Shocked, Shocked Over Hospital Bills

“Here is a simpler approach. Why not make it illegal for hospitals to charge uninsured people more than X percent of what Medicare pays for a procedure?”

March 1, 2013, 6:00 am


Shocked, Shocked, Over Hospital Bills



Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Capt. Louis Renault’s famous line in the movie “Casablanca” comes to mind as I behold the reaction to the journalist Steven Brill’s 36-page report “Bitter Pill: Why Medical Bills Are Killing Us,” published in a special issue of Time last week. Mr. Brill was swiftly invited to appear on “The Daily Show with Jon Stewart” and on “Charlie Rose.”

Today’s Economist

Perspectives from expert contributors.

Americans are shocked, just shocked. But what they should have known for years is that in most states, hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals – is often protected by state Certificate of Need laws that bestow on them monopolistic power by keeping new potential competitors at bay.

As George Bernard Shaw, whose works include “The Doctor’s Dilemma,” might have put it, that any lawmaker would grant hospitals monopolistic powers plus the freedom to price as they see fit is enough to make one despair of political humanity. Mr. Brill vividly illustrates the harsh financial mauling that the hospitals covered in his report – all nonprofits – visit on uninsured middle-class Americans stricken with serious illness.

Often these people operate small businesses or are entrepreneurs in start-ups and cannot afford anything other than skimpy health insurance with strict upper limits on coverage. When they fall ill and require hospitalization, they become easy marks for what I think of as “extreme billing.”

In fairness, let me note that we cannot be sure whether the vignettes Mr. Brill presents are representative of the entire hospital industry or the policies of the proverbial few bad apples, a line that may well be taken by representatives of the hospital industry.

It does not take away from Mr. Brill’s brilliant journalism – especially his use of the Form 990 on which nonprofit hospitals must report their financial performance to the Internal Revenue Service – nor from Time’s brilliant marketing to note that the practices Mr. Brill reports have been well known to health-policy analysts and health-policy makers for at least a decade. And they should have been known to broad segments of the public as well – certainly to news organizations.

As early as 2003, Marilyn Werber Serafini’s “Health Care — Sticker Shock” was published in The National Journal, which is well known to Congressional lawmakers and their staffs.

Also in 2003, The Wall Street Journal began publishing on its front page a series of investigative reports by a staff reporter, Lucette Lagnado. In one article she reported on patients being hounded by collection agencies and their lawyers, only to end up in jail for failing to make court appearances in connection with their hospital bills.

Yale-New Haven Hospital, prominently mentioned in Mr. Brill’s report, was featured in one of Ms. Lagnado’s sad stories. I wish Yale University, where I received my doctorate, would withdraw its hallowed name from that legally independent hospital.

In 2008, The Wall Street Journal published an article by Barbara Martinez with a vignette at the M.D. Anderson Cancer Center, based in Texas, that is eerily similar to Mr. Brill’s depiction of the center, although the articles are about different patients.

As these earlier reporters and Mr. Brill underscore, all manner of amazing behavior can hide under the pious label of “nonprofit.” A giant, inscrutable economic sector, in command of trillions of dollars in resources, nonprofits are governed by nonelected, self-perpetuating boards and virtually no effective accountability to any “owners” or the general public. By comparison, for-profit institutions are paragons of good corporate governance, transparency and accountability; I shall comment more on that in a future post. (Allow me to disclose that in the past I have served on the boards of both nonprofit and for-profit hospitals.)

The articles on extreme hospital billing practices that appeared in 2003-4, especially those so prominently displayed in The Wall Street Journal, led to a flurry of activities in Washington at that time.

There was a hearing on the issue by a House subcommittee. The American Hospital Association developed a set of principles and guidelines on hospital billing and collection practices. Brandeis University established the “Access Project” to focus on this issue. The Washington-based Center for Studying Health System Change weighed in with a lengthy paper, “Balancing Margin and Mission.”

In short, there was much ado, as there often is in response to disturbing news reports or calamitous events. But in the end, after the stories and events fade into memory, not much happens. How else could Mr. Brill have come up with this stunning set of vignettes today?

Part of the problem was that the issue in 2004 was framed in Washington as the charitable activities performed by nonprofit hospitals – that is, whether they rendered sufficient “community benefits” for the tax exemption they enjoyed. Instead, the focus should have been on the general pricing policy of hospitals, which has never attracted the public scrutiny it warrants.

Similarly, by focusing as much as Mr. Brill does on the compensation paid the executives of the hospitals, he may inadvertently seduce readers to the view that this the crux of the problem. It is not.

It should be possible to compensate hospital executives well without treating middle-class uninsured people like lemons to be squeezed fiscally. After all, as Mr. Brill shows, these so-called nonprofit hospitals typically have ample profits that would permit humane comportment in billing the uninsured while paying executives enough to retain them.

Finally, in the “Changing Choices” section on his policy recommendations, Mr. Brill once again illustrates why dubious policies such as he describes can persist. He offers a bewildering potpourri of little tweaks here and there, including huge taxes on the salaries of hospital executives and hospital profits, capping profits on lab services, changes in patent laws and, of course, the eternal stalwart, malpractice reforms.

That is a scattershot response to the central problem he lays bare: the pricing of hospital services in general and to uninsured middle-class people in particular.

Here is a simpler approach. Why not make it illegal for hospitals to charge uninsured people more than X percent of what Medicare pays for a procedure? That maximum price would certainly cover the true incremental cost of serving uninsured middle-class people, with handsome contribution margins to overhead and, most probably, to profits as well.

Could this be done? Yes. It was done in 2008 by former Gov. Jon Corzine of New Jersey and the state Legislature, when they enacted Assembly Bill No. 2609. (Disclosure: I was chairman of Governor Corzine’s Commission on Rationalizing Health Care Resources, which produced a href=””>a report in 2008.) The bill limits what New Jersey hospitals can charge uninsured New Jersey residents with gross incomes up to 500 percent of the federal poverty level: no more than 115 percent of the applicable payment under the federal Medicare program.

To be sure, a family of four with a gross income above $117,750 could still be fleeced royally by New Jersey hospitals; I can only hope they would resist the temptation.

In my next post, I shall describe how this law came about.