The sickening cost of health care

March 18, 2013

Gary Lapon reports on a new expose that explains why Americans pay the highest health care costs in the world--and endure a system that serves them so badly.

HEALTH CARE costs in the United States continue to skyrocket, with dire consequences ranging from personal bankruptcies to the growing national debt. Yet the even more outrageous fact is that these inflated costs--the highest in the world--produce health outcomes that trail countries which spend far less.

In a Time magazine special report titled "Bitter Pill: Why Medical Bills Are Killing Us," published in February, investigative journalist Steven Brill pulls back the curtain to expose the price-gouging and profiteering that explains why health care in the U.S. costs so much.

Brill's article details the devastating impact that health care costs--which are behind six in 10 personal bankruptcies--have on working-class people. As Time managing editor Richard Stengel pointed out, Brill "inverts the standard question of who should pay for health care and asks instead: Why are we paying so much?"

Barack Obama used the urgency of this crisis to press Congress to pass his health care law. But the Patient Protection and Affordable Care Act does little to address rising health care costs.

The sickening cost of health care

On the contrary, it will almost certainly make things worse by requiring the uninsured to get coverage from for-profit companies and providing subsidies from taxpayer revenues to pay the premiums. Rather than challenging industry giants, Brill writes, "Obamacare enriches them. That, of course, is why the bill was able to get through Congress."

Meanwhile, outsized health care costs--which continue to rise faster than inflation--are a central reason for big government deficits, which the very same politicians then use as a pretext to push for cuts in "entitlement" programs like Social Security and Medicare, by reducing payments for the former and raising the eligibility age for the latter.

However, as Brill points out, Medicare, the government's universal health care system for the elderly, is one of the few bright spots in the current system. Whatever its flaws, caused by cuts and restrictions over the past few decades, it is still far more efficient than private insurance, it offers universal coverage while even Obama's health care law will leave tens of millions of people uninsured--and it has mechanisms to keep costs down.

If Medicare, instead of being cut, was expanded to cover everyone and to provide even better care than it does now, it would save about $380 billion per year by cutting down on administrative waste, according to a study published in the New England Journal of Medicine--and on top of that, it would actually improve health care.

Over 10 years, that's just about the same amount--$4 trillion--that Barack Obama's deficit reduction commission proposes to save, with massive cuts to entitlement programs that dwarf proposed increases in taxes.

IT'S TRUE that government spending on Medicare has been rising much faster than inflation and is a major cause of government deficits. Medicare spending, after adjusting for inflation, increased fivefold from $110.2 billion in 1990 to $554.3 billion in 2011, according to the Centers for Medicare & Medicaid Services (CMS). And that was after it nearly tripled in 10 years from $37.4 billion in 1980.

In fact, according to Congressional Budget Office figures, protected increases in health care costs are behind most of the expected growth in government debt.

While a significant part of this increase is the result of a growing and aging population, much of the increase in Medicare spending is being driven by increased health care costs overall. The CMS reports that total per capita health care spending in the U.S., adjusted for inflation, more than tripled from $2,854 in 1990 to $8,680 in 2011. Health care accounts for nearly one-fifth of the GDP in the U.S..

Other advanced industrial countries such as Germany have a significantly higher percentage of their populations over age 65. Yet they spend much less on health care than the U.S.--and achieve better outcomes.

In "Bitter Pill," Brill examines hospital bills to expose how extreme price inflation generates massive hospital industry profits, while driving health care costs sky-high--a price that is ultimately paid by consumers.

According to Brill, hospitals charge patients different amounts for the same equipment and procedures, depending on what kind of insurance they have. While Medicare and Medicaid pay a set amount for each item, various insurers negotiate the rates they pay. Many insurers negotiate a discount off the "chargemaster"--a hospital's list of charges for everything from aspirin and gauze to major procedures and cancer drugs that cost tens of thousands of dollars each.

Because hospitals use the chargemaster as a starting point in negotiations, these prices are much higher than the items actually cost. To cite one example, Brill points out a hospital that charges $24 for a niacin pill which costs about 5 cents in an ordinary pharmacy: a markup of 47,900 percent.

Hospitals also gouge patients by charging multiple times for the same procedure. In the article, Brill quotes Patricia Palmer, who is paid to negotiate with hospitals on behalf of patients to lower exorbitant bills:

First, they charge more than $2,000 a day for the ICU, because it's an ICU and it has all this special equipment and personnel. Then they charge $1,000 for some kit used in the ICU to give someone a transfusion or oxygen...And then they charge $50 or $100 for each tool or bandage or whatever that there is in the kit. That's triple billing.

For the un- or underinsured, tragic illnesses can be a financial catastrophe. The terminally ill can even be forced into an impossible choice: whether to extend their lives and leave their families with a crippling debt, or give up time with their families to avoid burdening them financially.

This was the choice faced by Steven D., who Brill profiles in his article. After being diagnosed with terminal cancer, Steven's wife Alice, who earns about $40,000 a year, racked up over $900,000 in debt to pay for treatment to keep her husband alive for an extra 11 months. Although Alice was able to get Medi-Cal (Medicaid) coverage and hired an advocate to negotiate with the hospital, she still ended up owing $142,000, more than three times her yearly salary. Not only did she have to cope with losing her husband, but she was left financially crippled as well.

When pressed by Brill, hospital administrators weren't able to give a plausible explanation for the chargemaster rates, except to say that they are only a starting point and patients aren't actually expected to pay them. The grim irony is that it is the uninsured patients--those among the least likely to be able to afford it--who are charged full chargemaster prices. And many don't know negotiation is an option.

WHILE THE majority of hospitals are technically "non-profit," they generate immense amounts of revenue, with some of the biggest bringing in billions of dollars each year. While they don't pay dividends to shareholders, executives are rewarded with lavish salaries, and hospitals frequently invest earnings, which can run into the hundreds of millions, in new capital projects.

Many "non-profit" hospital CEOs make more than $1 million a year. For example, Dean Harrison of Northwestern Memorial Hospital in Chicago raked in $9.72 million in 2010.

Of course, the majority of hospital employees make much less. In addition to overcharging patients, hospitals make a killing by paying staff much less than the revenue they generate through their work.

Brill cites a case where the Memorial Sloan-Kettering Cancer Center in New York City charged a patient about $800 per hour for the services of a nurse. The nurse, of course, didn't receive nearly that much. Assuming a 40-hour workweek, $800 an hour works out to around $1.7 million per year, more than 20 times the actual average salary for a registered nurse in the New York metropolitan area.

And if you ever wondered why Washington politicians--Democrats as well as Republicans--are so eager to serve the health care bosses, consider all the legalized bribery, otherwise known as lobbying and campaign contributions.

According to the Center for Responsive Politics, the hospital industry spent over $481 million spent on lobbying in 2012, trailing only FIRE (finance, insurance and real estate) among the various economic sectors. This helps explain why during the debate over health reform, proposals like a single-payer health care system were never even on the table, and every option considered protected industry profits.

The health care industry's case for forcing the rest of us to pay these inflated costs might be more reasonable if they resulted in better care. But while the U.S. spends far more per capita on health care than any other nation, health outcomes in many areas are poor compared to other industrialized countries. Life expectancy in the U.S. is actually over one year less than the OECD average, despite the fact that Americans spend double the average on health care.

RATHER THAN Medicare and Medicaid being a model to construct a rational system for providing health care, the health care industry increasingly encroaches on the government programs. And now there's worse to come as Democrats and Republicans alike propose further cuts in entitlements in the name of deficit reduction.

The latest attack has come in the form of the "the sequester"--across-the-board cuts in discretionary spending that will total $85 billion this year and $1.1 trillion over the next decade. The sequester is another manufactured crisis which provides the justification for more and more harsh austerity measures that disproportionately hit workers and the poor. Medicare is one of the big victims of the sequester, with a 2 percent cut in payments to physicians that, along with other reductions, will total nearly $10 billion this year.

In addition, the debate over what to do about the sequester is providing a cover for proposals for even deeper cuts. For example, according to Reuters, "conservative Republican Senator Lindsey Graham of South Carolina said he was open to raising $600 billion in new tax revenue if Democrats accepted significant changes"--translation: cuts--"to Medicare and Medicaid as part of a long-term budget deal." A few days later, Obama said once again that he's open to exactly this kind of deal that cuts hundreds of billions in Medicare, Medicaid and Social Security, in exchange for some increased tax revenue.

Obama's offer is nothing new. In 2010, Alan Simpson and Erskine Bowles, appointed by Obama to chair the National Commission on Fiscal Responsibility and Reform, released a report recommending making poor people pay more for Medicaid and introducing caps that would force "force Congress and the President to increase premiums or co-pays or raise the Medicare eligibility age," as Talking Points Memo described the report.

Obama offered cuts to Medicare again in the debt ceiling debate in the summer of 2011, as well as during the fiscal cliff negotiations at the end of last year.

While Republicans seek to privatize Medicare--the former Republican vice presidential candidate wants to replace the program with vouchers to purchase private insurance, which would fall far short of the cost of caring for seniors--Obama and the Democrats are in favor of whittling away at the program. Hence, the debate in Washington centers around how much to cut, not whether to cut.

Left out of the debate entirely are the opinions of the majority of people in the U.S. In a Kaiser Family Foundation/Robert Wood Johnson Foundation/Harvard School of Public Health poll from January, 58 percent opposed any cuts to Medicare, while only 10 percent supported major cuts. Medicare is overwhelmingly popular: 60 percent of people said it is "working well," including 80 percent of those aged 65 and up, the age of eligibility for Medicare.

BRILL'S CONCLUSIONS correlate with public opinion concerning Medicare--the program is much more efficient than private health care, keeps costs down by tying reimbursements to actual costs and is universally available to everyone aged 65 and over.

Contrary to the ideas that the private sector is more efficient than government, Medicare administrative costs are much smaller than those of private insurers. Brill compares Medicare, which spends less than 1 percent of total claims on administration and management, to major private insurer Aetna, which spends 29 percent. Medicare pays out more than 20 times the amount in claims that Aetna does, while spending less than half overall on things besides health care.

And Medicare would be even more effective at controlling costs if it weren't prevented by law from negotiating with drug companies to get better prices.

Because Medicare is so much cheaper than private insurance, the claims that raising the Medicare eligibility age to 67 will reduce the deficit ring hollow. In fact, this measure would most likely increase government spending on health care overall.

As Brill points out, many of the 65- and 66-year-olds who would no longer receive Medicare would instead have to purchase private policies when the health-care exchanges in the Affordable Care Act kick in next year--and these purchases would in turn be subsidized by the government. According to Brill, "[T]he cost of that private insurance--and therefore those subsidies--will be much higher than if the same people were enrolled in Medicare at an earlier age."

While Brill doesn't think it's politically realistic, he does admit that the same logic against raising the Medicare eligibility age would apply to extending Medicare to all under a "single-payer" system where everyone has insurance. Not only would this be much cheaper than the Affordable Care Act's subsidizing of private health insurance, but it would be truly universal health care--some 30 million are expected to remain uninsured after the Obama health care law fully kicks in.

According to the Center for Economic and Policy Research, if the U.S. spent as much on health care as Britain--whose public universal health care system, according to the Commonwealth Fund, outperforms the U.S. while spending less than half as much per capita--we would save $3.7 trillion over the next 10 years.

If Democrats and Republicans were serious about reducing the government deficit, they would take on health care costs--price gouging by hospitals, the outrageous profits of the industry, and the vast administrative waste of the medical-pharmaceutical-insurance complex. This would also produce a system that's much more effective at meeting the needs of people in it.

Instead, the government debt crisis is used as a pretext for policies that put profits before people.

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