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The Anatomy of Healthcare Billing

Posted Jun 09 2013 2:53pm
Stanley Feld M.D.,FACP,MACE

The start of exposing the real cause of healthcare inflation has begun.  The billing and reimbursement system is finally being questioned.

I hope the debate creates an uproar among consumers who are the most important and most disadvantaged stakeholders in the debate. My hope is consumers will realize they are pawns in the complex billing and reimbursement system created.

Consumers must also realize they have the power to demand control over their healthcare dollars and not hope the government will protect them.

Steven Brill’s article in TIME magazine started the debate. The demand for transparent pricing has started.  Steve Brill’s numbers are far from accurate.  However,the pricing information is close enough to get consumers mad as hell.

The Centers for Medicare and Medicaid Services finally  released its massive database containing what 3,000 hospitals charge for 100 of the most common medical procedures.

The database compares the hospital “chargemaster” to the prices Medicare actually paid.

The reimbursement to hospitals is based on the hospital system’s estimates of the actual hospital costs plus hospital administrative overhead. These estimates are an error. The calculation should be the actual costs and not an estimate of the actual cost.

The database only covers 100 of the most common illnesses.

I have written about hospital administrators’ salaries being in excess of 1 million dollars a year with many being up to 15 million dollars a year. These salaries are included in the overhead covered by Medicare payment.

I have questioned the appropriateness of these massive salaries. In Boston there seems to be a contest between hospital systems for which CEO gets a bigger salary.

Another important question is how many hospital administrators in a hospital system get an excessive salary for the value they add to medical treatment.

Who is worth more, a physician or a hospital administrator?

 In many cases the reimbursement by Medicare to some hospitals is 10% of the hospital’s billing.  In other hospitals the difference is 20-40%.

The payment gap between hospital charges for procedures and Medicare payments is also stunning. The average difference between hospital charges for the 100 procedures tracked and what Medicare’s average actually payment is a difference of 72%.

A good metric is to beware of the man that quotes average percentages if you want to understand the actual difference.

The best example I have seen to visualize the variation of these prices in simple terms is as follows.


“Imagine a banana in a supermarket. It costs $1 for those paying with Visa, $3 for those paying with MasterCard, and $32 for those paying with cash.

You can't sign up for Visa until you're 65, and you can only get a MasterCard if you have a nice employer or a decent income.

Worse, customers have no idea that such price discrepancy exists. They don't even know how much they'll pay for the banana until long after they've eaten it.”

“That would be absurd. No one would put up with it.

But it's how our health care system works.”

Why should healthcare consumers in America put up with it? Isn’t it the government’s job to protect us from this abuse and not have a system that encourages it? Obamacare claims to stop the abuse as it has been going on its merry way to encourage it.

This is not the entire grizzly story.

The average prices by states shows massive discrepancies. In California, the average hospital charges $101,844 to treat respiratory infections. In Maryland the average price for the same respiratory infection is $18,144. The difference is 82% for the same disease in two different states. The government is the same payer for both states.

 New Jersey hospitals bill an average for $72,084 for "simple pneumonia," while Massachusetts’ hospitals charges an average of $20,722. Neither of the state’s hospitals receives that much reimbursement for treating these infections from Medicare. However, New Jersey hospitals receive more.

Uninsured patients and the indigent without insurance are getting the shaft. These people will have to pay retail hospital prices or get sued by the hospital system.

None of the hospital prices are transparent. A patient cannot even beg the hospital system to get a price.

Many treatments can be administered as an outpatient. The government pays at least three times more for chemotherapy in a hospital setting or a hospital outpatient clinic as it would to a freestanding private outpatient oncology clinic.

 What’s the deal? The government doesn’t trust physicians. It is afraid physicians will overcharge.

What does the government think the hospital systems are doing?

I have also written about primary care physicians’ salary being about $100,000- $120,000 a year. Surveys of physician salaries have shown salaries varying between $100,000 to $600,000 per year. Surgical subspecialists receive more than primary care physicians.

Let us assume the average physician’s salary is $300,000 per year. There are approximately 600,000 practicing physicians in the U.S.

The total physician reimbursement is $180 billion dollars a year in a $2.7 trillion dollar industry. This is less than 10% of the total dollars spent. Even if you doubled physicians’ salaries to include an overhead of 50% physicians receive 13.2% of the healthcare dollars spent.

A major question is where is the remaining 2.5 trillion dollars going?

The healthcare insurance companies take 40% off the top of all care delivered including Medicare and Medicaid and other government programs. They do all the government administrative services and hide the fees through deductions that should go to expenses but with the government’s permission go to direct patient care.

The most important metrics are never discussed and inaccurately measured.  They are clinical outcomes and quality of procedures performed with respect to financial outcomes.

The reason this measurement is not done is because there is no accurate definition or measurement of these metrics. Clinical outcomes as it relates to cost of care has to be included in the measurement of quality of care.  No one knows how to do this.

Consumers must drive the healthcare system. My ideal medical saving account would go a long way in dis-intermediating the healthcare insurance industry .

An easy to use web site should be constructed using the Travelocity, Expedia or the Orbitz formula.

All hospital and physicians’ prices should be online. All insurance and government reimbursement should be published on this web site, plus insurance premiums and their justifications. The real government overhead should also be available to consumers. 

A government web based educational program to make consumers smart medical consumers would decrease healthcare costs immediately.

All of the above would be a good start.

 The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone

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