Hospital Bills Spin Out Of Control
By Julie Appleby, USA TODAY

Hospital sticker shock is hitting the USA.

It isn't just $5-a-pill aspirin. Daily room charges exceed $5,000 in some New Jersey hospitals. An appendectomy in California, including about two days in the hospital, has an average list charge of $18,000. Nationally, federal data show the median charge for treating a heart attack is more than $20,000.

Rapidly rising hospital charges have placed hospitals in the spotlight. Critics say hospitals are unfairly using their growing clout in many markets and charging far more than it costs to provide services. Spending on hospital care is the fastest-growing segment of the nation's health care tab.

"It's a national crisis," says Sean Harrigan, head of the board that oversees the California Public Employees Retirement System (CalPers), which is considering dropping 45 of the states' most expensive hospitals from its network. Doing so could save $72 million annually.

Hospitals are fighting back, saying they are only trying to counter rising labor and equipment costs, while faced with insufficient payments from government and private insurers. The American Hospital Association says one-third of hospitals are losing money. And it rejects the argument that most hospitals have strong bargaining power. ( Related story: Hospital sues insurer for not paying full charge )

"Half of all hospitals are in rural communities where it's not about market clout and leverage," says Carmela Coyle, senior vice president at the hospital association. "These are hospitals that are basically told by insurers what their rates are going to be."

In California, where hospital charges have been increasing faster than the national average, lawmakers last year ordered hospitals to make their price lists available to the public by posting them with a state agency, at the hospital or online. The sponsor of the measure, Assemblyman Dario Frommer, says the measure also requires hospitals to give a list of charges for 25 common procedures to any patient who asks for it.

"Health plans, employers and patients have a right to know what these costs are," says Frommer, a Democrat who represents Glendale. "We want to get to a point where, if you are considering some kind of elective surgery, you can get that information and make an informed decision. In California, if you get your brakes fixed on a car, the mechanic has to give you an estimate before doing the work. That's not true if you go in for major surgery."

Patients in other states say they want such information.

When Karen Hamers' teenage daughter Michele needed knee surgery, Hamers called several hospitals near her home in Vero Beach, Fla., and asked how much the surgery would cost. At the time, her family did not have health insurance. After choosing a hospital, Hamers paid the surgeon and then also paid the hospital what it said the surgery would cost: $4,200.

"Six days after surgery, we receive a letter from the hospital asking for an additional $21,000," Hamers says. She asked for an explanation and got an itemized bill.

"It was two pages of gobbledygook," Hamers says. "We could not understand it. They could not explain it. We showed it to our doctor, and he didn't understand it."

Hamers had kept a detailed log of her daughter's 20 hours in the hospital, including a list of all the staff who cared for her and what drugs she was given. After reviewing the log and its own records, the hospital reduced its additional billing to $610.

Hamers said the hospital industry needs to make its billing system more understandable, especially for people who are paying the bills on their own. "If I'm going to have a procedure, I would like to know what my costs are expected to be, going in," she says.

Consumers caught in middle

The debate over hospital charges is part of the fallout from the rise of managed care, when insurers drove down payments to doctors and hospitals with a take-it-or-leave-it attitude. In response, hospitals banded together in systems, giving them larger market share and bargaining power. Many hospitals successfully demanded bigger payments by telling insurers to pay up or they would stop accepting their patients.

The outcome of the ongoing debate will affect where consumers get their hospital care, how much they know about what their hospitals charge and how much they pay out of their own pockets for that care. Here's what's changing:

• More insurers are setting up "tiered hospital networks," in which consumers pay more out of their own pockets for care in expensive hospitals. Massachusetts state employees covered by Tufts Health Plan, for example, will pay an admissions co-pay of $200 starting in July if they choose hospitals the plan has deemed lower-cost and higher quality, but they will pay an admissions co-pay of $400 if they choose to go to the higher-cost/lower quality hospitals.

• Consumers are demanding discounts for uninsured patients and individuals who have high-deductible insurance policies. Several state hospital associations and some hospital chains have agreed to voluntary discounts.

• Some insurers and employers are demanding that hospitals provide data on quality to justify their higher costs. A hospital with higher initial costs may prove cheaper in the long run, employers say, if it has a lower rate of infection or other complications.

"The bad news is hospital costs are the single biggest driver of medical inflation today," says Peter Lee of the Pacific Business Group on Health, a consortium of employers who buy health insurance. "The good news is it is forcing employers to look at what they're buying."

The industry's prices have also caught the attention of regulators:

• Tenet Healthcare, the nation's second-largest hospital chain, said last year that it rapidly raised charges in recent years. Government regulators are investigating whether those price increases allowed Tenet to collect more than it should have from Medicare under a special program designed to compensate hospitals for sicker and costlier-than-average patients.

• In February, the Federal Trade Commission filed an antitrust complaint against a hospital system in Evanston, Ill., part of a revived effort by the FTC to look into the effect hospital mergers have had on prices. It is the first time the FTC has looked at a hospital merger after the fact to determine its impact.

The hospitals say they have done nothing wrong and that increased prices in the area reflect increased hospital spending to improve services. The case is being watched closely by the hospital industry and by insurers and others who pay for hospital care.

"What the FTC is looking for are cases where a hospital merger resulted in a significant increase in market share followed by a significant increase in prices. It sounds simple, but because pricing is so complex, it's not," says Richard Raskin, a partner with Sidley Austin Brown & Wood in Chicago. "There is a real concern about rising hospital costs, but there's a question about how much, if any, is attributable to consolidation or mergers. That's part of what these cases are designed to ask."

Hospitals driving costs

Hospital care is the largest chunk of the health care pie, accounting for about one-third of the $1.6 trillion national spending on health care. Hospital spending has been rising rapidly for the past five years, contributing to the fastest rise in health insurance premiums in a decade.

"We're better at fixing hearts and hips than we were 10 years ago, and that better performance requires more resources," says Len Nichols at the Center for Studying Health System Change, a non-partisan research group in Washington. "At some level that's OK. We like it and want it. But then we react when premiums are higher than they used to be."

And spending is just one measure of the hospital industry.

Charges are another — and the one attracting the most controversy. Hospital charges are similar to the list price on a car. Few pay the full amount because insurers negotiate discounts, and Medicare tells hospitals what it will pay. Still, some insurers do pay full charges, such as when a policyholder goes to an out-of-network hospital with whom the insurer does not have a negotiated discount.

Insurers can also be hit for additional payments when the charges for treating a patient exceed a specified amount, which occurs more frequently in hospitals with higher charges.

Charges have gone up quickly in recent years and often bear little relationship to the actual cost of services. "It's not unusual for a hospital's billed charges in a market to increase 25% to 30% in one year," says John Bauerlein, senior partner Milliman USA, a firm that tracks health care spending.

Hospitals can raise charges to any amount the market will bear, but it's an odd market because most hospital customers negotiate discounts off charges. One of the reasons prices rose so much in recent years is that hospitals tried to increase the amount they could get from insurers, who had often used charges as a starting point for negotiations.

But in recent years, as charges have climbed, insurers began to negotiate in other ways, basing payments, for example, on set amounts for a day's care or the treatment of a particular condition.

In 1993, charges were, on average, 159% more than costs, based on data provided to Medicare, says Glenn Melnick, professor of health care finance at the University of Southern California. Last year, he says, the national average charge was 211% higher than cost. In some states, those ratios are even higher. California, Florida and Nevada have some of the highest hospital charges, close to 300% higher than costs, according to his research.

No single formula

So just how are charges calculated? "There is no single formula or method for calculating charges," says Coyle of the hospital association. Hospitals take into account such factors as labor costs, the number of uninsured patients the hospital treats and whether the hospital contracts with a lot of low-paying insurers.

Some insurers, she says, pay less than Medicare, which she says also fails to meet overall hospital costs. Federal statistics show that Medicare in 2002 provided an overall margin of 1.7% to the hospital industry, more for inpatient care and less for outpatient.

Overall, the nation's hospitals had a 4.4% margin last year, according to the hospital association.

Because most hospitals rely on government health payments for about 50% of their revenue, and private insurers who negotiate discounts for much of the rest, raising charges is one way hospitals can try to bring in additional money from individuals and insurers not covered by the discounts, Coyle says.

Even so, some consultants say raising charges doesn't help much because so few insurers pay full charges. Jim Callanan of the Impart Group, a hospital management company, says the consulting firm helped a large, inner city hospital with $300 million in annual revenue do a financial turnaround.

"We raised charges 45%," Callanan says. "We only collected $8 million more."

Still, hospitals raise charges to capture any dollars they can: "You do it so you're not leaving any money on the table," Callanan says.

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