement I have heard in a long, long time, because what
hospitals receive and what third-party payers, the primary
function of paying, is a negotiated price. When you talk about
disclosing prices, those are mainly out there to make sure you
get more payments from the government, not that they are any
real standard of what the prices are. In attempting to
determine the initial statement that I asked, whether or not
there was a differential that could be seen and value gotten
from the tax treatment, prices are fundamental to what we need
to focus on. Let me ask only one additional question. Thank
you, Mr. Chairman, for the time. Mr. Lee, when you looked at
the differential in quality and cost on a quintile or a
quartile structure, did you break it down between not-for-
profit and for-profit as well as the structure that you
outlined?
Mr. LEE. We have not done a full review of that, but we
have that information, and right now when you look at this
quartile mix, it is really sort of a scatter all across the map
of where hospitals fall on efficiency and quality. I will look
at it more closely and follow up with you, Mr. Chairman. My
recollection that it is a mix among nonprofit and for-profit,
where they are scattered amongst this mix of efficiency and
quality.
Chairman THOMAS. Mr. Chairman, as we examine the question,
we shouldn't just focus on community or charitable care as it
may be defined. It seems to me that given the significant tax
break that not-for-profits provide, we should see to a certain
degree discernible differences among a number of axes that you
would examine the materials, and I would submit that that is
not the case now, or we don't have enough evidence to make that
decision, and I would hope people don't believe as a general
position that transparency and knowledge to consumers is a
dangerous thing. It is the most important thing to getting some
rational payment and quality structure in this area as far as I
am concerned. Thank you very much, Mr. Chairman.
Chairman HOUGHTON. Again, I turn to Mr. Pomeroy. Mr.
Thomas, I thought we would have a second round with the
exception of you, because you had two positions here. Is that
all right with you?
Chairman THOMAS. I am under the complete control of the
Chairman.
[Laughter.]
Chairman HOUGHTON. Okay, Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. Well, we have a rich
stew of health policy ideas bubbling in this hearing, not
really leading any direction, but we got a rich stew on our
hands. I guess to the extent it relates to this issue of not-
for-profit and their role in providing charity care, the panel
is in agreement that there is a distinction in the market
practices of not-for-profit versus proprietary institutions.
There also seems to be agreement that not-for-profit, the basis
for not-for-profit status as a hospital, ought to be considered
beyond the issue of charitable care or uncompensated care, role
in the community, community service, or other things
appropriately considered. Any objection with those kind of
general conclusions so far?
[No response.]
All right. I think a third point of consensus that I
understood is more data to the public in understandable ways
involving cost, but very importantly, also involving quality
would be of great value.
[No response.]
Consensus again. All right. Well, let us kind of wade into
areas where we might have some differences of opinion. Ms.
Herzlinger, first of all, congratulations on raising a fine
son, and our full support is with Captain Herzlinger and his
important responsibilities on behalf of all of us in Iraq
today.
Ms. HERZLINGER. Thank you.
Mr. POMEROY. It seems to me that you place a very important
role on market dynamics. If we could get market dynamics into
health care providing, it would be a big step forward. Do you
believe abolishing employer-based health insurance for some
other kind of comprehensive coverage is then a step in that
direction?
Ms. HERZLINGER. I think it is very important that people
have access to money that enables them to buy health insurance.
Right now that money comes from employers, but it is really
paid by employees. They just get paid in the form of health
insurance rather than getting paid in the form of salaries.
Mr. POMEROY. Although there are some marketplace dynamics
that captures. I mean distribution, discounts.
Ms. HERZLINGER. Perhaps. Although if the distribution were
so powerful we would have our employers buying our cars for us,
they would buy our food for us, they would buy our housing for
us.
Mr. POMEROY. I am not sure of this car deal. I mean I kind
of think, I like my car, Ford Escort, runs fine, but I think
quite differently about health.
Ms. HERZLINGER. Yes, but that is----
Mr. POMEROY. I buy a cheap car because it gets me around.
When it comes to my health, I don't want cheap. I want good.
Ms. HERZLINGER. You want value for the money.
Mr. POMEROY. I think that this analogy just didn't quite go
all the way, but I was trying to get to what you imagine as a
perfect coverage scheme.
Ms. HERZLINGER. Correct.
Mr. POMEROY. Would it be government provided?
Ms. HERZLINGER. My point was, Congressman, that the idea
that big is beautiful, that big buyers create efficiencies in
the market. If that were so, then all consumer goods would be
purchased through big buyers rather than through consumers.
Yet, most consumer goods are purchased, you and I buy our own
clothes, we buy our own house, we buy our own food. We buy many
things for ourselves, and we get good values for the money.
Mr. POMEROY. This is an interesting discussion in
economics. I don't quite understand its application to what we
have before us as a point of inquiry.
Ms. HERZLINGER. Well, you----
Mr. POMEROY. I really don't have time, unfortunately, to
ferret it all out, because there is a couple things I want to
get to beyond that. Probably, Dr. Kane. It seems like our
pricing, it has had an evolution. Hospitals are, from the
beginning of time, I suppose, they get paid by some, not for
others, got to provide care for all. So, over time they
developed a pricing way of making sure they recovered enough
from those who paid to cover those who didn't pay, and in the
era that we are in, be it Medicare on one hand or third-party
payers on the other, they have been pretty effective at
ferreting out where the cross-subsidies are for those not
paying, and they don't pay for them anymore. They pay cost, not
this cost plus a subsidy for those not paying and at the end of
the line is the hospital, therefore, as you point out, charging
the private uninsured more, because there is no discounts
attached, than the others now pay.
However, as this has evolved where those with coverage used
to pay more to cover those without coverage, now the uninsured
are billed more than those with coverage. The difference for a
hospital is that they are very unlikely to recover from those
without coverage. So, although they are billed more, they are
not paid more from this group; is that correct?
Ms. KANE. I think the average amount you recover from your
people who would classify as uncompensated care is around 20
percent of cost, and that is the hospital's side of the
experience. If you are a medical debtor, you have a very
different experience even if you don't pay your full bill. You
still can get harassed. You can still lose your house. You can
still have your wages garnished. You can still be afraid to go
back into the health care system for the next round. So, even
though they don't pay their full costs, most of those who are
eligible for medical bad debt or free care don't pay their full
cost, they are still, particularly the bad debtors,
experiencing financial angst.
Mr. POMEROY. Absolutely. In North Dakota, where I am from,
I mean it is our leading cause of bankruptcies among farmers.
It is a big deal. I will look forward to the second round, Mr.
Chairman. So, much more to cover.
Chairman HOUGHTON. Thank you very much. I would like to ask
a question of Dr. Ginsburg. I think you mentioned two things,
one, using the insurers more to determine the pricing strategy,
and also you talked about the hospital networks. Do you want to
elaborate on those two things?
Mr. GINSBURG. Yes. I think one of the most important
innovations associated with managed care has been in
purchasing, in a sense by developing a network of providers who
have come to an agreement with the insurer about rates. This is
a very effective mechanism for obtaining a lower price for the
policy holders, and probably a lot better than they could do on
their own even if they had a lot more price information than
they do.
Chairman HOUGHTON. Any more?
Mr. GINSBURG. I would say that the--obviously the----
Chairman HOUGHTON. You don't have to go on. That is fine.
Mr. GINSBURG. Well, let me say that the one other point is
that the network tool starts breaking down to the degree that
consumers or employers demand that all hospitals be in the
network, then that removes the leverage that the health plan
would have with the hospital, and that issue is what the tiered
network is trying to respond to.
Chairman HOUGHTON. All right. Mr. Stark, would you like to
inquire?
Mr. STARK. Thank you, Mr. Chairman. Dr. Kane, in your
review of foregone taxes, I guess, are you taking into account
only Federal income taxes, or do you take into account real
estate taxes paid locally, or forgiven locally?
Ms. KANE. The study I did it about, using '95 data, so it
is old, was property tax, sales tax, State income tax, and
Federal income tax, not including the value of tax exemption,
the value of donations, the overall value of research grants
and other tax-exempt benefits that come from being a
charitable, the market value of the reputation of being
charitable, none of that is in there, just the quantifiable
numeric values.
Mr. STARK. I am just guessing here, but were the real
estate and sales taxes the largest?
Ms. KANE. Yes. The real estate was the largest.
Mr. STARK. By far?
Ms. KANE. By far, yes.
Mr. STARK. So, that in effect, in the community, if you let
the Federal income tax go away, which I don't think is very
significant, if the local community, for example, were to apply
real estate taxes to the institution, and then give them a
voucher for every local resident that they treated who was
indigent, say, and if they got enough vouchers, they could pay
their real estate taxes. We would have a little bit more
accurate way to measure what we in our respective communities
were getting out of these hospitals, would it not?
Ms. KANE. It would help to be able to at least quantify the
value of the real estate taxes. I just want to point out that
when local tax authorities do challenge a hospital's tax
exemption, as in Pennsylvania, what they ask for instead of
vouchers for free care, is they ask for dollars to support
highways and schools, so it doesn't get translated back into
health care.
Mr. STARK. Okay. I suppose that happens with all of our
real estate taxes, and squeaky wheel theory that I am sure you
all teach in your various Ph.D. courses. Mr. Lee, are you
acquainted with the Maryland Hospital Plan at all?
Mr. LEE. I am not sure what you are referring to, sir.
Mr. STARK. Well, Maryland has, I believe now, a unique
system for reimbursing hospitals that I think would put many of
your fears or your concerns to rest. Free advice, it is worth
what you pay for it. We did have the California Hospital
Association Board of trustees here to review what they do in
Maryland. It probably would help California, but it is
something you might want to take a look at just to get an idea
of how some of the concerns that you have might be addressed. I
guess this is just in the way of disclosure here, but do any of
you have either a financial interest in, or a large consulting
contract with any for-profit plans, any large ownership,
contractual--you sit on any boards? None of you?
[No response.]
You are all pure as the driven snow. Good.
[Laughter.]
Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you very much. Mrs. Johnson, would
you like to inquire?
Mrs. JOHNSON. Just briefly, what do you know about another
aspect of the issue of charity care and nonprofits? One of the
key differences between a nonprofit and a for-profit is that
the for-profit is more agile and can simply close up and move
out if the charity care is overwhelming their bottom line. We
have some indication, at least I have seen some evidence that
for-profits are doing better in part because they have rebuilt
hospitals in the suburbs and left the inner cities.
I would guess that part of the reason they have done that
was because of the overwhelming concentration of charity care
in the inner cities, though I don't know that. What do you know
about this subject? Are mergers, are for-profits moving to
avoid high volumes of charity care and leaving for-profits with
greater charity responsibilities? Anyone of you who would like
to respond that.
Mr. GINSBURG. Well, actually, I could say from our visits
to communities around the country, we see both for-profit and
nonprofit hospitals focusing their expansions in suburbs where
there are large numbers of privately insured patients. It seems
as though there are market incentives out there, and they are
being responded to by both for-profit and nonprofit hospitals
in many cases.
Mrs. JOHNSON. With no differentiation? There is no
predominance of one versus another in their movement?
Mr. GINSBURG. Well, I am sure there is a differentiation.
In a sense, I think the shareholders of a for-profit company
wouldn't forgive them if they located new hospitals in areas
where most of the people were uninsured. Some nonprofit
hospitals that have good assets have that option of focusing
more on their mission to provide care to the uninsured and
other community services.
Mrs. JOHNSON. Anyone else? Ms. Davis?
Ms. DAVIS. If you look at the major provider in inner
cities, those are either academic health centers or public
hospitals. Historically, that has been the case, and they are
the ones that wind up with large proportions of uninsured
patients, large proportions of Medicaid patients. They are the
dominant provider in those communities.
Mrs. JOHNSON. Anyone else care to comment? Yes, Dr.
Herzlinger?
Ms. HERZLINGER. There is an interesting example of the
hospital system in Milwaukee, a nonprofit hospital system which
is the main provider of charity care in the inner city. It has
formed a for-profit joint venture with its cardiologists to
open a heart hospital in the suburbs. The cardiologists control
the majority share, so they are, as you so aptly put it, nimble
and responsive to the market. The hospital owns the minority--
and the rest of the community, the minority share, and the
hospital uses--the nonprofit hospital uses the profits from its
for-profit venture to subsidize charity care in the inner city.
I think it is an important and an instructive example.
Mrs. JOHNSON. Thank you very much. Dr. Ginsburg, just one
comment on your technology issue. You know, the current payment
system rewards expensive technology for diagnosis or treatment.
It does not reward systemic technology that would reduce
overhead costs or improve quality or eliminate duplicate care.
So, I think right now we see technology as a big cost driver,
but it is because the system is selecting the most expensive
technology, and the technology most easily subject to overuse.
Mr. GINSBURG. That is right, and I think we have a problem
just as far as medical services of inadvertently overpaying for
some services, usually the newer ones where there are still
productivity increases and underpaying the others. When it
comes to things like information technology, which I believe
has enormous potential to improve care and quality, often the
business case is negative, that because of the fee-for-service
payment system, often what hospitals or physician practices can
do to avoid complications and errors hurt them financially
rather than reward them.
Mrs. JOHNSON. Thank you, Mr. Chairman, for your courtesy.
Chairman HOUGHTON. Thanks very much, Mrs. Johnson. Mr.
Kleczka?
Mr. KLECZKA. Thank you, Mr. Chairman.
Ms. Herzlinger, I happen to represent Milwaukee.
Ms. HERZLINGER. I know that.
Mr. KLECZKA. I think your analysis of what is going on with
the boutique heart hospitals is not really accurate. In fact,
since they are investor owned, there is not that much coming
back to the hospital. It is going to the physicians who are the
owners in part of the specialty hospital.
I should point out that we have two in Milwaukee, and I do
not think it is a model to brag about for a profit hospital
care, because what they are doing is not only from the
nonprofits but also the for-profit hospitals, they are taking
or cherrypicking not only the patients, but they are also
taking out of these hospitals that provide charity care one of
the big profit centers, and that is the heart.
I am happy to relate to you that both are doing very poorly
in Milwaukee, and, in fact, they are having a problem getting
patients and are today they are running specials. You can get a
Magnetic Resonance Imagery (MRI) for $49.95. So, let me just
say for those of you who shop at Kmart, come to Milwaukee and,
even though you do not need one, we can get you a real cheap
MRI for $49.95. So, you all come down, hear?
[Laughter.]
The problem I am having with this hearing is that we need
this to find out more information on what is going on, and I
guess that is fine, if the Committee were consistent on that.
Know full well that last week we passed a tax bill which
contained a $9 billion tobacco buyout for the tobacco farmers
of the country, and this Committee never met and had a hearing
on it. The full Committee never had a hearing on it, so we
passed this blindly with no input from the public and it went
through Congress--it went through the House, anyway, by a vast
margin.
Today, we read in the Washington Post that the bulk of that
$9 billion is going to go to the big, big, big tobacco
producers, and the Ma-and-Pa farmer who has 10 acres or so of
tobacco, they are going to get $1,000 a year. For the Chairman
to come here and say, gosh, we have to do this, the Committee
is so knowledgeable, we were not last week when we took $9
billion of your money and just dumped it down the ashtray.
I have a real problem, Mr. Chairman, with equating health
care with buying a car, because when I bought my Jeep, I could
kick the tires, but when I went for my colonoscopy last week, I
couldn't kick my colon. I had to have someone who is an expert
in that to do that, Dr. Herzlinger, so when you say that we
have to provide the system in the country for health care
consumers to get things cheaper, well, we have that for
consumer goods. I can go buy a Digital Video Disc (DVD) for
$39.95, pretty cheap, but where am I buying it from? I have to
go to Kmart for that, who buys DVDs by the zillions from China
and sells them cheap. However, if I go down to my local
electronics store two blocks away from home, I am going to have
to pay $129 for the same DVD because they don't volume purchase
and things of that nature and that is our current health care
system.
Ellen Bradley from Milwaukee has 5,000 employees and they
go either to the hospital and the health care system and say I
want to make you a deal, I have 5,000 people I want insured. Or
they can go to a third-party insurer like Blue Cross or Aetna.
That is where I as the consumer get my deal, through volume
purchasing. I do not think we are going to see this through
this much-touted HSA problem. In fact, it is going to probably
add to the bad debts for the hospitals because until I have my
account established, my high deductible has to be paid out of
my pocket. For someone who is living on the edge and, you know,
bought that car that you talked about so cheap, the Impala that
they are giving away, they are not going to have money after
they pay their Impala monthly payment to pay the hospital the
$2,000 for the one visit or one episode. What we are looking at
is destroying the employer-based insurance system of the
country, and we, my friends, are going to live to regret it.
Now, if, in fact, we want nonprofit hospitals to do things
on the cheap, as Dr. Ginsburg pointed out--and it was disputed
by the Chairman, but I do not believe the Chairman or agree
with the Chairman--a lot of the hospital costs and doctor costs
are related to new technology, which we all want. So, we are
going to say to the nonprofits, We want you guys to do it on
the cheap so you can give more health care away and forget the
new MRI because you should not be having that because you are
billing these patients as Dr. Herzlinger said in her
statement--in fact, what she referred to in the statement is
price gouging of the uninsured. Well, that has not been proven
by any of the panelists today. It is a nice thing to say.
Again, I have to refer you to the article I put in the record,
and this was the one I asked you to read, and it is a Business
Week article, and it is entitled ``Making Hospitals Cry
`Uncle.''' If you ask me, it is not the nonprofit, tax-exempt
status that is up today for a hearing. It is this article here
which talks about a large contributor to the Republican Party
and what he is doing to hospitals by grabbing them by the neck
and shaking them until they call ``Uncle.'' Thank you.
Chairman HOUGHTON. All right. Uncle Ryan, would you like
to----
[Laughter.]
Mr. RYAN. What was the question? I, too, represent
Milwaukee, Milwaukee County, seven suburbs in Milwaukee and I
would argue that there is a different story behind these
specialty hospitals. The MRI center in question, they are
providing a service to the Milwaukee area residents, same MRI,
same General Electric MRI device, same kind of skilled MRI
radiologists, and they are doing it at lower cost. They are
actually on radio and television saying, ``If you want an MRI
and you want it today, if you need it, or you want it the next
day or the day after, we will give it to you instead of having
to have the long waits that you have at hospitals, and we will
do it at a fraction of the cost.''
Mr. KLECZKA. Will the gentleman yield?
Mr. RYAN. So, I only get 5 minutes, so, no, sorry, Jerry,
not this time.
Mr. KLECZKA. I will tell you the rest of the story when you
are done.
Mr. RYAN. Okay. The point is that that is injecting
competition in the marketplace, and those people in the
Milwaukee area who have these consumer-directed plans are
actually saving money. What we are finding with HSAs, one of
our big Milwaukee insurance companies that is selling these
things has shown that 42 percent of the people who bought their
HSAs, many of whom are from Wisconsin, are people that did not
have health insurance before. We are finding that people care
about cost because they now have products that allow them to
save money, and then we have competition in the marketplace
where we are getting the same quality or better quality
delivered to people at a faster time frame at lower cost. So,
this form of competition is actually working, and we see it in
Milwaukee. I did not want to give a speech. I wanted to ask a
question.
Ms. Davis, I wanted to ask you a quick question, and then
Dr. Herzlinger. You stated that other countries had a greater
role for the government in establishing hospital budgets or pay
rates. Moreover, other countries have done more to rationalize
costs than the United States has, as you have mentioned. You
know, I have seen so many cases, in the United Kingdom, in
Canada, where we see these global budgets in place, we see
rationalized costs, but they are accompanied with long waiting
lists and higher mortality rates and lower-quality care. Could
you comment on that?
Ms. DAVIS. In terms of waiting lists, you are right.
Waiting times for elective procedures in the United Kingdom are
much longer than in other countries. They are longer in Canada,
and the United States is very low on waiting times for
surgeries that are elective procedures.
In terms of quality and outcomes, we just recently released
a report that was put together by an international working
group on quality indicators, and they looked at 21 different
quality indicators across the United Kingdom, Canada,
Australia, New Zealand, and the United States. The United
States is kind of in the middle. It is better on some things,
and worse on other things. We are the best on breast cancer of
those five countries and 13 percent better than the United
Kingdom. On 5-year survival rates for kidney transplantation,
Canada is the best, and the United States is the worst. Canada
is 14 percent better than the United States.
It is a narrow difference, 10, 15 percent. We are usually
in the middle, better on some things, though not on everything.
Certainly in terms of convenience and waiting time for hospital
care, we are better. On waiting times for physician care, we
are actually not better. The United States and Canada are
toward the bottom. In other places, you can get physician care
the same day if you are sick and need care. Here, you wind up
waiting a week, 2 weeks, to get----
Mr. RYAN. Well, is it not true that the average waiting
time in Canada is 6 weeks for primary care and 7 weeks for a
specialist on top of that?
Ms. DAVIS. The U.S. waiting time for physician appointments
are long also, which is surprising to me----
Mr. RYAN. In HMOs or PPOs or every instance?
Ms. DAVIS. Well, for most, the non-elderly population, they
would be in managed care.
Mr. RYAN. Okay. Just because I am running out of time, Ms.
Herzlinger, I want to ask you, you know, I think one thing that
we are all probably agreeing on here--and Congressman Stark and
I had a hearing on this in our other Committee, the Joint
Economic Committee--is transparency on price. I think that is
something that everybody here, every witness from all different
sides of this debate spectrum have agreed, let's have
transparency on price. That is something that I think we can
get consensus on, and I have always said to my hospital friends
that either they are going to come up with a way of doing it
or, unfortunately, the government is going to have to do it for
them. I would hope that the industry would figure out a way of
doing it. My question to you, Ms. Herzlinger, is: does the
current lack of price transparency benefit hospitals? Since
this is the tax status hearing, how does that play into their
hands on pricing strategy, if it does at all? Could you comment
on that?
Ms. HERZLINGER. I think lack of transparency in a market
always hurts consumers. If people do not know what something
costs, they are not going to be good shoppers and when they are
not good shoppers, we have misallocation of resources. So,
whether it hurts or helps hospitals, I do not know, but it
certainly hurts consumers. If I needed to have a mastectomy, I
would know more about my tomato sauce, my car, my pantyhose,
than about the quality and the cost of the surgeon and hospital
in which that mastectomy is to be done right now.
Mr. GINSBURG. If I could add something, I am certainly in
favor of consumers having as good, accurate, and accessible
price information as possible when they have incentives to
choose lower-cost providers. We have to realize that in most
markets, there is a lot of concentration on both the insurer
and the hospital side. This is oligopoly and oligopsony, and it
is not clear that actually announcing the results of
negotiation between large insurers and hospitals is necessarily
going to be better for the consumer. You know, if you think of
cartel theory, public prices, it is a way of having--it
facilitates the workings of a cartel. So, we need to be very
careful that while we do want to provide a lot of relevant
price information to the consumers, we do not want to also
broadcast it around to make negotiations come out differently.
Mr. RYAN. Thank you. That was insightful.
Chairman HOUGHTON. Thanks, Mr. Ryan. Mr. Sandlin?
Mr. SANDLIN. Thank you, Mr. Chairman, and thanks to each of
the witnesses for coming today. Dr. Kane, in reviewing your
testimony, do you think that the cost of the preferred tax
status of the nonprofits outweighs the benefits that those
hospitals provide to the communities?
Ms. KANE. I think I mentioned we do not fully know how to
value some of the benefits, some of the community benefits that
hospitals do provide, including stand-by capacity, or some of
the things that----
Mr. SANDLIN. Stand-by capacity and, of course, saving
people's lives and treating people and taking care----
Ms. KANE. Well, nonprofit and for-profit hospitals save
people's lives, so it is pretty hard--I hope.
Mr. SANDLIN. Well, my point----
Ms. KANE. It is a little hard to----
Mr. SANDLIN. My point is----
Ms. KANE. Just attribute that to tax-exempt status.
Mr. SANDLIN. My point is this: it is not all about business
and dollars.
Ms. KANE. Absolutely.
Mr. SANDLIN. It is about treating people in health care;
isn't that correct? That is the first obligation. Isn't that
right?
Ms. KANE. Both for-profit and not-for-profit hospitals do
treat people and hopefully do the best they can.
Mr. SANDLIN. Now, the Tax Code, I was looking at the 501(c)
requirement, and it says that the hospitals have to provide a
health benefit to the community at large, these nonprofits. Is
that correct?
Ms. KANE. Yes, they are expected to provide a health
benefit, which is about the same thing that a for-profit does.
Mr. SANDLIN. I understand that. My question to you is: does
a 501(c)(3) nonprofit, are they required under the law to
provide a health benefit to the community at large? That is my
question.
Ms. KANE. Well, I believe so. I am not a lawyer.
Mr. SANDLIN. Okay. Thank you. Now, these hospitals are
providing a health benefit to the community at large, are they
not?
Ms. KANE. The nonprofit and the for-profits are both
providing a----
Mr. SANDLIN. My question is: are the----
Ms. KANE. Health benefit to the community at large.
Mr. SANDLIN. Nonprofits providing a health care benefit to
the community at large as required by the law? That is----
Ms. KANE. I hope so.
Mr. SANDLIN. Thank you. So, they are following the law,
aren't they?
Ms. KANE. Again, I think you are asking me the question in
a way that is probably inappropriate----
Mr. SANDLIN. No, ma'am. Here is my----
Ms. KANE. In respect to the issue around tax exemption.
Mr. SANDLIN. My question--no. My question is: they are
following the law, are they not?
Ms. KANE. As far as I know. I think some hospitals do not
necessarily follow the law, but most do try to provide a health
benefit to----
Mr. SANDLIN. Do you think that nonprofit hospitals should
provide a specific amount of charity care?
Ms. KANE. I think they should provide a specific amount of
community benefits, as more specifically defined than is
currently defined in the Federal law.
Mr. SANDLIN. Okay. Now, I have noticed that you have used
some of your research, it says, and the materials we have to
challenge the tax-exempt status of hospitals in Texas and
Massachusetts and Idaho and Virginia, Ohio, Maine, and New
Hampshire. Is that correct?
Ms. KANE. I am sorry. What was the question?
Mr. SANDLIN. Have you been involved, have you used research
to challenge the tax-exempt status in those States that I
listed?
Ms. KANE. I have not actually been the challenger. Usually,
the Attorney General or a local tax authority is the
challenger, and I am hired as an expert witness to assist in
those challenges.
Mr. SANDLIN. So, basically you are an advocate for
challenging the tax-exempt status----
Ms. KANE. No. I am usually the expert witness for those who
have already challenged the tax exempt status of a hospital, in
general because even though it is providing health care for the
good of the community, they have a bad habit sometimes of
telling people who do not pay full charges or were not insured
that they cannot get care in their emergency room until they
are really, really, really sick and that is when they get
challenged.
Mr. SANDLIN. Okay.
Ms. KANE. There are some pretty egregious examples of that.
I hope you are not trying to----
Mr. SANDLIN. Well, that is a charming----
Ms. KANE. Defend those.
Mr. SANDLIN. Story, but that was not my question. Now, you
said that you are not an advocate for challenging the tax-
exempt status of the hospitals, so could you tell me, in all
the areas that you have worked to support or maintain the tax-
exempt status of a hospital? What States have you done that in?
Ms. KANE. There usually are not challenges to support the
hospital's tax-exempt status.
Mr. SANDLIN. Have you--I did not--have you taken a position
contrary, have you taken a position on the other side of the
issue to say, no, the tax-exempt status should be maintained in
any State?
Ms. KANE. I have written about hospital tax--the whole
article that I wrote that is cited in my testimony talks about
the hospitals that do maintain their tax-exempt status through
the virtue of providing charity. So, I do believe that most of
my work is on measurement and reporting fact, and then----
Mr. SANDLIN. My question is----
Mr. MORRISON. If it happens to be useful to those who make
a challenge, that is who calls me.
Mr. SANDLIN. Well, thank you again, and you have a nice
report. Here is my question: you said that your research has
been used as an expert witness to challenge the tax-exempt
status of certain hospitals. Has that research been used or
have you been an expert witness on the other side to support
nonprofits hospitals? In what States would that be?
Ms. KANE. No, I have not.
Mr. SANDLIN. Okay.
Ms. KANE. Generally, people do not challenge hospitals if
they think they are----
Mr. SANDLIN. That was not my question----
Ms. KANE. Already acting charitably.
Mr. SANDLIN. I think we understand what you are saying.
Now, in Texas, are you aware of what the Texas law is on the
requirement for charitable----
Ms. KANE. The Texas law was passed partly as a result of
the challenge that I was involved in in Texas back in 19--
somewhere between 1989 and 1991 or 1992, I believe.
Mr. SANDLIN. In 1993--well, the first I think was 1985 on
indigent health care. In 1993, it was SB 427 and that requires
charity care and government-sponsored indigent health care
provided in an amount equal to at least 100 percent of the
hospital's or hospital system's tax-exempt benefits, excluding
Federal income tax, or charity care and community benefits are
provided in a combined amount equal to at least 5 percent of
the hospital's or hospital system's net patient revenue. Do you
feel like that is an adequate amount?
Ms. KANE. I felt that was a fair law. They had to define
``community benefit'' in a way that leaves out things like
Medicare contractual adjustments and medical bed----
Mr. SANDLIN. One final question. I notice there are
lawsuits filed against East Texas Medical Center Regional
Health Center in Tyler, Texas. Are you an expert witness or
consultant in that particular litigation?
Ms. KANE. No.
Mr. SANDLIN. Have you been consulted or talked to in any
way about that particular litigation?
Ms. KANE. No.
Mr. SANDLIN. Did you know that system provided $91 million
in charity benefits in 2003 and will pass $100 million in 2004?
Ms. KANE. I am sorry. I did not hear what you said about
the----
Mr. SANDLIN. I said were you aware that--you do these
studies, and I just wanted to know if you were aware that that
system provided $91 million in charity care in 2003 and will
pass $100 million in 2004.
Ms. KANE. No, generally the data I get has to be nationally
available, and that may not be something that is in one of my
data sets. It is pretty hard to get that data unless you are
involved in a lawsuit in Texas.
Mr. SANDLIN. Okay. Well, thank you for that. It just seems
to me, Mr. Chairman--I am finished rather than attacking the
hospitals, we should focus on coverage and if we focused on
coverage, we could take care of these issues. Thank you, Mr.
Chairman, and thank you, witnesses.
Chairman HOUGHTON. Thank you. Mr. Johnson, Mr. Sam Johnson?
Mr. JOHNSON. Thank you, Mr. Chairman. I appreciate that. I
would just like to say that we have specialty hospitals,
numerous in our area, and they are all doing a great job. It
seems to me that physicians do not get away from the regular
hospital when they get into the specialty business. They still
maintain their status with the regular hospitals. Would you
think that the patient should or shouldn't have the ability to
choose between a specialty hospital and a regular hospital if
the physician operates at both of them? Anybody.
Ms. DAVIS. The basic problem is that there are very
different profitable returns on different services. So, the
real problem is that you can make so much money on orthopedic
care and cardiac care, yet you can lose so much money on burn
care, and neonatal intensive care. If we had a more rational
pricing structure, we would not have services being skimmed off
into separate hospitals. It reduces the ability to cross-
subsidize both patients who cannot pay and important----
Mr. JOHNSON. Okay. Let me ask you this question: why do you
think they skimmed off to specialty hospitals? Because they
were not getting the service at the hospital, which mostly are
not-for-profit. My view. Excuse me. I interrupted you.
Ms. HERZLINGER. Not at all, Congressman Johnson. I think
that the specialty hospitals, just like specialization in the
rest of the economy, make things more efficient and more
effective. That is why General Motors spun off Delphi because
it couldn't do everything. There is tremendous data to show
that the patients are very satisfied and they are lower cost.
The core problem is why do they set up specialty hospitals
in heart and orthopedics owned in the Milwaukee area, to my
knowledge, by the cardiologists in the area and the nonprofit
charitable hospital system in the area. The reason is that we
have these third-party payers who are setting the prices.
Sometimes they set them too high, as in cardiology and
orthopedics, and sometimes they set them too low, and sometimes
they set them so that they stop the innovation, which is the
key to raising productivity in the U.S. economy.
For example, Ralph Snyderman, the chief executive officer
of the Duke Medical Center, innovated a new treatment for
congestive heart failure. Congestive heart failure costs $56
billion. In 1 year, by focusing, by specializing on congestive
heart failure, he reduced the cost by 20 percent in 1 year. The
way he did it is, because he was specialized on congestive
heart failure, he made people healthier. When they were
healthier, they used the hospital less and they stayed for
shorter amounts of time.
In a normal marketplace, this kind of innovation would reap
large rewards. Ralph Snyderman lost virtually all the savings
because under a large third-party system, which is not agile
and not responsive to innovations, he gets paid for treating
sick people and the healthier they are, the more money he
loses. That is the problem with a volume-based model that says,
well, the big insurer can get big discounts. Perhaps that is
so. The big insurer can also stifle the innovation, which is
the heartbeat of the productivity in America.
Mr. JOHNSON. Let me interrupt you. I am about to run out of
time.
Ms. HERZLINGER. Sorry.
Mr. JOHNSON. I want to hear from Dr. Ginsburg as well.
Thank you.
Mr. GINSBURG. Yes, I wanted to first say that I think the
problem is not big insurers. It is fee-for-service payments.
When you pay for delivering more care, it is never a hospitable
system for excellence, for doing better with fewer resources.
I just want to say something about specialty hospitals.
There certainly are cases where specialty hospitals have
innovated in care, but because of our financing system, because
our reimbursement rates do not adequately reflect costs--and
the Medicare Program needs to pay attention to this--because of
the fact that we have different insurers paying different
amounts, there is a potential that the technical success of the
specialty hospital could cause irreparable harm to community
hospitals, not because the specialty hospital is better, but
because it is agile enough to concentrate on the inadvertent
incentives that have been placed in the system to treat more
cardiology and orthopedics, to treat privately insured patients
instead of Medicaid patients. I am also concerned about the
conflict of interest that physician owners of these facilities
have.
Mr. JOHNSON. Can he answer? Go ahead.
Mr. LEE. Congressman Johnson, I want to build on one other
point about the issue both with specialty hospitals but also it
goes to Congresswoman Johnson's question about the expansion of
hospitals to suburbs, and so forth. One of the key problems we
have driving hospital costs is supply driven demand. Where you
have more hospital beds, more people use them. We had in
Northern California, Redding, which got a lot of attention, a
Tenet hospital, it was not just an issue of its outlier
payments. They were having too many people getting cardiac
care, and it is because if you have docs that want to fill up
their portfolio, with all due respect to physicians, people
will get more care--physicians will provide more care. One of
the issues we have to get to consumers is information not just
about whether this hospital doing a good job or not, but are
they doing the right care at the right time. That is one of the
concerns that I have about specialty hospitals.
Mr. JOHNSON. Well, I will ask another question later, but
it seems to me the not-for-profits are building more hospitals
than the for-profits. You might answer that next time. Thank
you.
Chairman HOUGHTON. All right, fine. Thanks, Mr. Johnson.
Mr. Portman?
Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the
witnesses today. We have had a very interesting dialog about
health care, haven't we? We have gotten to talk about costs and
technology and its challenges as well as its opportunities. We
have talked about pricing and transparency, and I do take some
comfort, Mr. Chairman, in the fact that at least this panel,
and I believe the panel that I am sitting on--perhaps there is
not a consensus on this, but a majority of us, at least, seem
to be focused on the fact that more transparency and more
information will make not just a more efficient health care
system, but a higher-quality health care system and that is
encouraging. I do think that is a general direction that we
should be able to move on a nonpartisan basis. Then the final
issue is the tax-exemption issue, and they are all related, of
course. Since that seems to be more of the focus of the
hearing, let me focus my questions on that.
I will start by saying I represent the greater Cincinnati
area. We have three nonprofit health care networks who do a
terrific job in our community. They are all involved in charity
care, uncompensated care, but also community benefit. They are
also businesses, and they are run more like businesses today
than they were 10 years ago, even than they were 2 years ago.
As a result, they have gotten over some very significant
financial challenges. Mr. Lee talked about excess bed capacity
and so on, and, we have gone through a pretty aggressive
managed care revolution really in Cincinnati and back and
forth. My point is they are businesses and they have a bottom
line, and they must compete, and they do.
Having said how important it is that they provide that
community benefit--and it is--I also think it is appropriate
for us to review and clarify the rules. We are basing most of
our discussion today on, incidentally, a 1969 IRS ruling with
regard to what, in fact, is a community benefit, which was a
change from the charity definition and you know, probably once
every--what would that be--35 years, it is time to review where
we are, not that that has not been done periodically in the
interim period, but I think it is appropriate that we talk
about where we are.
So, my question would be whether this panel would have any
specific recommendations as to what the standard ought to be.
Do you believe the community benefit standard is appropriate,
again, dating back to 1969? Do you believe that there should be
more specific standards? Which is something Dr. Kane alluded to
earlier and if it is all right, I will just start with Dr.
Herzlinger and go across the panel. The mother of Captain
Herzlinger.
Ms. HERZLINGER. Also Dr. Herzlinger, my daughter. I think
businesses provide community benefits as well. They do provide
employment. They pay taxes into the community. Nonprofit
hospitals not only have tax subsidies; they also have capital
market subsidies. They are entitled to issue municipal debt,
which businesses cannot, and raise the cost of capital
elsewhere in the economy.
When we talk about community benefits, I think it is very
important to identify those community benefits that are unique
to nonprofits and that for-profit businesses, which, after all,
are the cornerstone of our great economy and our great country,
also generate.
Mr. PORTMAN. Thank you. Ms. Davis?
Ms. DAVIS. I think it is hard to quantify all of the
community benefits, like the value of stand-by capacity. So,
when you set an explicit quantitative goal, you wind up
focusing on charity care because it is easier to measure. So, I
think there are some problems with trying to set a specific
quantitative goal.
I do think one could work on better practices, for example
not charging American uninsured patients more than the
discounted rate you would give to an insured patient; not
having certain kinds of collection practices, like liens on
homes; and publishing the availability of charity care. So, I
think that is kind of the area where I think the best
improvement could be made in the near term.
Mr. PORTMAN. Interesting suggestions. Just as an aside, the
three major nonprofit networks in Cincinnati have just come up
with a draft billings and collections principles and guidelines
statement which they shared with me yesterday. In fact, I was
going to ask it be made part of the record later, if I could
ask unanimous consent, Mr. Chairman, to make it part of the
record. It is currently being subject to a comment period, but
it gets at those very issues, Ms. Davis, you talked about,
including collections. Mr. Lee?
[The information follows:]
DRAFT UNTIL PUBLIC COMMENT PERIOD ENDS 7/1/04
Billing & Collections Principles and Guidelines for Low-Income,
Uninsured Patients
Principles
All patients should be treated fairly, with dignity, compassion and
respect.
Hospitals have a financial responsibility to seek payment from
patients in cases where the patient does not qualify for charity care
and where the patient's income or other assets clearly indicate the
ability to pay for the health care services provided.
Each hospital should have clearly articulated, understandable
financial assistance policies consistent with its mission and values,
and which underscore the hospital's commitment to provide financial
assistance to low-income patients.
Financial assistance policies should be clearly communicated to
patients and must be applied consistently to all patients.
Financial assistance policies should apply to patients who cannot
pay for any or all of the care they receive, and should balance the
patient's ability to pay with the hospital's need to be fairly
compensated for services rendered to ensure its on-going financial
viability.
Hospitals should assist patients with enrolling in Medicaid and
other government--sponsored programs.
Debt collection policies of the hospital and its debt collection
agencies and attorneys must reflect the mission and values of the
hospital.
Financial assistance policies do not preclude the patient from
personal responsibility. Patients must communicate their financial
situation to hospitals, must work together with hospital staff to
receive financial relief, and must be expected to meet their financial
responsibility based upon their ability to pay.
Hospitals will not be able to reinvest in plant, equipment and new
technologies to continue to provide the highest quality of care without
being compensated for their services. Financial assistance from
hospitals must be complemented by efforts of government, employers and
others to expand access to health care coverage for all Tristate
residents.
Financial Assistance Eligibility
Each hospital should maintain, and update as appropriate, written
financial assistance policies for low-income, uninsured patients
including those eligible for charity care.
Absent regulatory prohibition, hospitals should develop discount
programs for low-income uninsured patients who do not meet Federal
Poverty Guidelines (FPG) to qualify for charity care. These discount
policies should be reevaluated periodically.
Hospitals should work with patients who do not qualify for charity
care to establish extended payment options including low interest loans
that are appropriate given the patient's income and assets.
Consideration should be given to prompt payment discounts and other
means of relieving financial pressure on self-pay patients.
Hospitals should ensure best efforts to apply policies consistently
to all patients, and hospitals should clearly define the type and scope
of services eligible for assistance.
Hospitals should assist patients in determining eligibility for
government-sponsored aid.
Hospitals should continue to provide financial assistance to
patients who have exhausted their insurance and who exceed financial
eligibility thresholds for extraordinary medical costs, although
hospital financial assistance is not a substitute for employer-
sponsored, public or patient-purchased insurance.
Communicating Financial Assistance Eligibility
All financial assistance applicants should be treated with dignity,
respect and with cultural sensitivity. Free interpretation and
translation services should be made available as necessary.
All patients regardless of income level or payment status (i.e.
insured, Medicare, self pay) will receive access to the same
information regarding services and charges.
Hospitals should ensure that patient financial services personnel
and financial counselors are fully trained on the hospital's financial
assistance policies and can communicate those policies clearly to
patients. Receptionists and switchboard personnel should be able to
direct callers to hospital staff trained to provide financial
assistance.
Communications to patients regarding financial assistance should be
written in reader-friendly terminology and in a language the patient
will understand.
Financial assistance policies must clearly state eligibility
criteria and the process used by the hospital to determine whether a
patient qualifies for financial assistance. Eligibility requirements
related to FPG should be clearly enumerated for patients, and patients
should also be told how assets may be used in determining eligibility
for financial assistance.
Hospitals should have adequate, easily visible signage in
appropriate areas of the hospital (i.e. Emergency Department,
Admitting/Registration) informing patients and their families of the
availability of financial assistance. Signs should include brief
instructions about how to apply for financial assistance including
contact information.
Information regarding the availability of financial assistance
should be included on hospital bills including who to contact to begin
the eligibility determination process.
Patients should be clearly informed about their obligations to
complete eligibility documents and to provide financial documentation
as necessary, as well as potential financial obligations they may
incur.
When applicable, patients should be referred to an enroller to
apply for Medicaid or similar programs to assist in offsetting some or
all of the patient's financial liability and to ensure that the
hospital is fairly reimbursed for its services.
Hospitals should share their financial assistance policies with
appropriate health and human services agencies and other organizations
that assist such patients.
(The financial assistance and communications guidelines listed
above apply to a hospital's treatment of patients seeking charity care,
financial assistance, or discounts, as applicable. To receive such
assistance, patients must comply with hospital financial assistance
application requirements, including providing documentation as needed.
Patients must also cooperate with hospital staff and provide needed
information in a timely manner to enroll the patient in Medicaid or
other programs as required.)
Collections Guidelines
Hospitals will provide their mission statement and their billings
and collections guidelines to their collection agencies and attorneys,
and hospitals will secure their agreement to adhere to the same high
standards incorporated in the hospital's policies. (Collection agency
is defined as an outside agency engaging in bad debt collection
services on behalf of a hospital as opposed to an outside agency
contracted to manage the hospital's day-to-day billing activities.)
No collections effort will be made by the hospital or its
collection agency for patients who have completed the financial
assistance application process and established their eligibility for
charity care. If such a patient is mistakenly billed, hospital staff
will apologize for their error and correct the mistake.
Legal action, including the garnishing of wages, may be taken by
the hospital only when there is sufficient evidence that the patient or
responsible party has the income and/or assets to meet his or her
obligation.
Hospitals will not force the sale or foreclosure of a patient's
primary residence to pay an outstanding medical bill.
If a patient is cooperating with an agreed-upon extended payment
plan to settle an outstanding bill with a hospital, the hospital should
not send the unpaid bill to a collection agency if the hospital is
aware that doing so may negatively impact the patient's credit rating.
(The above guidelines apply to a hospital's collections practices.
However, patients who are financially obligated to pay for a portion of
their care must cooperate with the hospital on establishing the best
method of payment and then demonstrate good faith efforts to abide by
that agreement.)
In conclusion, these guidelines largely reiterate current policies
and procedures of GCHC member hospitals. However, these guidelines may
require some members to enact changes in their policy, which may
require operational changes including, staff training, changes on
invoices, contract revisions with collection agencies, and so forth.
The Greater Cincinnati Health Council endorses these guidelines and
encourages its acute care hospital members to ensure that their billing
and collections policies are consistent with these guidelines as soon
as possible.
Mr. LEE. Also, Congressman Portman, California hospitals
have come up with the same set of standards around billing
practices for the uninsured. The only thing that I would add
that is easily quantifiable is how nonprofit hospitals play in
the market. As I noted in my remarks the concern is that
hospital consolidation creates negotiating leverage that
preclude insures from seeing differences in cost quality. Cost
and quality do not show through because it is a take-one/take-
all on the same price basis. There is a problem in the market.
I am concerned with having a separate set of standards for
nonprofits, and I have the exact same concerns with the for-
profit systems. This is an element that I think is worth
looking at.
Mr. PORTMAN. Dr. Ginsburg.
Mr. GINSBURG. My organization studies markets and the
implications for consumers, but we do not take positions on
policy, so I would just as soon pass on this.
Mr. PORTMAN. Dr. Kane.
Ms. KANE. I think there are new guidelines out by the IRS
that correspond more closely with what Karen Davis just
mentioned around practices that hospitals undertake to show
that they have a charitable intent when they are providing
care. I think that is an improvement over what it was
historically.
I have tried to quantify these benefits. It is difficult.
It is also difficult to quantify the benefit of the exemption
in any meaning--you know, without missing some large amounts of
benefit that you cannot quantify. I do think the IRS is paying
attention, and I think a stronger standard that allow States
and local communities to play a role in what constitutes a
community benefit is important. Hospitals in some States now
work with their local community health agencies to say, what is
important in our community for health, and if we do that, will
that be considered toward our charitable status? For instance,
in New Hampshire, that was part of their community benefit law.
I think there is a need to be more clear, perhaps, about
what practices and what types of activities would constitute or
count toward tax exemption and have some flexibility in how the
hospitals choose to play that out. I think just the disclosure
and the transparency of trying to do that will improve the way
hospitals behave at this point.
Mr. PORTMAN. Thank you, Dr. Kane. Just quickly, Mr.
Chairman, again, our three networks in Cincinnati are working,
in fact, right now with our City Council, which would represent
part of the population served, and with some of the health care
providers for uncompensated care, health care clinics and so
on, to try to determine what some of those needs are on a more
regional basis and be responsive to that. The question is
whether that is happening around the country. I cannot speak to
that, but that is an interesting part of the equation given the
fact that it is not just about Federal income tax; it is about
property tax and other exemptions. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you. I am going to ask a question,
and then I know Mr. Pomeroy wants to. I would like to step back
a minute and move away from profits, and return on investment
and community involvement and just take all those very
difficult to generalize in terms of the two categories, the
profit and not-for-profit. When you take a look at the cost
structure of medicine, you want to have the toughest, most
able, most precise financial people looking to make sure that
the equipment is there, the care is there, the pricing is
right. You would sort of instinctively go to the for-profit
institutions.
Yet at the same time, there is another element in the not-
for-profit, which is community involvement. People feel part of
the hospital. They want to play a part in the whole overall
medical element in the community. They feel it is part of them
and I don't know why there is any inconsistency in not having a
very sharp, driving, cost-conscious direction of a nonprofit
hospital versus the profit hospital. Maybe you would have some
comments to make on that.
Ms. DAVIS. Well, I think one of the basic differences in
just what motivates nonprofits versus for-profits--and it is
something I happened to look at 35 years ago in an economics
doctoral dissertation--is they are motivated to be the best, to
be the best equipped, and often to be the biggest, and,
therefore, they will do things that do not make sense to a for-
profit hospital because something they do may lose money. You
have got the very best burn unit. You have got the very best
neonatal intensive care unit. You do the best research. You are
there for the community and always known as, when anything
really bad goes wrong, this is the go-to place that leads
nonprofit hospitals to try to do things, even if they lose
money.
Now, in the past, they were able to cover that because they
could cross-subsidize it out of charges to privately insured
patients. As that has come down relative to costs under managed
care, they are less able to provide those kinds of services.
For the most part, they are the ones that will do things that
we as a society want done but that are not profitable. I used
the example of a major fire in a nightclub. Those burn patients
went to certain hospitals, and those hospitals provided care.
They are not going to make money on those patients. They are
going to lose a lot of money on those patients. We all want
those patients taken care of. That is the sort of thing that a
nonprofit will do because they take great pride in having
responded to that community emergency and were there at a time
when patients need them. Obviously, they get some publicity out
of it in local papers, and it helps their image as an
institution. That is one of the reasons the nonprofit nature of
this industry is so important.
Chairman HOUGHTON. If I could just sort of cut in here a
minute, to flip my argument, if you take a look at many of the
corporations in this country, they are enormously generous in
terms of what they do and contribute into the community. So, I
just do not understand the consistency here. Maybe you would
like to discuss this.
Ms. HERZLINGER. Well, on the for-profit side, clearly in a
well-managed, socially responsible corporation, its aim is to
maximize the return for the shareholders within the norms of
society. So, given a nonprofit and a for-profit, the for-profit
aim is clearly to be as efficient as possible, and for-profits,
especially if they are publicly traded, are much more
transparent than nonprofits. I can get the financial statements
of the Hospital Corp. of America (HCA) just by flicking on my
computer. I would have a great deal of difficulty getting
comparable statements for nonprofit hospitals. That kind of
transparency in the market is an incentive for efficiency. I
think the fair thing to do is to measure the costs and quality
of both of them and let people make their own decisions about
which ones gives them the best value for the money.
Chairman HOUGHTON. That is difficult when you are in a
small community. Would you like to add something?
Mr. GINSBURG. The perspective I would like to point out is
that nonprofit hospitals today account for, I think, upward of
85 percent of the beds. They are the core of the hospital
system. This percentage has been quite stable over time, and it
seems as though, this is a country where not-for-profit
hospitals are the norm. I think the major success that for-
profit hospitals have had has been, first, in areas where there
has not been a lot of local resources to support the
development and expansion of nonprofit hospitals. So, in a
sense, they have provided capital and I think that some of the
for-profit companies have been skilled and effective at
identifying failing not-for-profit hospitals that are failing
because they are not managed well and purchase them and manage
them well, and then often sell them back to a nonprofit entity.
We have to realize that the nonprofit hospitals have this very
dominant position. Whether it is the tax-exempt status, whether
it is people's comfort, whether it is their philanthropy that
leads to it, they are the central system.
Chairman HOUGHTON. All right. Does anybody have any other
comments? If not, then we will go on.
Mrs. JOHNSON. Mr. Chairman.
Chairman HOUGHTON. Yes?
Mrs. JOHNSON. I thought you were closing this panel.
Chairman HOUGHTON. No, no. Go right ahead because I wanted
to ask Mr. Pomeroy--go ahead, please.
Mrs. JOHNSON. I will not be able to stay for the second
panel, but I will review the testimony. I want to mention
something that has come out of this panel, although it is not
central to your responsibilities in testifying here. Ms. Davis,
you mentioned the stability that Medicare has provided to the
health care system. I would say that that is absolutely no
longer true. You look at the physician payment law. Talk about
creating instability. It is astounding. You look at our ability
under Medicare to reimburse accurately, and if you take the
newly proposed outpatient and inpatient reimbursements--these
are new regulations. They are precipitated by the big increases
we provided in the last Medicare bill and by the census
automatic action every 10 years, and you go through what is the
interaction between the census redefinitions, the increases we
gave them, the this is and the that's and the other things.
When I ask the experts, who have spent their lives on this,
``what is the outcome? how many of the hospitals in the rural
areas that we gave big increases are going to get those
increases?,'' they cannot tell me. When I ask them, ``what is
going to be the impact on these small urban hospitals that,
frankly, are most disadvantaged in the reimbursement system?''
they cannot tell me.
How can I make policy when we fight for a 4-percent
increase for hospital reimbursements, and then we do not know
whether they get them. My hospitals came in last week and
documented that for the first time under Medicare, in spite of
the big increases that we gave, the work we did on Indirect
Medical Education (IME), on market basket, the first time we
have ever given full market basket 2 years in a row, every
single hospital in Connecticut is going to get an absolute
reduction. A reduction. When their malpractice premiums are
zooming, when their nursing costs are going up, when their
technology costs are going up, and so on and so forth.
So, what drives me--and I am going to be looking at these
pricing issues. I want you to give me anything you know about
what we should do about how we price in Medicare, because every
aspect of the system is wrong. You cannot set a price and keep
it for 20 years. Volume increases; it should be declining. What
should we do about that? What should we do about these special
services? I mean, ironically, we have no cost base. We do not
know what anything costs. We have an arbitrary base that we set
in a certain year, and we have adjusted it by inflation. This
is no way to run a railroad. Whether it is hospitals, whether
it is technology, whether it is this, whether it is that, you
know, we are--just when you adopt a transfer policy and you
reduce benefit for short stays in a system based on averages,
this is a travesty. It is a travesty of logic and it is a
travesty of fairness to the hospitals.
So, whether it is doctor payments, whether it is hospital
payments, whether it is boutique hospital payments, whether it
is surgery center hospital payments, we do not know what we are
doing. The terrible proof is that this new regulation that has
come out, after the biggest increases we have ever passed
across the board, the first time we have just said the whole
rural system does not work because we cannot deal with low
volume so we are just going to increase payments, knowing that
it costs more for low volume. This is--I mean, I cannot tell
you. There is no logic. There is no structure. There is no cost
basis from which we can work. In the oncology area where I am
absolutely insisting that practice expense bear some reality to
practice expenses, I am being told, ``why should we do it there
when we routinely reimburse at 70 percent of practice expenses
for everybody else?'' What a bankrupt logic. What a quick way
to destroy the quality of health care.
So, I am very interested in this nonprofit/for-profit, who
is getting paid to provide uncompensated care. To think that
Medicare payments are stabilizing our health care system is to
put your head in the sand. I am sorry, but in every sector we
are destabilizing the system, eroding quality, and driving the
development of boutique hospitals and so on, in my personal
estimation.
We do not have time to go into all that, but I invite every
one of you to work with me on how do we change the way we price
in Medicare. Because if we do not, we will destroy community
hospitals, we will drive the good-quality physicians out of the
system, and, frankly, it is only because of the
administration's good sense and forbearance that we haven't
acted to destroy key home health providers who clearly are
providing more services for less acute care patients. You would
think we might want to know.
Ms. DAVIS. If I could respond quickly to that, I agree with
you. Most of my focus is on the patient and what is good for
the patient.
Mrs. JOHNSON. Right.
Ms. DAVIS. I did testify at the time of the Balanced Budget
Act that the proposed cuts to the health care sector were
simply unprecedented and much too deep. The effect of those
cuts and other changes in the late nineties was to take over a
10-year period $1 trillion out of the health care sector.
Mrs. JOHNSON. Right, but it is also true----
Ms. DAVIS. So, a lot of the problems we are seeing--and you
see it a little bit in my charts 3 and 5 on pages 25 and 26.
Medicare cut, Medicaid cut, managed care cut, and the
cumulative effect of that has not been helpful to the----
Mrs. JOHNSON. I agree that the system is far more fragile
than 10 years ago. It is also true that what we did in 1997 was
limit the rate of growth for the next 6 years to the rate of
growth of the preceding years.
What we are seeing now, because we limited that rate of
growth, because Medicaid, a publicly funded system, is
underpaying dramatically, and because of managed care's
pressure, we are seeing a very fragile system now, and we
cannot keep our head in the sand about the inaccuracy of our
payment structure any longer. So, I invite your input. I know
that you are concerned about this, and I just wanted to note
that we are--you know, I see this as the first hearing in this
venue, but we will be hearing these other things that are
intimately related, too much for one Committee, and I invite
your cooperation and input. Thank you very much, and thank you,
Mr. Chairman, for your indulgence.
Chairman HOUGHTON. Thank you. With all of that good news, I
now turn to Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. Well, we have been at
it a couple of hours, and I think so far this hearing has
established that a hearing undertaken without a rational focus
is unlikely to produce a clear record. That said, I want to
respond to the Chairman Thomas charge that we can try to make
some sense of all this. I believe that we have established in
this discussion that pricing alone is not a very effective sole
indicator of whether tax-exempt status for hospitals or not is
being appropriately fulfilled in the exercise of their
operations. Is that correct? Is that a consensus across the
panel? Any objection to that suggestion? Okay.
Then let me ask you this: do you think there would be--I
have seen--I used to be an insurance commissioner for 8 years.
I have seen all kinds of things in terms of hospital practices,
proprietary and nonprofit. I have seen some wonderful
commitment to the charitable mission of these nonprofit
institutions, and I have seen some exercised, on the other
hand, incompetently and less rigorously.
Is there something that ought to happen, that Congress can
contribute to the nonprofit hospital world by way of surveying
best practices, establishing a matrix of things that might be
present in an exemplary nonprofit hospital institution, not to
enforce but that maybe a hearing record would contain and it
might provide some guidance to hospital executives and boards
of directors in terms of things they ought to be keeping an eye
on to make certain they comport with what is expected of best
practices within the nonprofit hospital status? Would that have
some value? Let's just run right across the table and start
with Dr. Kane.
Ms. KANE. I think if Congress can come to some consensus on
what best practice is, other than simply providing care to the
public, it would be helpful. I am not sure you can come to
consensus, having just heard the debate on the panel here of
the Members. I think it would be helpful to clarify what
Congress thinks merits tax exemption, at least at the Federal
level. It would be helpful to go beyond that and say, you know,
here are best practices and how we expect you to provide those
types of activities, if they are community-based activities, if
they are the way you do billing and collection, if it is the
way you make people eligible for charity care and at what
income levels. All of that guidance would certainly help to
make it more standard across the country in terms of what a
citizen can expect if they do need a health care intervention
in their lives.
Mr. POMEROY. So, maybe right topic as we discuss tax-exempt
status, but we have to go far beyond pricing to capture maybe a
solution that has value.
Ms. KANE. Pricing is not really the--not where I would go
first.
Mr. POMEROY. Dr. Ginsburg.
Mr. GINSBURG. Yes, I think pricing is a different topic. I
think that it really would be useful to have expressions from
the Congress about what it expects hospitals to be doing for
the tax-exempt status because the Congress has not spoken to
this for a long time.
Mr. LEE. Congressman Pomeroy, the only thing I would add is
a best practice area that Congress could make advice on is
around not just what the hospitals do but how we pay hospitals.
We have heard that one of the other consensuses here is a
dysfunctionality in our payment system, a discussion that we
need to reform. I would actually recommend to this Committee
the Medical Payment Advisory Commission's (MedPAC) June report
which actually talks about forward-thinking purchasing
practices that is going to be the driver, I think, of changing
hospitals' performance.
Ms. DAVIS. I think you have put your finger on a very good
idea. We have supported a case study of exemplary hospitals,
which we will be releasing in August. It started with a
database on hospitals in 21 States and found those in the best
quartile on efficiency and the best quartile on quality
measures, risk-adjusted for different diagnoses; out of that,
it identified the 30 best hospitals and did case studies on
four of them.
There are certain characteristics that are common to all of
those best hospitals. It has to do with starting at the top,
with the chief executive officer's real commitment to quality.
It has to do with something called true resource management in
airlines, but it means that you listen to everybody you listen
to the nurses when they say there is a problem, and you fix it.
Everybody is free to speak up when they see a problem, and it
gets addressed. I think that is just the beginning. That was
conducted for us by Jack Meyer at the Economic and Social
Research Institute. Other work in that area, whether it is on
quality, efficiency, or access, would be very valuable.
Ms. HERZLINGER. I think it is very important that the
Federal government insist on measures of quality by provider,
by hospital, by procedure for diseases over the long term. That
is what transparency is all about. That is what the American
people are interested in, as well as price data. The quality
data are very important.
However, I think it is very dangerous for the government to
get involved in specifying the processes of care. Best
practices are the consensus of the majority, but the real
innovations come not from the majority; they come from
iconoclastic outliers. For example, the----
Mr. POMEROY. I agree. My time is up. By best practice, I
mean, you know, consensus that we ought not attach houses of
people that----
Ms. HERZLINGER. Oh, of course.
Mr. POMEROY. Not at all medical----
Ms. HERZLINGER. I misunderstood. Certainly.
Mr. POMEROY. Thank you very much.
Chairman HOUGHTON. Mr. Ryan.
Mr. RYAN. Are we doing a full round?
Chairman HOUGHTON. A very quick second round, please. Go
ahead.
Mr. RYAN. Okay. Let me see if I can widen the focus here a
little bit from the beginning statements of this hearing. Do we
have good measurement as to the value attributed to this tax
status? Obviously, I think everybody agrees we do not have
that. Do we think that public value comes from this tax-exempt
status? I think so. What is the measurement of that? Who knows?
Is that measurement so great that the costs do not outweigh the
benefits? We don't know the answer to that question. Perhaps
with better available data we will get the answer to that
question. It is a question that ought to be asked of all of us
in the public for the public good.
I guess the question is: you cannot get away from the whole
uninsured question when you talk about this. I mean, if we are
talking about the system today where we have to rely on the
public charity of nonprofit organizations who have to cross-
subsidized in order to pick up those who do not have insurance,
that is the system we are working in today. So, is this a
rational delivery system within this use of this tax
expenditure to get the care to those who are uninsured? Or
should we try and focus on getting insurance into the hands of
those who do not have insurance so that this method of
redistribution and cross-subsidization is not necessary?
I would like to ask you to sort of pull that focus back a
little bit and answer it this way: are we better served,
quantitatively, economically, by fixing this uninsured problem
we have in this country so you can focus on competition, on
transparency, on making the market work? Or is the current
system of using a tax expenditure on an ad hoc, individual
hospital-by-hospital basis, cross-subsidizing and picking up
the slack better than fixing this uninsured problem? Let me ask
it that way and we will just start left to right, Dr. Kane and
then to the right.
Ms. KANE. I think probably the obvious answer is it would
be great if everybody was insured. This is something that I
think--didn't Harry Truman suggest that? I mean, I am trying to
think of how far back--I mean, it was before I was born,
actually.
Mr. RYAN. We have to----
Ms. KANE. I agree that----
Mr. RYAN. Focus on direction of public policy.
Ms. KANE. Absolutely. We would love to see everybody
insured in some type of universal coverage. I don't think you
dare leave out the interim steps that we have in place for the
safety net, because we haven't gotten there yet, and I think in
1969, the IRS and whoever set the laws misunderstood the impact
of Medicare and Medicaid, thinking it would eliminate the
uninsured. Guess what? They have come back.
I think we always have to be aware that, you know, until we
are truly universal, we really will have people who are at risk
who are not covered, and that we do need a system, a safety net
for those people. Yes, absolutely, the bulk of public policy in
my mind should be toward insuring everybody.
Mr. GINSBURG. It is really inconceivable that someone can
be seen as having access to medical care today without having
insurance and that should be the first priority. What I would
say is that what we are seeing as our health care system
becomes more competitive, it is becoming more difficult to
continue the cross-subsidies that we have historically depended
on to serve uninsured people or low-income people. As Nancy
Kane says, we still have to do it, but in a sense, I think the
priority for taking steps to expand health insurance is that
much greater today because our cross-subsidy mechanisms are
breaking down.
Mr. LEE. Congressman Ryan, I think the first step-back
point is the tax benefit relative to uncompensated care
distracts a little bit from the fact that most hospitals, for-
profit and nonprofit, are compensated for that care from
commercial private payers. This is one of the dysfunctions of
our payment system. We have a vicious cycle caused by uninsured
and underinsured costs in hospitals being picked up by
employers, by those that have insurance, driving those prices
up, driving to more uninsurance.
Mr. RYAN. So, let me ask you this: you are saying that it
is the private dollars from the purchasers of health care that
are paying for those uninsured, not the tax expenditures that
are flowing through?
Mr. LEE. I am saying it is both, and I don't know the
quantity of which is bigger, but it is absolutely a huge
portion, which is hard dollars being paid by insured Americans,
which is picking up a substantial portion of the uncompensated
care costs in hospitals. Although the question that much of
this hearing is focusing on is the tax status, the issue
underlying driving hospital costs is part of a vicious cycle
that is discouraging small employers from stepping up to the
plate and getting insurance because it costs more. So, that is
an important observation, I believe. The other is in terms of
it isn't either-or----
Chairman HOUGHTON. Will you please be quick on this?
Because we have got another panel.
Mr. LEE. That is my main observation on that question.
Chairman HOUGHTON. Fine. Thanks very much. Mr. Stark?
Ms. DAVIS. I think the answer is hands down it would be
better if we would work on the problem of the uninsured. I
mean, it is just a massive problem. It affects every----
Chairman HOUGHTON. I thought I had cut this off.
Ms. DAVIS. I would like to say, even if we----
Chairman HOUGHTON. Could we come back to you? Thank you
very much. Go ahead, Mr. Stark.
Mr. STARK. I just had a comment for Mr. Lee on the idea of
not-for-profits banding together to set prices. I believe that
we certainly saw that in California. That was a reaction to the
original move by Aetna and others to gouge big discounts out of
separate units. So, this was the not-for-profits pushing back
after they had been told that they would lose a lot of their
patient base if they did not subscribe to discounts which were
arguably too deep. So, it is kind of a bounce back and forth as
the pendulum swings. Ms. Davis, of the 30 best in your study,
how many were for-profit hospitals?
Ms. DAVIS. Those were nearly all nonprofits, but as Dr.
Ginsburg said, most hospitals are nonprofit and all of the top
four studies were nonprofit.
Mr. STARK. They are, and we did our own study to try and
find in all of the for-profits, if any of them--this was just
with U.S. News and World Report's study. The closest we can was
one of two of them got a ninth ranking in orthopedic surgery,
and that was about as close as any quality hospital got in the
profit group. None of them are teaching hospitals, to my
knowledge, and then, of course, we have the example set by HCA,
HealthSouth, and Tenant, who are the largest criminals, Tenant
in California recently having killed 167 people by unnecessary
heart procedures. I don't think you can make a very good case
for the for-profit community based on the record that they have
established in this country to date. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you very much. Mr. Johnson?
Mr. JOHNSON. Thank you, Mr. Chairman. You know, since
enactment of the Medicare bill last year, many employers have
expressed interest in offering high-deductible insurance plans
along with HSAs to their employees. You know, employees will be
paying out of their pocket for their hospitals expenses. How
important is transparency to them? Can you tell me if there is
any transparency between doctors' costs, too?
Ms. HERZLINGER. Health Allies was started for just that
purpose. It was started with the idea that there would be high-
deductible accounts with Health Risk Assessments (HRAs) that
the employer, employee, or somebody else funded, for which they
could use the resources to pay part of that deductible. Health
Allies, which is what I referred to in my testimony, does is it
makes transparent to the user what the prices are for different
procedures and for different physicians. It also negotiates a
discount on their behalf. So, by aggregating individuals, it
makes these individuals as powerful as a group in seeking
discounts.
Mr. JOHNSON. Yes, sir?
Mr. LEE. Congressman Johnson, we have a problem with the
lack of transparency of hospitals. It is a real crisis at the
physician level, and generally there is not good information
there. There are a few very small, baby steps. The National
Committee for Quality Assurance has physician recognition
programs for physicians that provide diabetic care or cardiac
care, that provides a bundle of measures to say this doctor is
really good for these areas of care. Among the issues we happen
to be working on with CMS is to get to the physician level of
measurement and choice so consumers can get that information of
who should do my knee surgery. We are not there today.
Mr. JOHNSON. Yes, sir?
Mr. GINSBURG. I think a limitation of HSAs, according to
the way the legislation is written, is defining HSAs in terms
of a deductible and if you talk about someone who is being
hospitalized, inevitably they exceed that deductible. So, the
only price incentives they face, other than whether to go into
the hospital or not, is just if they have coinsurance where
they will bear, say, 20 percent of the price differences across
hospitals or if they have co-payments.
I think that there is some potential, which perhaps future
revisions of HSAs could address, about some incentives to
choose better providers or, in a sense, to make choices which
do not involve a large deductible and which would not qualify.
We published something in December reflecting a conference on
what are the innovative ideas in patient cost sharing. I am
concerned that many of those ideas just would not fit under the
way that the Congress has defined HSAs, and it is an area that
you might look at.
Mr. JOHNSON. I alluded to the fact that not-for-profits
were building more buildings, more hospitals--they are in our
area, for sure, and you all nodded yes--over the for-profits.
Are those beds going to be usable? Hospitals where I am are
turning those bed into family rooms, for crying out loud,
because they cannot fill them. Do you think that the
construction of not-for-profit hospitals is too high? If they
were taxed, they wouldn't be building them, would they? Does
somebody want to respond?
Mr. LEE. I would just respond, Congressman Johnson, that
health care very much is local, and in some communities there
is undercapacity because of lack of building, but in many
communities, there is overcapacity. So, I think that needs to
be looked at on a community-by-community basis in terms of the
need for new hospitals beds or not.
Mr. JOHNSON. Yes, but are not-for-profits building more
than for-profits? Because it used to be the other way around,
it seems to me.
Ms. KANE. It really is a function of your local market.
That is who is there, perhaps you know, that is where they tend
to stay. For-profits can really cruise the country and look for
a location they want to locate. Nonprofits tend to stay local
and look for local opportunities, so they may be more likely to
build in your market because that is where they are.
Mr. JOHNSON. Thank you. I appreciate your comments.
Chairman HOUGHTON. Thanks. Mr. Sandlin?
Mr. SANDLIN. Thank you, Mr. Chairman. I just have one
question. Dr. Ginsburg, from the information that has been
provided to me, most of these tax-exempt hospitals are
currently running at about a 5-percent margin, and if we change
the tax-exempt status of those hospitals, do you think we run
the risk of those hospitals closing or going bankrupt, and then
obviously not being able to provide services to the
communities?
Mr. GINSBURG. Yes, well, nonprofit hospitals need to earn a
margin if they are to have capital to expand and replace
themselves. So, because they cannot get equity capital, they
have to rely on their retained earnings and debt. So, just
seeing a nonprofit hospital earn a return is not a sign that it
is going awry. Certainly, anything which took away the tax-
exempt status would certainly hurt the abilities of these
hospitals to either continue operating or certainly to have
capital investment to expand.
Mr. SANDLIN. If, in fact, it is only 5 percent, not only
would it take away, but it might drive the stake in the heart
to kill the hospital by taking away the tax-exempt status. Is
that correct?
Mr. GINSBURG. I do not have information to be able to agree
or disagree about how important that would be.
Mr. SANDLIN. Would you think that taking away the tax-
exempt status is a larger financial penalty than the 5-percent
margin under which they are currently operating?
Mr. GINSBURG. That is really a quantitative question as to
how valuable that tax----
Mr. SANDLIN. Would you rather have a 5-percent margin or
the tax-exempt status?
Mr. GINSBURG. I am not prepared to speak to that.
Mr. SANDLIN. You do not know if you would rather have a
tax-exempt status or a 5-percent margin?
Mr. GINSBURG. No, I do not know and they have both now.
Mr. SANDLIN. Well, I think that answers the question. Thank
you.
Chairman HOUGHTON. Well, thank you very much. This is the
beginning of a long process. I appreciate your expertise and
your frank discussion. Good luck and we will be in touch with
you later. Thanks very much. I would like to ask the second
panel to come up here. That is David Bernd, who is Chair of the
American Hospital Association (AHA) Board of Trustees; Randy
Sucher, Executive Vice President and Chief Operating Officer
(COO) of Southern Medical health System, in Mobile, Alabama;
Richard Morrison, Regional Vice President, Florida Hospital for
government; and also Harold Cohen, Dr. Cohen, a consultant with
Hal Cohen of Baltimore. I am sorry that Ben Cardin is not here,
Doctor, wherever you are, because he wanted to introduce you,
but I am sure he will have something to say when he comes back.
He is managing a couple of bills on the floor.
All right. We are going to try to do this a little more
expeditiously because we do have votes coming up in about an
hour. If we could have your testimony, and I think the panel
has thinned out a little bit so we will not have quite as many
questions. I really appreciate your being here, and, Mr. Bernd,
will you begin?
STATEMENT OF DAVID BERND, CHAIR, AMERICAN HOSPITAL ASSOCIATION
BOARD OF TRUSTEES
Mr. BERND. Thank you, Mr. Chairman. My name is David Bernd.
I am president and CEO of Sentara Healthcare in Norfolk,
Virginia, and chairman of the board of Trustees of the AHA.
Sentara began in 1888 as a 25-bed retreat for the sick and now
serves more than 2 million people in the Hampton Roads area.
That is a big change, but what has not changed is the caring
and compassion with which our people do their jobs. All the
good things that hospitals do are done in the face of mounting
challenges; 44 million uninsured Americans is one of them. It
is a fundamental problem that permeates every aspect of our
health care delivery system. We recognize that hospital billing
and collection policies have come under increased scrutiny.
Hospitals, led by the AHA, are taking substantial steps to
demonstrate that their compassion extends from the bedside to
the billing office.
The AHA board recently developed a set of principles and
guidelines to help hospital leaders as they struggle to help
patients of limited means. My written testimony has details,
but the guidelines cover topics such as offering discounts to
patients who do not quality for charity care and making sure
patient accounts are pursued fairly and consistently. As of
today, over 2,500 hospitals have signed a confirmation of their
commitment to follow these guidelines, and the number is
rising.
With recent guidance that we requested from the Federal
government, it is now clear that fear of violating Federal
regulations no longer should impede hospitals' charity care
efforts. At the same time, we know that the transparency factor
is also important. We are attacking this issue on two fronts:
we are working with CMS, the Joint Commission, and other
organizations on the quality initiative to make information
about hospital quality available in a useful way to the public.
Nearly all hospitals eligible to take part in the initiative
are doing so. A consumer-oriented website will be up early next
year.
The important goal of transparency is pricing information.
Our principles and guidelines include this statement: hospitals
should make available for review by the public specific
information in a meaningful format about what they charge for
services. The key word, Mr. Chairman, is ``meaningful.''
Publishing our list of master charges would require patients to
sift through a document containing tens of thousands of
diagnostic codes. There are better, more meaningful ways to do
this, and I will outline some of these suggestions in my
statement.
Regardless of how prices are displayed, hospitals have
always helped patients who cannot pay. At Sentara, for
instance, 63-year-old Cora Brown came to us without insurance
and was diagnosed with colon cancer. Our staff treated her with
the respect and compassion every human being deserves, helped
her apply for Medicaid, and covered most of her medical
expenses that were not covered. Cora is just one example of a
patient who received care regardless of her ability to pay, and
we are just one example of how so many hospitals extend their
compassion to the financial side of caring.
Some have claimed that hospitals are subsidized for this
kind of care through special payments from Medicare. This is
inaccurate. While every hospital in every community serves
patients who are unable to pay, Medicare's disproportionate
share payments and indirect medical education payments, while
important to the industry, do not go to every hospital. They
are targeted only to specific hospitals, and they are not
intended by Congress to offset or subsidize the actual costs of
uncompensated care that individual hospitals incur.
Finally, let me touch on the tax-exempt status, Mr.
Chairman. Hospitals are the lifeline of many communities, and
not-for-profit hospitals, which receive certain tax exemptions,
are governed by the community and exist to meet the community's
needs. Since 1969, the promotion of health has been explicitly
recognized as a purpose meriting tax exemption. In 2002, 84
percent of community hospitals reported that they work with
other providers or public agencies to conduct community health
assessments. They determine what services are needed, and then
they work together to make those services happen. From homeless
shelters to school vaccination programs to free health
screenings, hospitals take medical care far beyond the hospital
walls to get at where it is needed--in the community.
To close, let me again stress that the people of America's
hospitals work hard every day to meet the needs of their
communities. They are why our Nation has the best health care
in the world. Making sure all Americans can take advantage of
that health care is a huge challenge. Hospitals are working
diligently to address the specific issues that I have outlined
here today, and nothing will make a greater improvement than
all of us working together to address the real need: health
insurance coverage for everyone. I will be happy to respond to
your questions. Thank you.
[The prepared statement of Mr. Bernd follows:]
Statement of David Bernd, Chair, American Hospital Association Board of
Trustees
Good morning, Mr. Chairman. I'm David Bernd, president and chief
executive officer of Sentara Healthcare in Norfolk, Virginia. I also
serve as chairman of the American Hospital Association's Board of
Trustees. On behalf of our almost 5,000 hospital, health care system,
network and other health care provider members, the AHA appreciates the
opportunity to testify today on ``Tax Exemption: Pricing Practices of
Hospitals.''
Sentara Healthcare began in 1888 as a 25-bed Retreat for the Sick.
Today it is the largest not-for-profit, integrated health care provider
in southeastern Virginia and northeastern North Carolina, serving more
than 2 million people. Our facilities include six acute care hospitals,
one extended stay hospital and more than 70 other sites of care, 25
primary care practices and a full range of health coverage plans, home
health and hospice services, physical therapy and rehabilitation
services, urgent care facilities, ground medical transport services,
mobile diagnostic vans, and two health and fitness facilities. We are
also the region's only Level One Trauma Center.
The Effect of the Health Insurance Crisis on Patients and Hospitals
Mr. Chairman, our nation's health care system is in desperate need
of repair. Medicare and Medicaid, two government programs that support
half of the care hospitals provide, reimburse hospitals at less than
the cost of providing those services. Insurers negotiate big discounts.
Meanwhile, rapidly rising technology costs, aging facilities in need of
repair, and a shortage of workers all place increasing burdens on
hospita l resources that are already struggling to meet rising demand.
T hese factors combined make it difficult for the people of America's
hospitals to continue meeting the growing health care needs of their
communities.
But more important are the nearly 44 million Americans whom the
Census Bureau estimates have no health insurance coverage--although as
many as 82 million, according to a recent report, lack health insurance
coverage at some point during the year. Millions more are underinsured.
Mr. Chairman, we lack a social policy in America that provides health
care coverage for all. In the meantime, hospitals are asked to fill the
gap, and they try to, for everyone who walks through their doors. In
fact, in 2002, hospitals absorbed more than $22 billion in
uncompensated care costs for patients who couldn't pay for the care
they needed. But more is required to meet the health care needs of the
uninsured, and America's hospitals cannot solve the problem on their
own. To do so would jeopardize their ability to survive and serve the
health care needs of everyone in their community, especially with one-
third of hospitals losing money overall, and another third on the
financial brink.
The AHA is a national partner in the Cover the Uninsured effort,
sponsored by the Robert Wood Johnson Foundation to shine the national
spotlight on the plight of the uninsured. Of the more than 2,300 local
events held nationwide during Cover the Uninsured Week last month,
hospitals sponsored or took part in many of the more than 1,000 health
and enrollment fairs that included helping eligible residents sign up
for coverage programs.
And many hospitals have staff on duty who are dedicated to helping
patients of limited means identify and sign up for Medicaid or other
programs, or to access charity care in other forms.
The AHA's Principles and Guidelines
Recognizing that the growing problem of the uninsured was demanding
national leadership as hospitals struggled to help their patients who
could not pay, the AHA convened a broad-based advisory group of
hospital leaders to develop comprehensive principles and guidelines
around better hospital billing and collections practices. These
guidelines were discussed by hospital leaders across the country and
approved by AHA's Board of Trustees. This effort to provide
comprehensive guidance to the hospital field will make a positive
contribution to helping many Americans better afford hospital care.
The principles and guidelines (attached), sent to all hospitals in
December 2003, put patients first and embody the longstanding mission
and goals of every hospital:
1. Treat all patients equitably, with dignity, with respect and
with compassion.
2. Serve the emergency health care needs of everyone, regardless
of a patient's ability to pay for care.
3. Assist patients who cannot pay for part or all of the care they
receive.
4. Balance needed financial assistance for some patients with
broader fiscal responsibilities in order to keep hospitals' doors open
for all who may need care.
The document also includes specific guidelines on:
1. Helping Patients with Payments for Hospital Care, which
includes making available to patients and others in the community
meaningful information about the hospital's charges;
2. Making Care More Affordable for Patients with Limited Means,
which includes offering discounts to patients who don't qualify for
charity care; and
3. Ensuring Fair Billing and Collection Practices, which includes
ensuring that patient accounts are pursued fairly and consistently,
reflecting the public's high expectations of hospitals.
Some state hospital associations have developed similar guidelines
to help uninsured and underinsured people. The Healthcare Association
of New York State (HANYS), for example, issued guidelines in January
2004. HANYS firmly asserts the principle that ``fear of a hospital bill
should never get in the way of a New Yorker receiving essential health
services.'' The guidelines help hospitals meet that commitment,
including a sample document to guide hospitals in communicating
consumer-friendly financial assistance policies to the public in
language that the patient can understand.
HANYS surveyed its members to ascertain their status with
implementing HANYS' financial aid/charity care guidelines, and to date
has received responses from almost 70% of the hospitals. About 80% of
respondents indicated they have updated their policy within the last
six months. More than 75% have eligibility standards at or above 200%
of the federal poverty level. And more than 95% initiated staff
training programs on charity care policy.
Clearly, the hospital field is responding to the problems at hand
and to the AHA and state hospital association guidelines. In May, we
asked hospitals to share, in writing, their commitment to fulfilling
the AHA's principles and guidelines. Just weeks later, more than 2,300
hospitals have signed an AHA Confirmation of Commitment, pledging that
they either meet or exceed these guidelines or are working diligently
to do so.
The AHA guidelines have also met with support from consumer groups.
Families USA, a leading consumer health care advocacy organization,
said ``our organization believes the Principles and Guidelines adopted
by the AHA Board of Trustees--are an important and commendable
initiative.'' The Access Project, committed to improving access to care
for uninsured and underinsured people, wrote, ``We applaud the American
Hospital Association's Principles and Guidelines--We believe that
American hospitals and patients would benefit from their full
implementation.'' And the National Alliance for Hispanic Health
commended the guidelines, calling them a critical step toward better
serving the uninsured.
Sentara Healthcare is a strong supporter of these guidelines, and
as AHA Chairman I was proud to be the first to sign the Confirmation of
Commitment. But we are certainly in very good company.
Cooley DickinsonHospital, a 125-bed community hospital in
Northampton, Massachusetts, is just one example of a hospital that
exceeds the guidelines. Working with Hampshire HealthConnect, a
community grassroots organization dedicated to helping uninsured
people, Cooley Dickinson has established a program to reach out to
uninsured patients who need help with their medical bills. At
registration, patients are provided a one-page flyer describing how
they can get assistance. Hampshire HealthConnect staff, which initiates
contact with patients during their stay in the hospital, provides a
full range of services to help patients qualify for coverage under a
variety of programs. In 2003 the program assisted 1,428 uninsured and
underinsured patients, connected 879 patients to free or reduced cost
medication programs, helped 479 patients gain approval for ``Free
Care'' to cover their hospital bills, and provided 125 patients with
access to mental health counseling.
The Challenge of Federal Regulations
In working to fashion the AHA's principles and guidelines it became
clear that hospitals were concerned about violating federal regulations
governing billing and collections that had accumulated over many years.
This became an impediment to hospitals' efforts to assist patients of
limited means with their hospitals bills. The rules are numerous, often
confusing and, as even the administration acknowledged, ``scattered''
among many different official publications.
The AHA sought to address that issue and asked the administration
to bring new clarity to the rules to assist hospitals in their efforts
to improve their charity care and other payment policies for patients
of limited means. We produced an analysis of the rules and asked the
administration for help in clearing away the unneeded regulatory
confusion.
Thanks to Secretary Thompson's leadership, the Centers for Medicare
& Medicaid Services (CMS) and the Office of Inspector General (OIG)
released guidance addressing many of the concerns AHA raised on behalf
of the field. The agencies recently followed up on that guidance at a
forum that gave hospitals an opportunity to ask specific questions.
Because of these efforts, hospitals are moving ahead to improve their
charity care and financial assistance policies and practices and make
them available to even more patients of limited means.
Empowering Patients With Useful Information
Mr. Chairman, hospitals are committed to increasing the
transparency of our efforts to best serve our patients. We agree that
the current health care ``system'' does not serve Americans well in
many ways, and that there must be more information available to
consumers so they can make better decisions about their care. We're
committed to working with the committee and others to develop these
methods. One way we're already doing this is on the issue of quality.
For the last two years, we've worked with the Association of
American Medical Colleges, the Federation of American Hospitals, CMS,
the Agency for Healthcare Research and Quality, the Joint Commission,
the National Quality Forum, AARP, AFL-CIO, the Disclosure Project, the
American Medical Association and National Association of Children's
Hospitals and Related Institutions on the public-private project, The
Quality Initiative. The Quality Initiative has one goal: to provide
patients and families with information to help them make decisions
about care choices. It has already begun to collect and display
hospital performance information about 10 measures of pneumonia, heart
attack and heart failure care, and will soon expand to include more
measures of heart attack, heart failure and pneumonia, and will add
measures on the prevention of surgical site infections. Currently, the
data are being displayed on CMS.HHS.gov in a manner that is designed
for use by health care professionals. A more consumer-friendly display
will appear on Medicare.gov early next year.
The Medicare Modernization Act of 2003 required that hospitals paid
under the inpatient perspective payment system (PPS) report on these
same measures in order to receive the full Medicare inpatient PPS
inflation update for fiscal years 2005-2007. Even before this
requirement was enacted, more than two-thirds of PPS hospitals had
committed to participate in this project and to provide the public with
useful information on hospital quality. Today, virtually all of the
eligible hospitals are participating.
We're working to ensure transparency on other fronts as well. The
government believes hospital pricing information should be transparent
and so do we. We encourage all hospitals to communicate pricing
information effectively with their patients. Our principles and
guidelines include this statement:
``Hospitals should make available for review by the public specific
information in a meaningful format about what they charge for
services.''
The key word here, Mr. Chairman, is ``meaningful.'' Publishing our
master list of charges would mean patients would have to sift through a
document containing tens of thousands of diagnostic codes, know all of
the care that might be required for a specific condition and then piece
together the information to arrive at a price.
While it is difficult for physicians and health care
professionals--let alone a non-medical person who suddenly is dealing
with a medical crisis or condition--to predict the specific course of
care and the associated charges, we agree that it is important for
patients and families to have access to meaningful information on what
their bill might be. Fear of a hospital bill should not deter a person
from seeking medical care. Such information will help patients better
understand their financial obligations and plan, with the hospital, for
any financial assistance they may need.
There are many ways hospitals can share meaningful charge
information with patients. One approach is to make available the
average charges for the top 20 diagnostic related groups and top 20
outpatient procedures performed by the hospital, or itemize the charges
by category of service, i.e., room and board, operating room,
laboratory, etc. Providing patients with a range of charges for a
particular condition also can help them understand how the actual
services provided and associated charges may vary.
Another approach provides information for a hospital's average, low
and high charge, broken out by severity for each of the 20 top
conditions and 20 top outpatient procedures. This type of detailed
charge information will provide a more definitive perspective on the
range of charges for the most common services in the hospital.
The AHA's principles and guidelines also state that:
``Hospitals should make available to the public information on
hospital-based charity care policies and other known programs of
financial assistance.''
At Sentara, we routinely assist patients who may not have the
ability to pay for medical care, like 63-year old Cora Brown. She came
to our hospital without insurance and was diagnosed with severe anemia.
Subsequent medical tests revealed colon cancer that required surgery
and chemotherapy. Later tests revealed liver cancer, and required yet
more surgery and treatment. Sentara staff treated Ms. Brown with the
utmost respect and compassion--as they would any patient--even while
her medical bills continued to grow, and helped her apply for Medicaid.
Sentara has covered most of Ms. Brown's medical expenses.
We helped Kathy Sievert, a Virginia Beach accountant who declined
COBRA coverage after she was laid off following a company takeover. Ms.
Sievert's rationale was that she was healthy and wasn't in need of
medical care. That changed, however, on the day she was hit by a truck,
and woke up at Sentara Virginia Beach Hospital with her bones
surgically repaired and a $12,000 piece of titanium implanted in her
leg. One of our patient advocates attempted to help her apply for State
and Local Hospitalization assistance, but no funds were available. In
the end, Sentara covered almost $45,000 of Ms. Sievert's medical care.
And today, she has a new job with health insurance.
Government Special Payments to Hospitals
Some have claimed that special payments made through Medicare PPS
and through the Medicaid program and other government programs are
taxpayer-provided ``subsidies'' for the uncompensated care provided by
hospitals--care for which no payment is received. While hospitals in
every community serve patients who are unable to pay for their care,
not all hospitals receive these special payments; they are targeted
only to specific hospitals or other providers. A recent study prepared
for the Kaiser Commission on Medicaid and the Uninsured showed that, in
2004, the Medicare program, the federal portion of the Medicaid program
and several other government programs together provided $23.5 billion
in additional payments to care providers. However, these payments are
not intended to offset or subsidize the actual costs of uncompensated
care that hospitals incur.
Medicare Disproportionate Share (DSH) Payments
Medicare disproportionate share payments are made to some, but not
all, hospitals that serve low-income patients. While all hospitals
provide uncompensated care, about 2,724 hospitals, or 55 percent,
receive DSH payments. In 2004, according to the Kaiser Commission
report, hospitals received $7.6 billion in DSH special payments. There
is a minimum threshold that a hospital must meet to receive this
special payment and a formula that calculates the amount a hospital
receives. The formula combines two measures: the percentage of
inpatient hospital days attributable to Medicare patients in the
Federal Supplemental Security Income (SSI) program, and the percentage
of inpatient days attributable to Medicaid patients. There is currently
no measure for uncompensated care in the DSH payment formula.
In the Balanced Budget Refinement Act of 1999 (P.L. 106-113),
Congress directed the HHS Secretary to collect data from hospitals on
costs incurred in both the inpatient and outpatient settings for which
the hospitals are not compensated, including non-Medicare bad debt and
charity care. This is the first year that hospitals' data will be
available for analysis.
Medicare Indirect Medical Education (IME) Payments
The Medicare program makes special payments to teaching hospitals
under the inpatient PPS. A portion of these payments, directed to the
1,112 hospitals (23 percent of all hospitals) that train our future
physicians, was $2.9 billion in 2004, according to the Kaiser
Commission report. Indirect medical education payments compensate
teaching hospitals for the costs they incur in training physicians. As
a result of their education and research missions, teaching hospitals
must offer expensive, specialized, and sophisticated services that may
not be utilized optimally. Often, teaching hospitals care for the most
medically complex and costly patients in our health care system. The
Medicare inpatient payment system does not adequately measure and
compensate teaching hospitals for these additional patient care costs.
The IME payment adjustment is designed to account for patients'
severity of illness and the inefficiencies in operating a hospital
where teaching and research occur. For example, physicians-in-training
may order extra lab or other diagnostic tests because they are
inexperienced in practicing medicine. They may also ask questions and
rely on other health care personnel in the hospital for help, thus
making professional staff less efficient in delivering patient care.
IME payments are calculated using a formula that is based on an
individual hospital's resident-to-bed ratio. It does not include a
measure of uncompensated care.
Today, even including the targeted payments mentioned above,
Medicare pays only 98 cents for every dollar of care provided by
hospitals to Medicare beneficiaries. If Medicare DSH and IME funds were
to somehow be redirected to cover hospitals' uncompensated care costs,
rather than their current purpose of helping hospitals provide care to
Medicare beneficiaries, the Medicare reimbursement would drop to an
estimated 91 cents for every dollar of care provided by hospitals.
Tax Exempt Status--Key to Community Care
The underpinning for charitable tax exemption is public support for
activities that serve the larger good--a concept that encompasses the
broadest range of public purposes. The governing body of a charitable
organization is based in the local community, and has a fiduciary duty
to see that the organization is organized and operated to fulfill its
charitable mission.
Since 1969, the promotion of health has explicitly been recognized
as a purpose meriting tax exemption. Health care organizations may be
awarded tax-exempt status by demonstrating that they promote health in
a manner that benefits the community as a whole. The premise underlying
the community benefit standard is that the promotion of health in a
manner that benefits the larger community serves a public purpose. The
promotion of health alone is not sufficient, however; how it is done,
when, and for whom are important factors. Tax exemption requires more.
The focus is not on what the hospital does but whether those actions
respond to community need. Providing charity care has been only one way
to demonstrate that benefit.
The community benefit test is still a sound and viable basis for
awarding tax-exempt status to hospitals. It places the focus at the
local level and examines the merits of individual situations against
the community environment in which they serve. The issue has been and
should continue to be whether they are providing public benefit.
Exemption is given in return for responding to the community's needs.
Hospitals are open 24 hours a day, seven days a week. The women and
men who work there--on the day shift, the swing shift or the night
shift--provide compassionate care and help bring new life into the
community. They provide medical care both within our four walls and in
other settings.
Hospitals provide emergency department care to all, regardless of
their ability to pay. Hospitals' uncompensated care, as well as
Medicare and Medicaid payment shortfalls, are costs absorbed in an
effort to serve our communities.
But hospitals across the country also provide a wide-range of
services for the benefit of those who don't seek care from the
emergency department, the pediatric unit or any other hospital
department. Instead they take the care to those who need it, delivering
charity care and offering special non-compensated services and
programs, including community education and outreach programs, health
screenings, and subsidized medical education and research. The Cover
the Uninsured Week activities I mentioned earlier are a good example of
these efforts.
Most hospitals work with local providers and organizations to
assess community status and needs. In 2002, 84 percent of hospitals
reported that they worked with other providers or public agencies to
conduct health status assessments of their communities. These
assessments help them determine what programs and services should be
targeted at various populations, such as minority, elderly or low-
income, as well as to the broader populations.
In South Bend, Indiana, St. Joseph RegionalMedical Center works
with more than 45 community agencies and businesses to provide health-
related services to the working poor and underserved--those who do not
have insurance and are not eligible for governmental assistance. Their
program includes 65 volunteer physicians and almost 100 community and
student volunteers providing a range of special services such as eye
care, on-site mental health care, access to a food pantry, and
assistance with food stamp applications. And St. Joseph's takes care of
physician visits, lab work, medications, and inpatient and outpatient
medical care.
Trinity Regional Medical Center in Fort Dodge, Iowa, created the
CAN, the Community Action Network. Working with schools, government,
law enforcement, local businesses and human services, CAN provides
community health and wellness screenings, free health screening, and
substance abuse and positive parenting programs.
These are just two specific examples of what hospitals around the
country are doing to ensure the health of their communities. Others
partner with community members to operate homeless shelters. They take
medical care where it is needed, collaborate with others in their
community to determine what non-medical services might be needed, and
then work to provide it--all in an effort to do what it takes to
improve the health of their communities.
Conclusion
Mr. Chairman, the people of America's hospitals work very hard,
every day, to get high-quality care to all who come through their
doors. They do it with caring and compassion that extend from the
bedside to the billing office. And they do it in the face of mounting
challenges. They are a key reason why our nation has the best health
care in the world. But ensuring that all Americans can take advantage
of that health care when they need it is a huge challenge. We can take
a giant step forward by working together to address the problem of the
uninsured. We look forward to working with you to help solve that
problem, and helping all Americans get the health care they need, when
they need it.
Chairman HOUGHTON. Thanks very much, Mr. Bernd. Mr. Sucher?
STATEMENT OF RANDY SUCHER, EXECUTIVE VICE PRESIDENT AND CHIEF
OPERATING OFFICER, SOUTHERN MEDICAL HEALTH SYSTEMS, INC.,
MOBILE, ALABAMA
Mr. SUCHER. Thank you, Mr. Chairman. I come from Southern
Medical Health Systems, a small for-profit company in Mobile,
Alabama. We operate Springhill Medical Center, a private for-
profit hospital. Establishing prices for hospital procedures
has changed a lot, as we have talked today, as the practices of
insurers and Medicare have evolved.
When Medicare adopted DRGs (diagnosis-related groups) in
the eighties as the basis for payment, this generally
introduced the concept of incentives for hospitals to control
costs. At the same time, it reduced the impact of the line-item
as that became less important because individual prices have a
minimal effect on payments to hospitals except in the rare
cases that an insurance company, HMO, or PPO paid for services
based on a negotiated percentage of charges.
So, why do hospitals charge for every item and service?
One, we still have to Medicare cost reports in order to
properly allocate our costs. For those Medicare cost reports,
we have to know the detailed charges to prepare those cost
reports. We also identify the usage of items internally for
internal control and internal costing purposes for hospital. We
also provide those detailed items, in providing detailed bills
with proper coding for insurance companies, as often requested
by insurance companies or individuals. So, even though we do
not like to, the practice of charging for every individual item
still continues in health care today.
Charges are generally developed based on detailed analyses
of prominent payer fee schedules in the current market. For
example, if Blue Cross were to pay us $2,400 for an outpatient
cardiac catheterization and the standard discount for Blue
Cross patients in Alabama is around 50 percent, the standard
charge may be 200 percent of that fee schedule amount.
Determining the allocation of that overall intended charge to
the components of care is difficult because every case is so
different. As we have already talked today, health care is not
like an assembly line in an automobile manufacturing plant.
Every patient is very different, with varying complications,
comorbidities, and severity of illness. Every physician is also
different in their treatment protocols for each patient, using
various supplies, pharmaceuticals, and diagnostic tests.
Hospital care is really much more akin to a chef making seafood
gumbo where almost all the outcomes are successful, but no two
taste or cost exactly the same, and there are very large
variations. In fact, hospitals have little control over the
costs since only physicians and not hospitals order the tests
and ultimately determine the cost and what is done for each and
every patient.
So, why do hospital charges vary so much from costs? One
reason is that every payer contract we have includes a
provision that for any particular individual patient, the payer
will pay the hospital the lesser of the negotiated rate or the
hospital's customary charges. Negotiated rates for each payer
are generally a fixed rate that the insurer pays for an average
episode of care across a broad spectrum of patients. For those
patients that require a lot of extra care, like a heart cath
patient requires a lot of stents, hospitals take a terrible
beating when they take that average payment. So, hospitals
cannot afford to not make money on the low-end cases by ever
having their charges be less than the negotiated rates. High
charge markups generally help hospitals avoid that catch-22.
The second reason for high hospital charges, as we already
talked about a lot today, is cost shifting. It has occurred for
many years in the industry and will continue to occur until
massive changes occur. To make up for those payers that often
pay hospitals below our actual cost--Medicare and HMOs
included--and to be able to provide some level of free care,
hospitals must shift unfunded cost to payers--generally PPOs,
commercial insurance, and the uninsured--that pay some
percentage of charges. In our case, these payers represent less
than 10 percent of our revenue, but they comprise most or all
of our profits.
The aforementioned item in the requirements that hospitals
charge all patients the same price for the same services
results in high prices for the uninsured. Until recent proposed
changes in regulations, hospitals have been very concerned with
giving discounts to patients other than as the result of
contractual requirements. Now most hospitals, including ours,
have a financial screening preregistration process whereby an
uninsured patient can receive a discount based on ability and
willingness to pay.
One thing we have talked a little about is efficiency. A
lot has been said about rewarding hospitals for efficiency. One
of the most perplexing aspects of Medicare, which espouses to
reward efficiency through the DRG system, is that the
application of the wage index guidelines actually penalizes
hospitals like those in Alabama for providing a lower cost of
care. We actually get much lower payment than most other
hospitals in the Nation, even though we are, in fact, a low-
cost provider State. Thank you very much.
[The prepared statement of Mr. Sucher follows:]
Statement of Randy Sucher, Executive Vice President and COO of Southern
Medical Health System, Inc., Mobile, Alabama
Establishing prices for hospital procedures has changed as the
practices of insurors and Medicare have evolved. Before Medicare
converted to payment to hospitals based on DRG's (diagnosis related
groups) in the 1980's, charges for individual items involved in
providing care were calculated as a markup of estimated or actual
costs. Individual item costs didn't matter too much because Medicare
(and other payors) paid their pro-rata percentage of a hospital's total
costs based on a ratio of costs to charges or average cost per day.
This payment often included an add-on for uncompensated care at all
hospitals and a return on equity for for-profit hospitals.
When Medicare adopted DRG's as the basis for payment, this
introduced incentives for hospitals to control costs. Line-item pricing
became even less important because individual item prices have a
minimal effect on payments to hospitals, except in the rare cases that
an insurance company, HMO or PPO paid for certain services based on a
negotiated percentage of charges. But in order to be able to allocate
costs for Medicare cost reporting purposes, identify the usage of items
involved in providing care to a patient for hospital internal costing
purposes, and to provide a detail bill as often requested by insurance
companies, the practice of charging for every individual item consumed
by or for the patient has continued.
Charges are now developed based on detailed analyses of prominent
payor fee schedules by procedure code. If Blue Cross pays $2400 for an
outpatient cardiac catherization and the standard discount for Blue
Cross is 50%, the charge (allocated to major components) may be 200% of
the fee schedule amount. But the allocation of the intended overall
charge to the components of the care is difficult because every case is
so different. Health care is not like an assembly line at an auto
manufacturing plant. Every patient is different with varying
complications, co-morbidities and severity of illness. And every
physician is different in their treatment protocols for each patient
using various supplies, pharmaceuticals, and diagnostic tests. Hospital
care is much more akin to great chefs making seafood gumbo, where
almost all outcomes are successful, but no two taste or cost the same.
So, why do hospital charges vary so much from costs? One reason is
that every payor contract includes a provision that for any particular
patient, the payor will pay the hospital the lesser of the negotiated
rate or the hospital's customary charges. Negotiated rates are
generally a fixed rate that the insuror pays for an average episode of
care (for example, a heart catheterization). Hospitals take huge losses
on cases when complications occur, or when routine heart caths wind up
involving expensive stents. So, Hospitals cannot afford to not make
money on the low-end cases by having the charges be less than the
negotiated rates. High charge markups generally help hospitals avoid
this Catch 22.
The second reason for high hospital charges is cost shifting which
has occurred for many years in the industry. To make up for those
payors that often pay hospitals below our total cost (Medicare and
HMO's included), hospitals must shift some of these cost to payors
(generally PPO's) which sometimes pay a percentage of charges. Although
these payors usually represent less than 10% of a hospital's revenue,
they can comprise a fair share of hospital profits.
The requirements that hospitals charge all patients the same price
for the same services results in high prices for the uninsured. Until
recent proposed changes in regulations, hospitals have been very
concerned with giving discounts to patients other than as the result of
a contractual requirement. Now, most hospitals, including ours, have a
financial screening process whereby an uninsured patient can receive a
discount based on ability and willingness to pay.
As you know, hospital pricing policies are very complex and greatly
misunderstood by the general public and many Medicare beneficiaries.
Patients tend to focus on the detail bill, whereas hospitals and
insurers look at the total bill for the services rendered. The industry
is very interested in finding a solution to simplify and clarify our
billing practices.
Mr. Chairman, thank you for the opportunity to testify before you
today.
Chairman HOUGHTON. Thank you so much. Mr. Morrison?
STATEMENT OF RICHARD MORRISON, REGIONAL VICE PRESIDENT FOR
GOVERNMENTAL AND REGULATORY AFFAIRS, ADVENTIST HEALTH SYSTEM,
ORLANDO, FLORIDA
Mr. MORRISON. Mr. Chairman and Members of the Subcommittee,
I am Richard Morrison. I am with the Adventist Health System
based in Orlando, Florida. We started out in 1908 with one
hospital. We now have 38 hospitals in 10 States. We believe we
provide a significant amount of community benefit in the areas
that we have our hospitals and nursing homes. I am not here
today to talk specifically about that. I am appearing today to
discuss the relationship between hospital charges and costs.
In my remarks, I would like to touch upon the relationship
between cost and charges, charges and payment. Do charges
differentially impact the uninsured? What does it cost to
maintain a current charge structure? Do charges serve a
purpose? Can the current system be changed? Can transparency be
improved?
There is, as has been noted, a very tenuous relationship
between cost and charges in the health care industry. It should
be noted, however, that this relationship did not come about
overnight. It has taken place over a 30-year period and has
been in response to changes in a Federal policy as it relates
to Medicare and Medicare reimbursement, industry policy, and
responses by the hospital industry in and of itself.
Hospitals do have charge masters, as, Mr. Chairman, you
noted. Some may be as much as 25,000 items. This is the list
from which the bills are created. The bills are not necessarily
what gets paid. Everyone gets billed the same amount. What
people pay or what the expectation of payment is is what
differs greatly.
Medicare does not negotiate. It pays a flat amount based on
a diagnosis. Medicaid pays a per diem. Health Maintenance
Organizations (HMOs) and PPOs may pay on a Medicare-based DRG,
they may pay a per diem, or in our case, they pay a discount
off of charges. Almost all of our accounts with managed care
companies are a discount off the charges, with a cap on the
amount that we can increase our charges year to year.
The system of payment for the uninsured is a little more
complex. For non-elective care and all admissions that come
through the emergency room, we have the expectation of payment
of zero for those with incomes under 150 percent of poverty or
less, and that expectation of payment can rise to 60 percent of
charges for those up to 400 percent of poverty, or about
$75,000 for a household income of four people. Overall, these
expected payments are subject to a cap of 25 percent of
household income.
We also have methods available that can deal with those
people who are above the 400 percent of poverty line so that
they are not facing the full impact of high charges. We will
work with these individuals and try to reduce their burden and
can guarantee them a discount of 30 percent or more, depending
upon their individual circumstances.
Charges do have some utility in health care even though
there is only a passing relationship to cost. As was noted,
they are still required by Medicare and some insurance
companies and form the basis of payment. Maintaining the
complex charge structure is expensive. We have to have over 300
people to track and audit the process of billing.
The charging structure also creates confusion for the
consumer. This goes beyond the oft-quoted $10 aspirin. This
includes the problem of giving a bill to an individual that
says that the bill is $25,000, your insurance company paid
$12,000, you pay $500. The question is: what happens to the
rest? It gives rise to the issue of charges are too high in
health care.
As we go to the high-deductible plans and the consideration
of HSAs, hospitals must give consideration to extending
discounts to the HSAs and the insurance companies themselves
must begin to negotiate on behalf of the beneficiary so that
discounts are passed on to the individual. Modifying our
structure is going to be extremely complex. Even if we were to
try to go to a diagnosis-based group, we are still going to
have to maintain the tracking of resource consumption.
If we look at the issue of transparency, I believe we do
have transparency in outpatient services. Where it will become
very, very difficult is looking at price transparency on the
inpatient side because there is a tremendous amount of
variation that can take place even for something so simply as a
routine delivery. Cost can vary as much as 25 percent for
something that you would expect to have a high degree of
predictability. This is owing to the idiosyncratic factors of
health of an individual as well as to practice patterns of a
physician.
To conclude, hospital charges today are a product of market
and regulatory behavior over the last 30 years. The connection
of charges to cost is tenuous. Charges do have some utility and
are still required to be maintained. Hospitals can deal with
the imbalance of cost and charges through aggressive
discounting, particularly to the uninsured. Changing the system
to something more understood and administered will take
extensive work and creativity. Mr. Chairman, Members of the
Committee, thank you for the opportunity to speak with you
today.
[The prepared statement of Mr. Morrison follows:]
Statement of Richard Morrison, Regional Vice President, Florida
Hospital for Government, Regulatory and Public Affairs, Orlando,
Florida
Mr. Chairman and Members of the Subcommittee:
My name is Richard Morrison; I am Regional Vice President for
Governmental and Regulatory Affairs for the Adventist Health System in
Orlando, Florida. We own and operate 38 hospitals in ten states. Since
1908 we have operated our flagship hospital, Florida Hospital, in
Orlando. We established and operate our hospitals as part of our church
mission to provide health and healing to our communities. From the
beginning to the present day, Adventist Health System takes its
obligation to meet the health needs of the communities in which we live
seriously. In 2003, Florida Hospital provided uncompensated care to the
uninsured/charity at a cost of $36 million dollars. In addition $29
million in cost of care was provided to those classified as bad debt.
Finally, we provided $45 million in uncompensated cost of care to
Medicare patients and $4 million in uncompensated costs to Medicaid
patients. Beyond the direct cost of providing care, the hospital is
committed to providing needed services to the community. In 2003, we
spent $100million in expanding emergency care and other capital
improvements. Over the next seven years we expect to spend over $700
million to expand capacity to meet the growing needs of our community.
I am appearing here today to discuss the relationship between
hospital charges and costs. A great deal of controversy has recently
been created over hospital charges. Many believe that hospital charges
are too high and that they do not have any rational relationship to the
cost of health care. The observation that health care costs and charges
have, at best, an attenuated relationship is essentially correct.
However, this relationship did not occur arbitrarily, nor did it occur
overnight. Rather, the disconnect between costs and charges evolved
over the span of nearly 30 years as a result of pressures exerted by
the insurance industry, the federal government and from within the
health care industry itself. It would take too long to recount the
history of costs and charges. I have provided a short history on the
subject for your review. In my remarks today I would like to touch upon
six questions:
1. What is the relationship between cost and charges, and charges
and payment?
2. Do charges differentially impact the uninsured?
3. What does it cost a hospital to maintain the current charge
structure?
4. Do charges serve a purpose?
5. Can the current system be changed and what are the barriers to
change?
6. Can transparency in pricing be improved?
As I noted there is a very tenuous relationship between cost and
charges. The relationship varies hospital to hospital and within a
hospital itself the mark up for items will vary dramatically.
Frequently, less costly items receive a greater mark up than more
costly items. Furthermore, some charges for services, such as the cost
for room and board and nursing care, understate the true cost. In
short, in the hospital industry, as in every other industry, the
practice of charging for individual items, is the chosen means, however
imprecise, of allocating the cost and general overhead of the hospital
and the overhead associated with a class of items.
Hospitals have extensive charge masters that may list as many as
25,000 or more line items. It is from this list that hospital bills are
created. It is also the basis for information used in the quality
assurance process, the utilization review process, cost accounting and
for various reports to the state and federal government. All patients
are charged on the same basis but all payers do not pay what is
charged. Medicare pays based upon the diagnosis and sets the payment.
Medicaid pays based upon a non-negotiated per day rate. Managed care
companies pay upon a diagnosis basis, a per diem basis or a discount
off of charges basis depending upon what is negotiated. I believe at
this time almost all of the managed care (HMO and PPO) contracts at
Florida Hospital are paid on a discount off charges basis. For our
major contracts we also have a cap on the allowable increase in charges
year to year. This cap is 5 to 6 percent. For those without health
insurance the expectation of payment becomes a bit more complex. For
non-elective care (and all admission through the emergency department)
the expectation of payment can be $0 for those with incomes under 150%
of poverty. The expectation rises to 60% of charges up to 400% of
poverty or $75,400 for a family of four. Overall these expected
payments are subject to a cap of 25% of household income.
For those who are above these income thresholds and who are
uninsured, there is the real potential of having to face the full list
price for hospital care. In 2003, only nine per cent of the uninsured
at our hospital paid more than 75% of charges. This nine percent of the
uninsured represented less than one percent of our patient population.
Adventist Health Systems does work with all of these patients to reduce
the financial burden and does have policies that allow the individual
to receive a 30% discount regardless of financial status.
Charges still have some usefulness despite the fact that they vary
significantly by institution and have only a passing relationship to
cost. Charges are still required by Medicare and by some insurance
companies. Medicare uses the reported charges to audit cost reports and
as noted to calculate outliner payments. Insurance companies use the
charges to project rates as well as to calculate payment in some cases.
Internal to the hospital, charges give some measure of resource
consumption but not one that is accurate at low units of analysis. At
best charges give a relative comparison between services. They are not
an elegant tool for management decisions. Maintaining the complex
charge and reimbursement system is also expensive. Our organization has
over 300 personnel whose primary responsibility is to track and audit
the complex billing process. There are additional costs incurred as
clinical personnel must record various charges for care taking away
from actual clinical time.
Charges can also be extraordinarily confusing for the consumer. The
problem goes beyond the oft-quoted $10 aspirin. It makes little sense
to the patient to see a statement that says the hospital bill was
$25,000, the insurance company paid $12,500, and the patient owes his
co-pay of $500--yet we are required to provide information on this
basis. A new challenge will occur for hospitals and consumers with the
advent of high deductible health plans and health savings accounts if
the current charge structure is not modified. To the extent high
deductible plans become a significant factor in the market place,
hospitals will have to consider the extension of discount policies to
these plans. We must also insure that any discounts given to plans are
extended to the beneficiary. In principle, there is not reason that
health plans with significant presence in a market cannot negotiate
discounts with hospitals on behalf of their members.
Modifying the current charging structure would be a complex task. A
simple roll back of charges may work for some institutions that do not
have discount based contracts and who do not have an extensive Medicare
population. It would be more difficult to do this for those who have
extensive contracts based upon discounts. In addition Medicare will
need to adjust its method for determining outlier cases, as well as
what it requires in its cost reporting methodology. Some have suggested
that the hospital industry move toward a diagnosis based payment
system. However, a diagnosis-based system will require some method of
tracking resource consumption as well as a greater uniformity in
physician practice patterns. The development of alternative
methodologies will take time and resources. Remember it took thirty
years to get us to where we are today
The final issue to consider is transparency. Is there a better way
to provide consumers with a clearer sense of what they will pay for
care? For most outpatient services this is not a major problem. Tests
are fairly discrete and outpatient surgery has more predictability.
Inpatient care is far less predictable. Within a given institution the
cost for treating a specific diagnosis can vary greatly. Even something
as seeming routine as a normal delivery can vary in cost by as much as
25%. This variance can be attributed to differences in physician
practice patterns as well as the health condition of the individual.
Further, a given diagnosis group may be made up of several different
individual classification of disease codes. At the hospital level,
there are generally not enough cases in a particular diagnostic
category to provide a meaningful average.
To conclude, hospital charges today are a product of market and
regulatory behavior over the last thirty plus years. The connection of
charges to cost is tenuous. Charges do have some utility and are still
required to be maintained. Hospitals deal with the imbalance of cost
and charges through aggressive discounting particularly to the
uninsured. Changing the system to something more easily understood and
administered will take extensive work and creativity.
Mr. Chairman, members of the committee thank you for the
opportunity to speak to you today.
Chairman HOUGHTON. Thanks, Mr. Morrison. Dr. Cohen--and
again, I am sorry that Ben Cardin isn't here to introduce you.
STATEMENT OF HAROLD A. COHEN, PRESIDENT, HAL COHEN, INC.,
BALTIMORE, MARYLAND
Mr. COHEN. Thank you, Mr. Chairman, Members of the
Subcommittee. I am here today to testify regarding the
experience of Maryland's Health Services Cost Review Commission
(HSCRC), which is the State agency in Maryland which regulates
hospital rates, as well as to answer any questions you might
have regarding the lessons to be learned regarding hospital
charge levels in the rest of the country.
The commission was created by the Maryland legislature in
1971 and began setting rates in 1974 for all acute care
hospitals. In 1977, Maryland entered into a demonstration with
Medicare and Medicaid whereby both government agencies agreed
to waive Federal supremacy and to pay Maryland hospitals on the
basis of rates set by the Health Services Cost Review
Commission, subject to a waiver test. That Medicare waiver was
later changed to an operating waiver subject to a payment test
with the considerable support of Senator Mikulski.
In setting rates, the commission's goal is to finance the
mission of efficient and effective hospitals. Hospitals are
expected to have missions that include care to the poor, and
some hospitals' missions included teaching and research. The
commission sets rates by comparing costs and making adjustments
which are not all that dissimilar to the kinds that the
Medicare system makes. I want to briefly discuss pricing
levels, equity, and access, and, if there is time, talk about
cost containment and data availability.
Since pricing levels are a focus of this hearing, I am
going to focus on them and the statistics that I present in all
the exhibits come from the AHA's 2004 edition of Hospital
Statistics, which has 2002 data. The national average markup,
as it shows, was almost 131 percent, meaning, on average,
hospitals charge about $23,100 for an admission that costs
$10,000.
There is a huge range in markups. Maryland has by far the
lowest markup, and well below the next-lowest, largely because
prices mean something. It is what, largely, everyone pays. In
addition, there is a common method for setting rates in
Maryland, along with pooling of uncompensated care, so that the
markups of all hospitals are fairly similar. In other States,
there is much greater variation in markups, with many
hospitals' markups being much higher than the national or State
average, some having charges more than 10 times their costs.
For hospital services, the typical markup in Maryland is
about 20 percent. That 20 percent roughly reflects about 8
percent for uncompensated care, because hospitals have to get
paid for the costs of the care, that they provide to the
patients who don't pay; about 7 percent for approved discounts;
and about 5 percent turns out to be for profits. That Exhibit 2
shows the average charge per case for the Nation and each
State. Again, Maryland has by far the lowest average charge,
being $9,945, which is a little more than half the national
average. New Jersey had the highest. The average charge per
case was $18,100 in 2002; it is now over $20,000, which
indicates that, as Paul Ginsburg mentioned in the first panel,
that once a patient goes to the hospital, they are almost
certainly going to exceed the deductible in a high-deductible
policy.
I want to discuss briefly--well, I am just about out of
time, so you can see the data. People in Maryland--one example
of the low charges in Maryland is that Medicare beneficiaries
in Maryland pay 20 percent of charges, and 20 percent of
charges is about $70 million less than paying the national co-
pays, which are based on 20 percent of national charges--though
they are coming down. There is a huge savings to the
beneficiary. Thank you very much.
[The prepared statement of Mr. Cohen follows:]
Statement of Harold A. Cohen, Ph.D., Consultant, Cohen, Inc.,
Baltimore, Maryland
Good morning Mr. Chairman and members of the Subcommittee. My name
is Hal Cohen and I am President of Hal Cohen, Inc., a healthcare
consulting firm in Baltimore, Maryland.
Before addressing the substantive issues, I would like to introduce
myself to you. Healthcare consulting is my third career. I am an
economist with a Ph.D. from Cornell University. My first career was
teaching economics, primarily government and business courses at the
University of Georgia, and doing research in health economics. My
second career was as the Executive Director of the Health Services Cost
Review Commission (HSCRC), the State agency that sets hospital rates in
Maryland. I have been a full time consultant in health economics for
the past 17 years, almost exclusively related to hospital financing and
public policy issues. My clients have included almost all sectors of
the industry, including the federal government, state governments,
hospital associations, health systems, hospitals, insurers, HMOs, self-
insured companies, self insured Taft-Hartley plans, purchasing
coalitions, and other consulting firms.
Along the way I have served on three Federal Committees. I was an
original appointee to the Prospective Payment Assessment Commission
(ProPAC) and served as the Chair of its Committee on Hospital
Productivity and Cost Effectiveness. I was a member of the National
Committee on Rural Health and served as the Chair of its Finance
Committee. I was also a member of the National Committee on Vital and
Health Statistics. I was a Commissioner on the Maryland Health Care
Access and Cost Commission, which established the Standard Benefit Plan
for the small group market, produces hospital and HMO report cards, and
maintains the state health expenditure accounts.
I am here today to testify regarding the experience of Maryland's
HSCRC and answer any questions you might have regarding lessons to be
learned regarding hospital charge levels in the rest of the country.
The HSCRC was created by the Maryland legislature in 1971 and,
beginning in 1974, assumed authority to set the rates for all acute
care hospitals in Maryland. In 1977, Maryland entered into a
demonstration with both Medicare and Medicaid whereby both government
agencies agreed to waive federal supremacy and to pay Maryland
hospitals on the basis of the rates set by the HSCRC, subject to a
waiver test. That ``Medicare waiver'' was later changed to an operating
waiver subject to a payment test with the considerable support of
Senator Mikulski.
In setting rates, the Commission's goal is to finance the mission
of efficient and effective hospitals. Hospitals are expected to have
missions that include care to the poor and some hospitals' missions
include teaching and research. The Commission sets rates by comparing
hospital costs and making adjustments for hospital differences that are
not significantly different in kind than the adjustments made under the
Medicare system.
I want to briefly discuss four areas of results: pricing levels,
equity, access, and cost containment. I briefly touch on data
availability.
Pricing Levels
Because pricing levels are a focus of this hearing, I start with
and emphasize this subject. Exhibit 1 shows the mark-up of charges over
cost for the nation and for each state in 2002. All data used in the
attached Exhibits are calculated from the American Hospital
Association's annual publication, Hospital Statistics. The most recent
data available are for 2002. The national average mark-up of almost
131% means that, on average, hospitals charge 131% more than cost, so
the average charge for an admission costing $10,000 would be $23,100.
Note the range in mark-up for various states. Because all payers
pay Maryland hospitals on the basis of charges, the mark-up is well
below the national average and well below the state with the next
lowest mark-up. In Nevada, the 213% mark-up means that the average
charge for an admission costing $10,000 is $31,300. In Maryland, the
average charge for such an admission would be $13,500. In addition,
since there is a common method for setting rates in Maryland (and
pooling of uncompensated care above the state average), the mark-ups of
Maryland hospitals are very similar. In other states, there is much
greater variation in mark-up among hospitals, with many hospitals'
mark-ups being much higher than the national average, some having
charges more than ten times cost.
The 35% mark-up reported by the AHA for Maryland in 2002 is much
higher than the AHA has reported in previous years and is much higher
than the mark-up for regulated hospital services of 20% (per the
HSCRC's annual disclosure). (For example, physician services are not
regulated.) Maryland's mark-up on regulated services reflects three
factors: uncompensated care--about 8%; contractual allowances
(primarily Commission approved discounts, but denials, too)--about 7%;
and profits--about 5%. Maryland, like everywhere else, has high mark-
ups (and high contractual allowances) associated with hospital billed
unregulated physician services.
Exhibit 2 shows the average charge per case for the nation and for
each state. Again, Maryland had the lowest average charge ($9,945),
little more than half the national average. New Jersey hospitals had
the highest average charge at $27,200, or 1.5 times the national
average.
I want to discuss two aspects of charge levels in Maryland. As part
of the original negotiations with Medicare and Medicaid, those payers
both pay 94% of charges. In order to allow Medicare and Medicaid
Managed Care Organizations (MCOs) to compete fairly with their fee-for-
service counterpart, those MCOs also get the same 6% discount.
Thanks in large part to Congressman Cardin, Maryland hospitals were
included when Medicare began to pay hospitals directly for the costs of
Graduate Medical Education associated with Medicare HMO members. In
order to assure that Maryland hospitals did not get paid twice, and to
attain Congress' intention that Medicare HMOs not be discouraged from
using teaching hospitals due to higher costs, the HSCRC gave Medicare
MCOs an additional discount to reflect those direct payments.
One final example. Prior to Medicare's outpatient PPS, a Medicare
beneficiary's co-insurance was 20% of hospital charges. In Maryland,
that amounted to about 20% of Medicare's total obligation. For the
nation as a whole, because of huge outpatient mark-ups and relatively
low Medicare payments, 20% of charges amounted to 50% of Medicare
obligations. When Medicare announced its outpatient PPS, it published
the new national co-payment for each outpatient service in the Federal
Register. Those co-payments were based upon 20% of national charges. I
advised my client CareFirst Blue Cross Blue Shield, a major provider of
Medigap insurance, that this proposed change would cost Medicare
beneficiaries in Maryland approximately $80,000,000. CareFirst directed
me to try to convince HCFA (now CMS) to allow Maryland's Medicare
beneficiaries to continue to pay 20% of state controlled charges. Using
Maryland's outpatient database, I showed HCFA officials that the impact
of changing from 20% of Maryland charges to the new national co-pays
based on 20% of national charges would increase the co-payments for
Maryland beneficiaries by over 70%! HCFA determined that such an effect
was contrary to Congressional intent. HCFA agreed that the outpatient
co-pay is part of the outpatient payment system and, thus, covered by
the Medicare waiver. As a result, Maryland beneficiaries still pay 20%
of charges as set by the HSCRC. As noted earlier, this more appropriate
division of payment obligation saves Medicare beneficiaries and those
responsible for paying their co-pays close to $80,000,000--though the
savings are somewhat reduced by the national co-payments moving closer
to 20% of the Medicare obligation.
Equity
In Maryland ``charges'' and ``prices'' have the same meaning for
all payers. In other states ``prices'' paid are, typically,
significantly lower than ``charges''. Since charges at each hospital
are the same for the same services, and, in Maryland, all payers are
responsible for paying charges, the uninsured face the same prices that
everyone else does. Reasonable prices mean that co-insurance
percentages associated with out-of-network care are equitable.
Reasonable prices mean that when a covered person is taken to an out-
of-network hospital in an emergency situation, the rates faced by the
insurer, HMO, self-funded plan, etc., are equitable. In other states,
significant inequities and market distortions arise whenever the
payment obligation is based upon charges, as in the examples above.
Access
As noted earlier, approved rates include uncompensated care. (In
order to reduce the advantage of shopping to avoid hospitals with high
mark-ups for uncompensated care, any approved uncompensated care above
8% is financed via a pool financed through the rates of all hospitals.)
All hospitals in Maryland share in the burden of care to the uninsured.
There are no public hospitals; there were, but they have converted to
private not-for-profit hospitals.
One of my most enjoyable days at the HSCRC was at a Sunset Hearing
before the Maryland legislature around 1986. At that hearing, the Legal
Aid Society testified that its sister agencies in neighboring states
had many cases associated with patient dumping, but that they had never
had a case in Maryland due to the equitable funding of uncompensated
care at Maryland hospitals. The Society urged the Legislature to not
sunset the HSCRC.
Cost Containment
The legislation made the financing of hospitals' missions dependant
on Maryland hospitals being more efficient. In addition, as I
mentioned, the Federal waiver comes with conditions regarding cost
containment. Exhibit 3, also from AHA Hospital Statistics, shows the
rates of increase in cost per adjusted admission since Maryland began
regulating hospital rates. (An adjusted admission is a standard measure
used to account for outpatient activity.) Exhibit 3 shows that, since
Maryland began setting rates in 1974, it has had the lowest rate of
increase in cost per adjusted admission than any other state (with
Arizona being second). Most importantly, during that period, Maryland
costs went from 23.6% above the national average to 5.7% below the
national average. Exhibit 4 gives the primary method by which Maryland
hospitals achieved this cost improvement. Since 1981 (I did not have
the older data available), Maryland hospitals had the second highest
reduction in average length-of-stay (ALOS), moving from an ALOS 11.7%
above the national average to 11.2% below the national average. During
this entire period, as now, Maryland's rate setting system provides
complementary incentives for both hospitals and payers to manage the
care of inpatients. Payers benefit from managing care because they pay
on the basis of the itemized charges to their patients. Hospitals
benefit because they face the same set of incentives as is provided by
Medicare's PPS. I believe this coordination of incentives at the level
of the individual patient adds to the, largely, provider bases
incentives upon which Medicare's PPS relies.
Data
In Maryland, information regarding hospital rates, charges, ALOS,
and volumes by service is public and amazingly current. There are
readily accessible inpatient and outpatient databases regarding charges
and discharges by DRG by hospital. (Data are currently available
through March 31, 2004.) The HSCRC has published reports showing each
hospital's charges and number of discharges for common services. (There
are only 47 hospitals in Maryland, making such undertakings relatively
manageable.) I believe the Commission needs to work toward developing a
publicly available database regarding clinical quality.
Conclusion
I believe the outstanding achievements in equity and access and, to
a lesser degree, in cost containment, demonstrate that the Maryland
legislature created a good law that has worked for Maryland. The HSCRC
has indicated its commitment to improving quality and must give high
priority toward improving the incentives for more efficient delivery of
outpatient care.
Thank you for the opportunity to testify today. I would be happy to
answer any questions.
Chairman HOUGHTON. Thank you, Dr. Cohen. Mr. Morrison, you
said in one of your statements something that I think is going
to be hanging over us for years and years and years: the
connection of charges to cost is tenuous. Are we always going
to be arguing about that irrespective of transparency and
fairness and the allocation of administrative costs and things
like that? Isn't that always going to be a problem with us?
Mr. MORRISON. Mr. Chairman, I believe it is. Just given the
nature of the health care industry and the way health care is
paid, you will always have arguments about what is the real
nature and real relationship of charges to cost. So, yes, no
matter what you do, I think we will still have that debate and
that argument.
Chairman HOUGHTON. Dr. Cohen, do the uninsured pay the same
as the insured?
Mr. COHEN. The uninsured frequently don't pay. The
uninsured are charged the same as the insured----
Chairman HOUGHTON. Is the concept that they pay the same as
the insured?
Mr. COHEN. The concept is that they are billed the same as
the insured, but they don't frequently pay. Since they don't
pay and there are resources used in providing them care, the
rates that are charged to those who do pay have to cover the
costs associated with their care.
Chairman HOUGHTON. So, in effect, when an uninsured patient
comes in the door of a hospital, they really don't have any
information on how much the service is going to cost them?
Mr. COHEN. In Maryland, they could if they want. I mean,
there is a huge amount of data available as to what charges are
by hospital, by DRG, and that data is current. As of now, it is
available through March of 2004. It is extremely current if
they wanted the information and if they ask the hospital what
on average it charged, you know, the hospital would tell them
if they knew in fact what DRG they were going to be in.
Patients don't always know, and their doctors don't always
know, exactly what they are going to have.
Chairman HOUGHTON. I guess that is my point. I am sick, I
am uninsured, I go into the hospital. I am really not
interested in the costs, I am interested in getting cured.
There is no sort of general framework which I can use as sort
of a cost estimate.
Mr. COHEN. I think if you ask the--I mean, typically,
certainly in Maryland, if you ask the hospital what do you
charge for this kind of procedure, the hospital could give you
an estimate, we charge about from this to this. You never know
what kind of complications might arise in a particular
instance, so you can't give a firm quote under those
circumstances.
Chairman HOUGHTON. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. My questions, really,
get to the issues of trying to get our hands around some other
points of fulfilling the nonprofit mission. I am very
interested, Mr. Bernd, in your testimony, where you indicate
that AHA has kind of set forward a number of things that
basically are expected of its members, particularly those
enjoying the nonprofit status. Would you expand on that a bit?
Mr. BERND. Certainly. We would expect all of our members to
have indigent care policies and to take care of the poor in our
communities. We would also expect them to endorse our policies
around discounts for patients that fall outside of charitable
care and have higher income levels than what is ascertained for
charity care normally. We also expect our community
institutions, not-for-profit institutions, to serve the larger
community through such things as health education, wellness
programs, outreach programs. I think the not-for-profit mission
is much wider than just providing indigent care, and we expect
that of our not-for-profit members.
Mr. POMEROY. The earlier panel, to a person, seemed to
agree with the proposition that looking at legitimacy of tax-
exempt status solely through the prism of pricing practices was
too narrow, there were other things involved. Do you agree with
that?
Mr. BERND. I certainly would agree. Our health care is a
good example. For instance, 3 years ago, our epidemiologists
determined that in our community there was a higher use of
antibiotics in our community. We actually started a community-
wide campaign with physicians in the community called
``Resistance Kills.'' This program costs us a considerable
amount of money, but we were actually able to show in 2 years a
significant reduction in the use of antibiotics. In fact, this
program has been picked up by other insurance organizations,
BlueCross BlueShield in other states. So, I think the not-for-
profit mission is much wider than the indigent care, though
indigent care is obviously the cornerstone of our not-for-
profit mission.
Mr. POMEROY. Mr. Morrison, your experience in nonprofit
care delivery--do you have any responses to those questions?
Mr. MORRISON. Yes, sir, I do. Thank you, Congressman. We
need to look beyond just the charity care, and I think we do
need to look at the broader issues of what is provided as well
as the issue of opportunities that may be foregone and the
willingness of institutions to undertake services that you
would not do if you were just looking at this from a profit
motive. Because one of the things that I think you will find
historically is that the not-for-profit institutions will take
on services that do not necessarily provide a bottom line, but
are necessary for the community. Not-for-profit institutions
will also take on related issues, such as what we are doing in
our community, a looking at the root causes, for instance of
health disparities in various ethnic populations, and then
working directly with the community to solve those issues.
We are also looking at, and it would be almost counter-
intuitive, but we are looking at how do we reduce utilization
of health care, how do we reduce chronic care, how can I reduce
the admissions to my institution. If I was just in this for the
profit, I would not be doing those things. I think there is one
of the distinctions that is very, very difficult to measure but
that you have to look at over the course of time.
Mr. POMEROY. I have no quarrel at all with the Chairman's
statement that this is something we ought to look at once in a
while, a tremendous tax expenditure going in this area in terms
of revenue foregone to the nonprofit status. It is only
appropriate to keep an eye on whether or not the ultimate
marketplace performance is as we expect for that status. Is
this something within AHA or within the community of hospitals,
there is discussion? Do you sense that there is a higher
sensitivity in these days about trying to be--making certain
that your operations lend a distinct character in light of a
nonprofit status? Mr. Bernd? Maybe right across the panel on
that one.
Mr. BERND. I would certainly agree with that statement. I
think the fact that we have so many uninsured in this country
has exacerbated the problem of trying to provide adequate
health care. With 44 million people without health insurance,
it has become a larger issue for all of us, and how do we take
care of those people appropriately and can we give them
discounts off these charges we've talked about, which I know
our institution certainly does. To give you an example, we have
a sliding scale that goes up to 500 percent of the Federal
poverty level and give up to 45 percent discounts. This is
widely available. We make it available to all of our patients.
So, it is an issue that I think is in the forefront and I think
it is a healthy discussion and I think it is something we need
to talk about openly, and I think this is a really good topic.
Mr. POMEROY. I had asked to go across the panel, but I have
taken too much time already, Mr. Chairman. I will yield back.
Chairman HOUGHTON. Thanks very much, Mr. Pomeroy--Chairman
Thomas.
Chairman THOMAS. Thank you, Mr. Chairman. The only medical
professionals that are truly trying to work themselves out of a
job are dentists, based upon the way in which we now treat
their area of expertise. I clearly think it is always smart
business to assist people in being around longer to utilize
services rather than intense interventions for short periods of
time so we could always try to get to a bottom line.
I guess I am most concerned about the arguments that the
not-for-profits are doing something, for example, the
``Resistance Kills'' on the antibiotics or the example of
attempting to reduce the needed services and that somehow that
was associated with your not-for-profit status. Is the reverse,
then, to be assumed, that if you were a for-profit you wouldn't
care about that? Or would the Hippocratic oath and the
commitment to helping people have something to do with that,
rather than your not-for-profit status. Mr. Sucher, would you
have anything to say about that, since I think you are a for-
profit operation?
Mr. SUCHER. I think it is incumbent upon the industry as a
whole, regardless of profit or not-for-profit status, that we
all seek quality probably even more than you can imagine. We
fiercely chase quality every day in everything we do in trying
to provide services to our patients, irregardless of our
status.
Chairman THOMAS. Let me ask you a follow-up question,
because I know pricing has been somewhat of a concern. There
was a statement earlier that in fact if you had disclosed
prices, would drive prices up. I have difficulty discerning
just what a price on a price list or a master charge list is
comprised of. If you ask most businesses, you would start with
materials and overhead and add labor and then perhaps put a
profit margin in there. Are any of your prices on your price
list constructed that way?
Mr. SUCHER. I think they were at one time. I think we have
gotten so far away from that and being so reliant on the
insurers for establishing procedure-based payments and
procedure codes that we now look to them to, really, tell us
what they are willing to pay and kind of establish our charges
accordingly. We want to make sure we are not charging less than
they are willing to pay, certainly.
Chairman THOMAS. Mr. Bernd, do you take a look at
materials, labor, overhead, and then add a profit margin,
notwithstanding the fact that you are not-for-profit?
Mr. BERND. Well, no, sir, I don't think we look at that
that way. I agree with what Mr. Sucher said, it is a matter of
negotiated price, so it may or may not reflect your costs.
Chairman THOMAS. Then what is the value of a price list if
everything winds up being negotiated?
Mr. BERND. That is a good question. Its relevancy is
probably not as much as it used to be.
Chairman THOMAS. Well, I think the proper answer is that it
is important when you deal with government as to what payment
you are going to get from government. We have seen enormous
increases in the price lists, and as you indicate, they have no
relationship to the actual payment made. Do you believe that
when you negotiate a price, you have a pretty good idea on what
your costs of materials, overhead, and labor are so that you
won't negotiate a price less than those costs?
Mr. BERND. I would say with commercial payors that is true.
With the government, we can't negotiate price.
Chairman THOMAS. Therefore a price list creates a value for
you if it continues to go up, notwithstanding the fact it has
no relationship to what you are really getting compensated for
by other players. Is that one of the reasons why the price list
goes up?
Mr. BERND. Probably.
Chairman THOMAS. Probably? Do you believe that if prices
were disclosed it would drive prices higher?
Mr. BERND. We disclose our prices to our customers. Again,
they are very complex, but we do disclose them.
Chairman THOMAS. Do you believe that has caused pressure to
drive the prices higher?
Mr. BERND. No.
Chairman THOMAS. If all hospitals disclosed prices, much as
you do for virtually any other commodity or service, would that
be a benefit to the consumer, or would it make it more
difficult for the consumer to make a decision?
Mr. BERND. I think we should be totally transparent on our
pricing to all of our customers.
Chairman THOMAS. Okay. In trying to determine structures
between not-for-profit and for-profit, Mr. Bernd, I notice that
on the Form 990 filed by Sentara Health Care in 2002, that in
your role as the president and chief executive officer, you
received $908,684, with an additional $236,000 in deferred
compensation and $12,840 in expenses, which is $1,160,000 in
salary and deferred compensation. Have you ever done
comparisons with for-profit systems, and do you believe that
that is kind of where the pricing for executives in your
capacity, given your responsibilities, are paid?
Mr. BERND. Well, first of all, I do not set my own salary.
I have an independent board of directors made up of community--
--
Chairman THOMAS. I didn't ask you if you set your own
salary. Is the number incorrect, the $1.16 million?
Mr. BERND. I believe it is accurate.
Chairman THOMAS. Then my question was do you believe that
is comparable across the board between for-profit and not-for-
profit with people in your commensurate responsibility
position?
Mr. BERND. I don't know.
Chairman THOMAS. You have never done comparative salary and
compensation examinations?
Mr. BERND. Personally, no. We hire an independent
organization that does that for the board of directors, under
their control.
Chairman THOMAS. Last question, for all of you. We are
looking at the question of whether or not we should maintain a
tax preference for a particular type of hospital structure.
Everyone believes we should take care of the uninsured. What,
to you, is a higher use of taxpayer money: should we deny tax
preference and use that to take care of the uninsured, or would
you prefer to retain your tax preference and we set up a set of
structures which guarantee that the uninsured are taken care of
under the charity or the community label for which you receive
the tax preference? We can just start with you, Mr. Bernd. We
will go down the panel.
Mr. BERND. That is a very long question. Can you repeat it
for me, please? I am sorry.
Chairman THOMAS. It is very simple. Everyone has argued
that because they received a nonprofit benefit, we are doing
charitable things, although once you examine it there are some
folks, especially Dr. Cohen, about the fact that they get
charged, we don't get collected. We have had bad debt. We've
got a very elaborate superstructure to try to deal with this.
Everyone says if we could get the uninsured insured, that would
really solve a lot of problems.
We are looking at an enormous amount of money that is
currently going, 41 percent of the tax expenditures under
501(c), to hospitals which originally was for charity and now
community. My assumption was that maybe some of the uninsured
got picked up that way and what we have heard were very
minuscule examples of that effort which should pass muster.
Very simple choice: in trying to make policy, would you
prefer we repeal the tax-exempt status under 501(c) for any
hospital and apply the money saved to perfect an insurance
package for the uninsured? That would solve your problem,
because now the people who are coming to your door are paying
you and you can run more on a for-profit structure in which we
might be able to adjust whether or not you make a profit. Or
would you prefer, do you think it is a better societal service
to keep the not-for-profit tax-preferred status, but you are
going to say somebody else should worry about the uninsured,
don't take it out of our money, when in fact the reason for
creating the tax preference was for charity and community work.
So, would you support eliminating the tax-preferred status and
solving the uninsured problem with that money? Would that be a
better use of the taxpayers' money than the way it is currently
spent?
Mr. BERND. No, I don't believe so. I think, as we talked
about it, not-for-profit status and charitable has more to do
than with indigent care and patients that don't have insurance,
it has to do with community mission, community assets. Not-for-
profit status is wider than just that issue.
Chairman THOMAS. The board that sets your salary may have
some impact on the $1.16 million. Mr. Sucher, what is your
position?
Mr. SUCHER. Obviously, being from the for-profit side, we
would much prefer a level playingfield in all of our
competitive aspects. We do provide much uncompensated care as
well, for which we get nothing as far as benefit. So, we would
really prefer to see something done regarding those who are
uninsured in lieu of a tax break.
Chairman THOMAS. You realize that your testimony just
shocks me in terms of the position that you have assumed.
Mr. SUCHER. Yes, sir.
Chairman THOMAS. Mr. Morrison.
Mr. MORRISON. My testimony will also shock you. It would be
my consideration that we should maintain the tax-exempt status
for long-term considerations. While there may be some short-
term issues that we are facing with the uninsured, I think the
stability of the health care system long-term has been shown
that it is served by the tax-exempt nature of hospitals. It
will continue to be served by the tax-exempt nature of
hospitals.
Chairman THOMAS. Dr. Cohen.
Mr. COHEN. Well, my priority is that extending coverage to
the uninsured is the most important option out there for the
limited resources that we have. However, tax breaks don't
provide money. They allow hospitals to not pay money and if
they suddenly have to pay that money, then Medicare, for
example, would have to pay rates which paid their fair share of
that burden that you then placed on the hospitals. So, if I had
to answer your question, it would be first extend coverage.
Then, if you eliminate the tax breaks, make sure that Medicare
and Medicaid pay their fair share of the added costs that would
be placed on hospitals by having to pay those taxes.
Chairman THOMAS. Thank you very much, Dr. Cohen, because
that underscores my point. I would say to my friend from North
Dakota, prices are fundamental to dealing with the question of
not-for-profit or profit, because nobody can tell you how they
determine what their prices are other than dealing with the
government on payments that are not realistic and don't deal
with the cost of materials, overhead, labor, or profit. If in
fact we are going to talk about trying to serve the uninsured,
and in fact the price list is created for the purpose of
getting more money out of taxpayers, i.e., the Medicare and the
Medicaid payments, what it actually costs to do what they do is
essential in looking at limited dollars, whether it is through
tax-preferred structure or payments for real costs. If you
don't know what they are, you cannot deal with the question
responsibly as a legislator.
When you are talking about tax-preferred status and what
requirements need to be performed for that, you need to start
with how much does it cost to do business. I would be more than
willing to submit for the record the list of CEOs and the
payment they receive between the not-for-profit and the for-
profit on comparable hospital responsibility sizes. There is a
significant difference in that area alone. You wonder what
other prices would be reflected if you had an accurate ability
to determine what materials, overhead, cost, small margin of
profit, notwithstanding the fact they are not for-profit, would
produce between the two structures. Then you can determine the
relative value of the tax-exempt. You can determine whether or
not we ought to create a real system where you get the money
out of the services that you deliver and that we make sure
everybody gets a minimum compensation from that structure, and
augmented if necessary to deliver the services.
Psychic value of believing you are serving the community
doesn't necessarily reflect the real value of the tax-deferred
that does not get counted when we are dealing with the
uninsured. Pricing is essential to completing the understanding
of that model. Thank you, Mr. Chairman.
[The information follows:]
Comparison of Not-For-Profit and For-Profit Hospital Executive Compensation
----------------------------------------------------------------------------------------------------------------
Hospital System Hospitals Beds Compensation
----------------------------------------------------------------------------------------------------------------
Top 5
Not-For-Profit
President and CEO
Catholic Healthcare West 38 8,413 $1,969,575
San Francisco, CA
----------------------------------------------------------------------------------------------------------------
President and CEO
Providence Health System 18 3,306 $1,421,000
Seattle, WA
----------------------------------------------------------------------------------------------------------------
CEO and Director
Sutter Health 24 5,383 $1,203,005
Sacramento, CA
----------------------------------------------------------------------------------------------------------------
President and CEO
Adventist Health System West 19 2,634 $ 971,410
Roseville, CA
----------------------------------------------------------------------------------------------------------------
President and CEO
Sioux Valley Hospitals 26 1,902 $ 398,303
Sioux Falls, SD
----------------------------------------------------------------------------------------------------------------
Source: 2002 990 IRS Forms for the 5 largest non-profit systems, excluding decentralized systems. It includes
salaries, deferred compensation, expenses and other allowances.
----------------------------------------------------------------------------------------------------------------
Hospital System Hospitals Beds Compensation
----------------------------------------------------------------------------------------------------------------
For-Profit
President and CEO
Health Management Associates 43 5,520 $1,404,203
Brentwood, TN
----------------------------------------------------------------------------------------------------------------
Chairman, President and CEO
Lifepoint Hospitals 21 1,968 $1,124,615
Brentwood, TN
----------------------------------------------------------------------------------------------------------------
Chairman, President and CEO
Iasis Healthcare Corp. 14 2,028 $1,086,449
Franklin, TN
----------------------------------------------------------------------------------------------------------------
CEO
Ardent Health Services 23 2,125 $ 525,001
Nashville, TN
----------------------------------------------------------------------------------------------------------------
Senior Vice President*
Group Operations
Community Health Systems 20 1,692 $ 477,980
Brentwood, TN
----------------------------------------------------------------------------------------------------------------
* Senior Vice President is used for comparison purposes. With 72 hospitals, the Community system would be
significantly larger than the not-for-profit systems.
Source: To compare systems of similar size, this includes the five smallest public for-profit systems. 2002
data, SEC 14(A) and Annual Reports. It includes salaries, bonuses and deferred compensation.
Chairman HOUGHTON. Thank you. Mr. Cardin?
Mr. CARDIN. Thank you, Mr. Chairman. As I listened to
Chairman Thomas' and Dr. Cohen's exchange, one very important
point--and that is if we were to eliminate the tax-preferred
status, then it would be incumbent upon the extra costs
associated with that being shared fairly. In Maryland, we can
do that because we have an all-payor structure. In the rest of
Nation, I doubt that would occur, because of the way the prices
are negotiated based upon market share, based upon the size of
the entity that is negotiating with the hospital. If you are
larger and you have a bigger share of that hospital's market,
you can command a larger discount. That is just basic
economics.
I apologize for not being here during the presentations. I
was actually, on behalf of the Democrats, managing two Ways and
Means bills that were on the floor. I first want to acknowledge
Dr. Cohen, because he is the person in our State responsible
for the way that we were able to administer an all-payor system
and still have one today. Many other States tried; Maryland is
the only State that has been able to succeed. The reason is
that Dr. Cohen established a regulatory system that was immune
from traditional political involvement. As a legislator in
Maryland, I never would have thought to interfere with the
rate-setting discretion of our commission. That is a credit to
Dr. Cohen and the confidence that we had in Maryland in the
manner in which he administered the system.
I think most people here don't understand what an all-payor
system is. All-payor system is not a regulatory system that
establishes a rate that hospitals can charge for a particular
service. It establishes a rate that a hospital can charge for
service, which is different among hospitals but the same for
all the payors within that hospital. So, it makes no difference
whether you are Medicaid or Medicare or private insurer or
uninsured when you walk in the door. Basically, you are going
to be charged the same amount for the services that the
hospital performs. Under that theory--and maybe this is theory;
I hope it is not--that you want to provide identical services
to everyone who walks through your door for the same type of
condition, that there is no difference in quality if you walk
in with a Medicare card or you walk in with a BlueCross
BlueShield card, into a hospital, that you are still going to
get the same quality attention. Therefore, why should there be
a difference in fee?
Of course, the second major advantage in the Maryland all-
payor system is that we can get Medicaid and Medicare to pay
its fair share, whereas in the other States in the Nation that
is a little more difficult and complicated process. There is
one more advantage, I might say, to the hospital community
here. I have been told there is either one or two people in CMS
that deal with the Maryland waiver. So, we don't have to deal
with CMS, even though it is located in the State of Maryland, a
great organization--at least the employees are great people. It
does give you that advantage.
So, I am just--particularly when you look at the nonprofit,
the tax-preferred community, where you have a role to play in a
community itself, why aren't you proposing more of this all-
payor concept so that you can get a fair distribution of the
costs? Why don't I hear more of my colleagues around the Nation
talk about returning to some form of an all-payor system in
order to deal with this dilemma of treating all the users of a
hospital fairly?
Mr. BERND. As you mention, the system in Maryland has been
very successful. In fact, talking to Dick Davidson about this,
who was there when the system started, and how successful it
has been, he said that there have been 15 other States that
have tried it and have failed. The uniqueness of the Maryland
system, as you know, is it is limited to 47 hospitals which get
reviewed independently each year. There is an independent
commission that is set up and I guess the biggest hurdle is
Medicare and Medicaid paying full costs and the State being
allowed by Medicare to set those rates.
For instance, we looked at if you set an all-payor system
in the State of California, for instance, just to duplicate
what has happened with Medicare in the State of Maryland, you
would have to increase the California medical reimbursement to
hospitals in California by 40 percent. So, you have such
disparities in reimbursement by Federal programs that it makes
it very----
Mr. CARDIN. I am not sure that is totally accurate. Why
don't we start with North Dakota, a little bit more manageable
State than California. I mean, there are a lot of other States
we could pick other than California. California is a country
unto itself. I understand the unique concerns. Dr. Cohen, is it
possible that we could export, or are just so grateful that we
have this waiver we are afraid if any other State looks at it,
it could jeopardize what we are doing in Maryland?
Mr. COHEN. I think--first of all, thank you very much for
the kind words. I think one of the issues, when Maryland
started, Medicaid was cost-based reimbursement. You were in the
State legislature at the time when we negotiated the waiver, as
I recall. We explained to the Maryland legislature that it was
going to cost an additional 2 percent to pay their fair share.
That is all it was going to be back then and the Maryland
legislature said we are happy to pay our fair share and they
adjusted the budget accordingly and went with the waiver. It is
not clear to me that a lot of other States are willing to pay
their fair share for Medicaid right now.
There are tremendous equity advantages and huge access
advantages. In my written testimony, I didn't have time to
present it all, but I did indicate the fact that in Maryland
everyone has access to all the hospitals. We had Legal Aid
testify that they had no dumping cases. Hospitals were, you
know, willing to treat people and uncompensated care is
equitably financed and it is spread among all hospitals. There
aren't any charity care hospitals as such. There are hospitals
that provide a fair bit of charity care, but the range is only
around 2 to 13, with the average of being around 7.5, I mean,
which is--the average is high because there is good access, but
no one hospital is all that high.
Mr. CARDIN. I appreciate that. I would conclude by saying
you are either going to pay now or pay later, and it is a lot
less expensive if you pay up front and give access to quality
hospital care to all your constituents. Thank you, Mr.
Chairman.
Chairman HOUGHTON. Thank you, Mr. Cardin. Mr. Johnson?
Mr. JOHNSON. Thank you, Mr. Chairman. I am wondering if
patients who have high-deductible plans or maybe the new HSAs
would be billed as those who are insured or those who are
uninsured, since they are paying out of the pocket.
Mr. COHEN. I can tell you that in Maryland they are all
billed the same. So, the answer is they are all billed the
same.
Mr. JOHNSON. For Maryland. I doubt that is the same with
the rest of them.
Mr. SUCHER. It is one of our concerns that those type
plans, and you are starting to see them proliferate in a less
organized manner across the Internet offering insurance for $50
a month, things like that. All those plans do is offer access
to that payor's discounts, which gets them, you know, maybe 70
percent of charges or 80 percent of charges. It gets them a
discount, but that is all. So, they are billed the entire rate
minus the discount that whatever plan they have signed up for
entitles them to, and then they are expected to pay that
discounted rate.
Mr. JOHNSON. Based on the insurer?
Mr. SUCHER. Based on the supposed insurer that is backing
them, of course, who is not just giving them access to their
rates.
Mr. JOHNSON. Which is providing that type of insurance.
Mr. SUCHER. Right, and of course our concern with that is
that the payor can't afford to pay 70 percent any more than
they could pay 100. So, we get very little from that patient as
well.
Mr. JOHNSON. Let me ask you this question. Since physicians
decide on what treatment is needed, do they know what the
treatment costs every time and how do you think that affects
total cost?
Mr. MORRISON. Congressman, that is an excellent question.
We have in our organization undertaken some efforts to try to
educate our physicians on what particular tests cost, what
particular drugs cost, and as we are able to increase their
sensitivity, they do make different decisions as to the
selection of the drug or whether that test is really, really
necessary. I am not sure it is a practice across the board, but
I think it is something that hospitals ought to consider
because doctors are a little inoculated from the impact of
their decisions upon the cost of care.
Mr. JOHNSON. Is every hospital different? Go ahead.
Mr. SUCHER. Well, we are the same way. We very much know
what our costs are and provide the information to our
physicians regularly and encourage them to understand that and
know what they can do to change that as well. Contrary to one
of Mr. Thomas's earlier comments, I think hospitals today
generally do know their costs of procedures. We know very
precisely what our average costs for most things we do are. The
trick is getting that from what we know the cost to be to some
sensible charge structure, when--you know, I can't get anybody
to pay any more to deliver a baby; where I lose money, I am
sure not going to go in and say, gosh, I am going to discount
my prices over here to come closer to costs when I can't raise
the other side of the equation.
Mr. BERND. I would just add that I think one of the most
effective tools to provide effective care is working with
physicians to look at the best treatment models for patients'
illnesses and try to streamline the care process, which takes
into account efficiency and effectiveness of the care, and
using disease-based information that is available on what the
best treatments are for patients with certain illnesses. I
think that is really a key to long-term success of trying to
hold down costs.
Mr. JOHNSON. Do you think the for-profits or not-for-
profits provide better physicians, facilities, and response
than one or the other? You know, why do you think specialty
hospitals popped up? According to the physicians I have talked
to, they said the hospitals were not giving them the operating
time when they needed it.
Mr. BERND. I think that facilities between not-for-profits
and for-profits are very similar. I think the specialty
hospitals in some places have been brought forward due to lack
of capacity. I think in others it has something to do with
profit motive. It just depends upon the situation, and I think
we have talked--we heard earlier the testimony about the fact
that certain procedures in hospitals are more profitable than
others, and if you do take those out of an institution you can
do well financially. So, it is a complex issue.
Mr. JOHNSON. Yes, sir?
Mr. MORRISON. I think that the first place you really do
have to look is that, the financial incentives that are there
in the boutique hospitals and with the physician involvement,
you do have the prospect of taking the more profitable or the
easy cases to someplace where you have an investment, and
taking the more difficult cases where you do not. There may be
instances where there are capacity issues, but those are
generally met by the not-for-profit institutions. The issue is
one of business and financial motive.
Mr. JOHNSON. Thank you very much. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you. I am going to turn to Mr.
Weller in a moment, but before I do, Mr. Bernd, please repeat
your answer to one of Mr. Johnson's questions regarding some of
the key elements of keeping down long-term costs.
Mr. BERND. Well, I think using evidence-based medicine and
trying to work with physicians to put into place treatment
protocols and care pathways are very effective. I know we have
had a lot of success in Norfolk with those, where you try to
use evidence that is there on how to best treat a patient and
follow a particular pathway. It is very effective in not only
reducing cost, but having more effective care.
Other things that are happening is we put in remotely
controlled intensive care unit monitoring, where patients are
monitored in intensive care units around the clock. You have
immediate intervention with patients in trouble and we have
seen a dramatic decrease in mortality and a decrease in cost
for the investment of this technology.
So, I think you are beginning to see some very good
breakthroughs. Another good example are software systems that
are now in place that, for instance, will provide to the
clinicians when they order a particular drug, will show them
how it interacts with other drugs, what counter-indications
there are, lab test results. So, I think we are on the cusp of
having some tremendous breakthroughs in both quality and cost
reductions.
Chairman HOUGHTON. Is this something which would lend
itself, really, to sort of regional repricing and re-
estimation, or is it something which could be right across the
country?
Mr. BERND. I think it is something that could be very
beneficial across the country and I think, the other problem we
have with prices and hospitals and health care obviously has to
do with increased utilization and the fact that we are getting
older as a society. I hope these interventions and changes in
technology will help us decrease the increases, which have been
very high lately.
Chairman HOUGHTON. Thanks very much. Mr. Weller?
Mr. WELLER. Thank you, Mr. Chairman, and thank you for the
opportunity to ask some questions. You know, Mr. Bernd,
representing the AHA, as you know in Illinois, as is in the
case of my own district, the vast majority of hospitals are
not-for-profits.
Mr. BERND. All right.
Mr. WELLER. The district that I represent in the south
suburbs, every hospital is a not-for-profit. They usually are
the largest employer in town, if not competing with the usual
locally, the school district, and they also provide service to
my communities. I would note, one thing I am particularly proud
of is that all my hospitals have a record of serving the health
care needs of people in our communities regardless of their
ability to pay, their insurance status or even their
citizenship status.
There is almost 1.7 million Illinoisans, many of them
immigrants and the working poor that have no health insurance.
Yet all my hospitals, as I have seen in the records that I
have, have been there when they have needed medical care. This
past year, Illinois hospitals provided more than $2 billion
annually in medical care for which they did not receive one
dime in reimbursement.
I would note one system which serves much of my district,
Provena Hospital System in Illinois, provides $6.5 million in
free care and last year lost $32.8 million on Medicaid services
that they provided to my constituents. One particular hospital
of Provena, St. Joseph's in Joliet, provides care at no cost to
the Will-Grundy free clinic and donated a quarter of a million
dollars to the local YMCA to build a health care facility.
As I have seen, Illinois hospitals take their commitment to
charity care pretty seriously. In fact, last year the
Integrated Healthcare Association (IHA) and the Metropolitan
Chicago Health Care Council developed guidelines in charity
care and collection practices for the uninsured that are
designed to be patient-friendly. Mr. Bernd, I would like to get
your perspective on these guidelines.
The guidelines include a number of basic principles.
Uninsured patients receive free care if they are at or below
100 percent of Federal poverty. Discounts provided to patients
with incomes between 100 and 200 percent of Federal poverty.
Hospitals work with patients receiving discounts to develop a
reasonable payment plan. Hospitals do not take legal action
against charity care patients who have demonstrated that they
do not have sufficient income or assets to meet their financial
obligations.
Obviously, in order for these hospitals to serve, they also
have to survive financially. Illinois hospitals such as Provena
have demonstrated that they can serve these communities,
particularly those with limited access to care. They tend to be
the poorer non-citizen patients.
The question I have for you, Mr. Bernd, is, you know, you
are coming before us today with a national perspective. I have
shared with you the initiatives of the Illinois hospital
community. I was wondering what are your thoughts on charity
care guidelines such as those that we have in Illinois?
Mr. BERND. Actually, those guidelines that you have
presented, endorsed by the Illinois Hospital Association, have
come from the collaboration with the AHA, and actually we are
asking every hospital in the union to endorse those particular
guidelines. In fact, over 2,500 hospitals have endorsed those
specific guidelines. I think they are excellent. I personally
see them as a minimum requirement for our members. In fact, I
was the first--we were the first institution that signed those.
I think that is very good and I think it is something that is
really needed.
Mr. WELLER. So, essentially these guidelines are in process
of being adopted nationwide? How many States adopted?
Mr. BERND. Well, again, 2,500 of our 5,500 members have
adopted it and we have only been at this about a month. So, we
are very encouraged by the results, and we expect to have 100
percent of our members across all States endorse this.
Mr. WELLER. You had mentioned that you see these guidelines
as the bottom line. How would you improve them?
Mr. BERND. Well, for instance, my own health care
institution, we provide discounts up to 500 percent of the
Federal poverty. So, that is our commitment to our community. I
think it would differ in each community, depending upon the
needs of the community, the types of population, the number of
poor you have, wage index. I think you need to tailor them by
each community.
Mr. WELLER. You know, Congress always comes up with great
ideas, as you know.
Mr. BERND. Yes, sir.
Mr. WELLER. I was just wondering, is there a role for
Congress in developing these kinds of guidelines?
Mr. BERND. I would hope what you have done, which is to
really publicly advocate what your member hospitals have done
from your district. That is really outstanding. I am sure we
will report that in our National news and the fact that our
congressmen are supporting us in this effort. I think the real
thing we all need to work on and the thing that we have all
talked about today is the fact that there are now 44 million
Americans without health insurance and the strains it is
putting on all the systems, our health care systems. It is a
real problem. It is now beginning to hit the middle class, and
it really is a problem.
Mr. WELLER. Thank you, Mr. Bernd.
Mr. BERND. Yes, sir.
Mr. WELLER. Thank you, Mr. Chairman.
Chairman HOUGHTON. Mr. Pomeroy.
Mr. POMEROY. Mr. Chairman, I just have a request relative
to the issue of whether people with HSAs that carry health
insurance over the top of their HSA first-tier exposure are
able to access the discounted arrangements made by the
underlying insurance company for their portion of the first-
tier costs. We inquired of the largest players in the health
insurance industry. I have a response from BlueCross
BlueShield. Others are sought from the United Health Group. We
would ask that these be allowed as part of the record of this
hearing, Mr. Chairman.
Chairman HOUGHTON. Absolutely. Mr. Portman.
[The information was not received at the time of printing]
Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the
panelists for giving us some good information today. I was here
for the earlier panel and then had a meeting in between. In
that meeting, it happened to have been with somebody who works
for one of our hospitals back home. I talked earlier in the
hearing about the fact that we have three major networks in
greater Cincinnati, Ohio. They are all three nonprofit. They
all provide charity care, of course, but also benefits to the
community beyond that.
This person in particular was talking about billing. This
was a good opportunity coincidentally to hear something from
somebody who in this case is a relatively junior member of the
billing staff, and she was talking about some of the very
issues that you struggle with every day, including the fact
that many of the patients are not able to access insured
coverage, so they come in either under Medicaid or with no
health care and no compensation for their care. They don't tell
the hospital that. So, the collection process begins, it
becomes very complicated. Reminds me a little bit of the IRS
collection process, where often the left hand has not known
what the right hand has been doing--although that is better
now--and in the end there is a lot of wasted cost and effort
and very little benefit to the hospital in the end because the
person doesn't have the resources.
My first question would be is the current system of billing
serving the hospitals well, and how could it be improved?
Particularly, what recommendations would you have for this
panel in terms of dealing with the billing side of things
strictly as it relates to uninsured or under-insured patients?
Mr. Bernd, maybe you want to start with that.
Mr. BERND. I think the present billing system doesn't serve
the patients and the hospitals very well. It is very complex.
We deal with over 100, 200 different insurance companies. I
think some of the things we could work on are standardization
of requests from insurance companies, standardization of
information that is needed. It is a very difficult system and
it is very complex. I think you heard about that today with
pricing in the other areas. So, we could use some help in that
area.
Mr. PORTMAN. Well, with regard to standardization, we have
talked about that for years. With regard to the Federal side, I
know we do more electronic billing now, which I am told is more
efficient. I hope you all believe that. With regard to the
private sector side, how would you get to that uniform or
standardization of billing? Should that be a Federal mandate,
are you suggesting? How would you get to the point that I think
everybody agrees would be helpful to reduce the administrative
costs?
Mr. BERND. Well, I would like to see the private industry
do that, but maybe encouragement by Committees such as this to
say that we need to do it on the private basis would spur us on
to do that. We need the cooperation of all these various
insurance companies.
Mr. PORTMAN. Let me ask the second question, and gentlemen,
jump in as to my first one, too. Do you believe that hospitals
are well-served by a system that bills consumers amounts
unrelated to what their insurer actually pays? Is that
something that is good for hospitals? Mr. Morrison, you seem
eager to answer that.
Mr. MORRISON. I am eager to answer that. Thank you,
Congressman. I am not sure that we are well-served by that,
because I think, if we know up front if you are insured, that
your insurance company is going to pay something substantially
less than, essentially, our rack rate, it does create a
significant amount of confusion to that enrollee if he were to
get a bill for $20,000. He doesn't know is he going to owe a
portion of this? What is this bill all about? His insurance
company comes back and says, you know, we paid $10,000, you owe
$500--is the hospital going to come back at me to get the
balance? Which we are precluded from doing because there is not
balance billing. I think if we are required to send out a
detailed bill when there is no expectation that an individual
is going to pay off that detailed bill, it does create a
tremendous amount of confusion and it creates a lot of cost. It
is unnecessary.
Mr. PORTMAN. Mr. Sucher.
Mr. SUCHER. I think one of the greatest injustices to
hospitals from the current system is that the insurers don't
really show the insured what they did in fact pay. For that
same $20,000 bill he just cited, if we get $10,000, for all the
patient knows, they paid $19,500, because all they then get is
a statement that shows the bill is taken care of except there
is $500 left. It is very hard, then, to collect that $500 from
the patient when he thinks we have already gotten $19,500, when
in fact we have only gotten $8,000 or $10,000. So, it is a very
disserving system for all concerned.
Mr. PORTMAN. So, more transparency, we talked about
earlier, even in billing--simplifying it and doing as much at
the front end as possible to determine what the insurer can
pay, will pay, and what the costs are would be helpful, it
seems to me.
Mr. COHEN. Mr. Portman, I believe that the very high
charges are a major problem for managed care and insurance
companies. Many admissions are through the emergency room. If
you don't have a contract with the hospital and, for those
patients who go through the emergency room, if you are
responsible for paying charges, it is an exceedingly high
amount. The result is that it puts inappropriate pressure on
payors to negotiate with virtually every hospital. I think that
puts too much of the balance of power in the hospital arena in
regard to the negotiations, and that is something to consider.
Mr. PORTMAN. Thank you, Dr. Cohen. One final question. I
would ask for this response in writing, since my time has
expired. Mr. Morrison, Florida law, as you know, hospitals are
required upon request to provide the estimated charges for a
hospital stay or a treatment. If you could give us your written
response as to what the positives and negatives are to that--
and for that matter, any other panelists who have thoughts on
that as a system that could be used in other States. Again,
gentlemen, thank you for your testimony. Thank you, Mr.
Chairman.
Chairman HOUGHTON. Thank you. I just have one final
question. Mr. Sucher, I am interested in a simplification,
reduction, making it understandable. This is not just in health
care, but in a whole variety of other things. Are there some
immediate changes we could use to simplify the hospital billing
system, like right now?
Mr. SUCHER. I wish there were. I would certainly be glad to
offer something if there was. The simplest thing is, as he just
said, doing some kind of a lump-sum billing that allows, like
Medicare for DRGs, and avoid the whole detail-billing process.
I don't think that is a quick solution because there is too
much invested in that process from so many things, to make a
quick change in that.
Chairman HOUGHTON. Is that possible on a State-by-State
basis or would it have to be a national?
Mr. SUCHER. I think you would prefer it was national rather
than State-by-State. I mean, demonstration projects oftentimes
can get something done, so----
Chairman HOUGHTON. All right. Okay, well, thank you very
much. Appreciate your testimony. It has been a great day.
Onward and upward to another session.
[Whereupon, at 1:20 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Houghton to Ms. Davis,
Mr. Bernd, and Mr. Cohen, and their responses follow:]
Question from Chairman Amo Houghton to Ms. Karen Davis
Question: You stated to the Committee that you have quantitative
estimates of the community benefits for medical education, standby
capacity and charity care. I ask that you provide those estimates to
the Committee. In addition, you stated that on the whole it was enough
to justify the tax difference. I ask that you provide that evidence to
the Committee.
Answer: Like other nonprofits, nonprofit hospitals are ordinarily
exempt from Federal income taxes. As a rule, they receive their tax-
exempt status under section 501(c)(3) of the Internal Revenue Service
Code which applies to organizations with religious, charitable, public
safety testing, scientific, literary, and educational purposes. Because
the Code has never explicitly included medical organizations, hospitals
and other health care organizations have qualified under the term
``charitable.''\1\ The status also means that hospitals will have
access to tax-free bonds, can receive tax deductible donations from
donors, and will have a greater likelihood of being exempt from various
state and local taxes.\2\
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\1\ D.M. Fox and D.C. Schaffer, ``Tax Administration as Health
Policy: Hospitals, the Internal Revenue Service, and the Courts,''
Journal of Health Politics, Policy and Law, 16 no.2 (1991)251-279.
\2\ M. Schlesinger, B. Gray, E. Bradley, ``Charity and Community:
The Role of Nonprofit Ownership in a Managed Care System,'' Journal of
Health Politics, Policy and Law, 21 no.4 (1996)697-751.
---------------------------------------------------------------------------
An IRS ruling in 1969 explicitly defined the criteria for
hospitals' tax exemption.\3\
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\3\ D.M. Fox and D.C. Schaffer, ``Tax Administration as Health
Policy: Hospitals, the Internal Revenue Service, and the Courts,''
Journal of Health Politics, Policy and Law, 16 no.2 (1991)251-279.
---------------------------------------------------------------------------
In particular, nonprofit hospitals were to operate a full-time
emergency room and could not deny emergency care to patients. In the
ruling, charitable activities, in the context of health care, were
those that generally promoted health and thus benefited the community
as a whole.
A broad range of activities undertaken by nonprofit and public
health care institutions have been identified as community benefits.
Schlesinger and colleagues, for example, identified over 30 different
community benefit activities that health care institutions engage
in.\4\ Such activities include those with public good attributes such
as teaching and research which benefit entire communities, those that
have positive spillover effects such as programs designed to prevent
disease, and those activities, like outreach to high risk patient
groups, which have little likelihood of being undertaken by profit
making institutions. Other types of community benefit are community
involvement in governance and a refusal to exploit information
asymmetries endemic to the health services market such as imperfect
information on the part of patients.
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\4\ M. Schlesinger, B. Gray, E. Bradley, ``Charity and Community:
The Role of Nonprofit Ownership in a Managed Health Care System,''
Journal of Health Politics, Policy and Law, 21 no.4 (1996) 697-751.
---------------------------------------------------------------------------
Academic medical centers and teaching hospitals, the vast majority
of which are public and private non-profit institutions, pursue several
unique missions that benefit the broader community. Those missions
include graduate medical education, biomedical research, and the
maintenance of standby capacity for highly specialized care to
medically complex patients. Research conducted by Lane Koenig, Al
Dobson and others for the Commonwealth Fund's Task Force on Academic
Health Centers and published in a late 2003 article in Health Affairs
estimated that the costs of these three missions alone amounted to
$27.2 billion in 2002.\5\ Of that total, $16.4 billion went to graduate
medical education, $9.6 billion financed stand-by capacity, and $1.2
billion funded research. Also see Appendix A for a summary of work on
this issue in the final report of the Commonwealth Fund Task Force on
Academic Health Centers.
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\5\ L. Koenig, A. Dobson, S. Ho, J.M. Siegel, D.Blumenthal, J.S.
Weissman, ``Estimating the Mission-Related Costs of Teaching
Hospitals,'' Health Affairs (November/December 2003):112-122.
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It should be noted that these estimates are based on standby
capacity for highly specialized care such as burn units and trauma
care. They do not include future threats including the value to
communities of having a hospital equipped to deal with terrorist
attacks or natural threats such as a SARS-like epidemic. Most
communities would willingly forego property taxes on local nonprofit
hospitals in exchange for assurance that this capacity was available--
even if an occasion to use it never materialized.
With respect to charity care, as I indicated in my testimony,\6\ a
significant amount of research has shown that nonprofit hospitals are
more likely to care for uninsured patients than are for-profit
hospitals.\7\ Further, academic health centers are more likely to care
for such patients than are community hospitals.\8\ In recent years,
care for the uninsured has been increasingly concentrated in fewer
institutions willing to provide that care. Public academic health
center hospitals provide the highest levels of charity care among all
hospitals, while private nonprofit academic health centers provide
twice as much free care as other private hospitals.
---------------------------------------------------------------------------
\6\ Karen Davis, Hospital Pricing Behavior and Patient Financial
Risk, Invited Testimony, Subcommittee on Oversight, Committee on Ways
and Means, Hearing on ``Pricing Practices of Hospitals,'' June 22,
2004.
\7\ L.S. Lewin, T.J. Eckels, and L.B. Miller, ``Setting the Record
Straight: The Provision of Uncompensated Care by Not-for-Profit
Hospitals,'' The New England Journal of Medicine, 1212-1215,May 5,
1988; Bradford H. Gray, ``Conversion of HMOs and Hospitals: What's at
Stake,'' Health Affairs, 29-47, March/April, 1997; Gary Claxton, Judith
Feder, David Shactman, and Stuart Altman, ``Public Policy Issues in
Nonprofit Conversions: An Overview,'' Health Affairs 9-28, March/April
1997; David Shactman and Stuart H. Altman, ``The Impact of Hospital
Conversions on the Healthcare Safety Net,'' in Stuart H. Altman, Uwe E.
Reinhardt, and Alexandra E. Shields (eds.), The Future U.S. Healthcare
System: Who Will Care for the Poor and Uninsured? Health Administration
Press; Institute of Medicine Committee on Implications of For-Profit
Enterprise in Health Care, Bradford H. Gray (ed.), For-Profit
Enterprise in Health Care, National Academy Press, 1986.
\8\ Commonwealth Fund Task Force on Academic Health Centers, A
Shared Responsibility: AcademicHealthCenters and the Provision of Care
to the Poor and Uninsured, Commonwealth Fund, April 2001.
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Recent work by Jack Hadley and John Holahan found that in 2001,
private and public health care providers spent an estimated $35 billion
a year on care for uninsured patients that went uncompensated (i.e,
that was not paid for by patients or private or public insurers).\9\
Hospitals delivered about two-thirds of total uncompensated care or a
total of about $23.6 billion.
---------------------------------------------------------------------------
\9\ J. Hadley and J. Holahan, ``How Much Medical Care Do the
Uninsured Use, and Who Pays for It?'' Health Affairs Web Exclusive (12
February 2003): W3-66--W3-81.
---------------------------------------------------------------------------
I have only identified some of the quantifiable benefits that flow
to communities and the nation as a whole from nonprofit and public
hospitals. Clearly such community benefit activities yield considerable
value to the U.S. health care system. Nonprofit hospitals' tax exempt
status should be considered in the context of the overall framework of
our health care system and its unique needs. Highly fragmented, it
relies heavily on local health care institutions to provide a wide
range of health care services, not all of them profitable, to an
increasingly diverse population, as well as the education and training
of health care professionals. Reliance on nonprofit health care
institutions has likely helped the system maintain its high degree of
decentralization and privatization while still managing to provide at
least some of the services that traditionally for-profit entities might
have failed to provide. Serious debate about the tax-exempt status of
hospitals really has to engage the larger, more fundamental question of
the how the United States wants to finance the health care of its
population.
______
Appendix A
Excerpt from Envisioning the Future of Academic Health Centers:
Final Report of The Commonwealth Fund Task Force on Academic Health
Centers, New York: The Commonwealth Fund, February 2003; 7-9. (Fund
Publication #600) Available at www.cmwf.org.
Clinical Costs of Mission-Related Activities in Academic Health Center
Hospitals
The conduct of mission-related activities in AHCs and other health
care institutions is often associated with extra expenses that are not
compensated in competitive health care markets. These extra expenses
are manifested in part as higher clinical costs at AHCs. The
performance of some missions, such as educating medical students and
residents and conducting clinical research, makes the provision of care
less efficient or requires extra work and the hiring of extra staff.
According to a recent analysis by The Lewin Group, the cost per
case for AHC hospitals ($8,548) was higher than the cost per case for
other teaching hospitals ($6,047) and for other urban, community
hospitals ($5,238) in fiscal year 1998 (Figure 3).\10\ The Lewin Group
analysis decomposed these total cost per case estimates to provide
separate cost estimates for each of the mission-related categories for
fiscal year 1998. After accounting for differences in wages, case mix,
and other factors that influence cost per case, mission-related costs
averaged $2,360, or 28 percent of total costs, for AHC hospitals. By
comparison, mission-related costs for other teaching hospitals
accounted for only 11 percent ($674) of total costs. For AHC hospitals,
stand-by capacity (defined as the capacity to provide high-technology
or intensive services whose availability is essential to a modern
health care system, but that are not always in use) accounted for the
largest component of mission-related costs (45 percent), with indirect
medical education and research representing 42 percent and 13 percent
of total mission-related costs, respectively (Figure 4). After updating
these cost estimates to 2002 values using the Centers for Medicare and
Medicaid Services Prospective Payment System Hospital Input Price
Index, total mission-related costs, including medical education, are
estimated to be $11.4 billion for AHC hospitals and $27.2 billion for
all teaching hospitals (Table 1).
---------------------------------------------------------------------------
\10\ Lane Koenig et al., ``Mission-Related Costs of Teaching
Hospitals: Estimates of Graduate Medical Education, Clinical Research,
and Stand-by Capacity'' (Unpublished manuscript, November 2002).
[GRAPHIC] [TIFF OMITTED] T9670A.024
[GRAPHIC] [TIFF OMITTED] T9670A.025
Table 1. Total Clinical Costs of Mission-Related Activities by AHC Status, 2002* ($ billions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Direct Ed. Costs Indirect Ed. Costs Standby Capacity
(DME) (IME) Research Costs Costs Total Costs N**
--------------------------------------------------------------------------------------------------------------------------------------------------------
AHCs 4.2 3.0 0.9 3.2 11.4 124
Other teaching hospitals 6.0 3.3 0.2 6.4 15.8 1015
All teaching hospitals 10.2 6.2 1.2 9.6 27.2 1139
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Costs have been estimated using the Centers for Medicare and Medicaid Services (CMS) Prospective Payment System Hospital Input Price Index.
** N is the number of hospitals in the CMS Prospective Payment System Hospital Input Price Index.
Note: Numbers may not add up due to rounding.
Source: Lane Koenig et al., ``Mission-Related Costs of Teaching Hospitals: Estimates of Graduate Medical Education, Clinical Research, and Stand-by
Capacity'' (Unpublished manuscript, November 2002).
Question from Chairman Amo Houghton to Mr. David Bernd
Question: In your written testimony, you stated that hospitals had
been concerned about violating Federal regulations governing billing
and collections if they discount charges to the uninsured. Can you
provide to the Committee descriptions of Sentara's charity care policy
before and after the February 19, 2004 letter by Secretary Thompson to
Richard Davidson, the president of the American Hospital Association?
Answer: Sentara works diligently to qualify low income uninsured
patients for public assistance through the Medicaid program or the
Virginia State and Local Hospitalization program. For those patients
that don't qualify for either of those programs, the Sentra charity
program provides assistance for those uninsured patients whose family
income falls below 200% of the Federal Poverty Level (FPL). The Sentara
charity program has been in place for many years.
In my capacity as incoming chairman of the board for the American
Hospital Association, I was involved in the development and approval,
by the Board, of the Statement of Principles and Guidelines on Billing
and Collections Practices (Guidelines) as well as AHA's efforts, in
connection with successful implementation of the Guidelines, to secure
needed regulatory clarifications from the Department of Health and
Human Services (HHS).
In response to the Guidelines and in anticipation that HHS would,
in fact, provide the necessary regulatory clarifications, in December
2003, Sentara implemented an additional program for uninsured patients
whose family income exceeds 200% of the FPL. The uninsured discount
program provides discounts to uninsured patients, on a sliding scale,
based on family income level and the amount of hospital charges
incurred. This program provides assistance to uninsured patients whose
family income is between 200% and 500% of the FPL.
Question from Chairman Amo Houghton to Mr. Harold A. Cohen
Question: In your written testimony, you state that as of 1986
there had been no cases in Maryland of ``patient dumping'' because of
the equitable funding of uncompensated care at Maryland hospitals. Is
that still the case in Maryland?
Answer: As Dr. Cohen testified during his presentation, this
original assertion was made in the mid-eighties by the Maryland Legal
Aid Bureau during a legislative hearing in Annapolis, Maryland. To be
consistent with the original testimony, we contacted Maryland Legal Aid
to obtain a response to your question. According to Hannah Lieberman,
Director of Advocacy, no cases of patient dumping in Maryland have been
recorded. I am enclosing her written response with this letter for your
review.
Thank you for the opportunity to provide you with further insight
into Maryland's unique rate setting system.
[Submissions for the record follow:]
Statement of Reverend Michael D. Place, Catholic Health Association of
the United States
As the U.S. House of Representatives Committee on Ways and Means
Subcommittee on Oversight conducts the first in a series of hearings on
tax exemption with a particular focus on hospital pricing practices,
the Catholic Health Association of the United States (CHA) is pleased
to provide this statement for the record. CHA is the national
leadership organization representing the Catholic health care ministry.
With more than 2,000 members, CHA is the nation's largest group of not-
for-profit health care sponsors, systems, facilities, health plans, and
related organizations from across the care continuum. CHA's members
provide care to one in every six patients, either in an acute care or
long-term care setting, in communities across the country. We have been
caring for the nation's poor and disenfranchised for more than 275
years and remain committed to health care that works for everyone.
Perhaps even more than the immediate issue of hospital pricing, the
specific subject of this hearing, is the need to find a real and
practical solution to providing health care coverage to nearly 44
million uninsured individuals. Finding a solution is critical to
stabilizing our health care delivery system and remains CHA's number
one priority.
The Catholic health care ministry has a long-standing commitment to
ensuring that every patient has access to quality care, regardless of
his or her ability to pay. The recent focus on the issues related to
services provided to uninsured patients of limited means has been a
solid reminder that as health care providers we must be ever-vigilant
to the unintended consequences of the complex financial and regulatory
environment in which we operate. Hospital pricing is a difficult and
complex issue that has its roots in the prior cost-based reimbursement
system. Hospital pricing is an intricate and detail-driven process that
affects all aspects of the health care sector, not-for-profit as well
as for-profit.
We fully support transparency in making financial assistance
available and accessible for the uninsured and underinsured and in
assuring quality care for the millions served by our ministry. As a
ministry, we believe that all patients and their families deserve to be
treated with dignity, respect, and compassion, not only when services
are provided but also throughout the entire billing and collection
process. To that end, members of the ministry have taken a thoughtful
re-examination of their pertinent policies and procedures to ensure a
greater degree of transparency. Many members of the Catholic health
care ministry have publicized their efforts to review and amend their
policies and remain committed to ensuring that uninsured individuals of
limited means are not inadvertently disadvantaged by a fragmented and
complex system. Additionally, the Catholic health ministry has long
supported quality reporting initiatives, beginning with those related
to our nation's long-term care facilities and now moving into our
nation's hospitals. Patients have a right to the information necessary
to make a reasoned and informed decision about where and from whom they
receive their health care.
As tax-exempt organizations, the members of the Catholic health
ministry are committed to fulfilling their obligations to their local
communities. Catholic health care has its origins in a faith-based
response to the health needs of vulnerable populations. Over a decade
ago, the tax exempt status of our nation's not for profit hospitals was
called into question and resulted in a robust dialogue about various
issues related to exempt status. Partly as a result of those
discussions, along with concerns of our sponsors and boards, the
Catholic health ministry developed a process for planning and reporting
community benefits, the Social Accountability Budget. Subsequently,
with VHA, Inc, (a leader in community health improvement) and others,
we developed a software accounting system for tracking community
benefits and revised our document to what is now the nationally
recognized ``Community Benefit Planning: A Resource for Nonprofit
Social Accountability.'' This is a community benefit planning resource
to assist members of the ministry in examining their policies and
ensuring that those policies encourage charitable behavior and
responsiveness to communities.
Community benefit is a planned, managed, organized, and measured
approach to a health care organization's participation in meeting
defined, identified community health needs. It implies collaboration
with a ``community'' to ``benefit'' its residents, particularly the
poor, minorities, and other underserved groups. We encourage each of
our facilities to develop a community benefit plan that includes a
community needs assessment, services designed to respond to identified
community needs (such as the needs of uninsured persons and activities
to improve health in the community), and continual evaluation of the
effectiveness and outcome of community benefit activities. The
community benefit services provided include charity care, responding to
Medicaid and public program shortfalls, education and research, and
subsidized services (providing services where there is a community need
but no business case for doing so), and outreach programs related to
health improvement and prevention.
Throughout this process, members are encouraged to assess the
particular needs of their communities, including addressing any
disparities that may be evident. Outreach programs and community
collaborations are encouraged to help meet the identified needs of the
community and, in many cases, to step in where government programs and
assistance may not be adequate to meet the needs of the community,
particularly those of the uninsured, the underinsured, and the poor
elderly. As providers of health care services, major employers in our
communities, and critical partners in community collaboration, we are
proud of our long-standing commitment and continuing contributions to
the communities we serve.
Notwithstanding the ministry's efforts at providing broad-reaching
community benefits, there is a much larger issue that overshadows all
of these issues and calls for immediate attention and real solution.
Our nation faces an epidemic of uninsured individuals. Unlike many
epidemics of the past, where every means necessary has been employed to
find a cure or a solution, we, as a nation, seem paralyzed by partisan
interests and bickering and continue to let this epidemic languish and
worsen with time. The most recently available statistics note that
nearly 44 million individuals go without any type of health care
coverage. A recent study noted that one in three people in the United
States under the age of 65 went without health insurance for all or
part of the two year period 2002-2003. The issue of the uninsured is
not an issue for government alone to solve, nor is it an issue that can
be solved single-handedly by our nation's not-for-profit hospitals. But
it remains an issue that cries out for action from all concerned
Americans.
As members of the Catholic health ministry, we have our foundations
in social justice teachings that acknowledge the human dignity of each
person, have a special commitment to care for the poor and vulnerable,
and call for responsible stewardship of resources. Furthermore, as a
ministry we recognize health care as an essential social good rather
than a commodity. Now is the time for a robust dialogue around a
lasting solution for providing health care services for all. While
there are tough moral, ethical, and policy questions to be debated, we
must all--individuals at all levels of government, the private sector,
the business community, the health care sector, the public policy
thinkers, and the number crunchers--demonstrate ``a willingness to take
a step toward the middle,'' to leave our special interests behind and,
once and for all, demonstrate a sense of collaboration and resolve that
will allow us to surmount our differences and find a lasting and
workable solution to providing affordable and accessible health care
for all.
We are pleased to provide this statement to the Committee and to
affirm the commitment of Catholic health care to providing quality care
for all individuals, particularly the most vulnerable among us, and to
strengthening local communities through a variety of services. It
remains our most sincere hope that the issues raised by examining the
problems of uninsured individuals will ultimately lead to a permanent
and lasting solution for this national disgrace. On behalf of the
Catholic health ministry, we thank the Committee for its interest in
this matter.
Statement of Community Catalyst, Boston, Massachusetts
Community Catalyst appreciates the opportunity to submit comments
to the members of the U.S. House of Representatives' Committee on Ways
and Means' Subcommittee on Oversight in connection with its hearing on
hospital pricing practices that was held on June 22, 2004. We applaud
the Subcommittee for focusing attention on this very important issue.
Community Catalyst is a national advocacy organization that builds
consumer and community participation in the shaping of our health
system to ensure quality affordable health care for all. It works with
consumer health advocacy groups across the country that are fighting
for health policy and system change at the local and state levels. It
provides these groups with a range of support including policy and
legal analysis, organizational development consultation, and community
organizing assistance. In addition to our work with these groups on
community-based health access issues, we work to build a national
network of consumer organizations dedicated to securing universal
access and health care justice.
We are submitting the attached Patient Financial Assistance
Principles for inclusion in the hearing record. Since 1999 we have been
working with consumer health advocacy groups that are concerned with
access to hospital care for the uninsured. The centerpiece of this work
was a report issued in October 2003 entitled Not There When You Need
It, the Search for Hospital Free Care.\1\ The report included findings
from consumer surveys of more than 60 hospitals, conducted in 9
localities across the country. The principal conclusion of the report
was that information about financial assistance with hospital bills is
not readily available to consumers. Front-line hospital staff at the
surveyed hospitals appeared to be almost universally unaware of
financial assistance policies, and they were also unable to redirect
consumers/patients to hospital staff who might have that information.
This was the case even where hospital leadership claimed such policies
existed. Other findings were as follows:
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\1\ A copy of the report can be obtained at
www.communitycatalyst.org.
---------------------------------------------------------------------------
That for low-income uninsured patients, a reduction in a hospital
bill from ``list charges'' to an average discounted amount or ``cost''
is not sufficient to alleviate the health and financial consequences of
being sick and lacking health insurance. The majority of the uninsured
have incomes below 200% of the Federal Poverty Level, so a $15,000
hospital bill reduced by 50% to $7,500 is just as daunting a challenge
to the uninsured person.
That hospital administrators are often unaware of the critical
difference between notifying a patient at the outset of a
hospitalization that they are eligible for free or discounted care and
simply writing the account off at a subsequent time. Whereas the former
means that the patient is never billed for the services, the latter
simply means that the hospital does not expect to collect on a debt,
even though collection action will continue and interest will continue
to accrue.
That there are serious health and financial consequences for
uninsured patients who are unable to obtain free or reduced cost
hospital care. Many uninsured simply avoid seeking necessary care
because they don't have the money to pay for it. And those who do seek
it often find themselves saddled with debt and subject to aggressive
collection actions that further undermine low-income family financial
stability.
It was these findings, along with the extensive research that went
into our report that led us to identify a set of imperatives that must
be addressed in any hospital financial assistance policy. These
imperatives are the basis for the enclosed principles.
Requiring hospitals to make free and reduced-cost hospital care
more readily available is not a permanent solution to the problem of
the rising number of uninsured in our country. Nor, for that matter,
will the ``health savings account'' model of coverage with its high
deductible alleviate the problem of impaired access and medical debt
for either low-to-moderate income patients or the providers that treat
them. The true solution lies in creating a program of comprehensive
universal coverage. Until such a program exists, the burden of being
uninsured will continue to fall primarily on the uninsured themselves.
We can and should take action to distribute this burden more fairly.
One step in this direction is to require hospitals to live up to their
community responsibilities.
That said, we firmly believe that revoking the tax-exempt status of
hospitals will not help them meet these crucial community
responsibilities. Regardless of current concerns about some non-profit
hospitals' operations and marketplace behavior, non-profit hospitals as
a class provide the lion's share of free and reduced-price care. As
such, they represent the ultimate safety net, not only for the 44
million uninsured but also for countless other financially strapped
individuals and families who are facing escalating out-of-pocket costs
for essential health services. The challenge for the Subcommittee and
the rest of us is to ensure that tax-exempt status means something
tangible.
Patient Financial Assistance Principles
Since 1999 Community Catalyst has been working with state and local
consumer health advocates across the country who are concerned about
access to hospital care for people with little or no insurance. Through
this work, it has become abundantly clear that many hospital financial
assistance policies are inadequate. The flaws include: a lack of clear
and consistent eligibility standards, a failure to publicize the
availability of financial help, and the use of harsh and inappropriate
collection tactics. While a number of hospitals have been very
responsive to consumer advocates' concerns, others have been slow to
take action. In order to ensure people get the hospital care they need
without incurring crushing debt, every hospital should adopt a
financial assistance policy--whether voluntarily or through a statute
or regulation--that includes, at a minimum, these 9 principles:
Eligibility. Uninsured and underinsured individuals with
incomes up to 200% of the Federal Poverty Level (FPL) should not be
charged for hospital care. Individuals with incomes between 200-400%
FPL should be eligible for financial assistance with their hospital
bills. Financial assistance should also be available to individuals
whose income exceeds 400% FPL but whose medical expenses have--or
will--deplete individual or family income and resources to the point
where the individual cannot pay for medically necessary services.
Amount of financial assistance. Generally, the out-of-
pocket contribution of a patient who is eligible for financial
assistance should be limited so that it does not exceed a reasonable
percentage of family income. A financial assistance policy that merely
applies a discount to a hospital bill may not provide sufficient
financial protection to an eligible individual. For example, it clearly
is preferable--and more humane--to base the financial liability of an
individual with an income of 300% FPL (i.e. $27,930 for a family of
one) and a hospital bill of $50,000 on a reasonable percentage of his
or her of income (e.g. 10%, or $2,793) rather than to have it set at a
discount of 50%--or even 75%--of that bill.
Basis of financial liability. Any amount owed by an
individual who is eligible for financial assistance should be
calculated using the hospital's cost of providing the care--or by using
the lowest rate negotiated by any private third-party payer--rather
than the hospital's substantially higher ``list price.'' People who
don't have insurance typically are charged the highest prices for
hospital care because they do not have the benefit of an insurer or
health plan negotiating on their behalf. As a result, they end up with
the largest medical debt and are subject to the harshest collection
actions, like wage garnishment, liens on personal property, and
foreclosures on the family home.
Covered services. Financial assistance should be
available for any medically necessary hospital service and not just
those services obtained on an emergency basis. This would include
services delivered on an inpatient as well as an outpatient basis, and
it would also include any medically necessary prescription drugs.
Notification of the availability of financial assistance.
Hospitals should broadcast the availability of financial assistance
both inside their own institutions and to their broader communities.
They should make sure that all staff who interact with patients and
their families are trained to provide information on the hospital's
financial assistance policies. Finally, hospitals should also ensure
that the information is readily accessible to people who speak
languages other than English.
Application process. The financial assistance application
form and process should be simple and ``patient-friendly,'' and any
income documentation requirements should not function as a barrier to
receipt of financial assistance.
Payment plans. Any payment plan shall be reasonable,
taking into account the patient's--or his or her family's--income and
other financial obligations, and limiting any interest charged on an
outstanding balance to no more than 3% per year.
Role of hospital governing board. Hospital governing
boards should be required to review and approve all collection
policies, including the policies of any collection agent or attorney,
and any purchaser of a hospital account. Certain collection actions
such as foreclosures, placement of liens, and wage garnishments should
require specific board authorization before they are initiated,
regardless of whether it is the hospital or any agent, attorney or
purchaser of an overdue account that is initiating the action.
Reporting. Hospitals should be required to report to a
state agency--or otherwise publicize--the amount of patient financial
assistance they provide on an annual basis, along with any other
information that enables the public and policymakers to assess the
hospital's application of its financial assistance policies. Financial
assistance should be reported using hospital costs rather than standard
hospital charges, and it should not include any costs associated with
bad debt, so-called shortfalls from government programs such as
Medicaid and Medicare, or contractual allowances provided to private
third party payers.
Statement of Geoffrey C. Mitchell, Columbus, Ohio
Thank you for your willingness to investigate tax-exempt health
care. As you know, we've reached a point where uninsured working people
are actually being forced to subsidize billion dollar insurance
companies. I think this is only the tip of the iceberg. The cost of
health care continues to escalate while the quality may actually be
decreasing. I believe this ``value gap'' is due to widespread looting
of American health care.
Unfortunately the looting is not confined to for-profit
enterprises. The leaders of non-profit enterprises too often emulate
what they see in the for-profit world. ProvenaHospital is the obvious
case in point but I'm sure there are others. Here is the story of the
``non-profit'' care provided by OhioHealth, the largest health system
in Ohio. This is a tale of behind-the-scenes antics of hospital
administrators who have forgotten the charitable mission of their
organization.
There are four intertwining stories to be told, 1) administrator's
secret drive to partner with and emulate for-profit corporate/criminal
entities, 2) the securing of $200,000,000 in tax-subsidized bonds under
false pretenses, 3) apparent private inurement at the highest levels of
the organization, and 4) a full-fledged assault on indigent care by
purchasing, then closing a hospital. Together, these stories bear
directly upon the justification for granting tax-exempt status and the
level of indigent and uninsured care provided by such ``non-profit''
hospitals.
Background
Riverside Methodist Hospital (RMH), the flagship of OhioHealth, is
reportedly the 5th busiest hospital in America. Over the
past decade, OhioHealth has capitalized upon the imbalance in Medicare
reimbursement, focusing its attention on relatively lucrative
cardiology services. This culminated in a recently completed $76
million ``heart hospital.'' OhioHealth administrators call RMH the
``Heart Institute of Ohio.''
Not all patients benefited from OhioHealth's obsession with
cardiology. Emergency department patients (ED) suffered greatly. For
more than a decade, Riverside's express policy was to treat emergency
patients in public hallways. This was a way to cut costs and increase
profits. This policy negatively impacted patient care in many ways. One
was that hallway medicine systematically discriminated against women.
Men got EKGs done in the hallway, women did not.
In the late 1990's OhioHealth saw itself threatened by the
expansion of for-profit hospitals, particularly Columbia/HCA.
OhioHealth administrators undertook a three-pronged strategy. They
instituted a vocal campaign to publicly denounce the ``for-profit''
hospitals. This continues today. At the same time OhioHealth was
publicly denouncing the evils of corporate medicine, these same
administrators cultivated a behind the scenes partnership with
MedPartners, one of the most corrupt and/or inept companies ever known
in U.S. health care. Finally, OhioHealth actually usurped Columbia/HCA
and acquired the hospitals Columbia had pursued.
The Acquisition of the Two Doctors' Hospitals
Doctor's hospital was a two hospital system consisting of Doctors'
West, a reasonably successful general hospital, and Doctor's North,
which was losing money providing indigent care. Doctors West had
enormous undeveloped potential as a referral hospital or portal of
entry for cardiology patients on the west side of Columbus. Doctors'
West is the closest hospital to the growing and affluent suburb known
as Hilliard. OhioHealth and Columbia both yearned to possess Doctors'
West.
OhioHealth succeeded in acquiring the two Doctor's Hospitals in
1998 but the $142 million price tag took a toll. At one point
OhioHealth's bond rating was cut. By the fall, OhioHealth announced
layoffs of 90 people. It was a difficult time.
Secret Contracting with For-Profit Corporate/Criminal Entities
The penny pinching required for the purchase of Doctors' meant RMH
had to squeeze the emergency department (ED) even tighter. To
accomplish this, OhioHealth contracted with MedPartners to run the RMH
ED. At the time, MedPartners was the worst performing publicly traded
company in America. Armed with this knowledge, RMH CEO David Blom was
determined to contract with MedPartners anyway. Publicly, Blom was
denouncing the evils of for-profit, Wall-Street groups but behind
closed doors, he cut a secret deal with MedPartners.
When the RMH contract was negotiated, MedPartners' chairman was
alleged criminal mastermind, Richard Scrushy. Scrushy has now been
indicted on 85 criminal counts for massive fraud at his other company,
HealthSouth. In order to make the deal work, Blom hired Clifford
Findeiss to work as ``hospital representative.'' At the time, Findeiss
was being paid by MedPartners to negotiate and acquire hospital
contracts on its behalf. Blom hired Findeiss to work for OhioHealth in
its supposed ``negotiations'' with MedPartners. Findeiss had a direct
reporting relationship to Richard Scrushy.
Thus, OhioHealth official Clifford Findeiss was actually being paid
by MedPartners while he was ``negotiating'' with them. This arrangement
had the appearance of a felony kickback. In addition to the alleged
kickback there were other massive conflicts of interest. E.g., while
negotiating with MedPartners on behalf of OhioHealth, Findeiss owned a
million shares of MedPartners stock. This whole arrangement was the
subject of a three-year investigation by multiple government agencies.
Apparently, there was ``not enough evidence to file criminal charges .
. . at this time.''
The RMH contract, negotiated by Findeiss, represented a trophy
contract for MedPartners. The RMH contract was secured at a time when
MedPartners was on the verge of bankruptcy. Scrushy had come from
HealthSouth to assume the reins at MedPartners and rescue the company.
As a result of his efforts, MedPartners was rescued. MedPartners was
able to sell its emergency medicine business, Team Health, to venture
capitalists for $335,000,000. The venture capitalists boast that they
make 40-50% annual returns on their health care investments.
Under the MedPartners contract, OhioHealth continued to squeeze the
RMH ED and treat patients in the hallways. OhioHealth and MedPartners
fired and defamed doctors who opposed their methods or spoke out about
the declining quality of care. Quality was declining because fraud
undermines the quality of care. There were many examples of poor
quality care under the umbrella of MedPartners. At RMH, a fifteen year-
old girl was paralyzed at the hands of the local MedPartners quality
expert. Findeiss' jail staffing company, EMSA, left a trail of wrongful
death suits across the country. In New York, EMSA hired a convicted
killer to treat patients.
OhioHealth continued to mandate the practice of hallway medicine in
the RMH ED. Then, in 1999, the overcrowded RMH ED was featured on CBS's
60 Minutes (No Vacancy). 60 Minutes had over 4,000 hospitals to choose
from. They chose RMH as the lead for this story. A five year-old boy
had been turned away from the RMH ED because ``every bed was filled.''
He died en route to another hospital. As a result of a lawsuit and the
feature story on 60 Minute s, OhioHealth eventually reversed course. In
December of 1999, OhioHealth announced plans to expand the RMH ED. The
new ED was incorporated into the ongoing plans for the new cardiology
tower.
False Pretenses in $200,000,000 Bond Finance Deal
In the fall of 2000, OhioHealth sought FranklinCounty's approval of
$200,000,000 in tax-subsidized bonds. They wanted this money to build
cardiology towers at RMH and Doctor's West. The County held the
requisite TEFRA hearing and invited me to attend. I understand that the
federal government mandates TEFRA hearings in an attempt to guarantee
fairness and fiscal responsibility in the funding of non-profit
organizations. Believing I had just the sort of inside information that
a TEFRA hearing is designed to uncover, I offered testimony to the
Hospital Commission.
I testified with regard to what I believed to be fraudulent
contracting between OhioHealth and MedPartners. Three years later, more
than a dozen HealthSouth executives and officers were indicted/
convicted and/or fired for their role in fraud with Richard Scrushy. At
least five of those individuals including Scrushy himself, were at
MedPartners when the RMH contract was negotiated.
OhioHealth attorney Penny Proctor attempted to contradict my
testimony. I testified that OhioHealth had contracted with MedPartners
and maintained a contract with MedPartners successor, Team Health. Ms.
Proctor stated categorically, ``[t]here is no contract with Team
Health.'' Her testimony may be found in the public record. Seen in the
most favorable light, Ms. Proctor is like child making a promise with
her fingers crossed behind her back. However, as an attorney and with
$200,000,000 at stake, this is no trivial act.
It is an undisputed fact that OhioHealth contracted with Mid-Ohio
Emergency Services (MOES). MOES is a MedPartners/Team Health subsidiary
completely controlled by MedPartners/Team Health. Secondly, is Ms.
Proctor really claiming that this 501(c)3 charity sent $60,000,000 to
Team Health without a contract? This is a gross breach of fiduciary
duty. Thirdly, the continued absence of a contract with Team Health
would now be prohibited under HIPPA law. OhioHealth has sent about a
half a million confidential patient records to Team Health.
Despite whatever convoluted technical sense in which her testimony
might contain some grain of truth, Ms. Proctor had one goal, to deceive
the Hospital Commission. Ms. Proctor sought to distance OhioHealth from
MedPartners, to publicly deny OhioHealth's affiliation with
MedPartners. Ms. Proctor's role was, like the old Mission Impossible
cliche, to ``disavow any knowledge'' of MedPartners.
There are two more ethical, and perhaps legal, problems with her
claim. One, her public claim appears diametrically opposed to the
testimony OhioHealth officials offered to federal investigators behind
closed doors. There, it appears they claimed that they fully intended
to contract with MedPartners, that they knew that Findeiss worked for
both MedPartners and OhioHealth at the same time. Which version is
true, the one offered to federal investigators or the one offered to
the Hospital Commission? Which version is false?
The most sinister aspect of Ms. Proctor's false testimony is that
it was made with the goal of obtaining $200,000,000. Ms. Proctor knew
or should have known OhioHealth had a contract(s) with MedPartners/Team
Health and/or its subsidiaries. Ms. Proctor misrepresented these facts
to the Hospital Commission. Does this amount to false pretenses in non-
profit hospital financing?
The Subsequent Closure of Doctors' Hospital North
At one point Columbia/HCA sought to purchase Doctors' Hospital.
They signed a letter of intent in March of 1997. Like OhioHealth,
Columbia saw the lucrative cardiology potential of Doctors' West as the
prize. The indigent care at Doctors' North was a burden. The deal
required the approval of the Ohio Attorney General. OhioHealth CEO,
William Wilkins, vigorously opposed Columbia's efforts and filed a
written response. The accusation was always that if the deal was
allowed to proceed, Columbia would close Doctors' North. Another
hospital system, Mt.Carmel had lost the deal for exactly that reason.
In late 1996, the Ohio AG began to expand the AG's oversight role
under the Charitable Trust Act. Wilkins may have had some role in this.
He appeared as a panelist at a symposium organized by the AG in April,
1997. The Doctors'/Columbia deal soon fell through. OhioHealth then
reached an agreement to purchase Doctors' Hospitals in August. The deal
was approved by the AG in October. OhioHealth was awarded the contract
because they promised Doctors' CEO that they would not close Doctor's
North. It appears that the Ohio AG understood this promise as well.
This appears to have been a condition of the Attorney General's
approval. The Ohio AG's office said that their approval of the sale to
OhioHealth, ``reduces our concerns over potential hospital closings.''
OhioHealth repeated this promise to the community. They promised not to
close Doctor's North.
OhioHealth's supposed plan to rescue Doctors' North relied upon
cardiology services, specifically a heart surgery program. This was
rather silly because it meant competing with the
OhioStateUniversityMedicalCenter which was just a few blocks away.
Predictably, the heart surgery program failed and Doctors' North died a
slow death. It closed inpatient services in 2001.
The non-profit ``charity'' known as OhioHealth made a ``profit'' of
$86 million after it closed the door to the indigent patients at
Doctors' North.
Private Inurement to OhioHealth CEO & CFO
Investigation of the OhioHealth/MedPartners connection uncovered
evidence suggesting private inurement to top OhioHealth executives. In
1996 CEO William Wilkins and CFO Dennis Freudeman filed to incorporate
the Upper ArlingtonSurgeryCenter aka the
RiversideOutpatientSurgeryCenter. There are several indications that
the ownership of this surgery center was structured differently than
all other OhioHealth surgery centers. Evidence indicates that the
RiversideSurgeryCenter is a privately held, for-profit entity.
The RiversideSurgeryCenter holds itself out to be part of the non-
profit, RiversideHospital. The Center uses Riverside's name and logo.
In newspaper articles and its annual reports OhioHealth indicates that
the RiversideSurgeryCenter is part of (non-profit) OhioHealth.
Publicly available state records indicate that Wilkins and
Freudeman still own the SurgeryCenter long after they left OhioHealth.
The problem is that this is not a separate, arm's length business
entity owned by Wilkins and Freudeman. This is not Bill & Denny's
SurgeryCenter. Wilkins and Freudeman were able to acquire their
ownership stake by virtue of the fact that they were officers of the
non-profit charity, OhioHealth. Wilkins' and Freudeman's ownership
stake is almost certain to be profitable. The RiversideSurgeryCenter is
strategically located in one of the most affluent sections of town.
When I sought information about this possible private inurement
under the FOIA, I was told that the SurgeryCenter is a for profit
venture thus no disclosure is required. Charitable 501(c)3
organizations are required by law to accurately and publicly disclose
the income of their executives. Private inurement is a basis for
revoking an organizations 501(c)3 status. OhioHealth did not report any
income from the surgery center to William Wilkins and Dennis Freudeman.
Wilkins and Freudeman were respectively the CEO and CFO of OhioHealth.
If they had additional undisclosed income as a result of their
positions, I understand this would be a violation of law. Since they
refuse to disclose the income from the SurgeryCenter, it appears this
may be the case. It appears that Wilkins, Freudeman and OhioHealth are
concealing private inurement.
Were there other examples of private inurement at OhioHealth? We
now know that Richard Scrushy's other company, HealthSouth, paid bribes
to acquire hospital contracts. Also, in a recent California court case,
several doctors alleged that MedPartners' successor, Team Health
offered kickbacks for assistance in acquiring the hospital's ED
contract. This suggests the possibility of other kickbacks or private
inurement at OhioHealth.
Conclusion
Certain hospital administrators and corporate executives abuse and
exploit the 501(c)3, non-profit hospital system. It's not known how
much private inurement may have passed to Wilkins and Freudeman nor is
it known exactly how Blom and/or Wilkins and others may have profited
from their relationship with Scrushy's MedPartners.
It is known that OhioHealth CEO Dave Blom seemed infatuated with
MedPartners and welcomed them with open arms. It is also known that
Richard Scrushy and Clifford Findeiss made or recouped tens of millions
of dollars in their rescue of MedPartners. That rescue coincided with
the secretive and I believe, fraudulent contract with OhioHealth.
Scrushy's successors, Team Health, its executives and the venture
capitalists make about $150 million per year from our nation's
emergency care system. I think the evidence shows little if any value
added by these expenditures. In fact, I believe it can be shown that
the quality of care actually declines as a result.
The solution is not to abandon the non-profit system. The solution
is to enforce laws already on the books, laws designed to prevent
kickbacks and private inurement. Where federal laws are unclear and
unenforceable, Congress should work with prosecutors to clarify
statutory language so the law may fulfil its intend purpose.
We must not abandon the non-profit hospital system. To do so would
be to relinquish health care to the Richard Scrushys of the world. We
can't depend upon them to provide compassionate, high-quality health
care.
If this is the kind of information you seek, please advise and I
will gather my evidence in support of my allegations. Thank you.
Statement of Pat Palmer and Nora Johnson, Caldwell, West Virginia
Hospitals assert that they bill all payers, including CMS,
uniformly. What is not often said, particularly to the under-insured or
the uninsured, is that all payers are not expected to reimburse
uniformly for the billed charges. Typically, CMS reimburses the lowest
amount, major insurers the next lowest amount, and the working poor and
uninsured pay the highest rate. It is our understanding that, when
referring to a facility's Cost-to-Charge ratio, many hospitals bill
uninsured patients 3 to 4 times the amount accepted as payment-in-full
from insurance companies. A careful review of individual items and
services contained in itemized statements will demonstrate mark-ups in
excess of 4000%, and a major facility routinely charges for a solution
that is marked up 367 times cost.
The area of unconscionable mark ups, is merely part of the problem
confronting our nation, the easiest to attack, but not the easiest to
rectify. An effort to remedy overcharges by exacting an agreement from
hospitals to apply a discount to uninsured, whether it is 40% or 80%,
is hopelessly naive, totally ineffectual, and contraindicated by the
billing examples we can provide for the Committee. Major healthcare
systems are offering such discounts for the purposes of simultaneously
appeasing lawmakers, generating good public relations, and emphatically
protecting profits.
In fact, a proffered discount is meaningless when counter-balanced
by rampant billing violations. The federal government has mandated that
facilities bill according to accepted guidelines. The government
considers violations of these billing guidelines fraudulent and/or
abusive. If CMS defines a billing pattern as fraudulent and abusive
when submitted to the federal government for reimbursement, then why is
it legal to foist the same billing pattern upon the public? Why are
courts forcing private payers and the uninsured to pay facilities for
hospital bills defined as fraudulent and abusive by CMS and the OIG?
Are these guidelines applicable to payers other than the government?
The Health Insurance Portability and Accountability Act of 1996 (HR
3103) or HIPAA Section 241
``With the passage of HR 3103 on August 21, 1996, Congress declared
war on all health care fraud and abuse and applied this provision to
all payers. Health care fraud is now a ``federal health care offense''
with the full arsenal of federal law enforcement agencies available to
find and punish violators. Fines are stiffer than in the past and
transgressors face possible prison sentences. For purposes of this law,
a health care benefit program is defined as:
``any public or private plan or contract, affecting commerce, under
which any medical benefit, item, or service is provided to any
individual and includes any individual or entity who is providing a
medical benefit, item or service for which payment is made under the
plan or contract.''
Source: Complete Guide to Part B billing and Compliance, February
2002Page Compliance-5 Published by Ingenix.
If, this is true, then why hasn't the government acted upon the
providers and facilities that flagrantly violate billing guidelines?
1. The OIG has, to some extent, but its results rarely redress
private payers.
2. CMS reimburses electronically via HCFA forms and UB-9X's. The
charges are grouped, and reimbursement is made according to the
applicable reimbursement system, (DRG's, APC's, etc.) An itemized
statement is usually not germane to the DRG/APC reimbursement system.
3. Billing violations are more easily identifiable when a line-by-
line examination of the itemized bill is performed. This is rarely done
by payers, and few have the expertise.
4. Most auditors are not educated in the area of billing
compliance guidelines as established by the federal government. A
hospital or insurance company audit examines items/services ordered and
documented in the medical record, and merely verify the quantities of
such as reported on the bill.
5. Facilities excel in creating cryptic, non-informational
masterpieces, euphemistically referred to as `itemized bills'. The less
sense a payer can make of the bill, the more cents the provider can
make with it.
The fact is that the overwhelming majority of hospital bills
generate charges from line items that are fraudulent and abusive
according to Federal Billing Guidelines, and coding guidelines as set
forth in the Current Procedural Terminology copyrighted by the American
Medical Association. Excessively billed items and services include:
Routine supply charges that have been calculated into the
cost of the room or service, and are duplicated on most bills with
individual charges attached;
Equipment charges for non-billable equipment;
Unbundled procedure coded charges that emanate from
hospital chargemasters' in direct violation of the Correct Coding
Initiative established by the National Correct Coding Council developed
for CMS Bureau of Program Operations.
Another trend and very troubling area is the emergence and charges
for disposable operating equipment. Equipment used multiple times and
for multiple patients is considered as part of the accommodation or
facility charge. One of the criteria defining ancillary supplies is
that they are either not re-useable (hence disposable) or represent a
cost for each preparation. This definition has given life to an entire
mega billion dollar industry of ``disposable surgical equipment''. The
result is that hospitals have discovered a new revenue center and now
bill for and use disposable equipment with abandon and capitalize on
enormous mark-ups as well. The red flags wave when the cost of
`disposable equipment' exceeds the cost of permanent reusable
equipment.
Hospital drug billing: many providers make a majority of profit on
drug billing. Aside from the obvious mark-ups, it is common to see
line-item charges for a vile of medication containing 5 mg billed for
each use, when in fact the patient was prescribed 1mg per dose, 2 times
daily. A phone call to the hospital pharmacy usually substantiates that
1 mg vials are in stock. If 1mg vials are available in the hospital
pharmacy, or available for order from a wholesaler, hospitals have no
justification for daily charges of the 5mg vial repeatedly for weeks.
Billing for items or services not rendered is #1 on the OIG's risk
areas for fraud and abuse. This issue is separate from situations
requiring use of a drug that cannot be used again, or drugs that have a
limited shelf-life once opened.
Hospitals bill whatever they want. They refuse to be accountable
for, items fraudulently and abusively billed, errors billed, and
grossly flagrant and unconscionable mark-ups.
There is NOT ONE entity in the United States of America that will
enforce federal compliance billing guidelines as they relate to private
sector patients.
One quandary faced by most patients is: do I take my finite dollars
and fight the hospital bill by hiring an attorney? Or do I take my
finite dollars, save my credit rating and good name, and just pay the
hospital or collection agency? The answer is as obvious as the choice
is narrow.
The concept of making hospital prices more transparent via
publication of charges designed to assist informed consumer choices
will meet with abject failure. That hospital will not tell consumers
that they will be charged an extra:
$57 for a FRED. (Fog Reduction Elimination Device--a 2X2
gauze used to wipe moisture from lenses in the operating room----not a
billable item);
$200 for a bag of IV solution that costs the hospital
about 25 cents;
$985 pair of scissors which is not a billable item;
$1,028 for a contrast solution that CMS deems not
chargeable as it is included in the cost of the procedure;
$11 for a mucous recovery system--a box of tissues
$350 for an IV start kit that is un-billable in the O/R
and costs less than $2.
Thousands of dollars per day for Nursing Services that
CMS mandates as incorporated into the daily room charge and is not
separately billable.
Are the hospitals going to inform patients of these charges before
they appear on the bill? Look at the dollars in their off-shore
accounts, the CEO & CFO salaries, then answer.
Report Summation:
The purpose of this report is to expose a few of the unscrupulous
billing methods and price gouging, regularly used by hospitals
nationwide. These examples represent a majority of hospital bills that
we have reviewed, ranging from the most prestigious institutions in the
country to religious affiliated hospitals, and corporately owned
facilities.
The examples provided represent a few of an infinite number of
methodologies that hospitals can employ to feed the bottom line. There
are hidden charges in most hospital bills, and these hidden items can
appear simultaneously, in several different places on the bill, with
different charges and descriptions that illegally inflate the billed
total.
Recommendations:
1. The enforcement of HR 3103, Section 241 of HIPAA, is
imperative. If billing is truly uniform, then the standards and
definitions for fraudulent and abusive billing should be enforced and
extended to all payers from all sectors.
2. Patients should have access to an itemized hospital bill--for
free and without encountering hostility from hospitals staffs. There
are facilities in Nashville that charge $13.00 for an itemized bill
that CMS has mandated as a right to their beneficiaries without charge.
3. Patients should also have the right to a UB-92, whether or not
they are insured. The information on the UB-92 is supplemental and
helpful when analyzing the itemized statement, and the provision of
such would not pose a significant additional burden on the hospital.
4. Regarding hospital cost reports submitted annually to CMS: are
the inflated or CMS non-reportable charges that are billed to other
payers, calculated into the cost report? Do these charges impact CMS or
the facility cost-to charge ratio for the following year?
5. How much is too much? What constitutes a `fair and reasonable'
price? Can we afford to suspend businesses rights to profit? Hospitals
are big business. A new `profit makes right' morality has emerged in
the last three decades, and its heroes are being consecrated. They are
the captains of industry who have amassed great wealth for themselves
and their businesses. We hail them and then jail them. This bottom-line
morality/mentality has pervaded the once held sacrosanct hospital, and
the nation is footing the bill.
A great man, a `captain' with a conscience, told us that DRG plus
26% would be a fair and equitable reimbursement for hospitals, juries
are in agreement, and so are we.
Statement of VHA, Inc.
Not-for-profit health care organizations are the backbone of the
nation's health care system, representing most of the nation's largest
and smallest hospitals, and providing the large majority of care to the
uninsured and underinsured patient population. Many of these
institutions are delivering on their promise of community service every
day, while also establishing clinical standards that make America's
health care system the most advanced and sophisticated in the world.
These hospitals are also investing in specialized programs and
technologies that improve their business operations while actually
reducing costs.
However, a number of socioeconomic, political and cultural issues
have converged in recent years to create a significant threat to our
health care system. Not-for-profit hospitals are struggling to balance
competing priorities and pressures. Hospitals are faced with limited
reimbursement from both private insurers and the government, the
imperative to acquire breakthrough clinical and operational
technologies, as well as the need to expend resources to attract and
maintain a strong workforce. Furthermore, the number of uninsured and
underinsured individuals in the United States is increasing, placing an
additional strain on the nation's not-for-profit health care providers.
Caught between these realities, not-for-profit hospitals and affiliated
physicians endeavor to remain true to their historic missions to
provide charity care and other community benefits, while remaining
financially viable.
Public attention has turned to examples of instances when hospitals
have acted aggressively to collect money from uninsured or underinsured
persons, yet little attention is paid to the community benefits that
not-for-profit hospitals consistently provide.
As the nation's largest alliance of not-for-profit health care
organizations, VHA Inc. believes hospitals and policy makers should
work together to better address the issue of caring for the uninsured
and underinsured. Hospitals must offer transparency regarding the
charges associated with providing care as well as assure high-quality
care for the uninsured and underinsured. We urge Congress to work
toward bipartisan, achievable solutions to address the health care
coverage needs of this population.