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Health care cost drivers, or, Here’s where you’re getting screwed

Forgive the vulgarity, but it seems apt when considering two articles just published in the venerable journal Health Affairs.

First, as physician practices consolidate, markets become more concentrated.   A study indicates orthopedic fees paid by private insurers are measurably higher in those markets with higher concentration.  As “Physician groups are growing larger in size and fewer in number”, expect this trend will affect other, currently-less-concentrated markets, thereby driving up the price of orthopedic services.

While the research by Alex Sun and Laurence Baker focused narrowly on knee arthroplasty, it’s likely an examination of other orthopedic procedures would yield the same finding.

A couple key quotes that should resonate among workers’ comp payers:

  • Our results suggest that the potential for reduced costs [due to larger physician groups] may be outweighed by providers’ ability to negotiate higher physician fees.
  • the ACA encourages further concentration to some degree by incentivizing physician groups to form ACOs to provide care. Again, our results suggest that the potential benefits of the formation of ACOs must be balanced against the potential for these organizations to negotiate higher physician fees.

I’d suggest that if private insurers are paying higher rates, workers comp payers are likely paying way higher rates.

Which is an excellent segue to the companion article on hospital markups (hat tip to Richard Krasner for getting to this a day before I did). The authors identified the 50 hospitals with the highest charge to cost ratios; this is a simple analysis comparing their chargemaster, or published price list, to Medicare’s assessment of their allowable costs. Here are a couple enlightening excerpts:

While most public and private health insurers do not use hospital charges to set their payment rates, uninsured patients are commonly asked to pay the full charges, and out-of-network patients and casualty and workers’ compensation insurers are often expected to pay a large portion of the full charges [emphasis added]

forty-nine (98 percent) are for profit, compared to 30 percent in the overall sample; one for-profit hospital system (Community Health Systems) operates half of the fifty hospitals with the highest markups (Exhibit 3). Hospital Corporation of America operates more than one-quarter of them.

Florida has 20 of the fifty hospitals with the highest markups; this is also a state with a fee schedule based on a percentage of “usual and customary” charges.

A notable finding; “markup varies substantially across medical services in the same hospital, and an overall hospital-level charge-to-cost ratio might not reflect the extent of markup for a specific patient. For example, among the fifty hospitals analyzed in this study, the average charge-to-cost ratio for anesthesiology is 112, for diagnostic radiology it is 15, and for nursery it is 3.”

What does this mean for you?

External forces are dramatically reshaping the health care delivery landscape; winners will be those payers who successfully adapt to those changes, not those who ignore them.

8 thoughts on “Health care cost drivers, or, Here’s where you’re getting screwed”

    1. Actually, it was the second one about physician fees that I stayed up late for.

  1. Since part of this article touched base on orthopedic fees, I would like to make a mention about POD’s (Physician owned distributors of implants).

    I would like to know if any reporters are looking into POD”s (physician owned distributors) of orthopedic implants not only in workers compensation, but also private insurance. California passed a bill in 2012 that no longer allows POD’s in the workers compensation system. This was a result of the pass through bill that previously allowed no limit to the cost of spinal implants.

    Physician owned distributors of implants (POD’s) is growing and I have read up to 50% of ortho surgeons in the US are now involved with distributing the implants (spine, knee, hip etc) they are implanting in patients. I have no idea if this statistical data is accurate but would like a reporter to look into this practice. Many surgeons are not disclosing this to their patients and I believe it is a conflict of interest.

    Scott Leiderhous MD who is President of The Medical Association for Medical Ethics was interviewed in a news story about POD’s.

    This is the news story.

  2. Joe,
    No question that this is a good insight into what may be the single largest driver of increased health care costs. Of the for-profit groups, is there any indication of ownership? Any corolation between type of ownership and price increases? As you’ve reported over the past months/years, private equity ownership of health care plans, ancillary providers and managed care companies has become the norm and M&A activity seems to be a staple news item. It seems reasonable to think that these private equity owners, who by and large own their holdings – be they hamburger chains or health care facilities – only for the purpose of selling them later, are working overtime to figure ways to build top and bottom lines in order to attract the next buyer. That’s capitalism at its best. However, there is little evidence that their maneuverings deliver any better results or any greater value to the patient (or in our corner of the world, for injured worker or their employers who pay the bills). What is the capacity for the system to continue to absorb cost increases when there is very little, if any, better results and better value attached? Is there an economic model that can help answer that question? Are payors and patients becoming sufficiently fed up with a lack of quality in the face of increasing prices to “vote with their pocket books” and simply say “no mas?”

    1. Steve – thanks for the comment.
      re the for-profit hospitals, the research and articles about same indicate the two systems are publicly traded stock companies. These are not controlled by private equity firms.

      I would note that the companion piece re physician costs describes those group practices that are primarily owned by docs. These too are “for-profit”.

  3. Florida recently implemented a WC fee schedule for outpatient hospital procedures (1/2015) but still pays a % of billed charges on procedures that aren’t specifically listed.

    There is no doubt that hospitals and large physician group practices may seek to leverage their consolidated positions to negotiate higher reimbursements from insurance payers. After all, insurance payers had done the same for years in their negotiations with providers. Unintended consequences of vertical integration…

    Variations in charge-to-cost ratios have been a problem for a long time. Over-inflated billed charges leave consumers with the ‘perception’ that health care costs are much higher than they really are.

    The lack of fundamental transparency on the actual cost of health care as well as knowing what constitutes reasonable charges for those services is the fuel that drives much of the dysfunction that we all love to complain about.

  4. Interesting that the lowest area of mark up was nursery at 3 percent. I wonder if that is because people shop around for which hospital in which to deliver their baby? Whereas anesthesiology–where the patient gets no choice in who is providing the care–is marked up the most.

  5. The American health care landscape veritably cries out for an alliance between all insurers and government over a national fee schedule.
    This has not occurred due I suppose to insularity (not reading about what other nations do), and distrust between insurers and government, and both parties being afraid to confront large hospitals.

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Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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