Would you like the $9,400 CT scan or the $450 CT scan?

"Medical services are not expensive. Health 'coverage,' on the other hand, is very expensive.”

We’re not all careful. Some of us ride motorcycles on the highway,… recklessly. A nephew ended up at a Level I trauma center in Houston, Texas, in March of 2016 as a result. He was patched up and lived to ride another day. Ten months later, his dad gets the final itemized hospital bill. As doctors in the family, my wife and I opine on medical matters with some frequency. The dad texted us a picture of the bill. As you are sure to expect, the charges were for ridiculous amounts that no one really pays. Most people probably think that these matters just get handled somehow, somewhere, between insurance companies and hospitals, then the patient pays some reduced amount of that massive charge, bewildered but happy to walk away still financially solvent after the threat of a bankrupting and indecipherable hospital bill. For most people, that vague understanding (and narrow fiscal escape) seem to be enough to be able to put the experience behind them. For others, though, we want to understand what the *expletive* is going on?!

As I looked through the 44 items billed to my nephew, there were a few which I could not identify despite my proficiency in medicalese. Some charges stood out as being so excessive that I felt guilt in being associated with hospital systems (which almost without exception follow the billing practices that will be described here). For years, I have been frustrated with the opacity of medical billing, physician “reimbursements,” and the seemingly secretive third party alliances which keep doctors and patients in the dark as to costs, pricing and revenues streams. This has led me to investigate and promote the growing numbers of medical practices and facilities that choose to operate direct-to-consumer with transparent and competitive pricing. Out of curiosity, and in disbelief at the hospital charges, I decided to attempt to find a transparent retail price comparison for each billed hospital item where possible.

Using some simple online searches, I quickly found cost comparisons for radiology and lab tests, as well as some pharmaceuticals. Pricing Healthcare, Good Rx, and Health Tests Direct gave me the bulk of the comparisons. For intravenous medications, which are more difficult to find for public consumption, I found some equivalent medications at a veterinary site, Medi-vet. Before you recoil at using a dog medicine, rest assured that these are the same sterile, safe, medical grade pharmaceuticals as those used on humans – some are the same brand that I personally have administered to patients. They just happen to be transparently priced because the veterinarians typically operate outside of the constraints of government and insurance company contracts in honest pricing models.

Tallying the 24 of the 44 charges for which I could identify and find a comparison, the hospital charged over $35,000 while direct-to-consumer retail businesses offered similar services for $3,200 (a price difference of over 1000%). For example, the $9,400 CT scan of abdomen and pelvis with contrast is offered for $450 in Dallas at Southwest Diagnostic Imaging Center (a 2,000% price difference). The $6.68 generic hydrocodone with acetaminophen pain pill can be readily found at Publix or Safeway or Walmart pharmacies for about a quarter each (a 2,600% price difference). Check out the table nearby for more head-shaking and sigh-inducing comparisons.

Hospital administrators are sure to retort: “but those tests aren’t of the same quality that we offer! These tests are done in an emergency and high acuity settings, which are expensive! We have very high overhead costs to cover and have to make up for those that don’t pay their bills!”

All of this may be true. True and unprovable? True and irrelevant? True or not, it definitely is not the fault of the billed consumer. A few years ago in Houston, I was pleased to hear economist Tom Woods of the Mises Institute talk on this topic. In response to such arguments, he opined, “your bad business model is not my problem.”

Bad Business Models

Where did the hospitals’ bad business model come from? Why are things the way they are? How did such a convoluted, if not collusive, system ever develop? Why do insurance costs keep rising? Books and innumerable articles have been written from a multitude of perspectives to explore those questions. The short answer might be that after more than fifty years of continual intervention into medicine by third parties (insurance corporations, lucrative hospital “non-profit” corporations, legislative bodies, and innumerable government agencies), patient and physician have been removed from as much of the health care interaction as possible. The primary participants have no idea what anything costs. The numbers are decided and exchanged behind closed doors with secret contracts negotiated by teams of lawyers and high-powered executives. There is no downward pricing pressure because the costs are well obfuscated from those that incur them (the physicians ordering the tests and medication) and those that pay them (the hapless patient that pays her insurance premiums in perpetuity, then the co-pay at time of service, then the deductible, and perhaps even a residual percentage of the bill) . Who knows how much money has been spent or where it went? To make matters worse, every economic incentive is to charge more.

In business, everyone understandably desires to receive as much for their product or service as the consumer or market will pay. But by hiding true costs, it is possible to eke out more than the consumer would knowingly agree to. (Imagine buying a vehicle and driving it off of the lot without any idea what you would be billed… many months later.) Admittedly, hospitals incur costs for the uninsured, under-insured and for emergency care that may be poorly reimbursed despite the hospitals’ tax benefits, direct taxpayer funding and government grants. They have an incentive to increase prices to recoup potential revenue losses, but also to accumulate very large cash flows to buy up the competition, purchase physician practices, and to build new facilities all around town.

But who really pays those massive hospital charges? Probably few, and maybe nobody. One might think that insurance companies would balk at such extreme charges, but they don’t pay those rates, either. By listing very high base charges (which can be found in every hospital’s typically elusive chargemaster), the hospital can show a generous concession to the negotiated fees with insurance companies and government payers. The insurance company, in return, can show its supposed advocacy to customers by how much it “saved” them in inflated hospital charges, thereby justifying higher premiums and deductibles. This distorted and distorting arrangement is the foundation of the cycle and incentive structure of ever-increasing prices in health care. Although I hate to admit it, physician groups are guilty, as well. To the extent that we participate in third-party billing, we too, will and must price services very high as a starting point to a low negotiated “reimbursement” by insurers and the government. Thus, a patient will commonly get a $2,000 bill for anesthesia services in my field of medicine, while the recovered payment to the group may only be a few hundred dollars or less.

So, what’s the solution?

Some may be ready to concede that mandating health “coverage” by law has not bent the cost curve of health services – nor has any previous legislative intervention of decades past. If the incentive structures and hidden costs described above are accurate, one might determine that forcing full participation in a highly flawed system can only worsen its inefficiencies and distortions. A few years ago at a meeting of the Free Market Medicine Association in Oklahoma City, one of its founders, Dr. Keith Smith, told us, “medical services are not expensive. Health ‘coverage,’ on the other hand, is very expensive.” When one is able to distinguish between the two, it becomes evident that in order to introduce downward economic pressures to our out-of-control health care prices, honest and transparent direct-to-consumer pricing must be at the core of the solution.

Today, as patients and physicians alike seek more truthful, ethical and affordable pricing models, there is a growing trend towards Direct Primary Care and transparent pricing of medical and surgical services. While every aspect of Big Medicine and its myriad lobbyists may oppose such moves, these drives to transparency are at least part of the solution in bringing down costs, extracting expensive but low-value middlemen and bureaucracy, putting control back in the hands of consumers, providing information to patients for honest evaluations of quality and value, and re-establishing the one to one relationship between patient and physician. So, the next time you need medical services, you may not be asked the question, “would you like the $9,400 CT scan or the $450 CT scan?” but if the situation permits, you just might benefit from doing some shopping.

[*the author’s views do not represent the views of his academic or employment associations… guaranteed!]

References, accessed between Feb 8 and Feb 10, 2017

sodium chloride 1-liter bag IV fluid $2.24

lidocaine 2% $2.58

Health Test Direct:

Basic metabolic profile (panel)  $40.93; complete blood count (CBC) with differential $24.79; PT and PTT combined $41.97; red blood cell antibody screen (Coomb’s test) $36.77; blood type ABO and Rh factor combined $32.48

https://pricinghealthcare.com/prices/SouthwestDiagnosticDallas/CT%20Scan

Pricing Healthcare, Southwest Diagnostic Imaging Center:

CT scans $275-$450

Plain film diagnostic x-rays $93-$150

Hydrocodone: multiple pharmacies under $15 for sixty tablets = <$0.25 each

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Dr. Todd Rice is a board-certified anesthesiologist with both private and academic medical practice experience who follows with great interest the development of the direct care and transparent-pricing models in medicine. He is treasurer of the Missouri state chapter of the American Association of Physicians and Surgeons (AAPS), a physician group that focuses on strengthening the physician-patient relationship. Dr. Rice is currently the Director of Anesthesiology at the Center for Advanced Medicine - South County in St. Louis, and an assistant professor at Washington University School of Medicine. He is an occasional blogger on topics of free markets and state interventionism at his site theindividualmind.com and can be contacted at mtoddrice@gmail.com

3 COMMENTS

  1. I enjoyed this article and wholly agree that the economic power of pricing, in combination with some incentive for the consumer to actually seek lower prices, would be an important step towards reducing health care costs.

    However, I don’t think pricing alone gets to the heart of the issue. If your hospital is anything like mine, I’m sure you’ve faced many an administrator that claims that they are dead broke and cannot under any circumstance afford a major cut in reimbursement. If you go up the chain, you’ll find that hospitals’ expenses are also outrageous, and I think a significant source of this is our adoption of anti-competitive policies. And I would look no further than our inane intellectual property laws and regulations. Looking at my own department, we spend hundreds of thousands on:

    1) computer operating system upgrades, so that our DOS-based LIS and EHR programs can run under Windows 10 instead of Windows 7. This is perhaps the greatest scam perpetrated on the American consumer, and with no technological basis.
    2) drugs that do not have a generic equivalent due to IP restrictions, all while our basic research departments here and at other (non-profit) academic medical centers were actually the ones to have made the bulk of the discoveries that led to the drugs’ development. This hybrid public/private model of drug development is absurd.
    3) medical devices that have been granted regulatory approval in the most nonsensical manner, and which we pay a premium for — mostly to improve reimbursement and not for reasons actually associated with the quality of patient care. This happens all the time.
    4) [this is not IP related, but…] Licensure and regulatory requirements restrict PhD’s in my department from performing certain mundane tasks that MUST be performed only by people who hold an MD, even though those functions have nothing to do with patient care or require any other special training. The number of attendings on staff increase as a direct result, even though experienced PhD-trained medical scientists cost on average less than 1/3 their equivalent MD.

  2. Great start – so, what’s the solution?

    I assume you’ve followed Steven Brill’s excellent work (“A Bitter Pill” Time Magazine and “America’s Bitter Pill”), you both agree on most issues.

    Here’s some solutions that I haven’t seen discussed…

    1) Require all hospitals accepting any form of public funds publish their charges – in computer readable formats (to facilitate search engine comparisons…)

    2) Ditto for quality ratings – infection rates, average time of stay, etc.

    3) As with mortgages (and car repairs) require that all medical providers give any patient who requests it an up front “good faith estimate” of charges at least a week before any scheduled procedure.

    4) Prohibit any medical facility treating a patient on an emergency basis (i.e. treatment that must be done immediately) from charging anything but Medicare rates for such treatments.

    With all that, we’ve exposed pricing, quality and given consumers the tools they need (the GFE) to “shop around”….

    Combined with high deductible insurance plans and we’re ready to see market forces drive pricing down (and quality up) the same as it does with everything else…..