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The number one reason private health care costs so much - The secrecy and pricing of health care - The 141% hidden tax, and what to do about it

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By Greg Dattilo, CEBS, and Dave Racer, MLitt

May 30, 2019


Health care prices are highly complex, completely confusing, and purposefully kept secret. These factors have made it impossible to stop the escalation of the price of health care.


The health care industry profits from complexity and secrecy at the expense of the patient. This has led to price variations of five times or more between providers in the same locale for the same service. 


There are no other products or services that consumers buy that have the same excessive price variance as health care. If we bought a car the way we buy health care, it might look like this: 


  • You go to ABC Auto, point at a car, and sign a contract to buy it. You have no idea how much it costs, but enjoy the new car feeling as you drive home. A few weeks later you get a bill for $20,000 and feel good about it. 
  • Your next-door neighbor goes to XYZ Auto and does the same as you – signs an open-ended contract, points at the same car as you purchased, and drives it home. A few weeks later he receives a bill for $100,000 and can’t believe his eyes – but he signed a contract and is obligated to pay it.
  • Ironically, XYZ Auto could stay in business, even price gouging like this, if car pricing worked like health care pricing. 


With health care, the buyer (patient) does not know the price of care until after using medical services. Unfortunately, the patient has signed an agreement that he or she will pay whatever the medical provider charges. The medical provider does not disclose the price until weeks later and, even if it seems excessive to the patient, will fight to collect every last dollar of it.


Secrecy in pricing hides the health care tax

The hidden health care tax is the increased amount that private, commercial insurance and/or an individual pays for medical care when compared to what Medicare allows for the same service. The level of the tax differs depending on location and the data studied, but recent reports have established that this tax is at least as high as 141% on average. 


The Congressional Budget Office, in a May 2019 finding, reported that in 2013, “three major insurers’ commercial payment rates for hospital inpatient admissions… were 89 percent higher, on average, than Medicare …” allowable reimbursements.[i] This means that when Medicare pays $100 for a service, those three private insurance companies are paying $189 – an 89% hidden tax – the Medicare-Plus amount. People with private health insurance pay that hidden tax in their premiums.


The Rand Corporation, however, in its May 2019 report, found far greater hidden taxes from a major study of large employers that crossed 25 state lines. Rand found that commercial insurance companies paid 204% more for inpatient hospital care, and 293% more for outpatient hospital care than Medicare’s allowable reimbursement amount. The average commercial insurance payments between inpatient and outpatient care came to 241% - for a 141% hidden tax.[ii] 


Minnesota Community Measurement, in its July 2018 report, determined that in 2017, Minnesota’s health care prices often varied by more than 1,000% for the same services within the state. The price of a knee X-ray, for instance varied from $29 to $378, a 1,300% difference. The report showed that this type of price variation was common across medical specialties and services. The drastic price swing for health care services is kept secret by medical providers and insurance companies. 


Overall, according to Minnesota Community Measurement, medical care providers agreed to receive as full payment an average 187% of what Medicare allows for the same services. This means Minnesotans with private insurance paid 87% more for the same care as Medicare paid on behalf of the state’s senior population – a hidden tax of 87%. 


Here is an example. If Medicare allows orthopedic surgeons $10,000 to do a knee replacement surgery, Minnesota surgeons will accept, on average, $18,750 for the same procedure from insurance companies as full payment. It is likely the orthopedic surgical center will bill Medicare and the insurance company as much as $45,000 for the procedure. 


What is going on here?

Medicare reimburses medical providers at a price set by the federal government. In almost all instances, as health care is practiced today, the allowed price is not enough for the medical provider to continue in practice. Hence, someone must offset the provider’s shortfall from Medicare (and Medicaid, which pays even less). That “someone” is private-pay patients – those with commercial insurance or who pay cash. That 141% more in payments from private payers that Rand found acts like a tax. The patient or their employer (if they have a medical insurance benefit at work) has no say in it but is compelled by contract and law to pay it. Without the 141% hidden tax, medical providers would seriously struggle to deliver care as we know it today. 


The medical and insurance industry keeps the hidden tax a secret, hiding it behind an incomprehensibly complex set of codes and contracts barring disclosure. This must change.


Hence the public pressure for Medicare for All

Secrecy in pricing is the primary reason for the demise of the private health care market by driving up the cost, making it unaffordable for a growing number of people. As a result, the public is increasingly demanding that politicians step in and set the price for health care. This price-setting strategy is generally known as Medicare for All. The price government would set is the Medicare allowable reimbursement.


A price-fixing plan like Medicare for All would certainly reduce the price of health care, but it would, at the same time, eliminate the private health care system as we know it. With all providers being paid the same government-set price as they do in other countries that use Medicare for All systems, we know what will happen. The best doctors will find other professions and fewer new doctors will start practicing medicine, wait times for medical care will increase, and taxes will spiral higher. 


In Medicare for All systems, the elderly, disabled, and those with life-threatening diseases suffer the most. Today, they have hope that our current system will discover the medicine or medical procedure to reduce their pain, suffering and, perhaps, find a cure. In contrast, what we see in countries with Medicare for All systems, is that medical innovation slows to a crawl as financial resources dry up.


Clearly, we need a robust private health care system. A private health care system attracts the best minds to practice medicine and become medical innovators. This leads to new life-saving procedures, products, medicines, and devices to extend and improve the quality of life. How to get to an open private health care market that thrives on patient-friendly price transparency, and maximizes competition, is the challenge.


To resolve price secrecy and build a strong private system

First, we must have a pricing system that is patient-friendly and makes the purchase of health care like that of any other products or services. This system must make the price simple to understand and easy to compare between all medical providers.


Secondly, the new pricing system must also compare the price paid by privately- insured persons to the prices paid by government plans. This would expose the hidden tax paid by privately-insured individuals.


Thirdly, a new pricing system must protect individuals with private health care from surprise billings. These happen when a person gets a bill long after receiving care, and it is a surprise because no one told them what the total charge would be. Then suddenly, they open an envelope and surprise!, “You owe this and payment is due now.”


Fourthly, this new system would not only let patients know the price, but other medical providers that compete for health care dollars would know what their competitors charge. This price transparency is necessary because it creates competition, and competition results in reduced prices and improved quality. 


The answer – Medicare-Plus Disclosure

In a free market, government does not set prices. Government does, however, often regulate how prices must be disclosed. Those sticker prices on the windows of new cars, for instance, are the result of a law authored in 1958 by U.S. Senator Amer Stillwell Monroney, an Oklahoma Democrat. About disclosing the price, Monroney said: “The dealer who is honest about the so-called ‘list price’ cannot compete with the one who ‘packs’ several hundred dollars extra into it so he can pretend to give you more on your trade-in..”[iii]


The Medicare-Plus Disclosure will work somewhat like that new car sticker-price on the window. All medical providers will be required to disclose the percentage above Medicare they accept as full payment from private-pay patients. 


The Medicare-Plus Disclosure means the rate must be publicly posted on the provider’s website, and/or to an individual as the result of a request whether by telephone, email, letter, or other form of communication. When a provider charges more than the Medicare-allowed amount, the Medicare-Plus Disclosure form must be signed by the patient and it must accompany the provider’s bill.

This does not put the state in the place of setting prices. It simply allows patients to see how the provider prices the care -- then let the open free market work. For example:


  • The patient could choose from four competing clinics in the same community. Clinic A accepts 150% over Medicare as full payment. Clinic B accepts 125%. Clinic C, 200% and Clinic D wants 300%. What do these transparent prices tell you about the price of care in this community? Clinic D charges almost 250% more than Clinic B. Why?
  • Clinic D will have to justify why it charges so much more. Perhaps it is the quality and experience of the physicians, or the latest medical technology that makes the difference. Maybe it’s because no one ever challenged Clinic D on price before, and now it must adjust.
  • The patient will determine if the extra cost of using Clinic D justifies the much-higher cost. Or the patient may choose one of the other clinics that charges less. 


Medicare-Plus Disclosure creates patient-friendly, simplified transparent pricing which makes competition possible. This requires providers to disclose their prices the same as all other products and services. The way to do this is simple enough. Disclose the rate the medical provider will accept as full payment above Medicare. In fact, show everyone, even competing hospitals, doctors, and other medical professionals. Then let patients decide where to shop.


Disclosing the Medicare-Plus rate is a far-better alternative than forcing providers to accept the Medicare for All price. The Medicare-Plus Disclosure is the mechanism that can do this.

    

[i] CBO Staff Authors. “Key Design Components and Considerations for Establishing a Single-Payer Health Care System,” the Congressional Budget Office, Washington, D.C. May 2019. P 21.


[ii]White, Chapin, and Christopher Whaley. “Prices Paid to Hospitals by Private Health Plans Are High Relative to Medicare and Vary Widely.” May 9, 2019. P 19.


[iii] Weber, R. and Racer, D. RIGGED: How Insurance Ruined Health Care, Alethos Press, 2017. P 99.

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