So, it’s true: Hospitals set steep surgery prices just by ‘spitballing’ costs

Hip and knee replacements  have become some of the nation’s most commonly performed surgeries with hundreds of thousands of Americans, many of them older, having their knees or hips replaced with metal, plastic or ceramic each year. Uncle Sam’s Medicare program is paying around $7 billion annually for all this work. But here’s a nasty revelation about knee replacements, in particular: Hospitals don’t know how much they cost.

In case you ever doubted the profit-seeking motive in these institutions’ practices, the Wall Street Journal reported some eyebrow-raising information on hospital pricing and costs, based on a Wisconsin facility’s rigorous efficiency study of knee replacements.

The procedure had risen in price by 3 percent a year for almost a decade, hitting a $50,000 cost per such surgery by 2016, including coverage for the expense of surgeons and anesthesiologists.

But with insurers and Medicare grumbling, Gunderson Health System decided to seek its own evidence about the appropriate price for one of its most frequently performed operations, work that occurred 400 or so times annually in its flagship community hospital.

It’s telling, first off, to know how the suits at the hospital priced knee surgeries before, according to the Wall Street Journal: Administrators “had no real idea what it cost to perform the surgery. They set a price using a combination of educated guesswork and a canny assessment of market opportunity.”

Hospitals conduct themselves sort of like that obnoxious corner mechanic, who gouges you for a price, which he says he just kind of “spitballed?” It’s true — and there’s more aggravation in the story: After conducting an 18-month, meticulous time-and-motion study and consulting with its own people, Gunderson decided that pricey knee operation really cost it $10,550, including doctors’ services.

Wait, there’s more: Based on inefficiencies found in its internal research, the hospital changed practices and policies, improving patient care and outcomes. And that knee surgery cost now went down to $8,700.

Want yet more? Under pressure from an alliance of local businesses and insurers, Gunderson has negotiated yet lower prices for some patients, though the parties involved won’t disclose the details.

How can it be that a surgery can be priced at $50,000 but cost a hospital less than $8,700? The free market-loving folks at the Wall Street Journal describe the economics of profit maximizing this way:

Competitive forces are out of whack in health care. Hospitals are often ignorant about their actual costs. Instead, they often increase prices to meet profit targets. Patients, especially those with insurance, often don’t know the price of a procedure and rarely shop around. This dynamic is a driving force in the explosion in health-care spending in the U.S., which will soon reach close to 20 percent of GDP. Americans spend more per capita on health care than any other developed nation, even though they aren’t buying more health care overall. The rise in hospital prices has outpaced economy wide inflation for decades. ‘When price isn’t tightly linked to cost, that is a sign that the market isn’t competitive,’ said Harvard economist Leemore Dafny. Hospitals can be shielded from the competition that forces other industries to wring out expenses and slash prices. Hospital list prices are a starting point for negotiations with insurance companies over what they will actually pay, and those deals are confidential. Consolidation has given hospitals greater pricing power in many markets, according to health-economics researchers.

In other words, doctors and hospitals have us over a barrel and they won’t hesitate to rip us off. In my practice, I see not only the harms that patients suffer while seeking medical services but also their struggles to access and afford safe, effective, and even excellent medical care. No one begrudges doctors and hospitals a fair, reasonable payday for their efforts, so many of which can be commendable and inspiring. But even as millions of patient-consumers have gotten so up in arms, rightly, about skyrocketing prescription drug costs, doctors and hospitals — which take up 52 percent of Americans’ health care spending (see figure above) —  take less heat for their big role in driving the costs of medical care big time.

Here’s another key takeaway from the Wall Street Journal story and one hospital’s scrutiny of its costs: Less expensive care can also be better for patients, while the inverse may be true of costlier care.

Gunderson found that highly skilled, expensive surgical personnel were distracted from more important duties and concerns and, frankly, wasted their time with tasks that others could better handle at much less cost — chores such as collecting, logging, and storing patients’ personal belongings, including their glasses and dentures, or positioning them for procedures. The hospital discovered that it lacked basic scheduling protocols for knee surgeries, meaning on many days there was a crush, while on others there were crickets. This also meant that on over-scheduled days, post-operative patients too often were stashed for recovery in some of the costliest to run care areas. They also could not be scheduled for the fast start on physical therapy, which can play an important part not just in their recovery but a boost to better outcomes overall.

And then the experts also found the “just because” cost drivers, notably that surgeons, without ever asking why, used a bone cement that was among the most expensive on the market. Yes, it was mixed with infection-fighting agents. But the glue had little or no effect on surgical outcomes or infection prevention, doctors decided — when asked and they consciously considered their product choice.

We all have choices, too. We can jaw with and at our hospitals and doctors about costs, researching and educating ourselves, especially with elective procedures, on options that produce the best and safest outcomes at the most reasonable price.

Besides keeping doctors’ and hospitals’ feet to the fire, we also need to ensure lawmakers and policy wonks exceed our expectations in slashing at unacceptable medical costs. The Wall Street Journal story notes that many hospitals these days have not-for-profit or nonprofit status, meaning they have little incentive to control prices — if they make whopping profits, unlike commercial businesses, these tax-exempt institutions are supposed to reinvest them. Too many institutions do this by making their suits even fatter cats, not even rewarding frontline medical personnel but the bean counters who run the places. But it also may not make sense for hospitals these days to put up even more and shinier wings, or to add razzle-dazzle and pricey equipment. Ask your local lawmakers just how much they know about area not-for-profit and nonprofit hospitals’ “community benefit” spending. That’s a complex and arcane issue. But putting money into “charitable” and direct patient care may be a key way that too-rich hospitals can try to defend their nosebleed costs.