What Does Health Care Cost?

In an attempt to change the subject from the excesses of its own behavior, the insurance industry has actually shed a little light on one of the most fundamental, and complex, questions in the health care reform debate: what does health care cost?

Last week, America's Health Insurance Plans (AHIP), the insurance industry's lobbying group, released a survey of its members which was meant to reveal the variations between what hospitals and physicians bill for services and what Medicare and insurers pay for them. You can read the New York Times article on the subject here.http://www.nytimes.com/2009/08/12/health/policy/12insure.html?emc=tnt&tntemail1=y

It's not a scientific survey. In fact, its purpose was to point out the most excessive billing behaviors on the part of health care providers. And the anecdotes do, in fact, illustrate absurd variations: an Illinois patient billed over $12,000 for cataract surgery for which Medicare pays $675; a California patient billed $20,000 for knee surgery for which Medicare pays $584; a patient in New Jersey whose bill for spinal fusion surgery totaled $72,000, while Medicare pays only $1629 for the procedure. And there are plenty of other anecdotes highlighting the difference between billed charges and insurer or provider reimbursement.

While the particular cases are meant to be particularly outrageous, they highlight an issue which is played out tens of thousands of times a day in communities across the country in smaller ways.

A patient sees a specialist for a medical problem. The physician bills $350 for a 20-minute office visit. The patient later receives a statement from his/her insurance company stating that, while billed charges were $350, the physician has agreed to take $125 as payment in full for the office call.

What does the doctor's visit cost?

In the real world, a patient without insurance coverage would be expected to pay the $350, or whatever lower number he might negotiate with the doctor's office. For the insured patient, the physician gets $125...or whatever amount the doctor has agreed to accept from whatever insurance carrier the patient subscribes to. The physician may be reimbursed at dozens of different levels for the same service, depending on the patient's health plan.

Throw in co-pays, out-of-network fees or penalties, and the picture gets even fuzzier.

But what does it have to do with the doctor's cost of doing business?

Here's the nasty part: in general, doctors and hospitals have no idea what their costs are; unlike every other element of business, pricing doesn't start with calculating the cost of providing a service, with mark-ups or discounts from "retail" based on volume. All they know is what Medicare, Medicaid, or insurance companies will pay them.

Again, in general, Medicare reimbursement sets the "floor" for paying providers. Insurance companies generally set their reimbursement rates as a function of Medicare: that is, 1.25 or 1.4 times Medicare rates.

But that still doesn't address the question of what those services cost. When hospitals or physicians state that Medicare reimbursement pays them below their costs, that usually means,"we're not getting paid enough."

The one thing which IS true, is that a provider writing off a charge for "uncompensated care" is charging off the highest possible billed charge.

When the President promises to "bend the curve" on health care spending to reduce costs, it'd be helpful to know exactly what that means. Frankly, I'd settle for some means to create more transparency and uniformity in billing for services...and actually, providers would benefit from that, too...