Mysteries revealed: why do medical supplies cost so much and how do the poor and uninsured pay for their hospital care?

A couple of weeks ago I wrote a post about the cost of various medical supplies at our hospital and about the cost of similar supplies from a veterinary source. Central venous catheters of various types (also called "central lines" or "PICC lines") when billed out by our hospital cost about 30 times what similar products cost vets. I ordered a central venous catheter from a veterinary supply company to see what 29 bucks could buy. I got it in the mail a few days ago.

The veterinary central line looked fine. It was almost exactly what we used maybe 25 years ago, which is only slightly different from what we use now. There have been some design changes that involve making sure that unintentional needle sticks to the provider placing the line are avoided, due to the risk of blood borne diseases like AIDS and Hepatitis C. There was no drape or sterile gown, but those are pretty inexpensive, especially from the vet source. I also bought a regular peripheral IV, the kind that we bill out for $60 or so, because it was only $1, and I was curious. The nurse in the ICU said that it looked like the kind we used a couple of years ago, which worked fine, but we use a different kind now, also designed differently because of the risk of blood borne diseases. I'm not quite sure why I bought the surgeon's sterile gown, but it was cheap too, and is exactly what we use for humans. It was about $3 and will work well as a kitchen apron if I do any deep fat frying.

I realized, though, that what the items cost at the supply company would not be the same as what a hospital bills for the item, since clearly there would tend to be a markup from a wholesale purchase by the hospital to a retail sale to the patient or insurance company. What, I wondered, did the hospital pay for these central venous catheters, and what did the consumer actually end up paying for them?

Today I went in to the hospital and talked to the various billing people and to the guy in central supply who know the answers to these questions. I learned a ton of stuff that clears up questions I didn't even know I had.

First, the numbers. When a hospital buys things like central lines and PICC lines, they get a really good deal because they buy in bulk. We pay about $110 for a triple lumen central line kit, including the drapes and gowns and hat and gloves (which nobody uses because they are one size fits nobody) and suture and tiny bottle of numbing solution. We bill out almost $900.  For the single lumen PICC line we pay about $170 and bill out around $1300. We pay $10 for a peripheral IV.

I asked the billing people how much Medicare pays for these things. Do they actually pay us 800 and something dollars for the central line kit? Well, actually, no. They don't pay us for any of our supplies. They pay a daily fee to the hospital for all supplies and room and board and social workers and cardiac monitoring and medicines and nursing. They also pay a percentage of professional fees, which include all physician services, on top of the daily fee. Hospitals get different daily rates from Medicare based on all kinds of things, and ours, a critical access hospital in a rural area gets about $2300 a day for patients insured by Medicare.

What about other insurance companies? It turns out that they usually pay a flat fee based on a diagnosis, so hospitalization of a very sick person with pneumonia and delirium and dehydration would result in a certain level of reimbursement for the hospital no matter how many days they were in the hospital or how many central lines or IV's they had placed. There are, however, some insurance companies that still pay a percentage of what is billed, and it is probably for those payers that prices like the $1300 for a PICC line are created. In my experience the price that is charged is usually just a little more than the allowable payment by the highest paying insurance company. In this way, a provider, hospital or primary care or specialist, is able to make the most amount of money from those who pay the most generously.

So what about the patient who is uninsured? That person will be looking at a bill that is larger than any insurance company will ever pay. This is not because the hospital wants to penalize the uninsured. The prices the hospital charges have to be the same for everyone, but different groups can negotiate for lower reimbursement. This doesn't entirely make sense to me. I'm not sure why it is a different thing to charge a different amount versus to accept a different amount in payment. I will eventually find the right person to ask about this.

But what, again, about this hypothetically uninsured patient? Is she really expected to pay this premium bill? And does she? In not-for-profit charity hospitals (only about 18% of hospitals are for-profit) patients are charged a percentage of their bill based on their income. Some patients are eligible to have their bills completely written off. Others are billed a percentage and the hospital works on payment plans with them so they can pay off a bill over months or years. Most patients  apparently try really hard to pay their bills. One of my sources estimated that about 50% of uninsured and underinsured patients paid their bills, based on the sliding scale. (This is, of course, a gross estimate based on one very small geographical area.)

Hospitals try to achieve charitable, not-for-profit status because they are then tax exempt, which is a major financial benefit. To do this they must provide services to everyone, regardless of their ability to pay and must have emergency services available. They must also feed profits either back into the community or into the hospital in such a way that patient care is improved. New legislation is adding some other requirements (http://healthlawmonitor.jacksonkelly.com/2010/05/jk-health-care-reform-whitepaper-new-irs-mandates-for-charitable-hospitals.html) The cost of care for those who can't afford to pay will inevitable be shifted to those who can, be it individuals or insurance companies.

Wow. That was a large amount of dense and maybe confusing information. My interpretation of the take-home points would be:

1. Basic medical supplies aren't all that expensive to hospitals. What suppliers charge for these things is probably not a big part of the problem of excessively high healthcare costs.
2. Veterinary supplies are quite a lot cheaper and pretty similar.
3. The amount that a hospital bills for a supply is hugely inflated but mostly irrelevant to the majority of patients and insurers since they pay a flat fee for to the hospital for everything, but very relevant to the uninsured patient.
4. Insurance companies (third party payers) determine the prices the hospital bills by the amount that they agree to pay. Without a third party payer system that pays fee-for-service or fee-for-item, costs would be lower.
5. Most hospitals are not-for-profit and so charge uninsured patients less than they bill, according to a sliding scale. Since hospitals cannot run at a loss, costs for these patients' care will be shifted to patients or insurers who pay more.