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February 25, 2013 8:23 AM Why Are Hospital Bills So High?

By Austin Frakt

There’s already been a lot of reaction to Steven Brill’s way-too-long Time cover story on the variation of health care prices across payers and what it means for the uninsured. (They’re screwed.)

Sarah Kliff boils down Brill’s answer to the question “Why are hospital bills so high?” to one sentence: “The American health-care system does not use rate-setting.” Brill makes brief mention of another problem though. Some of the health care consumed and charged for is not only not worth the price. It’s not worth any price above $0. Examples are sprinkled throughout his piece: a chest pain patient went home with a “false alarm” after a nuclear stress test followed three troponins,* documentation of the high rate of use of CT scans in the U.S., a neurostimulator is implanted in a patient for a bad back, and this:

“When you’re getting trained as a doctor,” says a physician who was involved in framing health care policy early in the Obama Administration, “you’re taught to order what’s called ‘morning labs.’ Every day you have a variety of blood tests and other tests done, not because it’s necessary but because it gives you something to talk about with the others when you go on rounds. It’s like your version of a news hook … I bet 60% of the labs are not necessary.”

For what amounts to a talking point, patients are mortgaging their houses and their future. For shame! Even if some of these tests and procedures are warranted in some instances, it’s a very safe bet that they’re not in many, many others. In those cases, the right price is $0. That hospitals charge for application of procedures when they are at best useless and at worst harmful — and in all cases draining the patient or society of resources — brings to mind Uwe Reinhardt’s characterization of patients as “biological structures yielding cash flows.” (PDF)

Matt Yglesias wonders why Brill didn’t arrive at the solution that Kliff points to. Why aren’t we using Medicare or an all-payer rate setting scheme to beat back the market power that allows hospitals to charge outrageous prices (not to mention abide procedures that aren’t necessary)? Marty Gaynor isn’t as convinced as Yglesias that price controls will work. After summarizing international and historical experience, he concludes,

[W]e don’t know what the impact of rate setting (price controls) would be on health care spending in the US. It’s possible that rate setting could prevent some of the most egregious practices recorded in the Brill article, but that depends on what’s enacted and how it’s enforced. Whether rate setting would substantially slow the rate of growth of health care spending isn’t clear. Further, the question that must be asked is what is the alternative? There’s evidence to suggest that robust price competition, such as we had with managed care during the 1990s, can perform very well in controlling costs. Unfortunately there has been a tremendous amount of consolidation in health care markets since the 1990s, raising serious challenges to competition. Whether the US decides to go with competition or with regulation, we have some serious work to do to make the system we choose work effectively.

Brill didn’t connect the dots, but he offers another reason why we don’t see broader rate setting.

According to the Center for Responsive Politics, the pharmaceutical and health-care-product industries, combined with organizations representing doctors, hospitals, nursing homes, health services and HMOs, have spent $5.36 billion since 1998 on lobbying in Washington. That dwarfs the $1.53 billion spent by the defense and aerospace industries and the $1.3 billion spent by oil and gas interests over the same period. That’s right: the health-care-industrial complex spends more than three times what the military-industrial complex spends in Washington.

So long as this much money is being thrown at the political process, there is very little chance of anything like what Yglesias proposed will happen. Money begets money.

* After a thorough literature review, David Newman and Ashley Shreves conclude, “After a two-troponin rule-out, the stress test adds nothing tangible to risk stratification of a low risk chest pain patient. It may, however, lead to unnecessary testing and needless harm.”

[Cross-posted at The Incidental Economist]

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Austin Frakt is a health economist and an assistant professor at Boston University's School of Medicine and School of Public Health. He blogs at The Incidental Economist.