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Mr. Chairman, members of the
Committee; my name is Dr. Gerard Anderson.I have been working on hospital payment issues for many years.Between 1978 and 1983, I worked in the Office of the Secretary in the US
Department of Health and Human Services.In
1983, I was one of the primary architects of the Medicare Prospective Payment
legislation.Following passage of the Medicare Prospective Payment
legislation, I joined the faculty at Johns Hopkins where I have been for the
past 21 years.At Johns Hopkins, I
direct the Johns Hopkins Center for Hospital Finance and Management - the only
academically based research center focusing exclusively on hospitals.I am also a professor of Health Policy and Management and professor of
International Health in the Bloomberg School of Public Health and Professor of
Medicine in the School of Medicine at Johns Hopkins University.
I would like to begin my testimony by highlighting several milestones in
hospital payment policy.Because of
the evolution of hospital payment policy, self pay patients are currently being
charged 2 to 4 times what people with health insurance coverage pay for hospital
services.These are not market
rates and need to be lower.After
reviewing the milestones, I will then make a series of specific suggestions to
the committee that will make the current hospital payment system more equitable
to the self pay patients.My
preferred option is that hospitals be limited to what Medicare pays plus 25
percent.
Critical Milestones That Have Led To Market Failure in
Hospital Payment
One hundred years ago most hospital care was either free or very
inexpensive.In 1900, hospitals were
institutions that could provide little clinical benefit for most
illnesses and were primarily places for housing the poor and insane who were
sick.Hospitals were primarily
philanthropic organizations.They
were established primarily in poor urban areas.
Beginning in the 1920s, the ability of hospitals to improve the health
status of patients increased dramatically.For the first time, rich and poor Americans sought out hospital care when
they became seriously ill.Anesthesia
expanded access to surgery and antibiotics made it easier to treat infections.
Physicians had a wider range of services to provide to hospitalized
patients.New drugs and new
equipment became available and better and more highly trained personnel were
required to provide these services.The
cost of providing hospital care began to accelerate.In order to recover these higher costs, hospitals began to charge
patients for services.Hospitals
developed a charge master file.Initially
there were only a few items on the list.It
listed specific charges for each service the hospital provided.A hospital day had one charge, an hour in the operating room had another
charge, and x-ray had a third charge, etc.As the number of services the hospital offered increased, so did the
length of the charge master file.There
are now over 10,000 items on most hospital charge master files.
Before 1929, there was no health
insurance and patients paid the hospital directly.In 1929, Baylor Hospital in Dallas, Texas began a program
selling health insurance to school teachers in the Dallas County School
district.Baylor created this
health insurance system because many of its patients were having difficulty
paying hospital bills.It became
the prototype Blue Cross Plan.As
the depression worsened in the 1930s, the ability of people to pay their
hospital bills also worsened.Blue
Cross and other types of insurance programs proliferated.These insurers paid charges based upon the charge master file.
During this period, the charges were based on the cost of
providing care plus a small allowance for reserves.The markup over costs was typically less than 10%.
Private health insurance received a major boost during World War II when
Congress made health insurance tax exempt.After World War II, private insurers continued to pay the charges that
hospitals had established.Over
time, the ability of
hospitals hospitals
ability to improve the health status of their patient's
increased, the kinds of services provided by hospitals increased and the costs
of hospital care began increasing at
2 to 3 times the rate of inflation.. By
1960, the typical hospital had established a list of prices for
approximately 5,000 separate items.There
were no discounts; everyone paid the same rates.The rates that insured and self pay people paid were similar.
Hospitals set their prices for these 5,000 items on a few criteria.on.The most important factor was costs.Charges were typically set
at a given a
markup over costs, usually 10 percent.The hospital would estimate how much it cost to deliver a service and
then charge 10% more.The ability
of hospitals to estimate cost for individual services, however, was extremely
limited by cost accounting.No
hospital really knew how much it costs to provide a particular service because
cost accounting techniques were not sufficiently detailed.
for
a very few services change may have been determined by market forces.Market forces determined charges for only a few services.Child birth for example, was one service for which patients could engage
in comparative shopping.Pregnant
women had almost nine months advance warning that they would be admitted to the
hospital and their families could therefore engage in comparative shopping.In theory, they would
could compare
differences in the out-of-pocket
costs and the perceived
quality between two hospital delivery rooms.
and their perceived quality.
Thus,
Because of this, hospitals kept delivery
room charges at or below actual costs.
For most services, however, it
was often impossible for consumers to engage in comparative shopping
because either for
most services comparative shopping was not possible.Eitherthe admission was an emergency or their doctor had
admitting privileges in only one hospital.For most admissions, they had no idea what services they would use during
their hospital stay.They could not
engage in comparative shopping if they did not know what services they were
going to need.In addition, for
most people, insurance paid the full bill and so patients had no financial
incentive to engage in comparative shopping.
Medicare Becomes Involved
When the Medicare program was established in 1965, Congress decided that
the Medicare program would pay hospital costs and not charges.This was the method of payment used primarily by Blue Cross.Congress recognized that charges were greater than costs and that the
Medicare program would be able to exert little control over charges.A very detailed hospital accounting form called the Medicare Cost Report,
was created to determine Medicare's allowable costs.
In order to allocate costs between
the Medicare program and other payors, the Medicare program required hospitals
to collect uniform charge information.Uniform
charges were necessary in order to allocate costs to the Medicare program.The Medicare Cost Report could determine allowable costs for the entire
hospital, however, it needed a way to allocate these costs specifically to the
Medicare program.Charges are used
to allocate costs to the Medicare program.If, for example, 40% of the charges were attributed to the Medicare
program, then the cost accounting system would allocate 40% of the costs to the
Medicare program.
In order to prevent fraud and
abuse, the Medicare program required hospitals to establish a uniform set of
charges that would apply to everyone.Otherwise,
the hospital could allocate charges in such a way that would result in more
costs to the Medicare program.
Hospitals continued to have complete discretion on how they established
their charges.The Medicare program
did not interfere with how hospitals set charges for specific services.One hospital could charge $5 for an x-ray and another hospital $25 for
the same x-ray.A number of studies
conducted at the time showed wide variation in hospital charges.
People with insurance generally
had little reason to scrutinize their bills because they had first dollar
coverage.Insurance paid the full
hospital bill.Also, patients did
not know what services they would need and so they did not know what prices to
compare.Insurance companies did
little to negotiate with hospitals regarding hospital charges in the 1960s and
the Medicare and Medicaid programs did not pay on the basis of charges.
In the 1970s, market forces still
had a small impact on hospital charges.In
reality, the hospital had virtual carte blanche to set the charges.The number of separate items that had a charge associated with them,
doubled from 5 to 10,000 at the typical hospital, where it is today.
Two major changes occurred in the
1980s that had a major impact on hospital charges.First, Medicare created the Prospective Payment System which
eliminated any need for using hospital charges to allocate hospital costs.Second, most insurers began negotiating discounts off of charges or using
some other mechanism to pay hospitals.As
a result, any market forces that existed to limit what hospitals could charge
were almost completely eliminated.
In 1983, the Medicare program moved away from paying costs and instituted
the Prospective Payment System (DRGs).As
the Medicare Prospective Payment System became operational, the need for the
Medicare Cost Report and therefore the need for a uniform charge master file to
allocate costs became less and less important.Today, because nearly all of the Medicare program uses some form of
prospective payment, the requirement of a uniform charge master file by the
Medicare program is virtually unnecessary.
Managed care plans began to negotiate with hospitals in the early 1980s.They wanted discounts off of charges in return for placing the hospital
in their network.They successfully negotiated sizeable discounts with
hospitals.As insurers began to
compete with managed care plans in the mid 1980s, they also began to move away
from paying full charges and started negotiating their own deals.Some insurers decided to pay on a per day basis, others decided to pay
discounted charges, or a negotiated rate.Nearly
all private insurers and managed care plans stopped using full charges as the
basis of payment by 1990.They
simply could not compete in the market place if they paid full charges.
Cost Shifting and Market Failure
As each segment of the market
developed a different way to pay hospitals, this lead to a phenomenon known as
"cost shifting".As the
Medicare program instituted the Prospective Payment System (DRGs), the Medicare
program began to limit the amount that Medicare would spend.Faced with constraints on Medicare (and soon thereafter
Medicaid) spending, the hospitals began to engage in "cost shifting".
To do this the hospital industry
increased prices to commercial insurers.Given
that most commercial contracts were written to reimburse hospitals based on the
hospital's own charges, it was relatively simple matter for hospitals to raise
their prices.When commercial
insurers tried to raise prices to the employers, however, employers began to
examine alternatives.Employers
slowly and then rapidly embraced managed care.Managed care expanded rapidly using their market power to negotiate
discounts off of charges with hospitals.Soon
commercial insurers asked for similar discounts.Private insurers continued to pay more than Medicare however in most
cases.
Without the federal government, state governments, private insurers, or
managed care plans paying full charges, the regulatory and market constraints on
hospital charges were virtually eliminated.By 1990, the only people paying full charges were the millions of
Americans without insurance, a few international visitors and the few people
with health savings accounts.These
individuals had limited bargaining power and were asked to pay ever increasing
prices.Effectively, there was
market failure in this aspect of the hospital market.
Without any market constraints, charges began increasing much faster than
costs.In the mid 1980s charges
were typically 25% above costs.Without
any market constraints, it is now common for charges to be two to four times
higher than costs.Charges are also
two to four times what most insurers pay.Most
insurers, including Medicaid, Medicare, and private payors, pay costs plus/minus
15 percent.Over the past twenty
years, the difference between what the hospital charges and what it costs to
provide care has grown steadily in nearly all hospitals.
Hospitals have been able to increase charges because self pay individuals
have limited bargaining
power when they enter a hospital. When
an uninsured person enters a
hospital they have limited bargaining power.They first must find a team of physicians willing to treat
them who also have privileges at that hospital.Then they must negotiate with the hospital.Often they wait until they are ill before they seek medical care.This further diminishes their bargaining power because it is now an
emergency.Often the hospital wants
prepayment.Because most self pay
persons have limited resources and cannot make full payment in advance, this
further diminishes their bargaining power.
Perhaps the most important
constraint on their bargaining power, however, is that they do not know what
services they will ultimately need.They
do not know how long they will remain in the hospital, what x-rays or lab tests
they will need, and therefore they cannot know in advance what services they
will require and which of the 10,000 prices they should negotiate.
Costs, and What Insurers Pay in Pennsylvania
Using the most recent data available I compared what insurers pay and
what hospitals charge in Pennsylvania.As
noted earlier, charges vary considerably from hospital to hospital.Pennsylvania collects data on what hospitals charge and what insurers pay
in Pennsylvania for different illnesses (www.phc4.org).For example, I looked at the charges that Philadelphia area hospitals
charged for medical management of a heart attack in 2002.The average charge was over $30,000.Most insurers paid less than $10,000.
Why Are Charges So Much Higher Than What Insurers Pay?
There are three main reasons why hospitals set charges 2-4 times what
they expect to collect from insurers and managed care plans.The first is that Medicare outlier payments are partially based on
charges.The second is that bad
debt and charity care is typically calculated at full charges.The third is that some self pay patients actually pay full charges.
In the Medicare program, a small proportion of patients are much more
expensive than the average patient.These
are known as outlier patients.Medicare
pays for these patients outside of the DRG system.Medicare continues to use charges as part of the formula used to
determine outlier payments.
Recent investigations have shown
certain hospital systems manipulating the payment system in inappropriate ways
to over charge the Medicare program for outlier patients.One aspect of this fraud was the exceptionally high amounts these
hospitals charged.Lowering the
charges would diminish the over charges in the Medicare program for outlier
payments and would reduce the level of fraud.
Second, hospitals routinely quantify the amount of bad debt and charity
care they provide.This helps with
fund raising and is used to meet charitable obligations.However, by valuing bad debt and charity care at full charges, these
numbers vastly over estimate the amount of bad debt and charity care the
hospital actually provides.
There are three groups that still pay charges.The first are people who have health savings accounts.Some of these individuals may be able to negotiate discounts although
most pay full charges.It is extremely difficult for one person to negotiate with a
hospital, especially in an emergency situation.The hospital holds all of the cards.Lowering the charges will benefit people with health savings
accounts.
The second category is international visitors.These are typically affluent individuals who need a procedure that can be
performed most effectively in the United States.These individuals are willing to pay full charges, even at
inflated prices.
There are compelling arguments to
charge international visitors higher prices than Americans.Most can afford to pay and, in addition, they have not subsidized the
hospital sector in the United States through tax payments and other public
subsidies.On the other hand, in
most other countries Americans are usually treated free of charges if they have
an emergency.An American injured
while traveling in Canada, Australia, France, etc would be treated free of
charge or receive a very small bill.Although there is no data that I know of that would allow us
to compare the cost of care provided to Americans traveling abroad to the cost
of care provided to foreigners receiving care in the U.S., I expect it would be
similar.In that case it seems
unfair to charge foreign visitors so much more for a service when Americans
receive care free of charge overseas.
Impact On The Uninsured
The third, and by far the largest group that is asked to pay full charges
is the uninsured.There are 43
million Americans who are uninsured.The
uninsured can theoretically negotiate with hospitals over charges, but they have
little bargaining power.My review
of hospital practices suggests that less than 1 in 20 uninsured patients
actually negotiates a lower rate.
Many uninsured people are unable to pay full charges.In fact, most studies suggest that less than 1 in 10
uninsured people pay a portion of their charges and relatively few pay full
charges.In fact, in most hospitals
only 3 percent of total revenues comes from people who are uninsured.Self pay patients represent a very small proportion of
hospital revenues.
The toll on the uninsured, however, can be substantial.There are numerous reports that show hospitals attempting to collect
payments from the uninsured.The
people who do not pay are sent to collection agencies and some are driven to
bankruptcy.One study found that
nearly half of all personal bankruptcies were related to medical bills (M.B.
Jacoby, T.A. Sullivan, E. Warren, "Rethinking The Debates Over Health Care
Financing: Evidence from the Bankruptcy Courts," NYU Law Review 76, May 2001:
375).Another survey (D. Gurewich,
R. Seifert, J Pottas, The Consequences of Medical Debt: Evidence From Three
Communities, The Access Project, February 2003) found that hospitals were
routinely requiring up front payments, refusing to provide care, or encouraging
uninsured patients to seek new providers if they did not have health insurance.Many respondents found the terms the hospitals were offering were
difficult to maintain given the hospitals' inflexible collection processes and
their own financial situations.
Nearly all hospitals do this to some extent.For example, a series of stories in the Wall Street Journal examined the
collection procedures at Yale- New Haven hospital.The Wall Street Journal found that in 2002, the Yale- New Haven hospital
was lead plaintiff in 426 civil lawsuits, almost all of which concerned
collections or foreclosure lawsuits against individuals, compared with 93
lawsuits at a similarly sized local hospital.Yale- New Haven Hospital also frequently engaged in aggressive
collections measures, such as wage garnishment, seizure of bank accounts, and
property liens.In 2001, the
hospital filed 134 new property liens in New Haven, almost 20 times the number
filed by the city's other hospital.
Benefits of Lower Charges
If charges were lowered there could be two beneficial outcomes.First and most important, fewer self pay individuals would
declare bankruptcy.Second, more
self pay patients would be able to pay their bills if the charges were more in
line with prevailing rates.
Guiding Principles for Setting Rates
The question therefore becomes what is a reasonable rate for hospitals to
charge self pay patients given that neither market forces or regulations
constrain hospital charges.
I propose four guiding principles.First,
the rate should not interfere with the market place.The rate that self pay individuals should pay should be
greater than what insurers and managed care plans are currently paying
hospitals.Second, the charges
should not be substantially higher than what insurers and managed care plans are
currently paying hospitals.Individuals
with limited bargaining power should not be asked to pay exorbitantly high rates
because they lack market power.Third,
the rate should be transparent to patients.Patients should know the prices they will be asked to pay when they enter
the hospital.Fourth, the system
should be easy to administer and to monitor.
Two Payment Alternatives
I have two specific suggestions for the Congress to consider.
The first is to mandate that the
maximum a patient can pay is the amount paid by Medicare plus 25%.I call this DRG+25%.The
rationale for allowing hospitals to charge 25 percent more than Medicare is
based on three factors.First,
private pay insurers pay an average of 14 percent more than Medicare for a
similar patient.I then add one
percent for prompt payment.Finally,
an additional amount (10%) is added because the amount paid by private insurers
is an average and some commercial insurers pay more than the average.Adding the three factors together results in a proposed
payment rate of DRG + 25%.
The advantages are that the DRG +
25% rate is easily monitored and adjusts for complexity of the patient.It would be continually updated by Medicare as Medicare updates the PPS
rates.The disadvantage is that the
rate is not market determined.In
most markets, however, it would be above what insurers and managed care plans
are paying.
A second option is to allow
hospitals to charge the maximum they charge any insurer or managed care plan on
a per day basis.The advantage is
that it is market determined.
There are four disadvantages.First, it will require regulations and auditing to verify the rate is the
maximum they charge any insurer or managed care plan.Second, in order to make the rate transparent, it will be necessary to
keep the rate in place for an extended period of time, probably a year.This interferes with the market place.Third, it will require hospitals to tell all insurers and managed care
plans who was the worst negotiator.This
also interferes with the market place.Fourth, it requires all negotiations to be on a per day
basis.Any other payment system
would be too complicated.This
interferes with the market place.
Balancing the pros and cons of
both options, I recommend the DRG+25% option.It complies with all four principles- it is above what insurers are
paying, it is a reasonable amount, it is transparent, and it is easy to monitor
and verify.
Rate Is Too Low
Insurers may argue that they are
entitled to more substantial discounts over self pay individuals for two
reasons- prompt payment and volume discounts.The prompt payment argument has some validity.A two month delay in payment at a 6 percent interest rate is
equivalent to a 1 percent savings.This
is built into the DRG + 25% payment.
The volume discount argument is
more complicated.In my opinion it
has limited financial impact, especially on medical services.Most insurers and managed care plans do not guarantee a certain volume of
patients and certainly they do not guarantee a certain case mix of patients.Instead, they agree to put the hospital on a preferred list of hospitals.The patient and the physician still make the final decision regarding
which hospital to select.The choice, therefore is fundamentally different from a
purchase in the manufacturing or retail sector where a large volume of goods or
services is actually purchased.
The second part of the volume
argument, however, is probably more important.The same medical services will be used if the patient is self pay or
insured.The patient will use the
same set of laboratory tests, spend the same time on the operating table,
require the same nursing hours, etc.The
medical services are what is most expensive in a hospital and this does not
depend on the volume of patients that an insurer has.
Incentives to Purchase Health Insurance
Some individuals with high incomes choose to self insure.An important and difficult question is whether these
individuals should be able to get the benefits from these lower rates.
One argument is that these individuals have voluntarily chosen to go
without health insurance and they should pay a much higher rate if they get
sick.A second argument is that
these individuals should be given financial incentives to purchase health
insurance and that lowering the hospital rates for them will only induce them to
go without coverage.
Although there is merit in both arguments, the question is what is a fair
rate for them to pay when they get sick?When
they need hospitalization they should pay a rate that is somewhat higher than
people with health insurance coverage pay.The DRG +25% criterion meets this objective.This group of people should not be asked to pay for the bad debts of
other self pay patients any more than the insured population.And, if the rates were reasonable they would be more likely to pay.
Simplification of Payment System
The medical care system could be
simplified if such a change were enacted.One
major change would be the elimination of the Medicare Cost Report.A second simplification is that it would be easier to calculate any
discounts that hospitals are offering to low income individuals.
The Medicare Cost Report was
created in 1965 with the passage of the Medicare legislation and the decision by
the Congress to pay costs.The
Medicare cost report is now a document that is over 6 inches thick and requires
many hours for hospitals to complete.However,
with the passage of the Medicare Prospective Payment legislation in 1983 and
subsequent adoption of additional Prospective Payment Systems for outpatient
care etc., there is no longer a compelling reason for maintaining the Medicare
Cost Report.Any information the
Congress needs from hospitals to set hospital payment rates could be summarized
in a few pages.The only relevant information is the profit of hospitals and
some information used to calculate graduate medical education and
disproportionate share payments.
Hospitals often give discounts to
low income self pay patients.It is
therefore key to understand what is the basis for the discount.A discount from full charges is not really a discount if it is still
greater than what insurers and managed care plans would pay.A true discount would be below what public and private payors are
expected to pay.If the payment system for self pay patients were simplified (DRG
+ 25%) then it would be easier for them to determine if they are really getting
a discount and how much they were expected to pay.Currently the self pay person does not know the real extent
of the discount or how much they will pay.
Summary
In summary, what should be done?
1. Both Congress and the hospital industry should recognize that hospital
charges are not determined by market forces.The only people paying full charges are those with limited or no
bargaining power.
2.The
maximum that self pay individuals should have to pay for hospital services
should be DRG rate plus 25%.
I would be
happy to answer any questions.
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