Friday, March 23, 2012

CIOs, Data and Patient Billing

Below is a Facebook message between a friend and me in which my friend asks for clarification about his hospital bills.

Healthcare CIOs are in a unique position to improve this terrible state of confusion and economic waste that exists in healthcare.  We understand the business and we understand the data of healthcare; and revealing data is the key to changing this dysfunctional situation.


Dear Dale,

Dumb question… I went in for surgery a couple of weeks ago. When it got to the payment part as we checked in they slid a paper in front of us. Without insurance my cost would be $30K, but with insurance my cost was $3.5K total with my portion being 10 percent of that cost. That's nearly 10 times different.

To me, this seems to be one of the major problems with healthcare. Do they really believe that some who can't afford insurance can afford to pay ten times the cost for service? Now there must be a reason and the only thing that I come up with is that unpaid services end up being submitted back and the government helps cover the cost. How far am I off? Why is this the case? Should the cost be the cost?

Dear MS,

Well, first of all, I hope your surgery was minor and you're on the mend, buddy!  Please let me know.

What you experienced is par for the course and one of the main reasons that healthcare is in such a mess. Hospitals have "charges" for patients and they have "reimbursements" from insurance. Your $30K bill represents the hospital's charges, but their charges are not calculated with any sense of sanity. Those charges are arbitrarily established, usually by simply marking-up federal Medicare/Medicaid reimbursement rates by 300% - 500%.  In the rest of the business world, like Apple for example, products are priced according to "Cost of Production + Margin".    The goal is to minimize the cost of production and establish a margin that is reasonable for the market, meets shareholder goals, and achieves sustainability of the company.  Hospitals have no understanding of their true Cost of Production...they are generally clueless in that regard.  They understand Cost of Operation, but that’s not the same as Cost of Production—that is, how much does it cost for healthcare to produce high quality health, in your case, a successful surgery, or a healthy diabetic or newborn baby? 

Insurance companies would never agree to pay most hospital charges, because those charges are typically and arbitrarily high.  That's why hospital charges to patients include such things as a single acetaminophen pill that costs $6.  Instead, the insurance companies negotiate individual reimbursement contracts with the hospitals. That $30K bill that you received was meaningless from a true business sense—that’s not what the government (Medicare or Medicaid) or the insurance company is going to pay. But those charges are very meaningful to patients who don't have insurance because those patients are held hostage to these arbitrary hospital charges and pricing practices.  If you don't have insurance, you are faced with paying hospitals' charges for your bill, so the non-insured patients are penalized the most.   Keep in mind that 42% of bankruptcies in the US are directly related to healthcare expenses.

Each insurance company negotiates a separate contract with individual, somewhat more reasonable fees for reimbursing healthcare services and $0.25 for a acetaminophen instead of $6. But these individual contracts are incredibly complicated and burdensome to manage, and make it confusing for patients and employers to understand the true cost of care. Imagine if your local grocery store negotiated a separate pricing structure for each customer... and there were no prices on the shelves. At the cash register, you wouldn't know your bill until the clerk scanned the products. The person ahead of you would pay $4 for a gallon of milk, while you might pay $2, and the person behind you would pay $1.50...depending on the contract that you negotiated with the grocery store. It would be incredibly inefficient to manage and confusing to everyone. But that confusion would make it nearly impossible for the customer to understand pricing, so the grocery store would likely take advantage of that confusion to keep prices higher than necessary for everyone. 

The confusion about pricing reinforces a concept that I call "disproportionate balance of knowledge", which means when one party knows a lot more about a situation than another party, the knowledgeable party is in a position to manipulate and take unfair advantage of the other party, and human nature being what it is, that unfair advantage is leveraged the vast majority of time in everything from parenting to real estate; car and plumbing repairs are notorious.  And healthcare is among the worst. But, if you can expose the pricing models-- cost of production and margin-- and you can make these prices transparent to the masses-- think Kayak, Zillow and CarMax-- it starts to balance the knowledge between the parties... and prices naturally come down.  By the way, the overhead cost of managing these bizarre pricing models in healthcare, with arbitrary charges and dozens of custom reimbursement contracts, adds 31% overhead to the cost of care which is at least $200B per year in the US, and that overhead is passed right along to patients and their families.  Thompson-Reuters recently published a report that revealed $36B in unnecessarily high US healthcare fees, directly attributable to hospitals’ variable and arbitrary charge practices.

So there you have it, brother. The mess of charges and reimbursements that we tolerate in healthcare, we would never tolerate in the rest of our lives.  We can't take the status quo any longer and the good news is, I truly believe that we’ve reached a tipping point of major and permanent change.


I might post this on my blog, actually...

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