Misappropriation of Healthcare Funding


“Preferred Provider Organizations (PPOs) perpetuate overpayments…………. average payments to hospitals of 250% of Medicare or more is horrendous, in many markets payment levels are twice that level and employers have no idea.”

By Mike Dendy, CEO/Vice Chairman AMPS Inc.

Misappropriation of Healthcare Funding

Feb 7, 2016

Healthcare costs in the US are significantly too high. However, not all healthcare providers or services are overpaid, but the ones that are tend to be significantly overpaid. Take the inappropriate balance between payment to physicians’ versus payment to hospitals. The graph above notes the average income level of physicians by specialty. Although doctors at the high end of the spectrum are very well compensated, when compared to what CEO’s and other executives at hospitals make it is almost paltry. The average hospital CEO in Atlanta makes over $2 million per year. In a recent segment on 60 Minutes, the CEO of University of Pittsburgh Medical Center admitted he is paid over $8 million dollars annually. Reports from reliable sources have informed me that Sutter Medical Center in Northern California has over 30 executives making over $1 million per year. If we are to balance payment levels for healthcare services relative to any type of reasonability factor we have to start with such inequalities as these.

To make matters worse, hospitals are now aggressively buying physician practices. The pitch to the doctors is easy: we will manage your offices, pay for your malpractice insurance, and allow you to do what you do best, get people well. For consumers, the transition almost always means a significant increase in physician service cost. My own orthopedic specialist told me recently that the hospital that purchased his practice “is significantly more proud of my services than I ever was.”

We now have three of the five leading candidates for President stumping for some form of European-style socialized medicine. This basically means that everyone has Medicare from the time they are born until they die. In some ways this could be seen as a positive movement, especially for employers that make up about 48% of the overall healthcare payer mix.  Employers utilizing the BUCA (Blue, United, Cigna, Aetna) network system of healthcare purchasing are on average paying about 250% of Medicare payment levels for hospital services.  So, a drop down to flat rate Medicare would represent a significant decrease in the most expensive element of their healthcare cost spectrum. However, the drop in costs comes with a significant catch: the US Government would now be managing all healthcare in the US. To finance such a system through the government, top tax rates will have to be raised significantly to similar levels paid in Canada and the European countries and everyone would see their federal tax bills increased significantly. Although the European and Canadian systems are all inclusive, such a system comes with significant drawbacks. For instance, once all healthcare services for all people are “prepaid” the system will be grossly over utilized. The European, Scandinavian, and Canadian systems are burdened with the issue of over consumption and thus the primary way of controlling healthcare access is long wait times and rationing of services. Care delayed in many cases is care denied, especially with cancer or other life-threatening ailments. Further, healthcare providers are much more inclined to treat issues as they arrive in emergent fashion and spend far too little on diagnostic and wellness treatments, preventative care.

There are hybrid alternatives that are much better suited to our general populace and how we are accustomed to accessing and paying for healthcare in America. However, the alternative means a significant reduction in the amounts paid specifically to hospitals as well as the pharmaceutical community. Unfortunately, the hospital and pharmaceutical industries have very aggressive lobbies and the thought of pruning their own fees voluntarily are beyond repugnant to them.   The movement for more reasonable reimbursement levels for hospital and pharmaceutical care has to be initiated and driven by the employer community. Employers split the cost of healthcare services with their employees and, not to mince words, they are being ripped off much of the time.  While average payments to hospitals of 250% of Medicare or more is horrendous, in many markets payment levels are twice that level and employers have no idea.

Preferred Provider Organizations (PPOs) not only perpetuate overpayments, they exacerbate such to further their own business models. To make their business practices even more offensive, PPOs mask the fees paid to providers so that businesses can’t readily determine just how badly they are being over-charged. So, to make it clear, an average employer is paying $120 to $200 per year per employee to have access and “discounts” at hospitals where they then are required to over pay for services.  If you think the PPOs will provide that data to your large company upon request, research the law suit of Anheuser Busch Vs CIGNA for your answer.

Make no mistake, America has excellent health care that provides good patient benefits and positive outcomes. Providers of healthcare, both physicians and hospitals, should be paid fairly for their services. Fairly means making a reasonable profit for their services. However, the cost of those services should be transparent to allow a purchaser to compare and contrast fees and to make a financially prudent decision about which provider to use for a procedure or care protocol. The current system that factors in the profit-taking and fee opacity of PPOs contributes nothing of value to the equation.  In the future, we can anticipate a system oriented toward employers offering defined benefit payment levels to their employees and contracting directly with doctors and hospitals to provide the healthcare services their employees need, without an additional layer of administrative costs inflating the overall expense of healthcare.