by Marty Makary
A few month later we exchanged text messages:
If a genius like Tim can’t understand how medical bills are created, the average patient doesn’t stand a chance.
Who Gets Played
Ron and Heather, close friends of my sister and her husband, are among those who fell prey to the game. One day when I stopped by my sister’s house, I bumped into them when they were over for dinner. They heard I was writing a book on the cost crisis in medicine and told me about the time Heather went to the Washington Hospital Center, a prominent Washington, D.C., hospital, for a small skin growth on her finger. Months later, she got smacked with a $10,000 bill. It included an $87 charge for blankets. No, these were not handwoven Persian shrouds. They were ordinary soft white coverlets such as one finds in a hotel room.
Heather sent me the bill. I had a tough time deciphering it. But one thing was easy to see: they had put her under general anesthesia for a minor procedure on her finger.
“Why did you have general anesthesia to remove a skin tag on your finger?” I asked Heather. They had basically shaved something off her finger—closer to a haircut than a medical operation.
“I don’t know,” Heather told me. “We thought it was going to be done by simply numbing the area. I was shocked. Someone came in just before they took me into surgery and said, ‘We are going to be doing general anesthesia,’ even though I told them I didn’t want general anesthesia.” Nevertheless, in her frightened and intimidated state, general anesthesia is what she got.
The couple have six children and had about the same income as the average American household, about $59,000. Their $10,000 bill was devastating.
I called the hospital on Heather’s behalf and asked them to explain to me, a surgeon, why was general anesthesia required for a procedure that could have been done with local numbing medication? And why did her blankets cost $87?
The representative who picked up the phone insisted that Heather and I complete a patient privacy authorization form, which we did. They accept these forms only by fax. (For younger readers, a fax machine is a device that humans used in the last century to transmit photocopies across telephone lines.)
Once I called to confirm that the authorization form had been received, I requested an itemized bill. I was told this had to be done in writing by ground mail. (For young readers, ground mail was a way people sent written documents, like letters, from the 1600s through the late twentieth century.)
Two months after I sent my letter requesting an itemized bill by ground mail, I received in my mailbox a letter from the hospital explaining that there is a $25 fee to receive a copy of the itemized bill. The letter went on to explain that the request had to be sent by mail (no self-addressed envelope was included) and that the $25 had to be paid with a paper check. (For younger readers, paper checks are pieces of paper on which one person designates an amount of money to be withdrawn from their bank account and given to another person).
After months of forms and delays, I finally had the itemized bill in my hand and authorization to speak for my friend Heather. I’m a patient person, but by this time I was feeling irritated. I let the billing representative have it. I went on a 15-minute rant, citing the unnecessary general anesthesia and the needless hassle even to get the itemized bill, let alone have a conversation about it.
She stayed so silent that I thought I might be getting through to her. But then, like an Olympic boxer playing possum, she perked up and said, “The law allows us to charge whatever we want. If we want to charge a million dollars, she has to pay it.”
I reminded the representative that the hospital, a nonprofit facility, was price-gouging a woman in the community for medical care that was excessive. I asked them to reduce the bill to the Medicare allowable amount of $750. She transferred me to her supervisor, who repeated her party line position. As I was getting ready to escalate the issue to the hospital CEO and board members to educate them, Heather, threatened by bill collectors, paid the amount in full to avoid further damage to her credit rating.
Heather is not alone. Half of metastatic (Stage 4) breast cancer patients in the United States report being pursued by a collection agency for their medical bills, according to a large study conducted in 41 states.10 As a cancer surgeon, hearing the details made me sick to my stomach. Is this what the noble profession of cancer care has become? Is this really how our society now treats breast cancer patients at the end of their life?
The game is out of control, and that’s yet another reason health care costs so much. Hospitals and insurance companies spend a ton of money playing the game—the staff, the infrastructure, the subcontractors. In addition to the collection side, hospitals and insurers have small armies of business people who negotiate discounts. Doctors and nurses don’t see these people. Their offices are off campus, even tucked away in the tallest skyscrapers in some big cities. Some doctors complain about the growth in hospital administration. But hospitals have to hire a lot of business people to participate in the game.
We see the game at work when we see hospital prices rocket up year after year. Consider joint replacement surgery. Medicare pays less than $13,000 for the standard operation, yet one in six U.S. hospitals charge more than $90,000 for it. And the prices go up year after year,11 even though it’s the same people doing the surgery. How does one explain this price variation and these price spikes in just one year?12
The game creates a giant middle layer of health care: the repricing industry, dedicated to negotiating bills among three or four parties after care is delivered. As I learned when attending one of their conferences, it has thousands of consultants and vendors, and well-paid middlemen. The bureaucracy on the hospital side is also large. One study found that for every ten doctors, the average U.S. hospital has seven nonclinical full-time-equivalent (FTE) staff working on billing and insurance functions.13 Health care has been one of the leading drivers of job growth in the United States, a trend that has made it the leading industry in the U.S. economy. But is this industry of new hires who are “playing the game” generating a product? Is this game making a meaningful contribution to our country’s GDP? Or is it a bubble?
Although the game gets scant attention in the news or in health reform debates, it explains many health care trends. It’s the reason hospitals are on a buying spree, snapping up private practices and other hospitals.14 It explains insurance company mergers. The players need power when they clash in the markup-discount game. It explains why health care stakeholders spent $514 million lobbying Congress in 2016. They need to keep their footing on the playing field.
These middlemen have nothing to do with removing a tumor, hammering in a hip replacement, sewing a pancreas, or comforting a patient. Yet their will often prevails over the providers of all of these services. This mammoth behind-the-scenes industry has created tens of thousands of millionaires. When people wonder why health care costs so much in the United States, they must remember that the cost of the giant repricing industry is built into the cost of medical services. The question no one in the health care establishment has been asking is: Do we really need it?
A Carrot
The American people are hungry for real prices, not the inflated “chargemaster” prices. Making real prices public would infuse much-needed competition into health care’s bloated $3.5 trillion market. To manage rising hospital prices, insurers have responded by designing plans with higher deductibles and copays. But that’s not real relief. For too long, the black box of real prices has been protected as a trade secret, resulting in medical centers competing on the level of better parking and NFL game day billboards rather than on quality and value.
The absence of real prices also fuels the problem of surprise bills and predatory billing. Conversely, predatory billing practices are rare in the few health care sectors that have already adopted real price transparency, including cosmetic surgery, in vitro fertilization, and LASIK surgery. In these markets, true competition has resulted in a global reduction in pri
ces over time and has appropriately rewarded high-quality physicians. As Congress and many states consider new legislation to rein in surprise bills, they should consider how transparency of real prices could address the underlying root problem.
Critics of real price transparency have argued that patients do not use price information when choosing where to go for their care and, when they do, they may sometimes choose the most expensive service because they are not paying for it. But asking how many patients will shop for care using price information is not the right question because proxy shoppers15—self-insured employers, health plans, and some patients who pay out of pocket—will use real price information to drive the market for everyone.
Proxy shoppers are common in other businesses. Think about what happens in the grocery business. Only some customers at a grocery store look at the price of produce and comparison shop, oranges to oranges, with other stores. Yet those who aggressively comparison shop create the demand for grocery stores to keep their prices competitive in order to retain the business of the small fraction who price shop, which in turn benefits all shoppers.
Critics also argue that prices are impossible to produce for emergency care. But no one is suggesting you are quoted a price if you are shot in the chest. Sixty percent of medical care is shoppable, representing a large opportunity for competition to reward centers with high quality and fair prices.
The debate over what percentage of patients will use pricing information has been a distracting argument used by special interests. The issue is not how many people will look at prices. It’s whether we as a country will empower proxy shoppers to drive value in health care.
Once real prices are available, Google should consider putting a hospital’s average “markup” on a hospital’s information card when a person searches a hospital. And hospital ratings organizations such as U.S. News and Medicare’s 5-star rating program should factor a hospital’s price quality and predatory billing practices when calculating a rank score. Given the heavy toll on patients, and its downstream impact on patients avoiding care in the future, financial harm should be considered a complication of medical care.
When you go to a restaurant and ask for a menu, you might be alarmed if the waiter or waitress were to respond by asking, “Who’s your employer?” If you then learned that the prices on your menu were much higher than those on menus given to other customers, you’d conclude it’s a dysfunctional market. Yet this is exactly what happens when you need medical care in our status quo system today.
But some smart people are now disrupting that status quo. Adam Russo is CEO of a Boston business that is self-insured—that is, his company directly pays for his employees’ medical bills. He’s one example of a proxy shopper. By virtue of his business, a consulting firm that reviews the medical bills of its clients, he sees wide variation in medical prices for common services in the Boston area. In particular, he observed that the cost of a standard uncomplicated baby delivery in Boston ranged from $8,000 to $40,000. The least expensive and the most expensive hospitals have the same quality. So Adam, a business leader who likes to try new ideas, decided to give any employee who delivers at one of the $8,000 hospitals (like South Shore hospital), free diapers and wipes for a year! Guess where every pregnant employee of his started going for their prenatal care? The $8,000 hospitals. Even though they had the ability to go to any hospital and have it fully covered by the company. The women didn’t price shop, they only quality shopped. Adam successfully demonstrated the power of proxy buyers empowered with price information.
An American Revolution?
“I don’t understand how a hospital can welcome a patient and then turn around and put them in medical bankruptcy.” Dr. Keith Smith, an anesthesiologist and health care reformer, spoke these words to a grassroots gathering of doctors a few years ago. About 100 people from 10 states attended, at the historic Skirvin Hotel in downtown Oklahoma City. I had flown down to join them and learn more. This was the first medical “tea party” meeting of its kind, and the group later became what is now called the Free Market Medical Association.
Dr. Smith’s damning statement resonated. The atmosphere in the room suddenly felt heavy. We sat in silence, reflecting on how far our profession had deviated from its noble heritage. We had gone into medicine to take care of the sick and injured, not to take advantage of them. Smith is a soft-spoken man with a disarming Southern drawl. But he becomes animated when discussing the lack of transparency in health care.
This was my first time meeting Smith. He had invited me to this impromptu conference to discuss how to change the game. Innovators like Smith are rewriting the rulebook in favor of patients. The message that greets visitors to the website for the Surgery Center of Oklahoma, which Smith leads, is simple—but it’s revolutionary in the health care industry: “You can and should know the price.”
Honest pricing is like kryptonite to the game. The website for Smith’s surgery center features an interactive menu of their prices for common procedures.
There is no game being played at Smith’s surgery center. Everyone gets one fair price, whether it’s an insurance company paying, an employer paying directly for their employees’ health care, or an individual patient paying out of pocket.
Smith is a free market champion. His convictions about transparent pricing stem in part from studying free market competition. He and his colleagues have treated hundreds of people from outside the United States, including patients from Canada, Mexico, and Japan. What would make a Japanese person fly to Oklahoma City for treatment? It’s American medicine with price transparency. Furthermore, because his surgery center is honest with their pricing, Smith believes patients are more trusting and satisfied.
Smith has not only attracted increased business with this simple idea, he has also saved the millions of dollars in overhead that’s usually required to play the game with insurers. As a matter of principle, the hospital carves out resources for free care, which is part of their mission to the community. His surgery center is especially popular among employers who self-fund their employee’s medical care, since they are protected from price gouging.
As you can imagine, his surgery center in Oklahoma has enemies. Some feel threatened by Smith’s price transparency model, especially if it becomes contagious. It could force competing medical centers to show prices and compete in a real marketplace. Many people at the conference said they’ve been bullied by insurance companies and hospitals in their area for showing their prices. Insurance companies like having secret discounts and networks.16 Those secret discounts are what insurance companies sell to employers who are essentially buying hospital services in bulk through an insurance company. Hospitals, in turn, rely on insurance companies to send them a steady stream of business. The self-preservation efforts of the stakeholders are so strong that California lawmakers had to pass a law to prevent insurance companies from retaliating against hospitals that disclose prices.
I had been sharing what I learned from Smith with other doctors and hospital officials when speaking at medical conferences. Frequently, someone in the audience would ask one important question: Is price transparency good for a medical group’s business?
I asked my research team to study the few medical groups in the country that have gone from the old way of doing business—giving patients sticker shock after their surgery—to doing business with full price transparency. Our study was led by Dr. Ambar Mehta, an inquisitive Hopkins medical student who is now a surgical resident at Columbia University Medical Center in New York City. His findings were dramatic. Centers that initiated full price transparency saw a 50% increase in patient volume, a 30% increase in revenue, and an increase in patient satisfaction.17 People are sick and tired of the game.
It’s ironic that the federal government already has a mandatory disclosure rule for the real out-of-pocket costs people incur at a vulnerable time in their lives. But it’s not a rule for health care—it’s for funeral homes. The Funeral Rule,18 enacted
by the Federal Trade Commission in 1984, requires funeral providers to offer itemized pricing information to consumers before they purchase any services. The rationale is that consumers in a distressing situation should have honest pricing information, a rule that should also apply to the living, not just the dead.
As a surgeon, I can tell you firsthand that patients and their families are also vulnerable when they seek medical care. There should be no excuse for taking advantage of them. But American health care is so crazy that as long as you are alive, you are susceptible to being taken advantage of by the game. Ironically, once you’re dead, federal law protects you.
CHAPTER 3
Carlsbad
We boarded the single-propeller plane on a beautiful West Texas afternoon. The sun heated the tarmac and glinted off the wings of the tiny aircraft. The young pilot instructed us to buckle up, and moments later, the eight-seater wobbled into the air. After two hours of flying over the desert, we landed on a small airstrip in Carlsbad, New Mexico. Upon arrival, nobody checked our credentials. This remote outpost seemed long forgotten by the TSA.
The town of 25,000 had no Uber or Lyft. Its little airport had no rental car company. Fortunately, I’d called ahead. The hotel couldn’t help me, so I’d phoned City Hall. They gave me a number for Betty, a local resident recruited by the city government to give people rides. Suggested fee: $2. I was relieved we didn’t have to resort to Plan B: walking to our hotel through the desert with our luggage. My medical student, Will Bruhn, had joined me for the journey.