by Marty Makary
At auto dealerships in the United States, you read the price on the windshield of a gleaming car and the salesperson says “I can talk to my manager about that.” Then he or she drops the price and says “We’re losing money on this sale to you.” It’s the same old dog and pony show.
Increasingly, we see the same markup and discount game in medicine. Hospital charges are notoriously inflated—and hard to pin to any actual costs. Each insurance company negotiates a different discount, which varies depending on who has the leverage. The result is that insured patients don’t pay full price, unless their insurance carrier doesn’t have a contract. Then they’re “out-of-network” and face whatever the hospital decides to charge.
The only difference between the game in car sales and health care is the size of the margin. For the car dealer, getting people to pay sticker price can mean making 15% more off the sale. But for a hospital, gouging the sick and injured can mean making 1,000% more.
Henri’s dad was lucky to get any price quote. In a study conducted by the University of Iowa, researchers called 101 U.S. hospitals and asked them what they would charge for the same type of heart bypass operation. Only about half of the hospitals—53 of them—would even provide the price. And for those hospitals that did, the average price was $151,271, just north of what Henri’s dad was quoted. The range of prices was astounding, from $44,000 to $448,000. Did they use gold-plated surgical instruments? No. Was the center that charged ten times more the one with the best outcomes? Nope. Heart surgery outcomes are publicly available. The research showed no correlation between surgery price and quality.1
Would-be Robin Hoods
To understand the mystery of why some health care bills seem to defy logic, I asked my research team to dig deeper, to find out exactly how much medical bills were being marked up. It was an impressive group that took a deep dive into the national data. Medical students Angela Park and Tim Xu rose to the challenge and crunched numbers with the help of two of my Hopkins colleagues, Ge Bai, an accountant on faculty at the Johns Hopkins business school, and Jerry Anderson, a mentor of mine in our Department of Health Policy and Management.
The analysis revealed some markups to be 23 times higher than what was paid by Medicare (the government’s insurance program) for the exact same service.2 Were hospitals that tacked on giant markups simply located in poorer communities where patients were less likely to pay their bills? Our research found no association. It seemed strange that some hospitals just happened to have excessive prices while others did not.
I gently introduced the topic of markups with hospital leaders I met at conferences. Most had no idea how their markups compared to those of other hospitals. And many offered the simple explanation “We have to make up the cost of taking care of the uninsured.”
But was that true? Were they really forced to upcharge some patients to compensate for charity care? They may have believed that explanation, but none of them could substantiate the claim with anything more than a hunch or an anecdote. We checked: the data did not support their assertion.
“It’s a stupid game.”
Every several months I am invited to a closed-door meeting of health care leaders who want to talk “big picture.” Most of these gatherings convene with the lofty goal of fixing health care but quickly digress into pontificating about issues that account for less than 1% of health care costs. For example, we’ll discuss ways to lower infection rates and hospital readmissions rather than tackling the leading drivers of our cost crisis. But one such meeting I attended was a refreshing exception.
This meeting, hosted by the Oliver Wyman Innovation Center, a global consulting firm, took place at a beautiful resort in Laguna Beach, California. I was there with about 30 high-level executives from hospitals, insurance companies, and health care start-ups. The resort was perched on a cliff overlooking the ocean, so we enjoyed breathtaking views. Morning runs on the beach were followed by delectable breakfasts. But most refreshing was the honest conversation. Unlike most of these types of gatherings, this one was filled with straight talk without stakeholder agendas.
We got right to business. The group acknowledged the rising price of health care and began asking the hard questions. Maybe it was the off-the-record nature of the meeting, or maybe it was just the sea air and California sunshine, but these titans of health care spoke freely. Hospital officials confessed that they inflate bills more and more each year to generate more revenue since their insurance companies pay only part of the sticker prices. Insurers confessed they demand bigger and bigger discounts in their contracts with hospitals in order to keep up. Both acknowledged that they pass on higher hospital bills to the public in the form of higher insurance premiums.
It was a lively, civil, candid conversation. At one point, Dr. René Lerer, the president of the large insurance company GuideWell Florida Blue, silenced the room with his honesty: “Insurers fight for a bigger discount every time they renew a contract with a hospital. Then hospitals go around and inflate their prices. It’s a game.” He seemed disgusted by the markup-discount games everyone in health care has come to accept as standard operating procedure.
“We play it, you play it, we all play it. Let’s not fool ourselves,” he added. “It’s a stupid game. We can do better.”
If anyone had the authority to identify the problem, it was Dr. Lerer. He’s been a practicing doctor and a health care executive, and he heads a well-regarded insurance company. I braced myself for backlash from the room, but an amazing thing happened: no one disagreed. Even if they didn’t admit it, everyone knew it was a game.
One by one, people meekly began to try justifying markups and discounts. Some blamed other stakeholders in health care; others attributed the collateral damage to out-of-network patients. But one by one, like a round of whack-a-mole, Lerer shot down the excuses. “Yes, that’s true,” he’d say, “but it’s still a game.”
We discussed all kinds of issues that weekend, but they were all footnotes to the problem Dr. Lerer had named: whether we liked it or not, we were all playing “the game.”
What does the game do? For one, it makes it nearly impossible for patients to know in advance what they will pay, but it enables insurance companies to have an agreed-upon discount rate on hospital bills. That discount rate is different for every hospital and a highly guarded trade secret. From talking to enough people in the industry, I learned that the secret discount that an insurance company gets ranges from 4 to 90%. But if you’re paying cash, like Henri’s dad, no one will tell you the discount given to insurance companies. With all the talk of addressing disparities in America, I’m amazed there can be radically different prices for the exact same medical care at the same facility by the same doctors and nurses.
Journalists have been busy trying to expose the game. A recent study found that the cost of a hospital bed alone during a routine childbirth can range from $1,000 to $12,000 per night. Johnny Harris, a journalist from Vox.com, read about the study and decided to shop around for the best deal before his wife gave birth. He called several hospitals to ask how much they would charge per night for his wife’s delivery. He spent more than three hours on the phone getting put on hold and transferred. Finally, one hospital staff member told him he would not be able to find out the cost until after the baby had been born.3 And that’s for childbirth, one of the easier quotes to track down, since so many people are now asking.
Why couldn’t Johnny get a price? A hospital’s true costs are as mysterious as the curse of King Tut. There’s good reason for the fog—it’s lucrative.
I don’t want to be too hard on people in the medical field (after all, I am one of them). My interactions with hospital leaders have been very positive. When it comes to pricing, I don’t believe they’re intentionally hiding what’s available to them. Most of the time, the insurance companies don’t let hospitals show their negotiated prices; they’ve made the hospital sign a nondisclosure clause in their operating agreement.4 Plus, coming up with a pr
ice can be hard work for a hospital. Imagine trying to factor in the price of the janitor, the front desk person, the electricity, the malpractice insurance, the nurse’s time, the supplies used, and all the rest. That’s why smaller surgical centers are more likely to be able to produce a price (and, on average, a lower one). Hospitals, in order to ensure they have enough cash on hand on a macro level, spend a lot of energy playing the markup and discount game. In fact, they are consumed by it. For example, if a hospital made $100 million the prior year, dialing up all bills by 5% as their expenses go up by 4% is a safe bet without having to accurately itemize every service. Hospitals use software called the “chargemaster” that automatically inflates prices to achieve a desired margin.
The book someone should write5
Markups are now so high that they are embarrassing for doctors and hospitals. It’s only natural that the good people working at America’s hospitals would react to questions by answering “That’s to compensate for charity care,” or “Don’t worry, people are not expected to pay those prices.” Given our research data, neither explanation seemed accurate, so I set out to explore each of these explanations in more detail.
Consider what happened to my friend Fred. He was skiing in Vail, Colorado, when he started to feel a little “off.” After a few trips down the slopes, Fred developed a headache. He also felt a bit light-headed. To play it safe, he had his wife drive him to a nearby hospital. There, a triage nurse listened to his story, and then leaned in close. “You have a touch of altitude sickness,” the nurse whispered. “We see it all the time. You didn’t hear it from me, but I would suggest you go back to your hotel and drink some water.”
Fred should have taken her advice. Instead, he decided to see the doctor. Within an hour, the doctor delivered the same diagnosis the nurse had given: altitude sickness. They gave Fred a whiff of oxygen and discharged him. A few weeks later, Fred’s brief trip to the hospital was a fading memory. That’s when he got a bill for $11,000. Suddenly he was light-headed again.
He was outraged for good reason. My hospital in Baltimore, for example, would charge $800 for the same service. Why was the bill marked up? Did the hospital by the Vail ski resort take care of so many low-income and uninsured skiers that it had to make up for all its charity care? No, Fred was the victim of a business model that has become all too common in American medicine: price gouging.
Desperate for Honest Pricing
When discussing astronomical medical costs, hospital CEOs often tell me, “Marty, nobody pays those chargemaster prices.” They point out that insurance companies have discounts. “Those are just the sticker prices. You wouldn’t ever be asked to pay that price.” But as I researched the issue, I discovered categories of people who are explicitly and sternly told they must pay those inflated sticker prices.
The Amish, who have a large community near my childhood hometown in Pennsylvania, believe in paying their bills in full. As a student rotating at a hospital in that area, I saw Amish people show up in the ICU with bags of cash. Their community would pool funds from their farmer’s market to pay medical expenses.
My colleague Jerry Anderson has done research on markups and has become a go-to person for some of the Amish leaders in America. One day an Amish leader in Indiana called Jerry, begging him for help in negotiating a bill for a man in his community. The man’s child had complications at birth and the hospital charged the man—in effect, the Amish community—a million dollars for services that would have cost less than $300,000 if a private insurer was paying. Jerry told the Amish leader to send him the bill because he was going to be seeing the head of the hospital at a reception in Washington, D.C. At the event, Jerry quickly made the case to the head of the hospital, and the price was reduced to less than $200,000. Ironically, it turns out that the Amish had helped build the hospital. If Jerry hadn’t gotten involved, the Amish community would have rounded up all its cash and somehow managed to pay the bill in full, paying five times what it cost the hospital to provide the service.
I decided to take a road trip into Amish country to learn more. Will joined me for the trip. We began our day at the Amish Farmers Market in a town called Bird-in-Hand, Pennsylvania, deep in the heart of Amish country. Half of the Amish people we interviewed said that when they or a relative gets a serious sickness, they take the Amtrak train to Mexico. Why? Because the medical quality is good and the prices are fair and disclosed up front. Will and I interviewed dozens more Amish people, everyone from those who sold us sticky buns to those stepping out of their horse and buggy. I couldn’t believe what I was hearing. Our next stop was the local Amtrak train station where we learned that some trains are half-full of Amish people taking the six-day ride to Mexico for medical care. Mexican hospitals even advertise in the Amtrak magazine. It’s incredible how far people will go for honest medical pricing. Uninsured patients who make too much money to qualify for Medicaid also get hit with the inflated sticker price. If they don’t pay up, they get sent to collections, which means they’re hassled by debt collectors and have their credit ruined. Debt collectors can be ruthless and often violate consumer protection laws.
Then there are the “surprise” bills—bills for costs a patient presumed were covered by insurance but were not. About half of these bills are for lab work, facility charges, or imaging tests.6 The other half of surprise bills are generated by doctors working behind the scenes, such as pathologists or radiologists, who may be out of your insurance network, meaning they don’t have a negotiated discount rate with your insurance company. The same could be true for your emergency room physician, or the lab that processes your blood tests, or the anesthesiologist who puts you to sleep. Your primary surgeon or obstetrician may be in-network, but you could have an out-of-network doctor put in your epidural or perform the pediatric hearing test on your newborn. You may not realize that a doctor or lab didn’t have a discount contract with your insurance company until weeks later. And those surprise bills are issued at the inflated sticker price.
Surprise bills are common. In 2015, the Consumer Reports National Research Center estimated that 30% of Americans received a surprise medical bill. But just three years later, another study found it was about double that figure. The University of Chicago reported that 57% of Americans received a surprise bill in the previous year.7 Another study of New Mexico residents found that more than half of people who had gone to the emergency room got a surprise bill.8
The concept of a surprise bill really bothered me as a physician. Ever since my eager high school days when I accompanied my physician father to his clinic as an observer, I saw how preparing patients for the unexpected was part of the art of medicine. Dad explained to leukemia patients up front everything they might experience in the course of their treatments. The modern-day surprise bills of medicine seem to violate a heritage of honest doctoring.
Genius
True geniuses are rare. But every few years, one shows up in my office. Tim Xu, the John Hopkins medical student I mentioned above, is one of them. He asked if he could observe my research team meetings. But unlike other students, Tim didn’t just sit there. He first looked up, read, and nearly memorized all 200-plus articles I have ever written in the medical literature. During the meeting discussion, he chimed in with deep insights and corrected errors with catlike reflexes. Every time the young gun rattled off formulas, theories, and article citations in seconds without hesitation, I could barely keep up. Tim blew all of us away. “I’ve heard about super geniuses like him,” said Dr. Susan Hutfless, a Harvard grad and PhD statistician on my team, after a meeting Tim attended.
Before coming to Hopkins medical school, Tim graduated summa cum laude from Vanderbilt, earned a master’s at Cambridge in mathematics, and started a genomics company. In his free time during medical school, he completed the health care management track at the consulting firm McKinsey & Company. I think Tim was bored in medical school. His massive brain probably explains why he had the time to publish ten research studies w
ith my research team as a medical student.
One day at our research meeting Tim proposed a highly mathematical study of medical bills to understand how they are being marked up. He was the right man for this study. Over the next several weeks, Tim showed me data on the complexities of medical bill inflation, pointing out the randomness of price setting and the stratagems for hiking charges. Tim was the lead author on our study that found that emergency room bills were marked up a lot more than what the internal medicine department charged for the same services.9 Tim and Angela also conducted a similar study of cancer care, which yielded similar findings. The markups certainly did not correlate with the amount of free medical care the hospital was providing, or with how poor the patient population was.
The game is absurd. Think of the problem of being out-of-network. The recommended solution is to join the network. The game proposes a solution that exists only because it created the problem in the first place. The network is both the firefighter and the blaze. It’s the savior and bogeyman, the police officer and perpetrator. We have come to accept this as standard operating procedure in the business of medicine. But somebody needs to ask: Did anyone ever intend things to get this bad? While networks served a purpose, they are now the very reason we have surprise bills and lives ruined by financial toxicity.
After Tim wrote his momentous papers on price markups, he mentioned to me that he had one more rotation to complete before finishing medical school. He was going to be working in a hospital’s emergency room. This would be great, I thought. Tim did a study looking at the big picture and gave us a global perspective in his study. Now he could zoom in to the granular level, examining the problem from inside a single emergency department. I couldn’t wait for Tim to get to the bottom of it. I told him to talk to emergency department doctors and business people in charge of billing to see if he could discern any rhyme or reason for the markups on emergency room bills. He eagerly agreed to investigate it from the inside.