Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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A Physician's Prescription for Managing Costs

Current problems of financing health care, paying for indigent care, and the corollary issue of rising costs are fairly recent developments. Major changes in the health care system passage of the Medicare and Medicaid legislation, emergence of comprehensive health insurance, and tax-exempt financing of hospitals have had a profound impact in creating the situation facing this country today. The relationship of these events to the current crisis in the system and what business can do to change the situation are discussed below.

Indigent Care Before 1965

The old system of running hospitals evolved over two centuries and was based on a realistic recognition that most individuals were not generous with regard to charity. Operating a general hospital on voluntary contributions was not feasible and using and using public taxes to pay for indigent care was not popular with the electorate. But somehow the system worked by overcharging private, invoking the Robin Hood principle, and thus finding the means, however questionable, to finance this care. Further, the medical training system helped out by providing unpaid interns, residents, and nurses who delivered free care to those unable to pay.

One underlying principle made the system work. It was essential to keep down indigent medical costs or be bankrupted by these costs, but at the same time, there was the corresponding issue of providing equal indigent and private care. A significant disparity between these types of care would have made a mockery of this generosity.

Passage of Medicare/Medicaid

In 1965 the system changed and the federal government undertook to pay for indigent care. But more important, it undertook to pay for it at the prevailing middle-class standards of convenience and amenity.

While it is true that care has been extended to some previously underserved populations under these public health assistance programs, it is also a fact that since 1965 hospital rates have gone up 77 percent, which is an inflation of unit prices. Experience over the past 17 years, and particularly during more recent times of high inflation, has prompted reductions in Medicare/Medicaid benefits. As a nation, there seems to some rethinking on the financing of indigent care through taxes. Barring a return to the Robin Hood principle, society must decide exactly how it wishes to pay for such care in the future. Failure to act will lead to a regulatory response much worse than the existing system.

The use of hospital cost reimbursement has defeated efforts to hold down costs by utilization restraint. For example, under the PSRO program, if physicians succeeded in cutting blood counts in half, the result would be a doubling in price for each blood count.

Hospital utilization has, nevertheless, been decreasing since the mid-- 1970s. As utilization has gone down, in Philadelphia for example, total hospital costs to the community have escalated at double the general rate of inflation.

The number of hospital employees and their salaries have increased during the past 17 years. Improved technology and the need for more highly skilled and specialized personnel are partly to blame, but the existence of comprehensive insurance coverage to pay the bill has been an overriding factor in promoting carefree internal hospital expenditures.

Cost Shifting and Cross Subsidies

Through Blue Cross discounts, the federal government's less-than-equishare for Medicare/Medicaid payments, and arrangements of commercial insurance carriers, cost shifting and cross-subsidies have become characteristic of the way the hospital covers its costs, and more broadly, the way the entire insurance system has created the current crisis in health care financing. This situation conceals what services/procedures actually cost the hospital, what they but the individual, and what they cost the purchaser of the services.

By shifting the overhead costs, for example, patients who stay a long time usually subsidize patients who stay a short time, and patients who need laboratory work subsidize patients who don't. By using two different and unequal pricing systems, patients with commercial health insurance are made to subsidize patients Blue Cross and Medicare, and patients without any health insurance subsidize those who are insured.

Young people subsidize older people through paying the same premium but using less service. Ambulatory patients subsidize inpatients, and ambulatory care is thereby discouraged, with the result that care is provided in the more expensive setting. Through "community rating" of insurance premiums, patients in non-teaching hospitals subsidize those in teaching hospitals. By only permitting selective premium adjustments, some insurance commissioners have to it that subscribers in small groups subsidize individuals, non-group subscribers.

The income tax code extends a$27 billion exemption of health insurance fringe benefits to salaried employees that are not enjoyed by, and hence subsidized by self-employed and unemployed persons. Through coordination of benefits, the 30 million working couples in America receive only half the fringe benefits they think they are getting, so they are effectively subsidizing single-earner families.

This process extends even to the corporate stockholder level. For instance, stockholders of corporations are deprived of dividends to the extent that the company is overpaying for employee health insurance, and the customers of the company are also paying somewhat higher prices because of it. AS this affects international competitiveness, one could say that the big winners are the Japanese.

Capital Financing of Hospitals

Although this is a time of recession, many communities are constructing new wings to existing hospitals, building additional specialty units, and renovating buildings constructed only five to ten years ago.

BUilding costs are astronomical. A new 200-bed hospital will cost $70 million without cost overruns, but after 30 years of a 15 percent tax-exempt bond, the community will have paid $240 million for the structure. That is well over a million dollars per bed, most of which will be paid to banks, insurance companies, and other institutional investors. Over the 30 years, it can be conservatively estimated that the 200 beds will generate $2 billion in costs, half of which will be paid out in employee salaries. It is conservatively estimated that $200 million will be spent on administrative costs.

Hospital governance can be partially faulted for this situation. Trustees of the largest nonprofit hospital system have lost their concern with costs because society has become insulated from cost consequences by being overinsured, thereby falling victim to what is known as the "moral hazard of insurance." Since everyone is desperate to keep the government from exerting dominance over hospitals, which its financial contribution would normally entitle it to, administrators and providers have clung to the honorary trustee form of governance, for lack of a substitute. The consequence is that hospitals threaten to become employee benevolent societies, displaying a marked distaste for supervision.

Recommendations for Business

The foregoing situation increasing costs for Medicare/Medicaid, cost shifting and cross-subsidies, the moral hazard of insurance, and tax-exempt financing of hospitals present some challenges as well as opportunities for the private sector.

Although there are a number of options for business, overestimating its commitment is also a danger. In the nation's experiment with health planning, the community elected board of laymen to oversee the affairs of the local health systems agency. The laymen often quickly lost interest, and the most pressing problem often became the inability to achieve a quorum to conduct business. The original idea was that leaders in the business community would make the decisions. But in fact, the decisions were made by staff committed to perpetuating the organization, rather than advancing its mission.

Business is further cautioned against becoming involved in the minute details of the operation of hospitals and how physicians practice medicine. The medical literature includes 200,00 new articles a year: a challenge for the physician, an absurdity for the layman. Avoid being misled by so-called innovations and new trends in health service delivery. HMOs, for instance, appear to drastically reduce costs, but a more careful analysis will reveal problems of adverse risk selection.

Steps that business can take to change the system are:

* Search for ways to restore the market mechanism.

* Devise new ways to govern hospitals. Try splitting the board into a two-corporation entity. One board would be responsible for teaching, research and charity, and the endowment portfolio; the second would be responsible for running the business.

* Consider requiring that hospitals pay local property taxes; such a move might quell criticism that since the government pays half the costs of running hospitals, it should control them.

* Urge state and local governments to reassume for charity care. Because the federal government can print money, it has spent more on this item. Local and state governments would be more cautious in this regard.

* Offer employees several choices of health insurance, including plans with high deductibles and copayments.

* consider supporting a change in the tax laws to permit a health hardship exemption from tax and penalty for early withdrawals from IRAs. Such an exemption could then be used for payments of health insurance premiums.

Encourage Blue Cross to adopt higher copayments and deductibles. The intent of this is to eventually eliminate the cost reimbursement system.

Support a limitation on the tax-exempt status of employee health benefits.

Originally published: Thursday, November 08, 2018; most-recently modified: Friday, May 10, 2019