Devon Herrick | NCPA

Back in the 1950s, department stores were the big box retailers of their day. Rather than go to different specialty stores for shoes, hats, coats and bed linen, one only had to stop by Macy’s. About that same time, discount stores like Walmart began to crop up around the country. As time went on, the size of discount stores increased to the point that super centers are now common. Other companies began to copy this retail model. Home Depot and Lowes reinvented the lumber yard and combined it into a big hardware store/home center. Sam’s Club and Costco began to sell food, electronics, clothing and merchandize in bulk — all under one big roof. Big Box retailers provide the convenience of one-stop-shopping, at prices that are lower than specialty stores. By contrast, consider the Big Box retailer in health care: hospitals.

The economics of medical care is indeed strange. At first glance, hospitals should have economics of scale, sort of like the Big Box retailer of the health care world. So why does Costco, Sam’s Club, Home Depot and Lowes have the best mix of both great selection and low prices on their respective goods, conveniently located under one roof; but the Big Box hospital has the highest prices on every service it provides? (more on that thought later)

Increasingly, hospitals are buying physician practices. Nothing may appear to change about your doctor’s practice, but the services performed in your doctor’s new hospital-owned practice come with a higher price in the form of a “facilities fee”. Once you’re in the hospital, there are a variety of care settings, each with a different cost. Intensive care costs more than acute care. Acute care costs more than skilled nursing. Because all these different levels of care come with different prices, it seems smart to make sure patients spend only as much time as needed in each care setting so their costs are not higher than necessary. For example, when patients get well enough to leave the hospital but are too sick to care for themselves they may move to a nursing home for a few days. As they recover they may go home with a visiting nurse providing home care. The system of multiple care settings, each with a different degree of care intensity, is referred to as the continuum of care.

Applying a concept known as medical homes, health plans are beginning to use care coordination to steer patients to the appropriate setting within the continuum of care. For example, physician visits are far cheaper than a hospital stay. One of the things a medical home does is try to keep plan members out of the hospital by providing physician care to keep members healthy. A medical home coordinates care after a hospital stay to prevent a readmission.  A care coordinator also tries to keep their enrollees out of the hospital Emergency Room (ER) because ERs are more expensive than a physician visit. In addition, an ER visit boosts the chances an enrollees will get admitted to a hospital when they could have been cared for outside the hospital.

It is a common belief among health policy wonks that there are too many ER visits for conditions that are not true emergencies. It is often said the ER is the most expensive place to provide routine care — so care in the ER should be used for truly emergent conditions.  If an enrollee needs urgent care and is unable to get in quickly to see his or her doctor, the care coordinator accesses the need and advises whether the enrollee should wait for their doctor, whether they can go to a retail clinic, or if an urgent care center may work. If the patient’s condition is questionable, they may advise them to go to a freestanding ER, since the admission rate at freestanding ERs is 5% compared to 16% to 20% at a hospital ER.

Writers may say a picture is worth a thousand words, but insurers and Medicare are discouraging medical imaging they consider unnecessary to reduce the cost of care. The prevailing wisdom asserts that there are too many unnecessary, costly diagnostic images being performed. A care coordinator may advise enrollees on whether they need a diagnostic image. Care coordinators also advise where to get diagnostic images or lab work done cheaply. Nowadays, many medical images — such as CT scans and MRIs — are performed at freestanding radiology centers. Prices vary widely based on who’s paying the bill. Indeed, the cash price varies depending on whether you ask ahead of time and offer to pay “up front” opposed to paying after the fact. Freestanding imaging centers provide stiff competition to hospital imaging centers. A hospital CT scan or MRI can cost upwards of $3,000, although Medicare would not reimburse that much. The comparable price at a freestanding imaging center is often as low as $300 and $400. The same is generally true of laboratory medicine. Lab work performed at an independent lab usually costs far less than blood chemistry performed in a hospital lab.

I was the accountant for an ambulatory surgery center (ASC) the late 1980s. At the time, ASCs were a relatively new phenomenon. They were often looked down on by doctors and hospital executives. The medical director explained to me that many doctors would not set foot in an ASC. After all, what’s the point of walking a few blocks away from the hospital campus to perform surgery outside the hospital? The attraction of ASCs (then and now) is to perform day surgeries at prices much lower than in a hospital operating room or in a hospital outpatient surgery center. Ambulatory surgery and “day surgery” is used to describe procedures performed on patients who can walk in and later leave that same day.

I am struck by an odd thought: why is the hospital the place to stay away from if you’re a health plan looking to hold costs down? Why is a hospital-owned physician practice more costly? Why is a hospital-owned MRI more costly than at a free standing radiology clinic? Why is it cheaper to have orthoscopic knee surgery at an ambulatory surgery center than in a hospital?

So why does everything in the hospital cost more than similar services performed outside the hospital? Hospitals executives will tell you they have to charge more for lucrative services so to subsidize money-losing services. The hospital trade associations will tell you that it’s because hospitals have high overhead; they have to buy and maintain all their medical equipment regardless of whether it’s likely to be used. For example, hospitals have to maintain costly MRI machines. Hospitals have to have laboratories, they have to build and maintain operating rooms. Hospitals have to charge more because they have to keep the ER open 24/7 and care for patients who cannot pay.

Yet, there are investors that build freestanding imaging centers and offer lower prices. There are independent labs that perform blood testing services at low prices. Investors build ambulatory surgery centers and even specialty hospitals that often charge less than general hospitals. There are even freestanding ERs that also have to remain open 24/7 and care for patients who cannot pay.

It may be a smart move on the part of health plans to shift patients to lower cost service outside the hospital. But that’s not the way it works in other areas of our economy. Consumers may go to Elliott’s Hardware because they appreciate the larger selection of hardware than Home Depot offers. They may even go because it’s more convenient to swing by to grab a few screws — even at slightly higher prices. But nobody ever goes to their local hardware store because Home Depot charges too much.

I’m back to my original question: why does everything cost more in a big box hospital? It’s not because of hospitals have high overhead (Home Depot has high overhead). It’s due to the lack of competition. Ninety-seven percent of hospital bills are paid for by third-parties, so hospitals don’t have to compete on price. Another reason everything costs more in a hospital is because Congress tolerates it.
Source: Health Policy Blog

Devon HerrickDevon Herrick, Ph.D., is a preeminent expert on 21st century medicine, including the evolution of Internet-based medicine, consumer driven health care and key changes in the global health market. He was among the first health policy analysts to identify and publish in-depth policy reports on consumerism in health care, including: medical tourism, telemedicine, retail clinics, concierge medical practices, cosmetic medicine, “shopping for drugs” strategies and value-based health plan design. He has researched personal technology and medical aps that empowers patients to better manage their medical needs.