Saturday, November 15, 2008

Dark side of the US health care industry: 10 things hospital CEOs won't tell you


1. “I’m a CEO first and a health care professional second.”

With 46 million uninsured Americans and major health care reform possibly ahead, the roughly 5,000 CEOs at U.S. community hospitals aren’t in an enviable position. In the 1980s almost all hospital heads held advanced degrees in health administration, but the American College of Healthcare Executives says more than one in four of its member CEOs now has an MBA, which President Tom Dolan thinks has “advantages and disadvantages.” One plus: Business savvy sure helps in the $1 trillion U.S. hospital industry.

But along with that have come less welcome changes, like Wall Street–style salaries and perks. Gary Mecklenburg, former CEO of Chicago’s Northwestern Memorial Hospital, was paid $16.4 million from September 2005 to October 2006, including a nearly $11 million retirement bonus. A Northwestern spokesperson says the hospital complies with IRS standards of “fair and reasonable” compensation.

Cathy Glasson, a nurses union leader in Iowa, says only recently have hospitals internally begun calling patients “consumers” or “clients.” “Even that small shift hints at today’s business model,” she says. “Focus
less on care and more on profits.”

[US nonprofits have been forced to act like for profits to compete. It's a tough industry.]

2. “Just because we’re nonprofit doesn’t mean we’re good guys.”

These days even nonprofit hospitals have become more entrepreneurial. Executives have all but replaced the nuns who once ran Catholic hospitals, and at least a few facilities have upped prices to several times what procedures cost. What’s more, even though nonprofit hospitals get roughly $12.6 billion in annual tax breaks and billions more in government subsidies in exchange for community service, there’s no standard for how much free care they must provide. Studies show many hospitals don’t give enough free care to equal their tax breaks, and figures they report can be misleading. For instance, many facilities claim
the amount they bill for a service instead of what it costs to provide it.

The Service Employees International Union recently criticized Beth Israel Deaconess Medical Center in Boston for reporting bad debt (unpaid bills for which it had already been partially compensated by the state) as charity care, inflating its free-care figure by about 20 percent. A Beth Israel spokesperson says hospital auditors have “never found any cause for concern.” And no wonder: The hospital was acting in accordance with IRS regulations.

[Free care is only one type of benefit to the community that hospitals provide, and it's a very narrow measure. Under Catholic Health Association guidelines, Catholic hospitals count free care, shortfalls from Medicaid payments

3. “Who says you can’t haggle for health care?”

After media coverage about how they often accept lower payments from insurers while charging higher list prices to the uninsured, hospitals are now more open to bargaining. So how can you take advantage? For starters, many facilities have financial counselors who can set up no-interest payment plans or adjust prices based on financial need—all you have to do is ask. Or team up with an outfit such as North American surgery—which pairs patients willing to pay up front with small hospitals willing to give discounts—and you could save up to 80 percent on common procedures like bypass surgery.

Kelly Proffitt, a 39-year-old teacher in Bassett, Va., knows the benefits of bargaining. In May, when her mother got a $12,000 bill from a hospital after spending almost a week there with a near-fatal blood infection, Proffitt hired a health care advocate—a private individual, often with insurance experience, who helps tackle charges. Weeks later the hospital offered to cut the bill by 80 percent. The advocate “found strings to pull we didn’t even know existed,” Proffitt says. To follow her example, visit to find your own bill bargainer.

[Unfortunately true. Hospital charges are basically a fiction.]

4. “If we build it, you will come.”

The hospital industry is in the midst of a serious building boom, having spent more than $100 billion on construction from 2002 through 2007, double the amount from the previous five years. Hospital executives argue that they’re trying to make patients more comfortable, but critics claim much of the work is unnecessary, “like putting waterfalls in the lobby,” says Maggie Mahar, author of Money Driven Medicine. “And that cost trickles right back down to consumers.”

What’s more, when construction increases the number of hospital beds, doctors tend to fill them and charge accordingly. Researchers at Dartmouth University have repeatedly found that patients with chronic conditions spend more time in the hospital in areas with more hospital beds per capita. And during the last months of life, patients in bed-glutted regions like Miami spend 20 days in the hospital on average, compared with six days elsewhere.

The upshot for patients? “Researchers have never found all that extra care is producing better health outcomes,” says Paul Ginsberg, president of the Center for Studying Health Systems Change. “In some cases, outcomes are actually somewhat worse.”

5. “We don’t like competition, especially from doctors.”

Tensions are up between hospital executives and doctors, especially since many physicians have begun opening small outpatient-surgery centers or mini hospitals in direct competition with big hospitals. The CEOs worry such facilities—which often focus on profitable specialties like liver transplants—will shear off the most high-paying, well-insured patients.

Orthopedic surgeon William Reed has felt the blowback: In 2003, when he and 21 colleagues opened Heartland Spine & Specialty Hospital in Kansas City, Kan., he says the six biggest insurance firms in the area stopped talking to him about adding the facility to their networks. When Reed filed suit alleging tortious interference and civil conspiracy, his lawyers uncovered e-mail showing several large local hospitals had told the insurers they didn’t want them working with Heartland. One hospital allegedly said it would drop an insurer that did. Five hospitals settled for undisclosed sums this spring; the one that allegedly threatened to drop an insurer says its contracting uses a “thorough, lawful approach.” But says Reed, “They were trying to find a way to choke me right out of business.”

[Consider the previous point. Then consider these physician owned specialty hospitals. First, they skim profitable patients from community hospitals. Second, they raise medical usage without necessarily bettering health. The specialty hospitals treat far fewer Medicaid patients; all hospitals lose money on Medicaid payments, which means the specialty hospitals dumped unprofitable patients on the community hospital. Furthermore, specialty hospitals also tend to treat healthier patients with the same diagnosis - the more complicated cases are less profitable. Interested parties can read this letter to Sen. Max Baucus from the American Hospital Association and a couple other associations.]

6. “It’s all about PR.”

You can hardly log on to a hospital’s Web site without a logo proclaiming it “one of the country’s best.” Rankings have proliferated in recent years and are now offered by such varied sources as the for-profit firm HealthGrades and magazines like U.S. News & World Report. The problem is, consumers still don’t know how to assess and research hospitals adequately, says Howard Peterson, managing partner of hospital-consulting firm TRG Healthcare, so “image becomes everything.” That’s why each year when hospital rankings that factor in the reputation of a facility within the health care community get compiled, “I can’t even tell you how many e-mails I get wanting my vote,” Peterson says.

How to find reliable rankings? For starters, look closely at what goes into these calculations. For example, a facility may label itself “best hospital” when only one division (say, ophthalmology) has won an award. Among rankers, HealthGrades ( bases its ratings on more than 90 individual procedures and lets you access ratings based on mortality or complication rates of patients, as well as data on safety and what the hospital charges.

7. “You might be paying for the guy in the next bed.”

Hospital CEOs tend to focus on “the mix of privately insured and Medicare patients at their hospitals,” says Leah Binder, CEO of industry monitor The Leapfrog Group. And for good reason: Because Medicare reimbursements barely cover the cost of procedures, privately insured patients and their insurers often pay more to compensate. One PricewaterhouseCoopers study predicts one of every four dollars spent by private insurers will cover such cost shifting by 2009. That can lead to some pretty outrageous charges. For example, says consumer advocate Nora Johnson, many hospitals bill about $30,000 for appendectomies when the cost to do the procedure is more like $4,200. (Insurers negotiate prices, usually somewhere between those two benchmarks.) But because it isn’t easy to compare prices, Johnson says there are “no checks and balances to keep hospitals from marking things up as much as they want.”

Richard Clark, CEO of the Healthcare Financial Management Association, a professional group for hospital CFOs, says it’s “frustrating” to hear arguments that pricing is arbitrary, since hospitals painstakingly adjust prices based on the number of patients covered by government programs and on market forces.

[Depending on their costs, hospitals may lose a bit of money on Medicare patients, lose quite a bit of money on each Medicaid patient, and obviously lose a lot of money on the uninsured. Given the bizarrely convoluted structure of the US health financing system and the lack of a national insurance solution, hospitals have no choice but to use the privately insured patients to essentially subsidize everyone else.]

8. “Our mergers are pretty messy.”

the hospital industry has been rapidly consolidating since the 1990s, with more than 100 merger-type deals announced or completed in 2007 alone. What does this mean for consumers? When a hospital buys another close by, prices can jump more than 40 percent. That’s because big chains have more leverage to demand higher rates from insurers, says Robert Town, professor of health policy at the University of Minnesota.

Hospitals say mergers ultimately help them improve quality—they’ll spend more on care and less on back-office needs. But the process can cause customer-service snafus and occasionally compromise quality. Hospital consultant Corbett Price says it’s “very common” for hospitals to have problems coordinating accounting systems after a merger, which can result in duplicate or flawed bills, for example. And since mergers gobble up competition, some critics say hospital CEOs no longer feel they have to address black marks—like low nurse-to-patient ratios—to compete.

Price urges concerned consumers to talk with their primary-care doctor about changes at a newly merged hospital and make sure the facility remains accredited by checking Another option: Wait at least three months for the dust to settle before going back.

9. “If it were up to me, we’d be doing more breast implants.”

With more hospitals focused on financial survival, many are pushing the most profitable types of care. Nowhere is this trend more apparent than in advertising: A 2005 study of top academic medical centers’ adsfound that 29 percent of those focused on specific treatments touted cosmetic procedures, while another 38 percent focused on experimental (read: high-priced) services like deep-brain stimulation for Parkinson’s disease.

Critics worry hospitals are becoming dangerously out of sync with the needs of the public. Author Mahar says ERs are often crowded because hospitals don’t want to expand this low-profit unit. Poor financials also explain why the U.S. doesn’t “have nearly enough burn units,” she says, and why more than three-quarters of hospitals don’t offer palliative care. Clark says that while a focus on building up profitable parts of facilities is “definitely going on,” nonprofit hospitals also focus on “making sure they are still providing the services the community needs while making a hospital financially sustainable.”

10. “We don’t like you poking into our business.”

things have improved in recent years, but consumer advocates trying to make data publicly available on such topics as staph infection rates in hospitals often describe a multiphased process of resistance. “First the executives just flat-out oppose you,” says Denise Love, executive director of the National Association of Health Data Organizations. “Then they say they love the idea but begin attacking the data points and methodology.”

At HealthGrades, Chief Medical Officer Samantha Collier says she gets calls “at least once a week” from hospital CEOs or their underlings complaining about everything from her methodology to where they fall in the hierarchy of rankings. Granted, hospital execs have some legitimate concerns: For example, there’s the issue of whether hospital researchers and raters are properly adjusting data to be easier on facilities seeing the toughest cases and thus posting higher mortality rates. But Mahar says hospitals’ stake in keeping the public underinformed is mostly business savvy. “CEOs realize that patients walk away [from the hospital] knowing whether they like the food and the view,” she says. “They’ve got no idea if they actually got good quality health care.”

[This is true and inexcusable. Hospitals are not ordinary businesses. They provide an essential public service and take much public financing, and therefore should be open to scrutiny. That said, hospital operations are highly complex and aren't easy for a layperson to interpret. For example, a layperson might be outraged at the way charges are structured, but there is a reason behind it as discussed earlier.]


Anonymous said...

Your comments on physician owned hospitals are way off base. Why would believe anything that the American Hospital Association says? Their number one goal is to keep anyone from competing with their bloated inefficent members. Right now the phsycians offer the only alternative. The studies that AHA paid for are worthless.

W said...

No, it's you who are off base. The AHA quotes from studies commissioned for such bodies as the Medicare Payment Advisory Commission, the Centers for Medicare and Medicaid Services and the Government Accountability Office. I would trust the studies.

As the memo says, the CBO finds that banning physician owned specialty hospitals would reduce Medicare spending by $2.35 billion over 10 years.

I'm not denying that hospitals are often very inefficiently run. However, the physician owned specialty hospitals don't offer a viable alternative. They unnecessarily raise utilization in the specialty that they operate. They don't take complicated cases. They don't operate emergency rooms. They obviously won't specialize in low-margin cases like burn units. If they were offering alternatives for primary care, I wouldn't be as vehement about this - but they don't.

Is the best you can do to try to attack the AHA? I'd at least try to refute the CBO and Medpac studies. The American Hospital Association are decent folks in any case.

Smooth Melon said...

The MedPAC report on specialty hospitals did indeed state that specialty hospitals had a higher mix of more profitable cases, including a lower Medicaid case mix.

The GAO report also stated that specialty hospitals did not have a meaningful impact on community hospital overall profit. The reason is that general hospitals discovered that, if it couldn't sue or smear their competitors into submission, they would have to compete, and compete they did, re-investing resources and improving services. Indeed, overall hospital profitability in 2007 was up 22.8%, on top of 21.8% growth in 2006 (source: Modern Healthcare). Clearly, hospitals are capable of doing just fine, even with approximately 100 specialty hospitals competing with 5,000 community hospitals.

The CMS report on specialty hospitals indicated that quality of care in specialty hospitals was good. No report found a pattern of over-utilization, which doesn't pass the smell test anyway. No surgeon is going to make a habit of unnecessary surgery, if he/she wishes to keep his/her license. Further, with respect to orthopedic surgery, the NIH reports significant national under-utilization. To the extent that specialty orthopedic hospitals create greater access and awareness for patients of available quality care, the overall health of these patients improves.

In response to the wolf-crying from AHA about dumping less-profitable patients, CMS adopted severity-based DRGs.

Why did specialty hospitals form in the first place? Surely financial incentives played a part. But according to a study by the Robert Wood Johnson Center for Studying Health System Change, physician frustration with hospital management was the #1 reason.

Hospitals' unwillingness to work with specialists are well-known, and are reflected in your comments. My theory is that, if hospitals attempted to create their own centers of excellence for higher-profitability services such as cardiac surgery and orthopedics, we would have fewer specialty hospitals.

In general, if I have to choose a hospital that is run by, as you say, an MBA or a group of surgeons with demonstrated proficiency in a particular specialty, I'll choose the medical degree every time. The patients will decide which they prefer, as it should be.

Hospitals should not be afraid of competition; they should be forced to compete. After all, their own policies and practices drove surgeons to compete with them. Fight it out in the market, not in the papers and the courts. And if you can't compete, you shouldn't be delivering healthcare.

Clearly, you are not a fan of hospitals, but also not of specialty hospitals. I'm curious as to what delivery model you advocate.

I would also caution you, as your previous responder did, to not just quote AHA press releases, as they have a clear desire to stifle competition. Go to the source material. For example, AHA continually chirps about the fact that ~30% of hospitals have negative margins. What they fail to point out, however, is that this pattern and percentage has been consistent since 1966, according to Tom Scully, former head of the FHEA and HCFA. I don't think you can decry hospital PR in your statement and then use that very PR to bolster another argument. Based on your comment, I think your readers would expect more skepticism.

W said...

While I strongly disagree with you, I definitely appreciate the well thought out comments. This thread is becoming worthy of a full post, and I will dissect CBO's and Medpac's analyses later.

Smooth Melon said...

What exactly do you disagree with? If, as indicated by the running of the SmartMoney post, general hospitals are "bad," but specialty hospitals are also bad, what's the delivery model you advocate? I'm not sure you're taking a position so much as you are railing against the status quo...not a bad thing, necessarily, but in order to have a meaningful discussion, there should be two alternatives to discuss.

W said...

I actually agree with most of what the Smartmoney article said. However, I'm hard pressed to sympathize with Dr. Reed and other physician owned specialty hospitals, for the reasons I've outlined. I may agree that hospitals don't like competition, but the example Smartmoney used to illustrate that wasn't the best example.

Health economists contend that physicians can create demand for their services that is separate from existing market forces. In other words, demand for medical services may not be tied solely to a population's health, but also to how many physicians there are. Physician owned specialty hospitals are especially conducive to distorting the market thus.

Nonprofit general hospitals can and should compete with each other - it keeps everyone on their toes.

As I said, I would prefer to discuss the matter in a new post when I've had time to go through the CMS/CBO analyses. I don't mean to cop out - I just have an interview to prepare for as well as some other projects.