The Health Care Cost Article Every American Should Read

Every American should read this piece on health care costs, from Steven Brill, of Time Magazine. It’s 11 pages of excellent journalism that will enlighten and enrage you, as it highlights the “why” of skyrocketing health care costs in the U.S.

There is an epic battle going on between health care providers and insurers. And providers are winning as they consolidate and increase their negotiation leverage. The result? We all pay more. Absurd levels more.

Mr. Brill examines a number of actual patient medical bills and compares costs to what you would pay on Amazon or elsewhere for the same product, as well as what Medicare and insurers might pay for services – and what unfortunate patients without health insurance are forced to pay.

Below are some specific examples of ridiculousness that stood out to me:

  • health care costsCommon items like generic Tylenol coming with a charge of $1.50 PER PILL while you can purchase a bottle of 100 for $1.49 on Amazon.
  • Hospitals that are “non-profit” in name only, with net annual profits of $500 million+, even after paying high level executives millions. The article gave the example of the non-profit MD Anderson (part of the University of Texas), who’s CEO, Ronald DePinho, receiving total compensation of $1,845,000 – two and a half times the salary of the chancellor of the entire university.
  • MD Anderson charged $7 each for “ALCOHOL PREP PAD.” This is a little square of cotton used to apply alcohol to an injection. A box of 200 can be bought online for $1.91.
  • Stamford Hospital charged 11 times its costs on lab work, on average.
  • 14 administrators at New York City’s Memorial Sloan-Kettering Cancer Center are paid over $500,000 a year, including six who make over $1 million.
  • With $2.586 billion in revenue, New York City’s Montefiore Medical Center (a non-profit) is more than six times as large as the New York Yankees. It’s CEO makes $4,065,000, chief financial officer makes $3,243,000, executive vice president makes $2,220,000, and head of its dental department makes $1,798,000.
As wells as some broad facts/statistics on health care costs that stood out:
  • In the U.S., we spend almost 20% of GDP on health care, compared with about half that in most developed countries.
  • Americans spend more on health care than the next 10 biggest spenders combined: Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain and Australia.
  • We’re likely to spend $2.8 trillion this year on health care. That $2.8 trillion is likely to be $750 billion, or 27%, more than we would spend if we spent the same per capita as other developed countries, even after adjusting for the relatively high per capita income in the U.S. vs. those other countries.
  • Every hospital has a document called a “chargemaster”, which acts as a price catalog for every service/medicine/etc. they provide. Prices for the chargemaster are not in conformity between providers and seem to be arbitrarily set and automatically increased each year.
  • Under Internal Revenue Service rules, nonprofits are not prohibited from taking in more money than they spend. They just can’t distribute the overage to shareholders — because they don’t have any shareholders.
  • Aware of the leverage that drug companies — especially those with unique lifesaving products — have on the market, most developed countries regulate what drugmakers can charge, limiting them to certain profit margins. In fact, the drugmakers’ securities filings repeatedly warn investors of tighter price controls that could threaten their high margins — though not in the U.S.
  • The difference between the regulatory environment in the U.S. and the environment abroad is so dramatic that McKinsey & Co. researchers reported that overall prescription-drug prices in the U.S. are “50% higher for comparable products” than in other developed countries. Yet those regulated profit margins outside the U.S. remain high enough that Grifols, Baxter and other drug companies still aggressively sell their products there.
  • More than $280 billion will be spent this year on prescription drugs in the U.S. If we paid what other countries did for the same products, we would save about $94 billion a year.
  • Congress prohibits the Centers for Medicare and Medicaid Services (CMS) of the Department of Health and Human Services from negotiating prices with drugmakers. Medicare is forced to add 6% to the average sales price, by Congressional law. In the areas of the country where Medicare has been allowed by Congress to conduct a competitive-bidding pilot program, the process has produced savings of 40%.
  • Medicare has an overall administrative and management cost of about two-thirds of 1% of the amount of the claims, or less than $3.80 per claim. According to its latest SEC filing, Aetna spent $6.9 billion on operating expenses (including claims processing, accounting, sales and executive management) in 2012. That’s about $30 for each of the 229 million claims Aetna processed, and it amounts to about 29% of the $23.7 billion Aetna pays out in claims. (GE note: Medicare can negotiate prices that are a fraction of what insurers can and their administrative costs are 10% of insurers. On top of that, there is no 20% profit payout to Medicare, and no lavish CEO salaries in the other 80%. Please tell me why we are better off with Aetna and like insurers?)

My Thoughts on Steven Brill’s “Bitter Pill” article:

Despite my appreciation for almost all 20,000 words of this article, I take one rather big exception to his conclusion. Brill’s uses the entire article to explain why costs are so high – and he compares how effective Medicare is at examining costs, negotiating lower prices, and being more efficient than private insurers. Some of his recommendations at the end of the article are spot on, but he doesn’t close the circle and make the ultimate recommendation that his months of painstaking work pointed towards – the need for single payer in the marketplace.

The author, who has conservative leanings, goes as far to say we should heavily tax profits, put caps on profits, and expand our current single-payer Medicare (by lowering the age from 65 to 60), but doesn’t go as far to say we should move over to single-payer completely. Why? Cowardice? Political angst against him? I don’t know. But as this article highlights, the numbers don’t lie. There is no politics behind numbers – the lowest cost options should win out for the American people. Brill takes you up 99% of the way up the grueling, unexplored summit, then turns around and says, “oops, forgot the flag.”

If the government (Medicare single payer) is that much more efficient and leveraged in negotiating payouts and limiting costs, I’ll sign up and pay for that insurance plan vs. my existing, any day. Unfortunately, we don’t have that option. We should all want it though, because ultimately, all of these costs are passed along to every one of us. Private insurance is nothing but an inefficient non-government tax that distributes these outrageous costs while taking an additional 20% middle-man surcharge. With private health insurer payouts gone, and more leverage, our shared costs would plummet.

A few other conclusions I drew from the article:

  1. 60% of hospitals in this country are labeled as an IRS tax exempt non-profit. What does this tax-saving, “non-profit” status cost them? 3% of operating revenue to patients who can’t afford to pay. Meanwhile, 1. there is no cap on profitability, and 2. there is no cap on executive pay. Maybe it’s time that changed.
  2. Why not set a limit for hospitals to charge uninsured X percent of what Medicare pays?
  3. I’ll echo one of Mr. Brill’s conclusions: “the bills tell us that this is not about interfering in a free market. It’s about facing the reality that our largest consumer product by far — one-fifth of our economy — does not operate in a free market.” Health care is often a matter of life or death. And consumers have little to no choice when they end up in a hospital emergency room.

So have a read, and I’d love to have an ensuing discussion on the following:

  • What are your conclusions on the article?
  • How can we change these ridiculous pricing practices? What solutions would you propose, if any?
  • Do you think we are better off with the current cost payment/insurance plans we currently have, or do you think we would be much better off with at least an option to choose a highly leveraged negotiator with no profit-motive (single-payer)?
  • The current health care system has picked winners: drug-makers, hospitals, and insurers. Why is it that they should be the winners while every taxpayer, insurance-premium payer, and uninsured citizen stuck with an outrageous bill they can’t afford – are chosen as the losers?
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