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What is Price Shifting(Cost Shifting)?

Stanley Feld M.D.,FACP,MACE

In the early 1980’s, the government made an effort to control its costs by regulating prices for encounters, procedures and diagnoses. We had terms such as Evaluation and Management codes (EM codes), ICD-9 coding, CPT codes and DRGs. The goal was to quantitate services and unify prices for each diagnosis. This was very confusing and complicated for the practicing physician. We went to hours of dull, descriptive lectures to learn what these terms meant. We tried to figure out how to participate legitimately. Quite simply, a system of price controls was imposed upon us. Price controls, in my opinion, never work no matter what the industry. These price controls set into play many of the serious economic misalignments all the stakeholders suffer in our healthcare system. Price shifting occurred. Hospitals had more money and more administrators than physician practices. The hospitals figured out what was going on and how to get around it before the physicians did.

Price shifting was simply the phenomenon of increasing the price of a service to another payer (Private Insurer) to compensate for the reduction in fees imposed by the initial payer (Medicare). If the institutions’ or physicians’ cost to provide the service was $75, they would charge the patient, Medicare, and the private insurer $100 and have a $25 profit. Medicare now said it would only pay $50. In order to compensate for the Medicare reduction in payment below the cost of the service, the fee for the service was increased to $150 to the private sector. The price charged did not take into account the institution’s or physician’s patient mix. Some hospitals and physician practices lost money because they had a high percentage of Medicare patients. Some experienced a windfall profit because of a high private pay population. The insurance industry did not protest because its revenue increased with the increase in revenue volume.

The plot thickens. I believe the solutions to the riddle are in the developing defects in the system.


What Is Real Price Transparency?

Stanley Feld M.D.,FACP,MACE

President Bush has stated that price transparency is essential for healthcare reform. Price opacity has been frustrating to the individual patient. Patients have not been able to find out the price of services they are buying from hospitals before they have the service completed.

This is especially significant for 46.7 million uninsured Americans. Recently, there has been a series of articles exposing the fact that the uninsured are required to pay at least two and one half times the fees that the insured pay.

We have seen Denise’s frustration. She is an uninsured patient. She wrote an appeal for price transparency to Kinky Friedman the Jewish Cowboy Humorist who was running for Governor of Texas.

We have also seen that hospital systems have proudly declared that they have published their prices on the web in the name of Price Transparency. I have been able to find information for hospitals in Wisconsin and Texas. You can find the retail price for an illness’ DRG and the DRG range of prices for hospitals in the area. You can also study the discounts the hospital system gives to Medicare and a basket of insurance companies. Additionally, the hospital systems’ patient mix is published. This is the hospital industry’s definition of price transparency. The uninsured cannot negotiate the price from this published data.

A few weeks ago I was at a lecture given by the CEO of a large hospital system. He was very proud of the fact that his system published this price transparency information. I asked “If I was one of the 46.7 million uninsured, could I successfully negotiate the price his system accepts from Medicare?” The first answer was an answer to a different question. The second answer to the same question was,“No.” I could not negotiate for Medicare’s discount. I could get a certain discount depending on my financial status. I asked, “If I was a self employed consultant earning a good living could I get a discount?” He said, “The maximum discount I could negotiate would be 20% off the retail price.” I then said, “If I am not able to negotiate a price, what good is publishing your prices?”

The California Hospital Association’s defense of their fees charged by hospital systems is lame at best. “They claim the studies quoted are old from 2004.” My guess is from my small sample the results would be even worse in 2007.

If you have health insurance you would not care about this price transparency discussion. You would think your health insurance company is going to take care of your prices and provide adequate coverage. Today I got a note from a nurse practitioner stating that medical insurance coverage is a racket. The California Hospital Association’s reply was;

“There is no relationship between what is charged, the actual cost of care and what hospitals get reimbursed,” a hospital association spokesperson said. “But we are doing our share. It is unfair to expect hospitals to provide care and also fix the system.”

“Why hospitals have full price rates to begin with is the result of a Byzantine pricing system that is as much a result of the country’s broken healthcare system as the hospitals’ billing practices, said Emerson of the California Hospital Assn. Hospitals in large part have borne the brunt of caring for the country’s uninsured population with uncompensated care in their emergency rooms and by writing off what uninsured patients are unable to pay.”.

“If you’re one of the growing numbers of Americans without health insurance, you are billed top dollar for hospital care.”

“Now, for the first time, a study purports to show just how costly that is — although hospital groups immediately took issue with the findings.”

“Uninsured patients on average are billed 2 1/2 times more than what the insured are billed through their health plans, and more than three times what is billed to patients through Medicare, according to the study appearing today in the journal Health Affairs.”

“In effect, the uninsured are billed at full price, while health plans and Medicare receive deep discounts.”

“Hospitals might charge $12,500 for an appendectomy, for example, but collect only $5,000 from a health insurance plan. Members of the plan actually pay a lot less, through nominal co-pays or deductibles.”

I bet Medicare reimbursement for an appendectomy is less than $5,000. The hospital has to accept the payment. Hospitals determine their retail prices by price shifting as a result of the Medicare discount. The brunt of the price shifting is borne by the uninsured.

Health plans can negotiate such discounts because they can direct a large number of patients to certain hospitals by making them part of their provider network.”

“Uninsured patients do not have such leverage and may face full hospital prices.”

Why can’t we set up a system where the uninsured can buy insurance with pretax dollars and receive the same negotiated discounts health insurance plans receive? Why couldn’t we subsidize the uninsured who truly can not afford to buy health insurance? Doing this would level playing field for all.

“As a consequence, uninsured patients who are billed full prices are left with exorbitant hospital bills that are impossible to pay, said Gerard F. Anderson, author of the study and a healthcare researcher at Johns Hopkins University”.

“Hospitals shouldn’t be charging three times” Medicare rates, Anderson said, “especially from poor people who are uninsured.”

This is the crux of the problem. Hospitals have multiple prices. The price varies depending on their need to compete for patients or the patients’ insurance plan. They have to accept Medicare by law. The government sets the price. The 46.7 million uninsured do not have this negotiating power.

Think about it. Why should the hospital want to negotiate price? All over the country aren’t hospitals overbuilding with their new found profits. They are going to need patients to fill their buildings. They will have to become more efficient and provide better prices at better quality, if they want to pay their overhead. This will happen only if the patients control their health care dollars. Remember hospitals are tax exempt. They could lose this status if the government had the guts to pass the appropriate law and enforced hospital non compliance.

“According to the Kaiser Family Foundation, a research institute, about 15% of the nation’s 45 million uninsured earn above 350% of the federal poverty income level, meaning they make too much to qualify for hospital discounts in many cases. But they are also too poor to afford health insurance.”

“The solution is for people to be covered under health insurance,” said Anthony Wright, executive director of Health Access California, a consumer advocacy group.

Anthony Wright’s concept is a simplistic view leading to the simplistic concept of universal healthcare. His views, as well as some of our politicians’ views, is that universal healthcare will fix everything. The universal healthcare concept has been disputed. In my opinion universal healthcare can not work. The patients have to have incentive to be responsible for their healthcare and healthcare costs in order for a system to work. We must empower the people to make the stakeholders compete for their business on price and quality.

A few weeks ago John Goodman proposed a brilliant idea in answer to a question about his Wall Street Journal article. He said “Suppose we passed a law tomorrow prohibiting all insurance companies (including Medicare and Medicaid) from paying any medical bills less than $5,000. What would happen? The medical marketplace would transform almost overnight.”

It would be transformed from a demand side healthcare economy system to a supply side healthcare economy system. Patients would shop for the best quality and the best price just like they shop for cars, TV’s and clothing. Hospitals and Physicians would be force to be more efficient, increase quality and be more price efficient.

“(Just thinking about it makes you wonder why we haven’t done this already?)”

My answer to the question is that the facilitator stakeholders are afraid that they will lose control our healthcare dollar. We, the people, would be in charge of our healthcare dollar. We would force all the waste out of the system, waste that the facilitator stakeholders profit from. The waste that lets the CEO’s of hospital systems justify their million dollar plus salaries and the healthcare plans CEO is their billion dollar compensation package. At the same time the healthcare system is at the verge of bankruptcy.

If the waste was eliminated and a competitive system was instituted, innovative systems would be developed to reduce the price and increase the quality of medical care. The people would be responsible for quality medical care at competitive prices because they would own their healthcare dollar.

Hasn’t Wal-Mart’s innovative $4 a month generic drug price begun to establish such a system? The answer is “Yes.”


The Demise of the Patient-Physician Relationship: Price controls do not work!



A few days ago I received an email comment about my successful 43 years of marriage.  I answered the email in the comment section. However, I feel the answer deserves publishing in the main body of the blog. The answer can serve to illustrate the development of problems in the healthcare system and the Demise of the Patient-Patient Relationship.



Wanted to let you know that I have been reading your blog from the start, keep up the good work! On a personal note, happy 43rd to you and Mrs. Feld. Whatever your secrets to a long and happy marriage, we should try and bottle that, we could all use some. Also, Happy Father’s Day!



Thanks for the comment.

The key to our successful marriage is mutual respect, mutual trust, and love.


One can also look to this answer as a definition of the therapeutic effect of the Physician-Patient relationship. The therapeutic effect is a positive physician-patient relationship. In my opinion, the patient-physician relationship has been destroyed by the attempts of policy makers to fix the healthcare system. The actions catering to the facilitator stakeholders have only made the this relationship vanish.

Price controls do not work in any industry in my view. Intelligent people always seem to figure out how to get around price controls.

In medicine, the price controls imposed by Medicare in the early 1980’s, led to physicians seeing more patients in a less of time. Physician offices started to rely on physician extenders to relate to the patients as well leverage the physicians intellectual property. Physicians were forced to distant themselves from this important therapeutic effect. One of the most important healing factors in medicine, in my opinion, is a positive relationship with the patient. If physicians have no time to relate to the patient this all important effect erodes.

As a result of Medicare price controls, price shifting was occurring. The private insurance industry was happy because more money flowed through the system resulting in more profit. However, the insurance carrier started to delay payment and in many cases reduce payment to the physicians. Physicians did not notice the reduction in payment. Their financial information systems were not very efficient or effective.

Physicians noticed they were working harder, seeing more patients and taking home less money.

When they realized their fees were cut by the insurance companies, they were very angry at the insurance industry. The physicians’, then, billed the patient many months after the service was performed. Patients’ became angry at physicians and at the insurance companies. Physicians were angrier at insurance companies because patients became angry at the physicians. Employers were angry at the insurance companies and the physicians. Everyone is mistrusted, and everyone disrespects each other. The demise of the physician-patient relationship. In fact the demise of any relationship.

Hospital stayed very quiet as they steadily raised their rates. Hospital pricing is a topic of a future blog. The hospitals did not experience the firestorm the physician community experienced. The rate of increase of hospital rates were higher than physicians’ or insurance companies’. However, the hospitals had an advantage. Only 5% of patients are hospitalized. Ninety five percent(95%) of potential hospitalized patients have no idea of the fees charged in the hospital. In fact, at least 60% of physicians do not know what the hospitals charge. One has to be pretty sick to be put into the hospital in these days. If you leave the hospital with all the scary media news about hospital acquired infections, medication errors as well as such things as amputating the incorrect arm, the former hospitalized patient is grateful to be alive. They do not have the energy to complain. They simply pay the bill, if they can. If they can not they are usually more stressed by the hospital system pursuing the payment. This collection drill also stress the hospital system and is costly. The remaining 90% of us, thank god, so not experience hospitalization. We are able remain detached from the fees the hospital is charging and choose to ignore the problem.

The therapeutic effectiveness of the physician patient relationship deteriorated rapidly during this period of anger toward physicians. Patients expressed some of this anger by suing the physician.

Malpractice suits increased markedly. Media coverage of medical errors did not help. The fact that some of the media coverage was disinformation was immaterial. The excessive law suits served to increase the price of care. Premium cost had to be passed on somehow. The government should have taken action at that time, but did not do anything. The government should have set or define liability limits as well as rules to discourage frivolous law suits. Limits on liability would have acted as a deterrent to plaintiff attorneys who saw easy money.

The physician extender market was escalating. The insurance industry saw an opportunity to devalue physicians. They categorized physicians, nurse practitioners, and physician assistants as Healthcare Providers thus implying an equality of value and therefore an equality of fees.

The mounting distortions resulted in physicians adjusting to the distortions. They ordered more physician visits and more procedures. The increase in malpractice suits lead to more defensive medicine. The result was more testing and more expensive treatment to avoid a malpractice suits.  The increase in the delivery of medical care led to higher Medicare payments and private sector payments as well. As a result the total gross Medicare and private sector payment obligations increased markedly over the next few years.

The major take home point of these examples is that price controls do not work. Price controls simply distort a free market system even further.

Everyone was in pain. The patients, physicians, government, and employers are all suffering. The insurance industry was prospering, but they feared they were losing their customer, the employer and can not keep up with their crazy insurance billing and payment practices. The lawyers were prospering at the expense of cost effective medical care (defensive medicine). The major stakeholders, the patients and the physicians were suffering because of the quality of care, the cost of care and the access to care. Interesting enough the facilitator stakeholders were starting to suffer as well.

What came next was even a sharper blow than previous blows to the effectiveness of our healthcare system.


Did Obamacare Cause The Increase In Private Healthcare Insurance Premiums?

Stanley Feld M.D.,FACP, MACE

A reader of my blog received this question from one of his friends.

The reader asked me his friend’s question  “I have a question and I don’t want it to be political (as I stay away from that for many reasons).                                                                                                                                 
Health insurance is so expensive and it does not cover hardly anything. We had to get the worst plan with the worst coverage. But it was not this way 6 years ago. We could afford good coverage.   

 The question is: Did Obamacare cause this change in healthcare insurance and these problems in access to care?

A reader asked:

Which of your blogs would be the best one to show him to answer his question?

The answer to the question is YES!! I will try to explain.

If I sent all the links to your friend would be overwhelmed. There are too many to count.  I will summarize some of the major reasons Obamacare is to blame for some of the increases in private healthcare insurance premiums and the decrease in the access to care. Obamacare has led us into a financial disaster. “Medicare for All” is not the answer.

I believe the goal of Obamacare was to create greater dysfunction in the healthcare system which would lead to huge premium increases for private healthcare coverage. The public would then beg the government to adopt a single party payer system with “Medicare for all.” This has been the progressives”  goal since 1935. Do you remember Barney Frank and John Kerry saying we cannot have a single party payer system yet because we do not have the votes?

The government has not had a very successful single party payer systems record.  The VA Health Administration, the Indian Health Service, Medicare and Medicaid are all inefficient and financially unsustainable.

“Our federal government already runs three single-payer systems—Medicare, the Veterans Health Administration, and the Indian Health Service—each of which is in a shambles, noted for fraud, waste, and corruption.”

“Why would we want to turn over all of the American medicine to those who have proved themselves incompetent to run large parts of it?”

The federal government depends on healthcare insurance companies to do the administrative services for Medicare, Medicaid and Obamacare. Administrative services include negotiating payments to hospitals, nursing homes, physicians and providers on all levels.

The various healthcare insurance companies are supposed to bid for these service contracts. The insurance companies receive one global fee.  The healthcare insurance company with the contract must pay providers on a fee for service basis. The healthcare insurance companies do not have good enough data to make an accurate bid estimate.  Actuary science is not rocket science. The healthcare insurance company builds in a twenty percent cushion to the bid. If the bid was low and the healthcare insurance company that lost money Obamacare guaranteed through a complicated reinsurance formula reimbursement to the company for its loss.

Recently the government audit discovered an overpayment of $10 billion dollars to the healthcare insurance industry for Medicare Part D.

I believe there is much more overpayment in Medicare Part A, B and D because of the government bureaucracy. The government only had the money to pay 12% of the reinsurance claims of the healthcare insurance company one year. The insurance industry simply raised the premium in the private sector.

Nationwide, the Obama administration made $7.3 billion in reinsurance payments to health insurers. The reinsurance program, funded by taxes on health insurers and self-funded employer health plans, has been criticized by Republicans as a “bailout” for insurers.

The healthcare insurance industry then once again raised premiums on the private healthcare sector to make up for its losses. to

The government reinsurance payments weren’t enough in all cases. New York-based Assurant Inc. asked for a 26 percent hike in private premiums for 2016, due to high claims in Indiana, before that company decided to exit the Obamacare markets in all states.

This was typical price shifting.

Healthcare insurance companies projected that Obamacare would result in them losing money because of adverse selection. Obamacare’s increase required benefits for both public and private insurance. Obamacare’s rules included coverage for oral contraceptives for all and coverage of pre-existing illnesses among others. A sixty-year-old male does not need an insurance policy the receives oral contraceptives.

The healthcare insurance industry asked for double-digit increases in private healthcare insurance in every state. The logic was that these enrollees would pay for the loses that would occur from the Obamacare enrollees.

The government’s argument is all should pay for everyone ’s healthcare needs. These healthcare needs have increased as the population has gotten more obese and has had a rise in drug addiction. These increased healthcare risks resulted in increased actuary estimates of healthcare cost. It does not put a burden on consumers who do not act responsibly.

The increased healthcare premiums caused many employers to drop healthcare coverage for their employees. The decrease in healthcare insurance coverage added to the pressure of healthcare premium increases.

The healthcare insurance industry also plays games with the Medical Loss ratio. The result is an increase in healthcare premiums and deductibles while decreasing services. The Obamacare issued regulations that the insurance industry must dedicate 80% of the healthcare premium to direct medical care and 20 % can be used for administrative expenses for both the public government insurance and private insurance. It is the state insurance regulators responsibility to enforce the regulation.

The expenses the industry wanted to be included are;

Expenses to be included in direct medical care are:

  1. The cost of verifying the credentials of doctors in its networks.
  2. The cost of ferreting out fraud such as catching physicians over testing patients or doing unnecessary operations.
  3. The cost of programs that keep people who have diabetes out of emergency rooms.
  4. The sales commissions paid to insurance agents.
  5. Taxes paid on investments.
  6. Taxes paid on premium income.

All these expenses are administrative expenses in my view and not medical expenses. If these expenses are permitted as benefit expenses, premium money available for direct medical care would decrease. The eighty percent required for direct medical care would be markedly reduced. The result would be an increase in healthcare insurance premiums.

The calculation for direct medical care helps the healthcare insurance company prove it lost money. The insurance company then applies to state regulators for a premium increase. The state regulators permit the premium increases.  If the premium increase is refused by the regulators the insurance company threatens to leave the state. The other option the healthcare insurance company uses is to decrease the insurance services and/or increase the insurance deductibles.

Another problem has developed in the healthcare insurance industry that is causing it to raise premiums and reduce services and access to care as a result of Obamacare.

Hospital systems are buying out physicians’ practices. Obamacare has put many restrictions on physician practices. It has increased practices overhead. Obamacare has decreased the ability for physicians to use their medical or surgical judgment that they have become happy to sell their practices to hospital systems. The hospital systems now have to deal with the problems of medical practice. The cost of electronic medical records, which have not added to the quality of medical care, increased many physicians’ willingness to sell their practices to hospital systems. At the moment the percentages of hospital-owned practices are up to 65% from only 17% ten years ago.

As premiums have gone up physicians have not experienced an increase in reimbursement. They have been forced to see more patients quickly to earn almost as much as before Obamacare. Obamacare has destroyed the patient-physician relationship which in my view is essential in medical care. Physicians simply do not have time to talk to patients.

Hospital systems have taken over physician populations in many communities. This gives the hospital leverage over the healthcare insurance industry. The hospital system can demand higher reimbursement because it provides all the physicians.

The large hospital systems can demand that the insurance company only use the physicians in its hospital system even if there are lower cost of care options in a community.

The result is an increase in healthcare premiums and decreased the quality of care.

All of this is the result of Obamacare. There are about ten more reasons why Obamacare has increased premiums and decreased access to care. I have left link exposed. You are encouraged to look at them to see the full explanation for some of the point I have made.

I hope this blog answers your friend’s question. :  Did Obamacare cause this change in healthcare insurance and these problems in access to care? 

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.

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Government Is The Problem Not The Solution

Stanley Feld M.D.,FACP,MACE


The government has been attempting to take over the healthcare system since 1935 at the time of the Roosevelt administration.

The government took over the healthcare system 30 years later during the Lyndon Johnson administration. LBJ passed Medicare and Medicaid. It turned out that financial projections were faulty and the business model was defective.

Medicare and Medicaid provided medical care for the elderly and the poor at an affordable price at that time. Everyone loved it. At the time it was also affordable for the government.

I do not think anyone contemplated the healthcare inflation that occurred as a result of the government’s business model.

Inflationary pressure increased rapidly.

Finally, President Reagan said the government could not afford the increasing prices any more. He said enough is enough. He decreased provider (hospital, doctors, pharmaceutical company, and insurance company) reimbursement for Medicare and Medicaid services.

The reduction in reimbursement for services resulted in price shifting increases in reimbursement in the private sector.

Both the private sector and the public sector experienced increased inflationary pressure as a result of this maneuver.

It was clear by 1984 that Medicare and Medicaid were unsustainable long term.  

America did not have a free market healthcare system before Obamacare. It was a hybrid system.

The country already had 90 million Americans in a single-payer system. Ninety million Americans get coverage from Medicare, Medicaid, and the Veterans Health Administration systems.

The problem is these government controlled single-payer systems did not work efficiently. They were financially unsustainable.

Obamacare expands the single party payer system to eventually cover all Americans. Obamacare simply adds on to an existing unsustainable healthcare.   Raising taxes is not going to make it more sustainable.

The expanded bureaucracy will only make the system more inefficient and more prone to fraud and abuse.

President Obama is already modifying the law without congressional approval. He is trying to hide elements of this unsustainability from the American public.

The federal government’s Obamacare enrollment system alone has already cost taxpayers about $2.1 billion dollars according to a Bloomberg government analysis of contracts related to the project.”

The website is still not working perfectly at the backend after spending $2.1 billion dollars.

Americans will experience more of the dysfunction after the mid term elections.  

Navigator companies hired to help people enroll cost $48 a session. These companies are increasing their prices for the 2015 enrollees.


These same companies have had their fraud and abuse exposed. Nevertheless they have been rehired at the increased price by the Obama administration.

President Obama announced to Democrats last spring that Obamacare would not be an issue at the time of the midterms.

This week the administration also announced that the cost of healthcare insurance through the health insurance exchanges is decreasing next year.

It was also announced that there is an increase in the choice of insurance carriers in most states resulting in competitive premium pricing and lower premiums.

President Obama announced that Obamacare is working. He said Obamacare is a non issue in the 2014 mid term elections.

Nothing could be further from the truth.

If our elected officials cannot see President Obama’s trick play how can the public expect to understand the deception?

This is another of the manipulations of Obamacare designed to hide its impending failure from the public.  

The Obama administration set up a reinsurance company funded by taxpayers that eliminates any insurance risk the healthcare insurance companies might incur in insuring enrollees.

Healthcare insurance companies are signing up and competing for market share to gain profit from this no risk insurance. They can easily afford to lower the premiums because the government will cover their supposed loses.

None of this has anything to do with patient care or the quality of patient care.

It has little to do with providing low cost insurance. The cost of insurance keeps increasing. The government pays the difference between the cost of insurance and what patients who receive subsidies pay for their premiums.

Obamacare misses the main problems in the healthcare system. Obamacare creates more dysfunction in the healthcare system.

 Obamacare will result in greater unfunded future liabilities.

White House spin pretends otherwise, but the unfunded liabilities may exceed $100 trillion.”

 The Congressional Budget Office said,

 “Looking indefinitely into the future, the unfunded liability, with optimistic assumptions, is $43 trillion—almost three times the size of today's economy.”

Based on more plausible assumptions, such as those reflected in the "alternative" scenario for Medicare produced by the Congressional Budget Office in June 2012, the long-term shortfall is more than $100 trillion.

It is the responsibility of our elected officials control America’s expenditures.

Unfortunately, for American’s, this is not how a government controlled system works.

Voters must decide how long they are going to tolerate this abuse of power.

   The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.  

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Dr. Feld, Why Only Pick On The Healthcare Insurance Industry?: Part 1

Stanley Feld M.D.,FACP,MACE

Matt Modleski of Stovall Grainger Inc a company that “ maximizes people's potential through the application of strategy in sales, leadership and life" wrote the following comment.

"Dear Dr. Feld,

I believe many of your points are right on the mark, but your credibility is undermined when you speak so infrequently about the “supply side” of healthcare delivery as if the insurance companies were always wrong."

I will divide my comments into two articles. I assume Matt means the patients, physicians and hospitals on the supply side. You may recall that I have blamed all of the stakeholders for the dysfunction of the healthcare system. The physicians, hospitals, the government, the healthcare insurance industry, pharmaceutical companies, malpractice attorneys and patients are all at fault. The questions are who started this dysfunction?, who made it worse?, and who can fix it?

The answers to the questions are the government started it; the healthcare insurance industry made it worse. and continues to make it worse. The only stakeholder that can fix it are consumers.

The government initiated the dysfunction of the healthcare system in the early 1980’s. It imposed price controls to combat rising costs. The rising costs were the result of increased technological advances leading to procedure based diagnoses. Some hospitals, physicians and patients took advantage of this diagnostic procedure based shift in medical care.

Historically, price controls never work. They usually create stakeholder incentives to develop innovative methods to get around the price controls. This leads to increased dysfunction and greater costs to the system.

The dynamics between hospitals and the healthcare insurance industry became perverse. The more spent for medical care the more the healthcare insurance industry could charge employers. The result was increased hospital and healthcare insurance industry profit at the expense of the employers and patients.

Employers started providing healthcare insurance to their employees after WWII as an employment benefit. This led to post war healthcare price inflation. In 1965, Medicare healthcare coverage for all seniors over 65 increased healthcare price inflation.

When the government decreased Medicare reimbursement in the early 1980’s increased prices (price shifting) for employer provided healthcare was rampant. Price shifting led to the healthcare insurance industry increasing healthcare premiums to employers.

In the late 1980’s employers said they could not afford to pay healthcare premiums costing 18% of their gross revenue. The insurance industry asked what they could afford. The answer was 12%. The insurance industry said no problem. Managed care and all of the managed care problems were born.

Managed care is managing costs. It is a form of price controls. Managed care introduced another form of stress into the healthcare system. Patients experienced limitations on access to care. Physicians experienced increased paper work, bureaucratic interaction with a defective care approval system, and decreasing reimbursement. Physicians’ frustration increased as non medical related time and overhead increased and reimbursement decreased. The managed care system interfered with effective care. It also led to increase mistrust for the administrators of the healthcare system.

Hospitals experienced the same pressures. Hospital administrator figured out how to creatively adjust to the new system.

The healthcare insurance industry changed some rules in order to manage costs. It started paying for out-patient procedures rather than paying exclusively for in-patient procedures and hospital bed days. The bed day cost at that time was $100-$200 a day (as opposed to $1,000 to $10,000 today). In-patient procedures were two to three times the cost of outpatient procedures done in a physician’s office. Managed care companies wanted to take advantage of this savings in order to manage costs.

In the early 1980’s with surgical and technological advances, the legal profession saw an economic opportunity to make quick money. There were no limits on liability. Malpractice suits and malpractice insurance premiums escalated for both hospitals and physicians. These costs were passed on to the consumer. Malpractice suits also led to an increase the practice of defensive medicine. CAT scans, MRI’s and other expensive tests were ordered by physicians to protect themselves from malpractice suits. The cost of medical care further increased.

Hospitals captured most of this increase in revenue production at an inflated price. Some physicians were unhappy they were giving away their intellectual property and not sharing in the revenue production. Additionally, they could do most procedures at half the hospital charges thereby saving money for their patients and the healthcare system. They started opening their own clinics, and testing facilities in order to capture the revenue from the new technology. The hospitals and the giant national laboratories were upset because their revenue production was threatened. They accused physicians of over testing in a well executed public relation campaign. Some physicians did abuse the system. However, the percentage of physicians’ abuse was small. I believe the reality of the situation is physicians did the procedures and testing more carefully and more conveniently for patients than hospitals or the national testing laboratories.

Physicians’ use of increased testing became necessary in order to protect themselves from malpractice suits. Physicians’ testing facilities charged substantially less than the hospital facilities. The healthcare insurance industry encouraged physician owned clinics because it was able to save money. The healthcare insurance industry then abruptly cut them off.

The Stark Laws slowed the proliferation of these facilities but only as applied to Medicare. Pete Stark created a restriction that most figured out how to get around. The price of procedures increased. The dysfunction in the healthcare system increase by Pete Starks own admission of the failure of his legislation

Matt, you might have thought the answer to your comment was simple and physicians are at fault. Unfortunately, the sound bite is usually not the answer. The stakeholder that has intensified the dysfunction is the healthcare insurance industry.

I will continue to answer your comment in Dr. Feld. Why Only Pick On The Healthcare Insurance Industry?: Part 2.

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.


Why The Resistance To A Logical Solution To Repairing The Healthcare System?

Stanley Feld M.D.,FACP,MACE

A key question to ask is how the insurance industry determines the price of the insurance coverage. I will discuss this question in detail in the future. A hint is, price is determined by an archaic, non scientific, administrative cost overloaded system. In my opinion many of the disease cost modeling is bogus. Disease burden could be very straightforward, scientific and logical.

All the discussions by health policy experts are not challenging the escalating health insurance cost directly to solve the key question. In my view the only expert who is challenging the present system in a logical and civil way is John Goodman. Until we face the issue we will make little progress in Repairing the Healthcare System. The insurance industry is going to have to face the facts unless it wants a single party payer system with the government being the payer. If they continue to overload premiums and segregate risk, the insurance industry will be reduced to a 3-6% broker at best. Many healthcare insurance companies will go out of business.

The second important issue deals with the escalating hospital costs. No one is demanding that we understand how a hospital services fees relates to the hospital cost of providing those services. The fact is that many of the prices for hospital services are arbitrary and have built in excesses that cannot be proven to be warranted. One cannot get a direct answer from a hospital administrator. In fact the hospital administrator does not know how they arrived at the price. Why? The pricing is buried is so much opacity and hearsay that most times it is impossible to discover the prices’ origin. Looking at the pricing of neighboring hospitals does not help because one hospital copies the other hospital’s prices. What you can find out is if the hospital is making a profit. If the hospital is making a profit the hospital administrator assumes they are charging the right prices. If the profit is minimal or less then last years’ profit then the hospital administrator has to raise the price. This is not a very effective way to manage a business.

If the hospital buys a new piece of equipment or information system it adds it to the price of hospital services even if the equipment or information technology saves it money and reduces its cost.
In order for the healthcare system to work, price shifting has to stop, inflating costs has to stop, and arriving at true cost per service has to be determined. If we are on a single payer system it will not matter what the hospital costs are. It will received a fixed, deeply discounted payment from the government no matter what the costs are. Finally, the hospital systems will be forced to increase its efficiency or perish.

It seems to me, that rather than reducing costs through efficiency and fees, both the insurance companies and the hospital systems are shooting at the goose that has laid their golden eggs. They had better wake up soon.

No one wants a single party payer run by the government with all the bureaucracy and inefficiency that will follow. We see what has happened in countries that have a single party payer. They are all moving back to an insurance model because a single party payer system does not work for their citizens.
The definition of a universal health care system is not necessarily synonymous with a single party payer system. Universal healthcare could mean a guarantee of health insurance coverage at a fair price for all. I think that is what Governor Schwartzenegger and Governor Romney were trying to construct. However, the manipulation of the political process by secondary facilitator stakeholders has contaminated the policy. The secondary facilitator stakeholders, insurance industry and hospital systems do not want to relinquish any control even though their control is not working. These facilitator stakeholders had better get smart soon or they will have nothing to control.

The role of government should be to enact rules and regulations for the benefit of the people it governs. Then, let private enterprise and private innovation be creative and compete for the business of the people. This is the market driven economy that has made the United States great. Sam Walton did it with Wal-Mart and Sam’s. Sears and J.C. Penny have never recovered. Target and Costco came along and are now giving Wal-Mart a run for their money to the advantage of the consumer.

This can happen in healthcare. We can promote the innovative and competitive spirit of America. We better do it before we get into a bigger mess with a single party payer system that will result in less quality care, less access to care, and escalating cost to all of us.


The Main Reason Behind Rising Medical Costs

Stanley Feld M.D.,FACP,MACE


President Obama and progressive Democrats such as John Kerry and Barney Frank wanted the healthcare system to become a single party payer system. Their problem was that they could not get enough votes in the house or senate.



This goal for a single party payer by the progressives and Democrats must not be forgotten as the Trump administration tries to make a serious attempt to repair the healthcare system.

The Democrats and progressive will try to block this attempt at every turn.

All the stakeholders have played an important role in distorting the healthcare system  including the government, the healthcare insurance industry, the pharmaceutical industry, the hospital systems, the physicians and patients.

A starting salary for a starting hospital administrator is $250,000 a year. A starting salary for a pediatrician is $90,000 a year. Top hospital administrators are paid between five (5) million and fifteen (15) million dollars a year. Mature pediatricians make $150,000 to $200,000 a year.

Which professional adds more value to medical care? Physicians add more value to the medical care system. Hospital administrators do not understand why physicians resent them.

Physicians also resent hospital systems ripping off consumers with $50 aspirins and $100 sleeping pillows. Consumers who care about the cost of healthcare do not understand why the government and insurance companies let hospital systems charge these obscene prices.

Most physicians do not pay attention to these costs until they are patients.

All of the stakeholders except the government and patients try to optimize the amount of money they take out of the system. Surgeons are much further ahead of primary care physicians in figuring out their value to the healthcare system.

As a result of advances in technology, physicians figured out that 70-80% of the work-ups done requiring hospitalization 30 years ago could be done as outpatient care.

The brick and mortar value of hospital facilities has decreased.

As soon as hospitals realized this they started to build ambulatory surgical care facilities and outpatient clinics.  Hospital system procedures are more expensive than free standing outpatient ambulatory surgical care facilities.

Hospital administrators somehow convinced the government that if they formed hospital systems and merged hospitals in an area they would increase their efficiency and they could decrease costs.

At the same time the management of private practices became complicated as a result of government regulations. Expensive electronic medical records were required but did   not work as advertised. Overhead increased while reimbursement decreased.

Many physicians became disgusted managing their complicated private practices. Some physicians quit practicing early.

The hospital systems offered to buy private practices for a “reasonable cash price”, provide an electronic medical record, do the billing and management of the practice and hire and pay full time employees.

Hospital systems usually paid physicians under contract the same take home pay they had for two years. After the two-year contract expired the hospital systems offered new contracts depending on a physician’s productivity or fired the physician. Physicians had no say in the matter.

Physicians and surgeons signing with the hospital system did not consider the criteria to be used for determining salary after their contract expired .

This hospital arrangement seemed attractive to many primary care physicians and some surgeons. The growth of hospital owned physicians increased from 20% to 70% of physicians in a region.

Organized medicine, the AMA and physician specialty groups, did little to warn or educate physicians of these unforeseen consequences.

Hospital systems did their best to isolate private practicing physicians from using their hospital facilities.

The only private practice physicians who were not marginalized by the hospital systems were physicians who were needed by the hospital system for the services they performed. As soon as the hospital systems were able to hire physicians to cover those services the private practice physicians were marginalized.

Large hospitals systems are making deals with insurers that squelch competitive hospitals.

President Obama’s plan was to allow hospital systems to hide prices from consumers and corporations. The goal was to discourage use of less-expensive rivals. This tactic would force the less-expensive competition to join the regional hospital systems as affiliates.

 At first hospital systems did not grasp the ultimate significance of enlarging hospital systems. They figured merging hospitals would increase efficiency and decrease the cost of medical care.

They also thought owning physician practices would decrease their reliance on in-patient hospital billings and their brick and mortar structures.

During the Obama years there was a tremendous increase in building growth on the campus of most hospital systems.

I never understood the hospital building growth. More building meant more hospital administrators and more overhead. I thought the government must have created some economic incentive for hospital systems to build more buildings on campus.  I could not find the  incentives given to hospital systems.

As hospital systems merged all the hospitals in a region the hospital systems realized they had a monopoly on not only hospital services but also physician services.

They could negotiate with healthcare insurance companies from strength.

Initially the healthcare insurance companies were in control of the costs and services that were available. The healthcare insurance companies lost their control over cost to the regional hospital systems.

Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs. As part of these deals, hospitals can demand insurers include them in every plan and discourage use of less-expensive rivals. Other terms allow hospitals to mask prices from consumers, limit audits of claims, add extra fees and block efforts to exclude health-care providers based on quality or cost.”

There are hundreds of regional hospital system giants throughout the United States. In many cities there are two or three giant hospital systems. It is difficult for independents to negotiate contracts in these cities.

The Wall Street Journal has identified dozens of contracts with terms that limit how insurers design plans, involving operators such as NewYork-Presbyterian, Johns Hopkins Medicine in Maryland, the 10-hospital OhioHealth system and Aurora Health Care, a major system in the Milwaukee market. National hospital operator HCA Healthcare Inc. also has restrictions in insurer contracts in certain markets.”

This is a very big deal.

The goal of the government should be to lower the price of healthcare to all of its citizens including seniors, workers who get insurance from their employers and people who do not have employer sponsored healthcare.

The Obama administration did nothing about stopping hospital system monopolies. In fact, it encouraged them.

“Certain hospital systems are able to command advantageous terms because they have grown through years of deal-making, shifting the balance of power between hospitals and insurers. In 2010, the year the Affordable Care Act passed, the annual number of hospital mergers shot up 40% to 59, and the number of deals has remained above 60 every year since, according to IrvingLevin Associates, a research firm that tracks health-care transactions.”

The Obama administration did nothing about it because the distortion in pricing is going to lead to collapse of the private segment of our healthcare system. Once the private segment of the healthcare system collapses a progressive government hungry to have power and control over the populous will install a single party payer system.

As proven over and over again, a single party payer system does not work. The government has to outsource all of the infrastructure to administrative services. The government does not control the administrative services overhead. Also, the government does not want to develop another uncontrolled and inefficient bureaucracy like the VA Healthcare System.

A single party payer system will lead to increases in unsustainable deficits and decreasing healthcare services.

It will take many years for the public to recognize that a universal single party payer system is inefficient. The government will hide the system’s inefficiency from the public.

The government should make common sense rules, enforce those rules and get out of  the healthcare administration business.

Medicare and Medicaid costs have not been recognized by the general public yet.

The VA inefficiency and lack of service by the VA Healthcare System has been recognized in the last two years by the general public. The government has assured the public that the VA Healthcare System is improving.

The insurance industry is trying to fight back.

“No hospital system should be able to exercise market power to demand contract agreements that prevent more competitively priced networks,” said Cigna’s chief medical officer, Alan Muney, in a written statement provided by the company.

The Trump administration is aware of all of these problems. President Trump is trying to figure out a way of negotiating a deal with all the providers who are taking advantage of consumers and the government. His administration’s actions have been delayed by the slow death of Obamacare.

If Obamacare was repealed last year I am sure the topic of hospital monopolies would be a hot topic of debate today.

President Trump is presently attacking the middlemen who have made drug prices so obscene. This is a big problem and an easier target.

“The effect of contracts between hospital systems and insurers can be difficult to see directly because negotiations are secret. The contract details, including pricing, typically aren’t disclosed even to insurers’ clients—the employers and consumers who ultimately bear the cost.”

Hospital contracts forbids healthcare insurance companies to cover many procedures that can be performed as outpatient services outside the hospital environment. I have listed some of the price differences between the more expensive outpatient hospital care facilities and the independent ambulatory care facilities.

There are many examples of how hospital systems rip off consumers and increase the cost of healthcare insurance for all including employers, individuals and the government. It is also decreasing the access to care for all.

If the government is really looking for a system that would work it should look at my Ideal Medical Saving Accounts are Democratic.

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.

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