PDF Summary:An American Sickness, by Elisabeth Rosenthal

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1. There are no fixed prices for medical procedures or tests.
2. Billing practices are out of control. Providers will bill for anything they possibly can.
3. Vendors will charge the maximum prices the market will bear.

Shortform Introduction

An American Sickness is a fantastic book on US healthcare, but with some weaknesses.

Primarily, the book omits blaming patients for contributing to rising healthcare costs, instead redirecting ire to other participants in healthcare. For example, Rosenthal doesn’t blame patients for wanting the best-in-class care and newest technology, regardless of its cost-effectiveness. She advises patients to be cautious of insurance clauses that “require you to try what the plan considers to be a more ‘cost-effective’ drug.” The scare quotes are unhelpful in getting patients to substitute drugs for generics, which is what she advises in the first place!

She also ignores that 70% of healthcare costs are a direct result of patient behavior, with a majority of cost in cardiovascular disease, diabetes, and obesity being preventable. Immense healthcare savings could be had in keeping to...

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This historical artifact was the origination of employer-sponsored healthcare, the predominant way people are covered today. Population insurance rates exploded from 10% in 1940 to 60% in 1955.

Growth in the insurance industry and public demand for health insurance from employers prompted for-profit insurers like Aetna and Cigna to enter the industry.

The author suggests that for-profit insurers were less bound by the mission statement of non-profit BCBS of “high quality, affordable health care for all.” For-profit insurers could segment the population, focusing on healthier patients and offering lower rates while excluding unhealthy patients. This meant the Blue Cross plans began having to support sicker patients.

In 1994, facing financial difficulty, the Blues’ board allowed member plans to become for-profit. The immediate intention was to raise funds in the stock market to stay afloat. Over time, the plans consolidated and grew, becoming today’s giants like Wellpoint and Anthem BCBS.

Medical Loss Ratio

One metric of how insurance companies perform is the “medical loss ratio.” This is the percentage of premiums revenue that is spent on medical care.

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Hospital Reimbursement

Hospitals provide the medical service to the patient, then are reimbursed by the payers (insurers) for the service. This practice has led to a complicated set of billing practices and gamesmanship to maximize hospital earnings. Hospitals employ reimbursement consultants to adjust their prices and billing practices to earn more money.

The high sticker price given by hospitals is a negotiating point with payers (insurers). Bigger payers pay a smaller fraction of the list price than smaller payers and the uninsured.

Medicare assigns to every hospital an overall cost-to-charge ratio it considers reasonable. This is meant to constrain the profit percentage that hospitals can make. However, this regulation turned billing into a strategic game. For example, hospitals adjusted their prices to maximize billing. They lowered charges for items that are often not reimbursed (like gauze) and boosted charges for what is reimbursed (OR time, oxygen therapy).

This led to a perplexing practice where a single procedure, like an overnight stay in the hospital, can be billed separately as a wide array of items. This is why a hospital bill can include...

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The reimbursement structure was based on retrospective “usual and customary” fees. “Usual” was defined as the average price of local providers in the preceding period, and “customary” was defined as the % of the bill that was typically reimbursed (75-90%). The key point is that doctors had every incentive to raise their prices—if they raised their prices today, then they would get reimbursed for more tomorrow, since they had raised the average price of the procedure. During this time, costs exploded, and insurers paid liberally.

This was starting to be a clear problem, so in 1992, Congress and the American Medical Association created the resource-based relative value scale (RBRVS) using relative value units (RVUs). This was an attempt to standardize the amounts paid for medical procedures. The calculation included factors such as:

• The level of work and time spent by the doctor on the service
• The overhead in rendering the service
• The cost of training to perform the service
• Malpractice expenses involved
• All of this was multiplied by a conversion factor that varied by location and was adjusted annually

Furthermore, Medicare set a legal cap...

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• 1980s: HIV concern led to rapid approval of AZT (1 human trial that lasted 19 weeks was sufficient for approval) and other antivirals. At the time, these became the most expensive drugs in history.
  • What was likely driving up the price: high public demand, high insurer willingness to pay, lack of substitutes, and perceived low market size by the manufacturer.
  • This created a new paradigm for acceptable limits of drug pricing.

An important point: in the US, Medicare is legally prohibited from negotiating prices with pharmaceutical companies. In contrast, single-payer systems like that in the UK have more leverage to choose a subset of drugs to support and squeeze prices down.

Clinical Trial Strategies

Pharma companies use a few strategies to speed up clinical trials to get drugs approved.

Surrogate Measures

The HIV rush for drugs prompted the FDA to allow surrogate measures, or proxies for health (like blood markers) instead of actually proving that the drug cured symptoms over months or years.

Manufacturers promise to carry out follow-up studies, but there is no...

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Some manufacturers don’t even seek FDA approval for new models, since they don’t consider the new version “substantially different” from older models. However, patients don’t always know the device is experimental and don’t consent to it.

Despite the fact that the devices are “substantially equivalent,” if a specific device is recalled, there is no recall mechanism to recall equivalent devices. Furthermore, complications are hard to detect—generally, reporting of complications is voluntary, unless the FDA mandates it.

Device Marketing

The easy clearance of “substantially equivalent” devices means they’re largely interchangeable and thus don’t have a clear product or performance advantage. As a result, marketing and sales agents need to intervene to push products.

This results in a variety of questionable relationships between industry and doctors.

• Device companies court doctors during residencies and fellowships. They get their brands partnered with major training programs.
• Device manufacturers target less experienced surgeons, who are less resistant to new technology or less aware of the device’s risk and lack of marginal benefit.
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Other Reasons for Unnecessary Testing

It’s too much to suggest that doctors and hospitals only order tests to increase billing. Of course, testing has a legitimate use. However, factors such as the incentives described above can push testing beyond their cost-effective point.

Another factor includes patient demands. Patients increasingly want more data now, and they may personally ask for excessive testing. Doctors may sometimes find it easier to placate patients by ordering tests than to instruct them about why the test yields little more information.

Doctors themselves worry about missing something. In this litigious medical environment, doctors practice defensive medicine to lower their risk of liability in a malpractice lawsuit. This means more testing to avoid a catastrophic mistake.

Pathology

Pathology is particularly used by dermatologists, gastroenterologists, and urologists.

Patients have little choice over where biopsies are sent for analysis, and doctors aren’t aware of how much they cost. Sending to a particular pathology center might cost 5 to 10 times more than a commercial center.

History of Pathology as a Business

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Tug of War

Billing is essentially a tug of war between providers and insurers.

Providers will bill for whatever they can. Not only does this mean billing for the most expensive treatments allowable, sometimes third-party coders will inappropriately code for treatments that never happened. One patient with a Jewish name found a charge for a circumcision for his newborn son, even though they didn’t even have a circumcision performed.

In turn, insurers will deny claims as overreaching. They also outsource precertification to contractors, firms that check for coverage and get money by denying care.

Billing Complexity Affects Doctors

With the increasing complexity of billing, single doctors have found it too difficult to run all the checks for a patient’s treatment, including whether the doctor participates in the patient’s insurance plan, whether a procedure is covered, and whether the procedure needs authorization from the insurer.

This is one reason independent doctor’s offices are rare. Instead, doctors have banded together into independent physician associations to better handle overhead costs.

Patient Advocates

To help empower...

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• If there are promising treatments that can’t be patented, and so the non-profits can’t profit, will they promote these as much as they should?
• In the extreme, might non-profits even shift toward pharma incentives of seeking expensive lifelong treatments, rather than real cures?

It appears as though fund-raising is now the primary metric for foundations, rather than patient wellbeing. Said a critic of JDRF, “if the March of Dimes were operating like today’s foundations, we’d have iron lungs in 5 colors controllable by your phone, but we wouldn’t have a polio vaccine.”

Activities of the American Medical Association

The American Medical Association is the professional organization representing doctors. It nominally supports the well-being of doctors and influences medical guidelines. It publishes the well-known medical journal JAMA.

However, like the disease-focused non-profits we just discussed, it engages in a variety of profitable practices that are somewhat questionable:

• The AMA Foundation receives funding from their corporate roundtable, mostly consisting of pharma companies.
• It owns the...

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The Large Keep Getting Larger

Size begets size. Large healthcare systems can pressure smaller players into being acquired in order to access the system’s services. It can also pressure insurers into dropping smaller players.

Sutter Health is an exemplar of aggressive consolidation, buying hospitals and restructuring around more profitable services. It downsizes less profitable hospitals to the bare minimum to meet Medicare’s 25-bed critical access designation, which raises reimbursement rates.

Electronic Medical Records

Obama’s 2009 HITECH Act gave $19 billion in incentives to providers to adopt EMRs. While this advanced the adoption of technology, it had a critical omission in not requiring intercompatibility between EMRs.

Like many software companies, EMR vendors such as Epic desire low intercompatibility to increase switching costs. Once you get used to a system, if you can’t easily export your records, you tend to stick with the system you’re currently using.

Because EMRs aren’t intercompatible, they can’t talk to each other. Patient records at one hospital are difficult to transport to other hospitals.

Non-intercompatibility is good for providers too....

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• The public option’s successor, non-profit health insurance co-operatives, largely failed. These had started as small startups without the size to get enough negotiating leverage.
• Some incentives created by the ACA were easily gamed.
  • For example, the ACA promoted free screening for certain conditions. But in some cases, providers could code procedures as a diagnostic instead of a screening procedure. For instance, if there was a benign polyp discovered 10 years ago, a colonoscopy could be a diagnostic instead of a screening.
  • Furthermore, the screenings themselves could be free, but providers could charge for the room rental or anesthesiology.

It’s not clear to patients that their lives have improved with the Affordable Care Act. Healthcare spending doesn’t seem to have been strongly controlled, and premiums have risen for many patients. This has led many to call for the repeal of the ACA.

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Market-based transparency in Singapore

What it is:

• The Ministry of Health publishes prices and bills at different tiers from different hospitals.
• Care is divided into 4 wards, with different levels of privacy and amenities.
  • Basic care is covered by the government, up to 80%
  • Higher priced and more selective care require more participation in payment, up to 100%.
• Most hospitals are state-owned. Private hospitals compete with public hospitals.
• Singaporeans are required to contribute part of salary to HSA (health savings account)

Where: Singapore

Benefits:

• Singapore spends only 4.9% of GDP vs USA’s 17.1%, while SIngapore ranks 6th in health system performance and the US ranks 37th. (Shortform note:it has a population of just 5 million.)

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*   Doctors need to see prices when placing orders—this will make them avoid unnecessary tests and find alternatives for overpriced treatments. Hospitals should release their master list of prices to staff.
*   Providers and insurers contractually cover their negotiated rates under a non-disclosure agreement. Some states have declared these illegal.

• Reform malpractice lawsuits
  • 80% of doctors will be named in a malpractice lawsuit by the time they become 60 years old.
  • Place limits on noneconomic damages.
    • In California, there is a $250k limit for indirect damages like emotional suffering.
  • Encourage arbitration instead of lawsuits. This will decrease time to payment and legal fees for both sides.
  • Offer warranties and guarantees for treatments. Some surgery centers guarantee care of complications with no additional charge.
• Medical education
  • Finance medical school to deter doctors from feeling like economic victims, which leads to overbilling for the sake of compensation.
  • Give loan forgiveness for doctors who enter low-paying specialties or work in underserved areas.

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    *   Hospitals may insist that HIPAA or internal policy prevents this, but this is false. It’s your right to access your own healthcare information.
    *   If itemization takes a while and your bill goes into collection, tell the company you’re waiting for itemization and are disputing charges.
*   Check the bill against your notes in hospital. Over 50% of bills contain mistakes.
*   Protest bills in writing, not by phone.
    *   Send an email or letter, and send a copy to a local reporter, state insurance commissioner, or the consumer protection bureau.
    *   If the doctor’s charge is outrageous, send a copy to his national specialty’s organization.
    *   Compare the fees to the Medicare payment rate. Use these databases to compare costs: Healthcare Bluebook, Pratter, ClearHealthCosts, FAIR Health, and the All Payer Claims Database.
*   Argue against out-of-network bills **if you didn’t provide informed consent for them**.

• Reduce the costs from testing.
  • Do not test outside your network.
  • As a general rule, send your labs outside the hospital lab.
  • Ask your commercial lab for a printout of results...

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    *   If you see poor performance data from HMOs, this might be OK, depending on the context. HMOs are the rare medical systems that actually track standards and release data.

• Don’t trust insurance navigators fully - they have inconsistent training and may not be fully informed.

Systemic Changes to Demand

• Require insurers to maintain adequate doctor rosters across a spectrum of care in your local area. This will avoid out-of-network charges.
• Require network provider contracts to be in force through the term of the policy. This prevents doctors from dropping out partway through your policy term.
• If a procedure is covered under the plan, then all tests and services associated with that procedure should also be covered. You shouldn’t have an unbundled component that causes a surprise charge.
• Keep provider directories up to date with no nonsensical information (like the confusing “in-network but not available”).
• Require insurers to justify premium increases over 10% (the ACA did pass this).
• Require reference pricing.
  • Set a total price for common procedures, then make this known to the patient. If the patient chooses care that...

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Systemic Changes to Demand

• Allow drug importation from vetted international pharmacies.
  • Maine tried to allow mail-order drugs from pharmacies in English-speaking countries, with the strategy of declaring such pharmacies licensed in Maine. This was later repealed.
• Give pharmacists more prescribing power. They’re capable of prescribing straightforward medication like birth control pills, asthma inhalers, and thyroid pills.
  • Doctors have resisted giving pharmacists prescribing power, since this would encroach on doctors’ turf.
  • Devise 3 classes of medicine—over-the-counter, prescription, and pharmacist dispensed.
• Reform the patent process to increase competition from generics.
  • The Orange Book includes all patents that protect approved drugs. All patents in the book must be expired or litigated before a competitor can start production of generic. Require more selectivity for which patents are included in the Orange Book.
  • The USPTO should restrict patents for drugs that do not offer true novelty or benefits, and shorten exclusivity for such drugs.
  • For drugs that are true breakthroughs, give longer...