The New York Times has reported today that Medicare pays medical suppliers significantly more than the market price for goods and services. While the specific example is those who provide oxygen and oxygen equipment, the point is that there are a number of areas in which companies providing medical supplies are being paid for goods and services at rates well above market.
The article reports two reasons. First, many of the payment standards were set some years ago. Second, when the Centers for Medicare and Medicaid Services (CMS) wants to renegotiate, or Congress wants to establish new standards, the companies rally their customers to complain, and to demand that nothing change. Using the example of oxygen supplies highlights just how anxious patients might be. They see it as a matter of life and death, and they might well be right.
That said, I have some concerns about the reporting. It’s not that I don’t think there’s waste; I’m certain there is, based only on my knowledge of human nature. And nobody wants to pay for waste.
However, there were hints in the report of the difficulties actually deciding what’s appropriate. Case in point: the reporters looked only at numbers, and not at the human context of health care. At one point, the report says, “Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.” At another point it quotes Representative Pete Stark as saying, “All you have to do is pick up an equipment catalog or search for ‘oxygen device’ on eBay to figure out better prices than what we’re currently paying.”
That’s all well and good, but it ignores the people who need service, their perception of what they need, and their perception of the means at their disposal. Patients in need, whether for oxygen or other services, aren’t likely to do an Internet search for the best price. They want goods and services now, and not in “three to six business days, depending on the shipment option you choose.” Their perception is that their needs are immediate, if not critical; and so they’re much more likely to seek out those who can promise to provide within hours, if not within minutes. Moreover, having established are relationship that has worked, searching for an alternate supplier might seem to entail a risk the patient or caregiver is not interested in taking. Haven’t we all said at some time, about some expense, “I know it costs a little more, but I know it’s dependable.”
In advising patients, prescribing physicians are likely to choose in the same way. This isn’t a matter of collusion, although that does sometimes happen. Doctors, too, have a sense of which providers come through and provide better service to patients. They hear from patients when there are problems. So, they, too, are likely to refer to the same companies over and over, unless patients or experience demand a change. The old saying, “You get what you pay for,” includes the calculations of service and of experience, and not simply the product in this one instance.
But local, immediate providers cost more for reasons beyond profit margin. They have overhead costs, including warehouse and transportation costs, which may well be different from online providers. They argue, too, that they have different personnel expenses. Local services providing oxygen may well have on staff respiratory therapists to oversee patient care and provide patient education. We’ve all heard of the shortage of nurses, but there’s a shortage of respiratory therapists as well, and providing that additional service for patients adds to the costs of local providers.
This tendency to focus on price and not on larger context can sometimes cut the other way. A good example is Medicare reimbursement for procedures done at specialty surgery centers and “boutique” hospitals. They’re popping up everywhere: smaller institutions with a largely outpatient practice, and a few inpatient beds. They serve a particular specialty or patient pool, and they’re commonly owned by physician groups, often in partnership with developers who specialize in medical facilities. Patients are frequently very happy about them. They’re smaller and more focused institutions, and they often provide a high level of amenities – a real “customer care” focus.”
Within the limited services they provide, smaller institutions can often provide services at lower cost. They tend to have good outcomes, too, and good numbers on their patient satisfaction statistics. Those things make them attractive to patients, and to the insurers who pay for their care. Patients and insurers alike are quick to ask, “If these doctors can provide this care for this price, why can’t larger hospitals do it?
Of course, insurers know the answer, even if patients don’t. They can provide care at a lower price for a number of reasons. First, unlike a full-service hospital, there are a lot of services they don’t have to provide, and therefore a lot of staff they don’t have to keep. They don’t provide emergency services, for example, and only limited lab services. Because their practice is limited in scope, they don’t need to maintain as full a pharmacy or central supply. With few inpatient beds, they don’t have to maintain a large staff, or pay shift differential for as many folks at night. In many ways their overhead is lower.
They also get to choose patients. Unlike a full-service hospital, patients don’t just roll up to the doors of a specialty hospital. Instead, they are selected by the physicians who practice there. The selection is made, by and large, for good, medical reasons: since services are limited, only low-risk patients are served at the specialty hospital. High-risk patients are served by the same physicians in full service hospitals, because they may well need the additional services. On the other hand, that also means the patients more likely to need the additional services, the patients more likely to cost more money to care for than insurers (especially Medicare and Medicaid) are going to pay, are brought to the full-service hospitals. By the same token, the specialty hospitals can selectively serve those who have insurance. Since those who don’t usually make their entry into health care through the Emergency Room, the specialty hospitals don’t have to wrestle with unreimbursed care to anything like the extent full-service hospitals do.
There is no substitute for a full-service hospital. Every community needs its share; and every full-service hospital needs to be fully staffed and fully stocked, even when its beds aren’t fully utilized. The community needs that breadth and level of service to be available all the time, and for all in need; and that kind of security costs. So, prices for care at a full-service hospital may well be higher than those in a “boutique” hospital. But if your analysis looks only at dollar costs, and not at contexts, you can’t fully appreciate the economics of health care.
Again, my concern here is not, first and foremost, with defending the expenses charged (and some would say overcharged) to Medicare, or the expenses that Medicare does or doesn't cover. (Those concerned providers can do that for themselves; and here, too.) Instead, I’m concerned with how well all of us, patients and providers alike, understand the real costs of health care. Folks are smart enough to understand the problems. The researchers who study these issues, and the reporters who report on them, or investigate them, need to do better in giving us the context; because if you don’t know the context, you don’t really know the story.