The Healthcare Breakdown No. 062 - Breaking down the rough economics of healthcare and how the whacky payment system made it that way
Brought to you by Forward Slash / Health
What we’re breaking down: The payment mechanisms and relative economic considerations in healthcare
Why it matters: Because they are whack, and shocker, lead to higher costs and less doctors
Read time: The time it takes to actually cook dinner. No it’s not a 15 minute recipe Ina. (9 minutes for real though)
Here’s the crux:
Doctors are underpaid for the value they deliver in healthcare. The rising costs are made worse by the payment mechanisms. Those mechanisms drive the economic outcomes of the system. The economic outcomes of the system are too expensive for the value that patients and doctors receive.
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Here’s the fun part:
All right you boat shoe wearin, gold chain danglin, fist wagging, Wall Street Journal reading fiscal conservative but social liberal. Let’s talk economics.
The economy is largely based on simple principles. One being supply and demand. Another being price elasticity. And another being value exchange. I suppose we could bring in market structure too.
You may be asking, how did all this come about? Well, while I should have been working, it was scrolling on professional Facebook and came across an INCREDIBLE interview with the one and only King Maverick Emeritus (Mark Cuban) and Dr. Graham Walker.
What got me is when Marky Mark said while it costs $25,000 for a heart transplant (heh, he’s been slingin low cost drugs for too long and forgot how much this stuff actually costs), the doctor only makes $2,500.
He goes on to say that the doctor should be paid $10,000 for the procedure!
And I agree. Totes. I want my doctor to be paid a bucket load and not have to do tons of cases a day to keep the lights on. I don’t want them charting on the weekends, pulling 24 hour shifts, and making pennies while taking call.
But, there is more to the story. Let’s look at the detailed breakdown of what Maestro Cuban is talking about.
First, a heart transplant doesn’t cost $25,000. Maybe in Turkey. I don’t know.
According to this Journal of the American Cardiology College (JACC) article, here are some costs of a heart transplant:
Median Medicare: $216,927
Median Commercial: $418,997
Median Chargemaster: $935,473
If you want more info on the whackado chargemaster, we wrote about it here.
Ok, so CONSIDERABLY more expensive than $25K.
But here’s the real kicker.
Surgeon reimbursement is based on CPT codes. The Heart Transplant CPT is 33945.
33945 in Atlanta reimbursement: $4,717.34.
Oh, thank my lucky stars for that 34 cents!
To be fair, that million dollar heart transplant you just got isn’t like a quick stay. You are in the hospital for the better part of a month. ICU. Tons of nurses. Constant monitoring. All the drugs. A new heart for crying out loud. Not cheap.
The purpose of this illustration is less about the total cost, but an indication that payments seem to be unbalanced. Though I may argue that a heart transplant isn’t the best example.
Let’s look at one more. One that comes up always and is important for all kinds of reasons.
The knee replacement.
We’ve been looking at this thing economically for decades. And don’t worry, I haven’t forgotten about the economics piece. Just laying the foundation.
So, for a knee replacement, here are some thing to Big League Chew on.
According to this article in the Journal of the American Academy (way fancier than College) of Orthopedics, here are some costs:
Mean Medicare: $11,828
Mean Chargemaster: $85,115
Full transparency. I don’t love this article. There are some typos (I expect way more from the academics than from my own grammatical and spelling capabilities). It doesn’t look at commercial rates. And the info is from 2018. But I am about those back links and this still gives you an idea of what’s what.
These days, Medicare is paying around $13K to the hospital. Surgeon reimbursement?
$1,272.63.
All right, but we still have two things to talk about.
One, what are these numbers based off of?
Two, is you said we were going to talk about economics!
I am trying to sprinkle a little fairy dust here! I am setting a scene. Don’t yell at me!
First, all of these payments are based on several payment mechanisms.
The Physician Fee Schedule (PFS).
The Inpatient Prospective Payment System (IPPS).
The Outpatient Prospective Payment System (OPPS).
And to get these payments wrong, we use something called CPT codes, which are part of HCPCs codes, MS-DRGs, and APCs.
I am sorry. I hate me too.
But, it’s important to understand since everyone is always prattling on about facility fees. Well, here we are.
Let’s do a quick overview, since either we have been talking for like an hour, or this is just taking forever to write.
Physician Fee Schedule
I hate the name because it makes people think this is what doctors are paid. It isn’t. This is what is reimbursed based on the particular procedures or services provided by a physician.
Remember that forty seven hundo the surgeon gets paid for the heart transplant? If they weren’t paid a salary by the hospital, they would only have that much money to pay all practice expenses.
It’s revenue, not salary.
We’ll come back to this.
The PFS uses CPT (Current Procedural Terminology) codes. Each CPT code has a reimbursement amount assigned to it. If you want the breakdown on where those rates and what even the heck an RVU is, check it out here.
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Inpatient Prospective Payment System
The IPPS is based on MS-DRGs (Medicare Severity Diagnosis-Related Groups). There are rates associated with each DRG. Then, there are calculations made that depend on various factors within each hospital using the DRG rate.
Those calculations will account for room and board, overhead, disproportionate share, cost ratios, all the good stuff.
As you can imagine, hospitals spend a considerable amount of time figuring out how to justify these numbers to get their rates as high as possible.
Outpatient Prospective Payment System
The OPPS is similar to the IPPS. You can think of them as effectively the same. The difference is instead of being based on DRGs, it is based on Ambulatory Payment Classifications (APCs).
Again, similar to the DRG, but takes different factors into consideration. These factors have to do with the clinical setting and all the costs and overhead the facility incurs.
Hospitals are more expensive than outpatient facilities because there is a 24/7 ER among other things.
And one more little bonus feature, the Ambulatory Surgery Center (ASC). Obvs. P.S. you should totally open one. Forward Slash / Health can help.
ASCs are typically paid at lower rates if they are independent from a hospital. When a hospital owns one, it can apply full OPPS rates versus the discounted ASC rates.
Ok, that was a lot. And this is a lot of words with less numbers. But we still have a little ways to go, so stick with me.
Refill your Big League Chew.
The golden nugget in what I just did a poor job explaining, is the professional fees versus facility fees.
Promise we are super close to tying this to economics.
The IPPS and OPPS are designed and necessary to cover a facility’s cost. It’s expensive to run a hospital. Hospitals need that paper. And they certainly aren’t covering the cost of a heart transplant on $4.7k.
These are the facility fees you hear so much about. Naturally, they are way higher in a more expensive facility, i.e. hospitals.
The rub is that so many of these procedures can be done in different, lower cost settings. The other rub is a big part of the reason they aren’t is because the lopsided nature of the payment systems.
Listen, a hospital needs a booty load of money to give you a successful heart transplant. But there is also zero ways a surgeon can run a successful practice getting $4,700 per transplant. You can’t do 12 in a day.
So what happens? The hospital employs the surgeon, pays them $800,000 a year and then its overhead goes way up.
And I think it’s important to say this here: IT IS NOT PHYSICIANS’ FAULTS THAT COSTS ARE GOING UP!
Sorry for type yelling.
That’s a big salary. But remember how much the hospital makes off of the surgeries that physician brings in. All wrapped up in those facility fees. And not nearly enough in the professional fees to run diddly squat.
See the dynamics?
The total knee example also give some additional perspective here. Because while you need a heart transplant in a hospital, you don’t need a knee replacement in a hospital.
But, hospitals keep buying ASCs or building them and then charging higher facility fees. And the independent physicians are having to up their productivity because CMS keeps lowering the PFS.
Mark is definitely right. I also want the doctors making WAY more money per procedure. But it isn’t the whole story. The whole story is worse and leads to ever rising healthcare costs.
Ok, now that I have been typing all day, here’s the economics part. Real quick.
Health systems benefit from Oligopoly market structures. Meaning few firms in a market. That drives consolidation and raises costs as competition is reduced. Health insurance companies do the same, though their goal is to lower THEIR costs, by paying less to the folks actually delivering healthcare and shouldering real costs.
So, then it seems that competition, naturally, is the answer. Yes and no. Knees? Yes.
Heart transplants, cancer, heart attacks, trauma? No. You can’t shop healthcare when you’re dying.
MRIs? Yes.
It’s a mix then. And market structures play a big role in the healthcare economic landscape. But we have to consider price elasticity. You will pay ANYTHING you can to live. So price becomes irrelevant. Hospitals know that.
In terms of supply and demand we are effed. Demand is increasing. Supply is decreasing. Doctors are in short supply. Nurses and all other clinicians too. Why?
All that junk I just talked about up top. Also the unrelenting moral injury.
Also this: value exchange.
Sure, give the hospital $200K for my new heart. But $4,700 to the surgeon?
The surgeon who took my beating heart in her hands, cut it out of my body, then put a new beating heart into my body in one of the most complicated biological systems on the planet, all while keeping me alive.
That’s $4,700?
The value equation is broken. All of these elements are coming together to break the system. And not in a good way like a Kit-Kat bar. In a really dangerous way. A way where we aren’t able to carry on this way much longer.
Good talk.
Here’s what I just said in one sentence:
Physicians are the value driver in healthcare delivery but do not earn the commiserate value exchange, therefore exacerbating the economic breakdown of the healthcare system.
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Great play on words - was that the intent? Whack for wack and commiserate for commensurate! Brilliant actually!