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Americans spend more on medical care than those in other wealthy countries, but we’re a lot sicker. "The Price We Pay" will explore the reasons for that and possible solutions to our health care crisis. Listen to "The Price We Pay" Tuesdays on WFAE's Morning Edition and All Things Considered. Also, we'll go deeper on some of the issues in this series on Charlotte Talks with Mike Collins.

Here's Why Hospital Bills Are So High In The U.S. Health Care System

hospital IV drip bag
Courtesy Joan Malloch
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Health care costs are growing faster than the economy, and a big portion of those bills is paid by employers and those with commercial insurance coverage.

This is Part 4 of an 11-part series. Read the full series here.

Americans will spend over $4 trillion on health care this year, and the federal government projects that will rise to more than $6 trillion in the next seven years. Health care costs are growing faster than the economy, and a big portion of those bills is paid by employers and those with commercial insurance coverage.

High premiums also mean that employers like Tom Savidge have to keep worrying about how they’ll pay for their company plans.

Ever since Savidge opened his first mental health clinic in Greenville, North Carolina, 17 years ago, he’s struggled to keep up with the cost of his employees’ health care. And one major hospitalization can have a big impact on the bottom line.

“At one point in time, we had an employee who had a heart attack and ended up being in the hospital,” Savidge said. “That year alone resulted in about a 30% increase in just one year.”

Savidge has had to spend a lot more time worrying about health care costs than he first anticipated. He’s offered preventative health programs, and switched insurance providers more than once. He even opened up an on-site pharmacy with lower cost medicines. But he says the bill for employee care has almost tripled since he started out, so he’s had to cut back on other things.

“It definitely impacted raises and bonuses,” Savidge said. “Especially when you had markups of 10, 15, 20, 25% on an annual basis.”

Over the last three decades, the cost of American medical care has more than doubled even after accounting for inflation, according to the Kaiser Family Foundation. And a lot of the burden has fallen on private employers, like Savidge, and those with individual insurance policies, says Gerard Anderson, a health policy professor at Johns Hopkins University.
“The private sector is paying four-and-a-half times what the rest of the industrialized countries are paying,” Anderson said, “whereas the Medicare program is paying about one-and-half times.”

The Medicare program sets the rates it will pay based on hospital costs. But private payers have to negotiate with every hospital and doctor. And Anderson says lack of competition is a big part of the problem. Much of the Charlotte region, for example, is dominated by three hospital systems: Atrium Health, Novant Health and the much smaller CaroMont Health. He says that mirrors metropolitan areas across the country.

“If you’re an insurer, you have to have that particular health care system in your network, and so they can charge whatever they want because you, as an insurer, can’t say no,” Anderson said.

Anderson says another problem is that insurance companies may not even be motivated to rein in costs for many large, self-insured company plans because they earn a percentage of the bill.

“They have no incentive — as long as they maintain the business — of getting the lowest price,” Anderson said.

Over the past three decades, hospital systems have been consolidating rapidly, merging with other hospitals and buying up physician practices.

And when hospitals consolidate, prices go up. On average, private insurance plans pay 247% of what Medicare pays, according to the RAND Corp., a nonpartisan think tank.

And that’s just the national average. North Carolina hospitals charge private payers 273% of Medicare rates, says RAND analyst Christopher Whaley.

Private payer rates
Data provided by RAND Corp.

South Carolina, where health systems are more highly consolidated, ranks second highest in the country in terms of how much its hospitals charge people with private insurance. On average, hospitals there charge people with commercial insurance 344% of Medicare rates.

“That’s almost a hundred percentage points higher than the national average,” Whaley said.

Hospitals argue consolidation isn’t the problem. Cody Hand, a senior executive with the North Carolina Hospital Association, admits prices for private payers are high, but he said hospitals have to charge them more because Medicare pays too little.

“Medicare is a very low payer across the board,” Hand said. “(For most services) it’s less than 80% of the cost they reimburse. And so because of that, we have to figure out how to collect that difference somewhere else in order to stay open.”

But If that were true, Whaley said, then hospitals with more Medicare patients would have to charge their private patients more. But the data doesn’t show that.

“There’s actually no relationship between a hospital’s share of patients that are on Medicare and Medicaid and that hospital’s prices,” Whaley said.

Another reason prices are high, Hand said, is that hospitals have to spend a lot on salaries and equipment. American doctors and nurses earn more than their counterparts in other wealthy countries. Specialists here make an average of $316,000 a year — more than twice as much as the average compensation in nine comparable countries, according to one 2018 study. And, Hand said, hospitals are willing to pay more to get the top talent.

“The private sector is paying four-and-a-half times what the rest of the industrialized countries are paying, whereas the Medicare program is paying about one-and-half times.”
Gerard Anderson, health policy professor at Johns Hopkins University

It just goes back to the competition argument,” Hand said. “You know, in order to attract the best you have to pay for the best.”

But studies show large hospital systems are also responsible for pushing up some physician charges. When they buy up doctor practices, hospitals often tack an additional fee onto the doctor’s bill. Hospitals say that additional fee helps cover the cost of operations, but consumer advocates say the charges can run into the hundreds of dollars.

Buying up doctors’ offices can also be very lucrative for large hospitals because those doctors then refer their patients back to the hospital for lab tests and procedures. And Whaley said reimbursement is greater for in-hospital tests.

“If you can move things like lab tests and MRIs from outside the hospital to inside the hospital then you can increase how much you get paid,” he said.

Duke University law professor Barak Richman said large hospitals can use their market dominance to become even more dominant. As an example, he points to a contract the former Carolinas HealthCare System required insurers to sign. Carolinas HealthCare eventually grew into the 42-hospital system Atrium Health.

“Atrium said, ‘If you’re going to contract with us at all, you have to promise us that you will not steer your patients to lower-cost hospitals,’” Richman said. “So this basically is a contractual provision in which Atrium was exercising its market power. And the Department of Justice thought it was an abuse of its market power and it was anti-competitive.”

After the Department of Justice sued in 2016, Atrium agreed to eliminate the clause. It issued a news release at the time saying it hadn’t broken the law and that the contracts in question were created “as long ago as 2001.” But Richman said that by the time the clause was finally eliminated almost 20 years later, Atrium had become a big player.

Big players can push up costs. Even if they do good things with that income, like invest in medical research, Richman said that it amounts to a tax on everyone with private health insurance.

“It falls on every premium payer like a flat fee,” Richman said. “A family that is earning $40,000 is paying the same in premiums as a family that’s earning $ 4 million.”

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