Healthcare Costs Part 1: Why Is Healthcare Including Joint Replacement Surgery, So Expensive?

Part 1 of a Series on Healthcare Costs and Future Disruptive Options to Lower Costs, Lower Prices, Provide Transparency and Improve Quality

Healthcare is expensive. This is no secret, and it continues to get more expensive with the traditional fee for service model that has been the standard model of care in the United States for several decades. Over the past decade the cost of healthcare has been significantly impacted by several factors. These include the following:

1. A lack of price transparency by hospitals means that consumers can only know the price of care after it has been delivered when the bill arrives and the money is due. Trying to determine the true cost of care, particularly for more complicated procedures such as joint replacement, can be nearly impossible since hospitals typically charge far more than the cost of care and then accept a discounted rate from insurance companies. This discounted rate is still far higher than the true cost of the care delivered but because it is lower than the billed amount, the hospital can claim a capital loss which allows them to claim a non-profit status and reduce their tax burden.
2. Hospital mergers have created large and complex consolidated health systems. This increases their network of “covered lives.” This refers to the number of persons who are enrolled within a particular health plan, or for coverage by a provider network. With more covered lives, the hospital then has more leverage to negotiate higher reimbursements from insurance companies since patients have fewer choices on where to pursue their care. This effectively creates a monopoly.
3. Health systems have also begun purchasing physician practices across an array of specialties to create their own internal provider networks. This ensures that patients will remain in the care of physicians within the hospital network so that all lab work, imaging studies, procedures, surgeries, office visits and other ancillary services are captured by the hospital system. Hospitals can also charge a facility fee on top of the regular cost of care so that an office visit to an employed physician whose office is part of the hospital campus costs more than a visit with a private practitioner outside the system. Hospitals argue that these costs go to finance the significant administrative burden of managing such complex health systems despite the fact that these increased costs have never been associated with an increase in quality.
4. The Medical Loss Ratio is a rule that states that insurance companies have to pay out 80% of the money they take in premiums or else they have to either refund money the consumers or lower premiums. Because insurance companies have made vast fortunes by keeping premiums high, they can continue to annually raise the premium price by paying to the expensive care charged by hospitals. In effect, these carriers do not mind paying the hyperinflated cost because it gets them to their 80% and allows them to charge more the following year. 
5. Brokers that sell plans to consumers and employees get commissions on the sale of health insurance plans and these commissions are directly related to the size of the sale. Thus, such brokers are perversely incented to continue selling high priced plans and keeping the purchaser locked in with the same carrier who can charge more than in year’s past. 
6. Insurance companies, while increasing the cost of health coverage are shifting an increasing proportion of the cost to the patient in the form of higher deductibles and out of pocket costs. For some plans, this can be several thousands of dollars that have to be shouldered by the patient before their plan even kicks in. And while the patient has to pay directly for this care, the system is shielded in opaque pricing practices that makes it nearly impossible for the patient/consumer to shop for value by knowing price in advance of the purchase. 

While this cartel-like collusion between hospital, insurance companies and benefits brokers sounds somewhat outlandish and perhaps borderline fraudulent, it is both real and pervasive. Those benefiting the most from this scheme have little incentive to change the status quo because of the financial windfall it provides. Lawmakers are also dissuaded from legislation to correct the flaws in this system because the hospital association and insurance industry have so much money that their lobby in Washington is far more powerful than that of the consumer or the employers who have little political leverage and clout to change the system. And so it goes on year after year.

There are, however, some bright spots on the horizon that have to do with the growing transition of procedures to the outpatient setting. This can allow for more transparent pricing in the form of bundled payments and direct employer contracting. Stay tuned for more information on these topics in future blog posts.