Issue No. 57: For Cost Containment, Policy Makers At Last Turning Toward Hospitals

Hospital spending increased to $1.2 trillion in 2018, according to National Health Expenditures (NHE) data, released earlier this month by the Centers for Medicare and Medicaid Services (CMS). The total now represents 33% of all U.S. health spending. By comparison, spending on retail drugs in 2018 was $335 billion, or 9% of all health spending, according to NHE.

In an analysis in Health Affairs on Dec. 5, Micah Hartman and his colleagues at CMS present a table that shows that from 2015 to 2018, hospital spending rose $157 billion while prescription drug spending rose $18 billion.

So, over the past four years, hospital spending jumped 15.2% while retail prescription drug spending increased a total of just 5.7%, which is less than the overall Consumer Price Index. And that is spending, which is boosted by increased utilization of drugs. As a CMS document put it: “In 2018, faster growth in non-price factors helped to drive the increase in total retail prescription drug spending growth, while retail prescription drug prices declined by 1.0 percent.” Drug prices have continued to fall. According to the Bureau of Labor Statistics, they have dropped in 10 of the past 16 months.

Using a different set of definitions, the Centers for Disease Control reported that hospital spending represented 38.6% of all U.S. health spending in 2017, up from 36.1% in 2007, and that pharmaceutical spending was 11.3%, down from 12.3% ten years earlier. Among the five major categories of health spending, hospitals were the only one where the proportion rose.

With these facts, where do you think policy makers, journalists, and non-profit advocates are focusing nearly all their attention when it comes to America’s health costs? The answer, of course, is prescription drugs.

Why? One explanation is the design of health insurance policies, which require patients to pay a far higher proportion of total costs out of their own pockets for medicines than for hospital care. Another is that hospitals, which are major employers in congressional districts, tend to enjoy the support of elected officials.

But lately, things are changing. The Trump Administration is now insisting that hospitals disclose price information which, as Kaiser Health News put it, “they have long kept obscured,” such as the rates they negotiate with insurers. In another proposal, the White House wants to require that insurers tell patients beforehand how much they owe out of pocket for hospital services.

Meanwhile, Congress is considering a deal on what is often termed “surprise billing.” The phrase, explains Peterson-KFF Health System Tracker…

…describes charges arising when an insured person inadvertently receives care from an out-of-network provider. Surprise medical bills can arise in an emergency when the patient has no ability to select the emergency room, treating physicians, or ambulance providers. Surprise bills can also arise when a patient receives planned care.
 
For example, a patient could go to an in-network facility (e.g., a hospital or ambulatory surgery center), but later find out that a provider treating her (e.g., an anesthesiologist or radiologist) does not participate in her health plan’s network. In either situation, the patient is not in a position to choose the provider or to determine that provider’s insurance network status.
 
Median rates for these surprise bills for anesthesiologists are 5.5 times that of patients treated under Medicare and for emergency medicine, 4.7 times, according to a study in August by the USC-Brookings Schaffer Initiative for Health Policy.

New rules would apply, according to Bloomberg, “where patients can’t afford bills from physicians who don’t accept their insurance. In those situations, patients would have to pay only what they would owe to an in-network provider of the same service.”

Disclosing Prices at Hospitals

On Dec. 4, the Federation of American Hospitals, along with three other hospital associations and three hospitals, filed a suit in U.S. District Court to prevent the Trump Administration from requiring them to disclose prices they privately negotiate with insurance companies. As an article on CNN.com explained:

The rule, which stems from an executive order Trump issued this summer, requires hospitals to make public by 2021 the rates they negotiate with insurers and the amounts they are willing to accept in cash for an item or service. In addition, they must provide this information in an online, searchable way for 300 common services, such as X-rays, outpatient visits, Cesarean deliveries and lab tests. 

Meanwhile, the Administration has asked for comment on further rules that would require health plans to allow their members to get access to pricing and out-of-pocket (OOP) costs through a standardized Internet tool.

Seema Verma, the CMS Administrator, wrote in an op-ed in the Chicago Tribune:

For too long, insurers and hospitals have dubiously claimed that negotiated prices are a strange variation of proprietary business secrets that they’ll share with you — just after you receive the service. Remarkably, prices are even hidden from people with high deductible plans who must pay for a substantial amount of services out of their own pocket before their insurance kicks in.

The idea is not just to inform consumers but to push down prices. “The price transparency delivered by these rules,” Verma wrote, “will put downward pressure on prices and restore patients to their rightful place at the center of health care.”

Or, as Caitlin Oakley, an HHS spokeswoman, said bluntly, “Hospitals should be ashamed that they aren’t willing to provide American patients the cost of a service before they purchase it.”

Judging from the lawsuit, however, one would have to conclude that hospitals are not. They argue that the Administration has exceeded its authority and that the rules violate the free-speech clause of the First Amendment.

It is also unclear just how much interest patients will take in hospital costs, when they pay such a small proportion of the total bill out of their own pockets. A Kaiser Family Foundation analysis in November found that Medicare beneficiaries – a good proxy for all Americans -- spent an average of 2% of the cost of in-patient hospital services out of their own pockets, compared with an average of 21% of the cost of prescription drugs.

In addition, it is uncertain whether the rule will stand up to legal scrutiny. In July, a federal court struck down a rule issued by the Department of Health and Human Services requiring that drug companies disclose the price of drugs in direct-to-consumer advertising. The court said HHS overstepped its statutory and regulatory authority. The judge didn’t rule on First Amendment claims made by the plaintiffs.

An Inefficient Hospital System

What is important about proposals to rein in surprise billing and to increase transparency may not be so much the substance of the measures but that they are being attempted at all. Hospitals have enjoyed a special relationship with policy makers, as chronicled by Chris Pope, a Manhattan Institute fellow, in the Winter 2019 article in National Affairs.

Pope wrote that our health care system is distinguished “by the protectionist nature of government intervention in the marketplace. And this above all means protectionism on behalf of hospitals.” He continued: “Over decades, the structure of state regulations and federal subsidies has encouraged hospitals to inflate their costs by protecting them from competition. This has yielded enormous overcapacity and inefficiency.

As an example, Pope writes:

Whereas the European Union had an average hospital-bed occupancy rate of 77% in 2015, the rate in America's community hospitals was only 63%. Occupancy rates were less than 30% for American hospitals with between six and 24 beds, and 42% for those with 25 to 49 beds.”

Hospital admissions inn he U.S. dropped from 39 million in 1980 to 35 million in 2015, and the average length of a hospital fell by 40%. But, meanwhile, hospital employment has been rising sharply – from 4.7 million in November 2014 to 5.3 million five years later – an increase of 10.5%, according to the Bureau of Labor Statistics. As The Economist magazine reported: “America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).”

The U.S. also over-invests in equipment, in part, as Pope argues, because political imperatives keep hospitals open that should be closed and, as a result, our system is far too decentralized.

As we noted in newsletter No. 46, a study by CMS found that over the period 1990-2013, the average annual growth rate of multi-factor productivity for hospitals was only 0.1% to 0.6% (depending on methodology). “Multi-factor productivity” (MFP) is the change in outputs that results from a change in labor and capital inputs. Along with population increases, it is the main factor in GDP growth. For private non-farm businesses in the U.S., the rate was 1.1%.

Hospitals don’t behave like other markets. Consolidation, which in most industries is a way to increase efficiency and bring down costs, has actually increased the prices of hospital services, according to a study by the National Council on Compensation Insurance (NCCI). The July 2018 report concluded:

Reductions in hospital operating costs do not translate into price decreases. Research to date shows that hospital mergers increase the average price of hospital services by 6%-18%. For Medicare, hospital concentration increases costs by increasing the quantity of care rather than the price of care.

A report to Congress in March by Medpac, the Medicare Payment Advisory Commission also took a dim view of the results of hospital consolidation in America. It found that horizontal consolidation (among hospitals) can lead to higher commercial prices and so a greater gap with Medicare, which “could put pressure on Medicare to increase physician prices.” Meanwhile, vertical consolidation (where hospitals buy out medical practices) “can also result in higher costs for Medicare and commercial insurers.”

Higher Prices Abound in Hospitals

A study in Health Affairs in February found between 2007 and 2014, “hospital prices grew 42 percent, while physician prices grew 18 percent. Similarly, for hospital-based outpatient care, hospital prices grew 25%, while physician prices grew 6 percent.” An article in Modern Healthcare that examined the study concluded: “Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward.”

The new NHE data show that hospital spending rose 4.5% during 2018, and prices were the main reason. “Faster growth in hospital prices,” said the CMS report, “was partly offset by slower growth in non-price factors, such as the use and intensity of services.”
 
Between 2005 and 2014, the average cost per hospital stay, adjusted for inflation, rose a total of 12.7%, according to a major study by the Healthcare Cost and Utilization Project (H-CUP). “The cost of a maternal childbirth hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%,” wrote the study’s authors.

The average cost of a hospital stay for pneumonia is now $10,000; for the fracture of a lower limb, $17,000; for a heart valve disorder, $42,000. A liver transplant averages $813,000; kidney transplant, $415,000. An MRI averages $1,119 in the U.S. and $503 in Switzerland; an appendix removal is $15,930 in the U.S. and $2,003 in Spain; and a C-Section is $16,106 in the U.S. and $7,901 in Australia.

It’s no wonder the New York Times in November ran an article headlined, “With Medical Bills Skyrocketing, More Hospitals Are Suing for Payment.” The reporter, Sarah Kliff, wrote:

When a judge hears civil cases at the courthouse in this southwest Virginia town two days a month, many of the lawsuits have a common plaintiff: the local hospital, Ballad Health, suing patients over unpaid medical bills. On a Thursday in August, 102 of the 160 cases on the docket were brought by Ballad. 

Hospitals mark up the price of the medicines they use by an average of 479% of the cost they actually pay, according to a study by The Moran Company, a research firm that prepared the report for the Pharmaceutical Manufacturers of America. Insurers don’t reimburse hospitals for the entire amount that they bill. But, says Moran, “hospitals receive 252 percent of estimated hospital acquisition cost from commercial payers.”

Government Subsidies

Another way that hospitals offset inefficiencies is through government subsidies like the 340B program. This program was established more than a quarter-century ago to stretch scarce resources for government grantees providing health services and to help large mission driven-public hospitals such as New York Health and Hospitals Corporation. Under 340B, in order to participate in Medicaid, drug manufacturers have to provide outpatient medicines at prices discounted by 23% to 99.9% to certain non-profit hospitals. The hospitals are then allowed to claim full reimbursement at undiscounted rates for private payers. The difference was intended to help support the institutions and centers that provided care to low income patients.

But the program has changed drastically from the original concept, as we showed in Issue No. 30 of this newsletter. It has encouraged hospitals to swallow up other independent health practices, which then get to take advantage of 340B program. Meanwhile, the law allows hospitals to avoid passing on the discount to poor or financially stressed patients, and the number of eligible types of hospitals has been expanded regardless of whether they serve any Medicaid or uninsured patients. 

Even ostensible attempts to constrain hospital costs turn into subsidies, as Pope demonstrated in a Manhattan Institute study, “When the Government Sets Hospital Prices: Maryland’s Experience,” released in June:

Rather than reducing health-care costs in any significant way, Maryland’s payment-regulation experiment has…been captured by the hospitals that it was intended to regulate. The regulation is loose and does little to distinguish the state from its peers in a variety of metrics—except for one crucial fact: the system allows the state to claim higher reimbursements from the federal government for Medicare patients.
 
Decades of regulations have induced unintended consequences, too, which have been patched with further regulations, inducing further unintended consequences. Nevertheless, Maryland’s payment system survives because it entitles the state’s hospitals to a unique $2 billion annual windfall from Medicare.

Insurance Design

Despite the attempts to fix problems of surprise billing and lack of transparency, politicians remain more focused on drug costs rather than hospital costs – even though hospital spending is at least triple drug spending and rising at 4%-plus annually, more than twice the rate of drugs.

Besides the obvious issue of political favoritism, with hospitals being the largest employers in 16 states (the University of Pittsburgh Medical Center, for example, has 89,000 employees), there is the problem of insurance design. More and more insurance policies are requiring the sickest patients to pay high co-pays and co-insurance tabs. These patients face large OOP costs, sometimes $10,000 a year or more, and the bills frighten not just those who have to pay them but their friends and neighbors who hear their stories.

While hefty co-pays and co-insurance affect all kinds of health care spending by consumers, the highest OOP expenses often hit people who use the most innovation medicines. So, while hospital spending is more than three times pharmaceutical spending overall, individual Americans pay out of their own pockets $47 billion a year for pharmaceuticals compared with $34 billion for hospital services – or 38% more.
 
The actuarial value – that is, the percentage of total average costs for benefits that a plan will cover – is 72% for hospitals, 71% for professionals and other, and just 54% for drugs in silver ACA Exchange plans with combined medical and pharmacy deductibles.

Medicare has the same problem. Hospitals represent 40% of total Medicare spending and only 9% of the average recipient’s out-of-pocket costs: a ratio of 4.4. But pharmaceuticals represent 12% of total spending and 19% of out-of-pocket costs: a ratio of 0.6.

A rational health insurance system would reimburse drugs more heavily than hospitals and doctors in order to encourage medicine use – because drugs can lower costs for other services, as we showed in our last newsletter.

No wonder constituents are more scared of drug costs than hospital costs. Insurance redesign would be a huge help, but, in the meantime, policy makers should keep their eyes on cost-containment prize: the American hospital.