The $60 Aspirin Syndrome - Part 1

by Hamilton E. Davis

   The Green Mountain Care Board had an illuminating epiphany last Thursday when they got their first look at the Vermont hospital budgets for Fiscal Year 2018, which begins Oct.1. Most of the figures were routine: net patient revenue for the hospitals, operating margins, inpatient and outpatient trends…the financial bones of a very complex system that costs the people of Vermont between $2.5 and 2.6 billion a year.
   For the first time, however, the Board’s financial team decided to look at the difference in pricing for various services among the 14 hospitals. The financial regulators haven’t tended to do that very much over the years. The Hospital Data Council didn’t do it at all in the late 1980s and early 1990s; its successor, BISHCA, didn’t do it much if at all in the late 1990s, and the oughts; and I don’t recall the Green Mountain Care Board doing it either, when it took control of the system in 2013. The primary focus over the three decades or so was net patient revenue, which was defined as the total amount of money Vermonters had to pay for medical care in hospitals. In 1987, when I was chair of the Hospital Data Council, we called net patient revenue the “Green Dollar Number”, the actual amount of money Vermonters had to come up with for health care each year.
   Now, the whole regulatory landscape has changed. The Board has a new chair, Kevin Mullin, and a new member, Maureen Usifer, neither of whom has seen Vermont’s hospital budgets before. Even more importantly, the financial team, which was run by Mike Davis from 1987 until his retirement just a few weeks ago, has new leadership also. Mike’s replacement is Andy Pallito, who came over from the Scott administration. Pallito has very impressive credentials—he has been running the finances of the whole state since 2015. But he has had only a few weeks to get his arms around the hospital numbers.
   So, it made sense for the first pass of a new team to look into what it costs to buy various services from each hospital. Their report laid out the prices for cataract operations, and colonoscopies, and broken legs, and heart failure, and knee replacement, and kidney infections, and office visits, and lab services, and MRIs—the whole miserable, amazingly costly symphony of modern health care treatment. The Board members looked at these numbers for a while, and then you could almost see their minds start to boggle. For at first glance, the numbers made no sense at all.
   Start with cataracts (known in the trade as lens replacement). The cost at Northeastern in St. Johnsbury: $9,572; at Springfield, $4,066, less than half, with the rest all over the place in between.
   Colonoscopy: at Northwestern in St. Albans, $2,064; at Gifford in Randolph, $5,426; at North Country in Newport, $4,583; At UVM in Burlington, $3,770.
   Best place to break your leg: Rutland, $6,379; at Gifford, a cool $31,941, five times as much; at Northwestern in St. Albans, $9,709; at Copley in Morrisville, $25,731.
   An MRI: at Northwest, $1,764; at UVM, $5,311.
   There’s more, but you get the idea. It was obvious within a few moments to the Board members that something unusual was going on, and that it would be necessary to dig deeper. What they will find out when they look deeper, is that the numbers make even less sense they did at first glance. Because the numbers lead right into the funhouse reality of health care financing.

1.     The first thing to note is that the “costs” cited in the tables mean nothing at all. They come from the listed prices at the hospitals. Each hospital has one of these "charge masters." They don't mean much because  nobody pays the charges, and on the few occasions we have seen inside of that, the actual prices differ in ways that make no sense at all. Medicare and Medicaid pay what they feel like paying. In the private sector, half of the costs is paid by Vermont Blue Cross, MVP, and a few other carriers like Signa. All of the prices on the charge master fare are discounted. Beyond that, they are negotiated between the insurance carrier and the hospital in a dance between the hospital’s need to get as much as possible and the carrier’s need to spend as little as possible. It is a little bit like the sticker price on new cars, but only a little bit because you are never going find the same Chevrolet selling at five times at one dealer as it does at another. Everyone will tell you that the patient’s needs are paramount in the dance, which is the sheerest eyewash. The whole thing is about money and market share, and if you don’t believe that consider that the hospitals and the carriers actually sign contracts pledging never, ever to let anyone know what the actual cost is.

2.     The second critical point is that even if the prices in the charge masters were the actual prices, you would still have no idea which hospital was the most cost efficient. The reason is that the cost to the Vermont “tax” payer isn’t the unit cost, it’s the unit cost times the wildly variable volume of the service delivered. I laid out how that works in my last post.

   You can see an example taken from the current tables combined with work that I did several years ago.
   The sticker price of an MRI in the table was $5,311 at UVM and $3,960 at Rutland. That’s a difference of $1,151, pretty significant given that so many of these scans are being ordered that the MRI machines at both hospital are working overtime. Looks like the thing to do is force the UVM price down to Rutland’s. That might be a good idea, but there is no way to test it because you can’t find out the per capita rates of MRI use going on in either the UVM or the Rutland service area. That data used to be reported regularly, and I looked at it all the time, first as a journalist and then as a regulator, in the 1980s and early 1990s. By happenstance, one of the metrics I used then was the per capita rate of MRI imaging in Rutland and Chittenden County. I want to emphasize that I have no idea what the actual comparative rates are today, but when I checked it in the early 1990s, the ratio was two Rutland MRIs for every one performed in the UVM service area. And those figures were age adjusted; age being the most important demographic difference between service areas in Vermont. In other words, the raw data would have showed a larger difference in use rates.
   As an illustration, it is interesting to test which hospital in the MRI case was financially more efficient. Let’s take two hunks of population from each service area, each comprising 10,000 people and apply at a use rate of 100 per 10,000 in Chittenden and the corresponding rate of 200 in Rutland. Result:

                                       Chittenden-UVM                 Rutland

                                              $531,100                       $792,00

                                      Total Difference: $260,900

   Pretty interesting, eh? If you are responsible for the cost of health care in Vermont, which of these per capita use rates needs work? These kinds of differences are now reported routinely in something called the Dartmouth Health Atlas, which uses the techniques designed in Vermont. A particularly good look can be found here, a 2009 look by Atul Gawande, a Harvard  professor, at the  differing practice patterns at medical systems in Texas and Minnesota. 

3.     The above doesn’t begin to exhaust the funhouse dimensions of the health care financing craziness. Back in the early Pleistocene when I began working on this issue (1980) the iconic example was the $60 aspirin. Woman goes to the emergency room of the hospital because she is sick or hurt. They fix her up, and then she gets the bill. It’s fully itemized, prima facie evidence of integrity. So much for this, so much for that. And what jumps out at her first is the $60 for an aspirin (not a bottle of aspirin, one aspirin). Outrage all around. Can you believe it? The nerve.

   No problem fixing this—just look at the individual elements, substitute a number that makes at least some rough sense, and you’ve cut the cost by a third, maybe more.
   Sorry, won’t work. Because the $60 for the aspirin has no meaning at all. It certainly didn’t actually cost that much. The reality is that the bill is what the hospital has to get to keep the emergency room going at all. And at a larger remove, it isn’t just the money you need for the emergency room, it’s the money the hospital itself needs just to stay in business. That’s the number that really counts. Once you go inside that top number, it doesn’t really matter how you spread it around. If the cost of the scalpel looks a little high, cut it and increase the price of the peanut butter sandwich or the towels, or bandages or whatever. Just make sure that you get the total needed to keep the doors open.
   That doesn’t mean that the total cost in our ER example or anywhere in the system isn’t too high. It is and after 40 years of exploding costs in the American health care system it is clear even to the family dog that something has be done. The question is what, or how. The first step is to get a grip on how the whole mess works. And it is absolutely shocking how badly we’ve done on that in Vermont.
   I’ll defend that proposition in Part Two of this little series.

N.B. I said in my last post that the current one would be about the primary care physician problem in reform. Sorry about that: I couldn't pass up the epiphany for the Board on the unit cost issue. Primary care docs coming soon.