Category Archives: Healthcare

Top hospitalists use questionable billing practices

Medicare physician-payment data shows that over one thousand primary care physicians providing hospital-based services billed Medicare more than five times the average, raising questions about their billing practices.

A common explanation that Medicare permits the use of a single National Provider Identifier (NPI) fails to account for specific requirements for the four common billing scenarios that allow such use.

The Medicare physician-payment data, made public for the first time in April, has revealed unusual patterns in doctor billings in recent stories by New York TimesWall Street Journal, and ProPublica.

Data Limitations

Many of AMA’s complaints about the Medicare provider payment data release have merit. For example, care quality cannot be assessed from the information reported. It is true that billed charges and payments are not the same. The data set also does not represent the physician’s whole patient population.

previous post provided demographic, utilization, and payment insights into the fastest-growing hospitalist specialty—primary care physicians who provide hospital-based services. This post will tackle the issue of billing outliers among hospitalists.

Human Limitations

With Medicare Advantage and all private payers excluded from the data, it is not unreasonable to expect that even the most hard-working individual physician would be able to provide about 5,000 hospital-based work RVUs (wRVU) per year for Medicare patients.

Medical billingThe work RVU (wRVU) element is associated with each CPT® code and represents the relative level of time, skill, training, and intensity to provide a given service. CPT is a registered trademark of the American Medical Association and an industry-standard way of measuring physician workload.

The average for more than 79,000 primary care physicians in the data was 1,230 wRVU in hospital-based services. Physicians who provided more than 50% of their total services using the 20 CPT codes commonly associated with hospital-based services were categorized as hospitalists. The average workload for the hospitalists was higher at 1,759 wRVU.

The data reveals that the top one thousand primary care physicians providing hospital-based services averaged more than 9,300 wRVUs or 7.5 times the average for all primary care physicians and 5.3 times the average hospitalist. The top 263 physicians each billed more than 10,000 wRVU, with one hospitalist topping out at more than 40,000 wRVU!

Plausible Explanation?

One plausible explanation that is often given for the top outliers is that the services can be billed under a supervising physician’s NPI. The AMA’s letter to CMS states the following:

There also are a number of situations where it will appear that one physician has performed services that were actually delivered by many practitioners because Medicare permits the use of a single NPI without identification of the individual who delivered the service in a number of situations. These include “incident to” services provided by residents and other health care professionals who bill for their services under a supervising physicians’ NPI.

While Medicare does permit the use of a single NPI, it is not a free-for-all. There are four common scenarios that permit billing under another physician’s NPI. It is worth discussing specific requirements for each to see if the single-NPI justification can sufficiently explain the high outliers.

 1.       Billing Under a Single NPI:

The mechanism for billing a physician under another physician’s NPI, known as the Q6 modifier, is very clear. Medicare Claims Processing Manual (Chapter 1, Section 30.2.11) unequivocally states:

“The regular physician identifies the services as substitute physician services meeting the requirements of this section by entering HCPCS code modifier Q6 (service furnished by a locum tenens physician) after the procedure code.”

In short, the Q6 modifier is reserved for locum tenens physicians and its use must meet several requirements, including:

  • The regular physician is unavailable to provide the visit services.
  • Locum tenens physician is not an employee of the regular physician.
  • The regular physician pays the locum tenens for his/her services on a per diem or similar fee-for-time basis.
  • The substitute physician does not provide the visit services to Medicare patients over a continuous period of longer than 60 days.

None of these “substitute physician” requirements could be met by other physicians in the same group, thereby making the use of Q6 modifier to bill under a single physician NPI on an ongoing basis a highly questionable billing practice.

2.       Billing for Locums Tenens Physicians

As the Q6 discussion has indicated, a regular physician may submit a claim under the locum tenens arrangement using his/her own NPI and, if assignment is taken, receive payment for covered visit services assuming the specified conditions are met.

However, the substitute physician may not provide the visit/services to Medicare patients over a continuous period of longer than 60 days.

Because many locum tenens assignments in the hospitalist environment last longer than 60 days, continuing to bill locums using the Q6 modifier could result in a highly questionable billing practice.

3.       Billing for Non-Physician Providers

“A high-earner may be billing for several mid-levels” is a common refrain offered to explain high billings. There is an equally common misperception that a hospitalist can routinely bill for a non-physician practitioner (NPP) being “supervised” under the physician NPI so as to get reimbursed at 100% of the physician’s rate rather than the 85% rate if billed under the NPP’s provider number.

According to Texas Medical Association, services and supplies that would normally be covered “incident to” in an office setting, such as NPPs that the physician hires and supervises, are not billable by the physician in hospital settings.

If the physician uses the services of his/her own employees in a hospital setting and the physician merely “supervises” his/her services, the physician is not eligible for a payment from Medicare because supervision alone does not constitute a reimbursable practitioner service.

WPS, a Medicare contractor, confirms the position that “incident to” guidelines do not apply to services in an inpatient setting. Rather than “incident to” billing, the encounter must be billed as a shared/split visit.

Finally, Medicare Claims Processing Manual (Chapter 12, Section 30.6.1.B) documents specific requirements for shared/split visits with a nonphysician practitioner (NPP):

When a hospital inpatient/hospital outpatient or emergency department E/M is shared between a physician and an NPP  from the same group practice and the physician provides any face-to-face portion of the E/M encounter with the patient, the service may be billed under either the physician’s or the NPP’s UPIN/PIN number. However, if there was no face-to-face encounter between the patient and the physician (e.g., even if the physician participated in the service by only reviewing the patient’s medical record) then the service may only be billed under the NPP’s UPIN/PIN.

In other words, to bill for NPPs under the hospitalist’s NPI as a shared/split visit, there must be: 1) documentation of the face-to-face portion of the E/M encounter between the patient and the physician and 2) the medical record should also clearly identify the part(s) of the E/M service which were personally provided by the physician and which were provided by the NPP.

In the absence of such documentation, the service may only be billed under the NPP’s provider number.

This applies to the initial history and physical examination, the discharge summary, and subsequent hospital visits. A notation of “seen and agreed” or “agree with above” does not qualify the situation as a shared/split visit.

If the face-to-face encounter and documentation requirements for a shared/split visit are not met, simultaneously billing for “several mid-levels” under the same physician’s NPI would become a highly questionable billing practice.

4.       Billing in Teaching Setting

Medicare Benefit Policy Manual’s Chapter 15 explains Part B services in a teaching setting:

Part B covers services that attending physicians (other than interns and residents) render in the teaching setting to individual patients. These include such services as reviewing the patient’s history and physical exams, personally examining the patient within a reasonable time after admission, confirming or revising diagnoses, determining the course of treatment to be followed, assuring that any supervision needed by interns or residents is furnished, and making frequent review of the patient’s progress.

Medicare Claims Processing Manual (Chapter 12, Section 100.1.1) documents specific requirements for services billed by teaching physicians as follows:

For purposes of payment, E/M services billed by teaching physicians require that they personally document at least the following:

  • That they performed the service or were physically present during the key or critical portions of the service when performed by the resident; and
  • The participation of the teaching physician in the management of the patient.

Documentation by the resident of the presence and participation of the teaching physician is not sufficient to establish the presence and participation of the teaching physician.

On medical review, the combined entries into the medical record by the teaching physician and the resident constitute the documentation for the service and together must support the medical necessity of the service.

The manual further states that if the resident performs some or all of the required elements of the service in the absence of the teaching physician, the teaching physician must independently perform the critical or key portion(s) of the service with or without the resident present. The teaching physician must also document that he/she personally saw the patient, personally performed critical or key portions of the service, and participated in the management of the patient.

If these key teaching environment requirements are not met, billing for residents under the same attending physician’s NPI would become a questionable billing practice.

Million Dollar Doc

In an interview, one of the highest earners explained that his hospitalist group had about seven providers in 2012 and their outside biller was “Q6ing most of the doctors” under his name. The group had no idea why and didn’t understand the process well enough at the time.

The unusually high number of services under a single NPI triggered a Medicare audit. The group had to provide extensive documentation to explain the issue and also had to make sure that individual physicians were credentialed appropriately.

Based on the data analysis and requirements review, his situation hardly seems like an isolated anomaly.

Questionable Billing Practices

With online access to individual physician’s Medicare billing and payment details, the front-page ethics test has now become a reality. But it amounts to more than just salacious, break-room gossip.

The bottom line is that each of the four scenarios above has very specific billing requirements, and proper compliance with them would severely constrain the maximum workload that can be physically provided under a single NPI.

The detailed data analysis points to the presence of questionable billing practices among high-earning hospitalists because the single-NPI explanation fails to justify hospital-based workload that would be several times more than the average.

To avoid any unwanted attention and to steer clear of expensive and time-consuming audits, all hospitalists should reexamine their current billing practices for billing under another provider’s NPI.

PS: You can also see the press release on this topic at:

What we know about Hospitalists

Although highly-paid doctors were played up in major newspapers after the Medicare data release, a lot of useful information about hospitalists has been ignored.

After Medicare released a treasure trove of provider payment data, media outlets such as The Wall Street Journal and New York Times, published pieces focusing on the tiny sliver of doctors accounting for an outsize portion of Medicare’s 2012 payments.

CMS has already listed several data limitations on its website. Further, AMA has made its feelings known even before and soon after the data release in a letter to CMS according to the CNBC story.

While the AMA’s objections clearly have merit, in my opinion the alleged data limitations do not render the information so worthless so as to prevent drawing any meaningful conclusions.

There is a wealth of demographic, utilization, and payment related information available for the very first time in the data release, particularly as it relates to hospitalists.

Deconstructing a Hospitalist

Information related to hospitalists has always been somewhat suspect.

Until now, many things we thought we knew about hospitalists (primary care physicians who provide care to patients in the hospital) have been based on anecdotal information, statistically questionable surveys, or incomplete membership information.

HospitalistUnfortunately, there is no “hospitalist” designation in the enormous data release because physicians are listed under Internal Medicine or Family Practice or General Practice.

However, there is enough information in the Medicare data release to reliably isolate hospital-based services based on the entity code, place of service, and provider specialty along with 20 specific CPT codes (registered trademark of the American Medical Association) predominantly used by hospitalists in a hospital setting for observation, inpatient, and critical care.

Using this methodology, I compared the number of hospital-based services provided by each independent physician belonging to Internal Medicine, Family Practice, or General Practice in a facility setting to the total number of services provided by the same physician.

Physicians who provided more than 50% of their total services under the 20 CPTs commonly associated with hospitalists were categorized as “hospitalists” and the rest were classified as “traditionalists.”

Further, by overlaying physician work RVU (wRVU)—representing the relative level of time, skill, training and intensity to provide a given service—associated with each CPT code, the services were converted to a more standardized and consistent wRVU metric, which is a predominant factor in physician compensation.

Key Findings

A detailed analysis of the 2012 Medicare data using the methodology outlined above revealed the following key findings:

  • Numbers: Hospitalists were outnumbered by traditionalists. There were 37,983hospitalists and there were 41,622 traditionalists.
  • % of Services: Of the 51.6 million hospital-based services, 67% were provided by hospitalists—twice as many services as provided by traditionalists.
  • % of Work: Hospitalists often exclusively provide hospital-based services so it should come as no surprise that the 20 hospital services comprised 87% of all the services for hospitalists and only 12% for traditionalists. This bolsters the hospitalists’ claim that greater experience in a hospital setting makes them more efficient providers.
  • % of Females: The percent of hospitalists that are female stands at 35% compared to only 24% among traditionalists. The difference may exist because of the location where hospitalists may be more common or because of women’s desire not to be spread themselves too thin as a traditionalist working in both inpatient and outpatient environments.
  • Uptake by State: States with a minimum of half a million hospitalist services and 75% or greater hospitalist uptake are: Nevada, Washington, Arizona, Massachusetts, North Carolina, and Virginia. States lagging with 60% or less in hospitalist uptake are: Alabama, West Virginia, New Jersey, Mississippi, Illinois, Arkansas, Kentucky, Louisiana, and Indiana.
  • Specialty: Internal Medicine specialty dominates the hospitalists with 84% belonging to it compared to 58% of the traditionalists.
  • Workload: The average Medicare workload for a hospitalist was 910 services or1,759 wRVUs compared to 409 services and 748 wRVUS for a traditionalist. It is important to remember that this workload only represents Medicare patients and does not include Medicare Advantage or private-pay patients.
  • Coding Levels: The highest level admission code (99223) was used 66% of the time as opposed to 99221/99222. For subsequent care middle level code (99232) was used 62% of the time compared to 99231/99233. Generally, hospitalists were more prone to using higher levels codes compared to traditionalists, possibly reflecting sicker patients under their care. .
  • Charge Mark-Up: Hospitalists marked up submitted charges at 204% (more than twice) of the Medicare allowed amount compared to traditionalists who submitted charged at 171% of the Medicare allowed.
  • Paid vs. Allowed: Both hospitalists and traditionalists were reimbursed 79% of the allowed amount. In other words, the an additional payment of 21% for deductible and coinsurance amounts would have been due from other sources, including patients.
  • Paid Amount: Medicare paid $3.93 billion for hospital services provided by hospitalists and traditionalists with 68% of it going to the hospitalists. It is important to remember that Medicare payments represent only a portion of the full revenues (notprofits) because physicians also bill private insurers and other payers.
  • Payment Rate: The payment rate per service was $76. Because services can range from 99231 (at $30) to 99291 (at $174), a better way to look at the payment rate is per wRVU, which was $40. The allowed rate per wRVU was $51.
  • Gender Gap?: Despite the headlines regarding Gender Pay Gap, the amount paid per wRVU was virtually identical for female and male physicians at $40 indicating that the difference in total amount paid to men vs. women is explained by the volume or number of wRVUs submitted rather than the reimbursement rate.


The demographic, utilization, and payment data provides unprecedented insights into the heretofore loosely-defined “hospitalist” profession.

Doctor-Pay: Top 10 Arizona doctors received $2.5+ million each

For the first time, Centers for Medicare & Medicaid Services (CMS) has released a public data set with information on services and procedures provided to Medicare beneficiaries by physicians (aka Doctor-Pay) and other healthcare professionals.

In 2012, Medicare paid $77.4 billion to more than 880,000 doctors and other health care providers. Eight states (CA, FL, TX, NY, NJ, IL, PA, and NC) accounted for 51% of the total payments.

doctor-payIn Arizona, Medicare paid $1.3 billion to more than 15,000 individual doctors, with the rest paid to companies, including clinical laboratories, ambulance service suppliers, and ambulatory surgical centers.

Medicare payments represent only a portion of the full revenues of a physician’s practice because physicians also bill private insurers and other payers.  For certain specialists, the cost of expensive equipment and/or drugs may be included into the payments doctors receive. In other specialties such as hospital-based internists, physicians may work as locums and actually get paid under another physician they are substituting.

Notwithstanding these and other data limitations, which doctors are getting paid how much from Medicare in Arizona?

Consistent with national trends, top 2% of the doctors accounted for 24% of the Medicare payments in Arizona. Because vastly different numbers of doctors can work in different specialties, merely looking at the total payments can be misleading. In terms of number of doctors in the top 2%, five specialties dominated this select list of 313 doctors as follows:

ARIZONA – Top 2% Docs Only


# of Doctors

Total Medicare Payments

Avg. Medicare Payment Per Doctor

1. Ophthalmology




2. Radiation Oncology




3. Hematology/Oncology




4. Cardiology




5. Dermatology









Top 10 Doctors in Arizona

The 10 highest-paid doctors in Arizona each received Medicare payments in excess of $2.5 million in 2012.

    1. SAAVEDRA, EGBERT – TUCSON – Ophthalmology               $4,364,977
    2. WALSH, MARK – TUCSON – Ophthalmology                        $3,964,410
    3. JAVID, CAMERON – TUCSON – Ophthalmology                  $3,348,891
    4. HARRIS,  APRIL – TUCSON – Ophthalmology                        $3,343,206
    5. RAKKAR, AMOL – GLENDALE – Hematology/Onc                $3,087,798
    6. VRANIC, MITAR – MESA – Vascular Surgery                         $2,991,155
    7. ISAACS, JEFFREY – PHOENIX – Medical Oncology             $2,808,139
    8. BHALLA, RAVI – PEORIA- Rheumatology                                $2,800,399
    9. GERSTNER, GREGORY – TUCSON – Hematology/Onc      $2,629,974
    10. CANTY, THOMAS – PHOENIX – Radiation Oncology           $2,597,257


“Outlier” Doctors

Payments vary greatly depending on the physician specialty. More than 1,559 doctors in Family Practice in Arizona received $50,032 in average payments and provided 1,224 services, whereas 1,776 doctors practicing Internal Medicine received $91,407 in average payments for 1,687 services in 2012. At the other extreme, 274 Ophthalmologists received $363,748 in average payments and provided 3,483 services, whereas 87 doctors practicing Radiation Oncology received $626,465 in average payments for 4,662 services.

To determine “outliers,” we calculated average payment received and average number of services provided for each specialty. And then we compared physicians to peers in their own specialty for an apples-to-apples comparison. We identified top 258 doctors, across various specialties, who received payments that were 5 to 42 times more than the average payment for their specialty in the state. On average, the number of services these doctors provided were nine times that of their same-specialty peers. Of course the service mix could vary from doctor to doctor in the same specialty.

Click on the following table to see the 25 doctors who were at the top of the “outlier” list for having the highest Payment Factor—defined as Medicare payment received by an individual doctor divided by the average payment among same-specialty peers in Arizona:

Top 25 Docs







Clearly, there are many factors including practice setup, location, place of service (facility vs. outpatient), patient population, and severity of disease that can skew the payment data. But an individual doctor receiving payments 10+ times more than his or her peers working in the same specialty is akin to a major league batter hitting .750 when the MLB average in 2012 was .255 over more than 165,000 at-bats.  (Nobody has ever come close to accomplishing that—even during the steroid era!)

The data limitations have been well-documented and even explained by CMS in its methodology document. The exceptions cited in the WSJ story for medical homes and more expensive procedures to avoid more invasive tests later are valid, but I don’t agree on the following points:

1) Exceptions: Are we to assume that all family practice doctors, even those being paid 5-10 times than their average peer, are running medical homes or that all cardiologists are doing PET imaging? That must not be the rule.

2) Overhead or Facility: How do we explain “overhead” when the place of service for many of the specialists is the facility. In those situations, I doubt if they are incurring the stated practice overhead as reported in the WSJ story. For example, I looked up a Nephrologist ($347K Medicare payment) who has an office, and either office visits or initial/subsequent hospital care  accounted for a majority of his payments. In such cases, which I believe are very common, I don’t buy that 46% of his actual reimbursement went toward expenses and overhead, especially if he does not buy and administer expensive drugs or own his own expensive dialysis or other equipment.

3) Partial Payments: The amounts Medicare reported as paid are after deductible and coinsurance amounts have been deducted. This means that doctors received payments for deductible and coinsurance in excess of the reported Medicare payments. My estimate is Medicare pays about 80%. If true, these payments are understated by as much as 25%. I have not seen this fact reported by any of the major media outlets.

4) Quantity vs. Quality: Although the quality of services is not reported the sheer volume of services in some cases is astounding. For example, Dr. Burhan Chinikhanwala (interviewed in the Arizona Republic story) in Bullhead City gave 30,000 Tocilizumab injections to 11 patients at $2.80, Abatacept injections to 20 patients 10,075 times at $16.13, and 17,090 Infliximab injections to 75 patients at $50 (according to NYT and WSJ interactive graphics). I am no Rheumatologist, but how is that even possible? Also, we don’t know the cost of these medicines to him, but it raises three questions: 1) Were these injections really needed or does everyone get it? 2) How can so many injections be justified, especially to so few patients? 3) Assuming the patient number is somehow inaccurate, how can one doctor see so many Medicare patients in addition to all the other Medicare Advantage and private-pay patients without burning out?

5) Complexity/Self-Referral: As far as the “complexity” argument of Dr. Fernyhough in the WSJ story, I am not so sure either. Having run a medical practice for hospitalists, I know that Medicare rules allow a doctor to bill for others’ services in case of locum physicians (for 60 days or so) and nurse practitioners directly supervised by the doctor. Same goes for attending doctors billing for residents and fellows. Physical Therapist, however, is a legitimate provider type. I don’t understand why Dr. Fernyhough would bill six of his office physical therapy staff under his own NPI rather than the NPIs for the staff if they provided the PT service. More importantly, it also raises an interesting question about self-referral related to physical therapy. Is it a Medicare requirement for orthopedic surgeons to also provide physical therapy in-house?

All in all, this data release is a great first step (kudos to WSJ for fighting for it) because it is forcing all of us to dig deeper and ask some very important questions.

Analysis: Obamacare Provides Competitive and Affordable Choices

Obamacare is providing competitive and affordable choices of health plans that consistently meet minimum requirements, according to a detailed analysis of county-level data available at the healthcare exchange website, combined with demographic data provided by Synergos Technologies. premiums

The federally run health exchange offers plans in 2,512 counties located in 34 states with a total population of nearly 200 million people. The analysis revealed that the national average for a 50-plus adult for the second-lowest Silver premium is $386. The national average for the lowest-premium Bronze plan for an under-50 adult is $174.

What choices in insurers and plans are available on

On average, there are 2.5 insurers and 9 Bronze plans covering 60% of the cost of care. For Silver plans, which cover 70% of the cost of care, there are 2.6 insurers and 10 Silver plans available per county. But the availability of insurers and plans is not distributed evenly. As expected, more populous counties have more insurers and health plans. Counties with a population of more than 500,000 have twice as many choices of insurers (average more than 4 insurers) compared to counties with a population of less than 50,000 (average more than 2 insurers).

Is competition restricted in smaller counties?

There are 454 counties in which only a single insurer is offering a Silver plan and 517 counties in which only a single insurer is offering a Bronze plan. Typically, these are smaller counties concentrated in southern states such as Mississippi, Texas, and Alabama. But it is worth noting that all the counties with a single insurer accounted for less than 10% of the total population in the 34 states. In other words, more than 90% of the population in the 34 states has access to two or more insurers and 10 or more Bronze and Silver plans apiece.

Does restricted competition drive premiums higher?

Although competition among insurers generally drives premiums lower, number of insurers may be only one of the contributing factors. Lack of competition among insurers does not always drive the premiums higher.

For example, the average for the second-lowest premium Silver plan for a 50-plus single adult in 74 counties in Texas with a single insurer is $335; the comparable average among 54 counties in Georgia is $585. The average among 77 counties in Mississippi is $502, but it is only $353 among 64 counties with a single insurer in Alabama. The least-expensive Bronze premium in Texas varies in a fairly tight range around the $135 average for an under-50 adult—regardless of the number of insurers or county population.

This disparity in premiums among different states indicates that some states may have been more diligent than others in challenging higher premiums through rate reviews.

What effect does income level have on premiums?

In many states, premiums are higher in counties where the median income is lower, which is also associated with smaller populations and fewer insurers. Are higher premiums a result of lack of competition, smaller population, underlying healthcare costs, or lower median incomes? It is arguable that lower median income—and therefore higher likelihood of federal subsidies—may be one of the motivating factors for insurers to charge higher premiums.

Do subsidies make plans more affordable?

An important aspect of affordability is that federal subsidies could significantly reduce monthly premiums for people with low incomes. Because Obamacare caps the amount consumers will pay as a percentage of their annual income, it is possible that low-income consumers may not even have to pay monthly premium if they qualify for subsidies.

Kaiser Family Foundation’s subsidy calculator ( shows that the premium for one adult earning $25,000 would be capped at $144 per month (or 6.92% of income) based on a Silver plan and the associated subsidy (depending on age, location, etc.) could be applied to a less expensive Bronze plan. For example, for a 49-year old adult located in zip code 39870 in Georgia, the Bronze premium could be $0 because the subsidy would cover the entire amount of the Bronze premium!

How do healthcare exchange premiums compare to the current premiums?

Because all plans available through the exchange must offer the same essential health benefits related to doctor visits, prescription drugs, hospitalization, maternity and newborn care, and preventive care, premiums available through the exchange cannot be compared to what consumers—many of whom are grossly underinsured—may be paying now, especially for a substandard insurance plan.

While canceled policies will provide fodder for political theater, it is an unfortunate but inevitable outcome of a major policy change for the better of this scope and complexity. The government routinely fails vehicles that do not meet emission testing standards. Why shouldn’t the same hold true for substandard healthcare plans that endanger people by underinsuring them?

It’s nothing new, but there is a lot of irresponsible journalism going on. Journalists with an axe to grind are interviewing uninformed people to push their foregone conclusions and to generate misinformation. Here is a classic example as reported in LA Times as reported by Michael Hiltzik: Another Obamacare horror story debunked

What is the bottom line?

The analysis confirms that Obamacare’s federal exchange offers competitive and affordable choices while providing essential health benefits and meeting minimum actuarial value thresholds. Expanding access to healthcare for millions of Americans in the individual market is an excellent first step in reducing overall healthcare costs.

On average, however, hospitals charge 370% of Medicare payments nationally. It is not uncommon for hospitals to report a charge-to-cost ratio of 700-800%. The high cost of the healthcare system as a whole is driven primarily by opaque and exorbitant provider prices—tempered only by illusory discounts hidden inside insurance products. To truly bend the healthcare cost curve down, these excessive cost markups will need to be challenged.

Employers of all sizes, as fiduciaries of self-funded plans, will need to implement a Cost Plus Model so that they can procure healthcare services in a transparent manner. Their focus should be on reducing the actual healthcare spend without reducing health benefits or increasing employees’ premiums.

PS: I sent out a formal press release on this topic on November 1 and it was picked up by Yahoo! Finance, MSN Money, and The Business Journal among many others.

Wrong-Headed Cure for Reducing Healthcare Costs

As the debate about how to reduce healthcare costs rages on, Jeffrey Singer, a general surgeon in Phoenix and Cato Institute adjunct scholar, has published an opinion piece in the Wall Street Journal. “The Man Who Was Treated for $17,000 Less” chronicles how the surgeon “saved” the patient, with a low-cost indemnity type of health insurance policy, $17,000 by pretending that he was uninsured, self-pay. It is a wrong-headed cure for reducing healthcare costs.

healthcare - head in the sandDr. Singer concludes among other things that it is the third-party payment system that interferes with true price competition, so market clearing prices can’t develop. He goes on to chastise Obamacare for expanding the role of the third party and practically eliminating the role of the patient in the delivery of health care.

On the face of it, Dr. Singer’s arguments to diminish the role of third-party payers seem compelling. After all, by bypassing the insurance company the patient paid only $3,000 when he was asked to pay $20,000 upfront. But that’s like saying, “I saved $17,000 by not buying a Rolex I didn’t need.” Based on the examination of assumptions and facts, I contend that Dr. Singer’s arguments are hollow and his conclusions are erroneous.

By Dr. Singer’s own admission, the true price for the procedure was $3,000, and at that price “none of the providers was losing money on my patient.” Why on earth then the providers and the hospital felt compelled to mark up the price to $23,000 for this unsuspecting patient? Could it have something to do with the fact that the insurance policy had no provider-network requirements or preferred-hospital requirements?

These absurd markups saw the light of day, when Medicare released hospital billing data and outpatient services data this summer. As reported in The Arizona Republic, for every $4 charged to Medicare, Arizona hospitals collected $1 from the federal health program for those 65 and older. My own analysis showed that New Jersey had a markup of 6.2 times and the prices were marked up by 5.4 times on average in California relative to what Medicare actually paid.

Contrary to the statements made by the hospitals and providers claiming that charges don’t matter because Medicare doesn’t actually pay them, Dr. Singer’s example clearly shows that anyone without the enormous purchasing power of Medicare or a third party behind them is highly susceptible to these astronomical charges. In other words, Dr. Singer justifies the role of third parties with his own example.

I agree with Dr. Singer that when patients are directly involved in their own healthcare decisions, they are more accountable. However, another major flaw in his argument is the utopian assumption that all patients have the medical and financial knowledge, cost and utilization data, the necessary time, wherewithal, and ability to analyze and negotiate every healthcare expense on literally thousands of diagnoses codes on the basis of quality, outcomes, and price. If Dr. Singer hadn’t gone to bat for this patient, could this patient have accomplished all of what Dr. Singer did on his behalf by himself in today’s system?

If we are truly going to bend the healthcare cost curve down, among other things we must first shine the light on incomprehensible, nationwide markups that have become the norm. As a start, maybe Dr. Singer can start by quoting to all patients regardless of their insurance status the price he actually accepted instead of the “more than enough” $2,500 list price.

If the hospitals and providers accepted and published what Medicare pays as the “standard” price, instead of marking it up 5-7 times, it would automatically diminish the role of third-party payers.  The payers will no longer have to play the game of chicken with the hospitals. And the unsuspecting patients—insured, underinsured, or uninsured—will no longer be caught in the crossfire.