Health Care Costs

How Hospital Administrators Hide the Umbrella

Hospital pricing is famously opaque. And until we understand it, we'll have a hard time controlling costs.

Steven Brill has a long, long piece for Time Magazine on hospital pricing. I'm still reading and digesting it, so expect more later. But here's an excerpt that sums up the core of the piece:

The total cost, in advance, for Sean to get his treatment plan and initial doses of chemotherapy was $83,900.


The first of the 344 lines printed out across eight pages of his hospital bill — filled with indecipherable numerical codes and acronyms — seemed innocuous. But it set the tone for all that followed. It read, “1 ACETAMINOPHE TABS 325 MG.” The charge was only $1.50, but it was for a generic version of a Tylenol pill. You can buy 100 of them on Amazon for $1.49 even without a hospital’s purchasing power.

Dozens of midpriced items were embedded with similarly aggressive markups, like $283.00 for a “CHEST, PA AND LAT 71020.” That’s a simple chest X-ray, for which MD Anderson is routinely paid $20.44 when it treats a patient on Medicare, the government health care program for the elderly.

Every time a nurse drew blood, a “ROUTINE VENIPUNCTURE” charge of $36.00 appeared, accompanied by charges of $23 to $78 for each of a dozen or more lab analyses performed on the blood sample. In all, the charges for blood and other lab tests done on Recchi amounted to more than $15,000. Had Recchi been old enough for Medicare, MD Anderson would have been paid a few hundred dollars for all those tests. By law, Medicare’s payments approximate a hospital’s cost of providing a service, including overhead, equipment and salaries.

On the second page of the bill, the markups got bolder. Recchi was charged $13,702 for “1 RITUXIMAB INJ 660 MG.” That’s an injection of 660 mg of a cancer wonder drug called Rituxan. The average price paid by all hospitals for this dose is about $4,000, but MD Anderson probably gets a volume discount that would make its cost $3,000 to $3,500. That means the nonprofit cancer center’s paid-in-advance markup on Recchi’s lifesaving shot would be about 400%.

When I asked MD Anderson to comment on the charges on Recchi’s bill, the cancer center released a written statement that said in part, “The issues related to health care finance are complex for patients, health care providers, payers and government entities alike … MD Anderson’s clinical billing and collection practices are similar to those of other major hospitals and academic medical centers.”

My first thought is that it reminds me of an old joke about a guy who buys an umbrella.

The guy is a working man, a manager of some sort with client-facing responsibilities. He goes on a work trip to Chicago, where it is a rainy, nasty spring. The first evening, he escorts the client from the door of a fancy restaurant to a nearby cab stand. "Allow me," he says, and unfurls his umbrella. The client gets in the cab, and then . . . disaster! The icy March wind, which those of us who have lived in Chicago know all too well, turns his umbrella inside out, and then shreds it.

The next day, he buys another umbrella, which he uses for the remainder of his visit. He flies back home, and submits a receipt for expenses, including a new umbrella.

His expense report comes back from accounting with everything approved except the umbrella.

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He appends a note to the report explaining that the umbrella was destroyed in the line of duty and resubmits.

Back comes the expense report, with a rather severe note from accounting to the effect that umbrellas are not on the list of allowable expenses.

He responds with a more strongly worded note, explaining that if it were not for the umbrella, they might not have had such a good new order from the client. Another note comes back from accounting: "For the last time, we will not approve the umbrella. Please submit a new expense report.

I should note at this juncture that this joke dates from the days before computer expense reports; these are paper reports that have to be filled out by hand. Our frustrated manager tears up the old report, then sits down and fills out a whole new form: $3.94 for lunch, $12.75 for laundry charges, and so forth. Which he sends to accounting with a note attached.


Writ large, this is how health care billing works. Insurers won't let them charge for one thing--nursing care, say--so instead they bill you for the Tylenol at $20 per. Or they bill someone else, someone who pays more. Or they double what they charge uninsured patients in the expectation that the bill will, for most people, eventually be written down by some large percentage.

The web of cross-subsidies, underpayments, overpayments, and upcoding is opaque to everyone except the adminstrators. And they are not, as Brill observes, eager to make any of it clearer. In part because they genuinely feel, as does the middle manager in our story, that they are forced into these little subterfuges to recover legitimate costs that short-sighted bean-counters are refusing to cover.

I don't say that they are right to feel this way; only that the feeling is quite clearly sincere.

In essence, we're all engaged in a giant game of Find the Umbrella with our nation's hospital administrators. Only we don't know how many umbrellas there are, or how much umbrellas cost, or anything else that we need to establish even the rudiments of a good price system. Which you should keep in mind whenever you hear a hospital administrator talking, but also, when you hear some other well-meaning person proclaim that they know how to get a grip on health care costs. They don't even know what the umbrella looks like, much less where it is.