How Much for That Shoulder Replacement?

Forgive the blog silence, I’ve been online trying to sign up for health insurance on (just a little healthcare reform humor there).

So today we’re going to do a bit of math. Don’t worry — I’m not a math person so this will be simple and painless.

We’re going back to my aunt, who was prominently featured in my last post.

She’s doing quite well ( thanks to all who sent good wishes). And she just received the first of what will be many bills.

This one was for the surgery and hospitalization. The hospital billed Medicare $11,851. Keep in mind that’s for the hospital only. Not the radiologist who read her xrays, or the anesthesiologist who made sure she felt no pain, or the surgeon who replaced her shoulder, or the visiting nurse, or the physical therapist, or the outpatient prescription medications. Just the facility charges for the surgery and three days in the hospital.

Medicare and her supplemental insurance paid the hospital $2,016 — about 17 percent of the total charges (don’t worry, I used an online calculator to figure this out). She had no copay thanks to that supplemental insurance.

If she didn’t have insurance, however, she would have been on the hook for the entire amount–plus whatever bills are to come.

Now, I don’t have the itemized bill (yet), but if I did, I can assure you that some of the charges would be ludicrous. The New York Times ran a fabulous story about what hospitals charge for saline — the stuff they use in most IVs. It’s saltwater, and I can get an IV bag of hospital-grade saline online for about $5 a liter. For the record, it costs between 44 cents and $1 to manufacturer. Medicare pays a little over $1. According to the Times story and another by Steven Brill in Time magazine, hospitals charge up to 13,300% more (again, I used a calculator) for that liter of saltwater. In Brill’s story, the hospital charged one patient between $84 and $134 a bag; in the Times story it was about $90.

There are a lot of reasons for these mark ups (which remind me of the markups restaurants put on wine-by-the-glass — a topic for another story). But one reason is our dysfunctional payment system. While it’s true that Medicare and many other insurers have fee schedules for reimbursement, those fees are  based on charges, not on the actual cost of producing the item or providing the service. All those charges go into a huge database which then spits out the recommended payment amount, usually based on a certain percentage discount. So the higher the charge, the higher the payment will eventually be.

After all, 10 percent of $1,000 is a heck of a lot more than 10 percent of $500, right? And since the end user of the service — you and me — rarely know what something costs or is purchasing the procedure/service based on price, normal market forces don’t work.

So what’s the answer? New reimbursement structures underway thanks to healthcare reform and the Affordable Care Act could help. Things like bundled payments, in which all providers share a set fee for a procedure. If my aunt’s healthcare providers participated in such a program (which Medicare is piloting across the country), she would have received a single bill — which would have covered everything from the pre-surgery visits with the orthopedic surgeon to the post-surgery physical therapist and visiting nurse as well as the operating room and hospital bed.

Another option is reference purchasing, in which a large insurerer or employer says, “Hey, whoever can give me the best price for a knee replacement — and demonstrate the best outcomes — gets all my business.” That’s exactly what CalPERS, which covers millions of retired state employees in California, does. More than a dozen high-quality hospitals agreed to perform knee replacements for $30,000 each. CalPERS told its members they could go to one of those hospitals, or pay the additional cost themselves at any other hospital. The program saved the health plan 19 percent on each admission, improved outcomes (fewer readmissions, for instance), and, in an unexpected bonus, 40 other hospitals in the state cut their surgery prices to avoid losing patients.

Stories like these give me hope that someday, somehow, we might actually bring medical costs in line with reality. Unfortunately, I fear it’s waaaayyyyy off in the future.


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