Why are hospital charges so high? I’ve asked myself this question for many years.
Although I was the CEO of a hospital for almost seven years, I’ve never really understood how hospital charges are determined. Since I retired in 1995, it seems to have become even more complex and less understandable.
For example, I’ve been treated at UCLA Medical Center in Los Angeles, and every time we receive the bill in the mail, usually 90 to 120 days later, the charges are not only enormous — generally around $40,000 — but completely unintelligible. As a Medicare patient with secondary coverage, I’m responsible for only a small co-pay, anywhere from $5 to $100, and the unpaid balance is written off.
A May 16 New York Times article headlined “The Murky World of Hospital Prices” uses data that had been “submitted to Medicare by more than 3,300 hospitals seeking fee-for-service reimbursements for the 100 most common inpatient treatments in fiscal-year 2011. The prices at issue — sometimes called ‘chargemaster’ prices — are not what most people pay. They are far higher than what Medicare pays, which is close to the real cost of providing the service, and also higher than what private insurers pay because they negotiate for discounts.
“The only patients likely to be charged the full listed prices are those with little or no insurance and no purchaser to bargain on their behalf. Many insured patients also face higher premiums or co-payments because their plans reimburse the hospitals based on discounts from the listed prices. The listed prices varied wildly from one part of the country to another and even within the same city or region, seemingly without any good reason or any relationship to the quality of care delivered.
“For example, a (New York) Times analysis … found that the Bayonne Medical Center in New Jersey charged $99,689 for treating each case of chronic lung disease, 17 times as much as Medicare paid in reimbursement. The price for a joint replacement with artificial hips or knees ranged from a low of $5,300 in a hospital in Ada, Okla., to a high of $223,000 at a hospital in Monterey Park, Calif., a 40-fold difference that cannot be explained by regional differences in wages, the sickness of the patients or a hospital’s teaching responsibilities. The charge for treating heart failure patients in hospitals in Jackson, Miss., ranged from $9,000 to $51,000.”
Part of the problem in determining what hospitals should charge for their services is the complexity of operating them: Staffing varies widely, depending on the number of patients who have been admitted, the time of the day (or night), the type of staff, i.e., doctors, technicians (such as X-ray or ultrasound techs), emergency room staff, nurses, aides and orderlies, maintenance personnel, etc.
Staffing is required around-the-clock, regardless of the number of patients who have been admitted, or even when there are no patients at any given time. I can remember occasions when we had no patients in the Intensive Care Unit, but were required to keep a minimum staff on duty in case someone was admitted. In the late 1980s and early ‘90s, our local hospital had an ICU that often had no patients. However, we had to have a minimum of three ICU nurses on duty at all times, at a minimum cost of around $250,000 a year.
That may not seem like a lot of money in today’s world, but it was a great deal at the time. Due to inflation, that number would now be $468,812.
Eventually, as part of a series of cost-saving measures that were instituted to keep the hospital open, we closed the ICU.
In addition, the costs of hospital operations are significantly increased by regulatory requirements (federal, state and local) — to a much greater degree than those of most other types of businesses. There’s a long list of agencies that monitor health-care practitioners and facilities, including the Occupational Safety and Health Administration, which establishes and enforces rules and regulations for the health-care industry.
California has a state agency commonly referred to as OSHPD (Office of Statewide Health Planning and Development) that must approve the construction and/or improvement work in all hospitals. Its website characterizes the agency as “one of the largest building departments in the State of California” — and, I might add, one of the most difficult to work with. It can take an inordinately long period of time for it to approve projects, and it has the power to put a hospital that doesn’t comply with its regulations out of business.
It may be different today, but a relatively minor situation that I had to deal with at the time illustrates the point. There was a small linen closet in the hospital that had floor-to-ceiling racks for the linens. These were anchored to both the floor and ceiling in case of an earthquake. We decided to move it, which was a very minor project. About a year later, when an OSHPD inspector visited our hospital, he threatened to close the hospital because we had not obtained prior approval from his agency — which, incidentally, would have taken about a year.
Although all businesses are highly regulated today, hospitals continue to rank at the top of the list of those that are the most regulated and the most complex to manage.
— Harris Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital. Click here to read previous columns. The opinions expressed are his own.