The Obvious Power of Price and Transparency in Slashing Hospital and Physician Administrative Costs

It takes a very unusual mind to undertake the analysis of the obvious.

Alfred North Whitehead (1861-1947), Dialogues of Alfred North Whitehead

I shall begin with the obvious. U.S. health costs are too high, and administrative costs account for much of these costs in hospital and physician practice settings, to wit, complying with regulations make up 25% of hospital costs, doctors spend over 20% of their time in nonclinical administrative tasks, and administration gobbles up about one third of all health care dollars.

I shall now proceed with three selected quotes:

The first is my own making in a March 26 2013 med innovation blog “Hospital Malfeesance – Fees for Services, Fees for Items, Fees for Facilities, and Fees for Physicians.”

The blog began:

“Steven Brill made quite a splash when, in a 2400 word article in the February 20, 2013 issue of Time, the most lengthy in the history of the magazine. Brill accused hospital executives of ripping off Americans.”

“How? By using a billing mechanism known as chargemaster accounts to charge exorbitant fees for everything from use of hospital rooms, to operating rooms, to recovery rooms, to ICU rooms to Tylenol to cotton balls to band aids. The problem? Chargemaster accounts are so complex, convoluted, and arcane that nobody seems capable of figuring them out or unraveling them.”

• The second quote is from Peter F. Drucker (1909-2006), the father of modern management and a social philosopher, whom I quote in my book The Health Reform Maze; A Blueprint for Physician Practices (Greenbranch Publishing, 2011).

“Government is a poor manager. It is, of necessity, concerned with procedure, for it is also, of necessity, large and cumbersome. It must administer public funds and account for every penny. It has no choice but to become ‘bureaucratic’. Every government is, by definition, a ‘government of forms,’ This means high costs. For control of the last 10 percent of phenomena always costs more than the first 90 percent.”

1. The third quote is from the November 25, 2012, New England Journal of Medicine, “Reducing Administrative Costs and Improving The Health Care System,” by David Cutler, PhD and two colleagues from Harvard.

“The average U.S. physician spends 43 minutes a day interacting with health plans about payment, dealing with formularies, and obtaining authorizations for procedures. In addition, physicians' offices must hire coders, who spend their days translating clinical records into billing forms and submitting and monitoring reimbursements. The amount of time and money spent on administrative tasks is one of the most frustrating aspects of modern medicine.”

“Indeed, for the system as a whole, administrative tasks are extremely costly. According to the Institute of Medicine (IOM), the United States spends $361 billion annually on health care administration — more than twice our total spending on heart disease and three times our spending on cancer. Also according to the IOM, fully half of these expenditures are unnecessary.”

Cutler et al conclude the only means of bringing these costs under control is more government with standardization of billing codes and more clinical coordination. This conclusion is predictable, given the fact that Dr. Cutler was one of President Obama’s major health care advisers.

I shall end with this obvious observation: anybody in his right mind knows that the U.S. government will not lower costs, even as it promises to do so. It raises costs, as it has done with ObamaCare, with premium costs rising more than $5000 per family per year instead of falling $2500 a year as promised.

So what are the answers? One answer, say the left, is universal government-run health care, as in Canada, England, and Europe, with their lower health costs. Another answer is more direct private care with less administration and lower costs.

Two examples of the second solution, with which I have some experience, are:

One, upfront bundling of hospital and physician charges for episodes of hospital care with back-up reinsurance should complications occur. In the early 90s, as chairman of a hospital PHO in Oklahoma City, we did this for more than 100 hospital procedures. How? Doctors, primary care and specialists alike, submitted their desired fees; the hospital gave us their usual expenses for treating patients with a given disease and procedure; we created backup reinsurance contingencies should costs go awry; we consolidated the costs and made them available to health plans in advance. The idea crashed because the state’s major health plan said it preferred to deal with hospitals and doctors separately and bundling of hospital-physician services would be too much turmoil in its billing system.

Two, upfront transparency and competition by hospitals and doctors by publishing fees and posting them in physician offices, surgical suites, and hospital marketing documents . I suppose this would be too radical for vested administrative interests in the present system, but it is doable, and it is being done by some hospitals, some physicians, and some diagnostic and surgical centers as they compete for the business of American health care consumers, who have grown leery, weary, and wary of the secrecy and delays surrounding health care charges which they only learn about weeks or months after the health care event occurred.

Ryan Visniski, in an October 13 Letter to the Editor in the Wall Street Journal, summed up my point of view;

“Price transparency is the key to significant, meaningful cost reduction. Transparency leads to competition, competition reduces price discrepancies and lowers overall prices. As an added bonus, which allows providers to arrange payment up front, rather than chasing delinquent accounts for months. Price transparency would reduce premiums and out-of-pocket expenses, creating a massive economic stimulus that benefits every individual, corporation and level of government.”