Gaming Medicare Hurts Uninsured

By Ronald L. Scott, JD, LLM

Hospitals often have retail price schedules that bear little resemblance to the amounts they actually collect from health insurers or the government. The inflated price schedules exist in part to manipulate the Medicare system. For example, the Justice Department alleges that the health care provider Tenet overcharged Medicare by artificially inflating prices charged in some of its hospitals.

The Health and Human Services Office of Inspector General recently published a proposed rule to further prevent health care providers from charging Medicare in excess of usual charges. The rule covers items such as clinical laboratory services, durable medical equipment, medical supplies, and covered drugs; it does not apply to physician services reimbursed under Medicare fee schedule.

The rule also addresses hospital charges for “outliers.” Medicare reimburses hospitals based on a patient’s diagnosis. Since some patients require longer stays, Medicare reimburses hospitals for such outliers based in part on the hospital’s fee schedules. Therefore, hospitals have a financial incentive to inflate their fee schedules.

Under the proposed rule, Medicare is considering 2 alternative methods to determine “usual” charges; 1 method would use the provider’s mean (average) charge for the service for the previous year; the other method would use the median (50th percentile) charge for such period.  Either method could substantially reduce the amounts received by hospitals for outliers, since the calculations would be based on actual charges made by the hospitals rather than on an artificially inflated fee schedule.

Providers that charge Medicare more than 120% of their usual charges may be excluded from participation in Medicare. The rule contains a “good cause” exception allowing providers to charge more that their usual charges due to unusual circumstances or medical complications that require additional time or expense.

Unrealistic fee schedules not only hurt the Medicare program but as an unintended consequence, also hurt the uninsured. Part of the blame lies with current federal law, which requires providers to establish uniform price lists and to seek full payment on medical bills. The current law in certain situations may not allow providers to charge discounted rates to uninsured patients or arrange for structured payments by such patients. Therefore, uninsured patients pay remarkably higher prices for the same services.

The House Committee on Energy and Commerce is investigating how these billing disparities hurt the uninsured. The committee noted that California-based urban hospitals’ list prices include more than a 300% markup over actual costs. Managed care organizations negotiate deep discounts from the list prices, but uninsured patients pay the “sticker” price. For example, the committee found that 1 hospital chain in California received 35% of its profits from 2% of its uninsured patients.

The committee sent letters to 20 hospitals and health systems seeking detailed information on the costs charged to uninsured patients. In response to the investigation, the American Hospital Association (AHA) issued a Media Advisory on July 25, 2003, noting that federal law provides severe penalties for failure to adhere to uniform charge schedules. AHA officials believe the law should “be clarified and possibly changed in order to allow hospitals to adjust bills for uninsured individuals without compliance concerns.”

The AHA also recommended that member hospitals “develop a way for the public to promptly access charge information for any item or service provided by your hospital or health system.” Both are excellent recommendations. In addition, hospitals should simply stop artificially inflating their “list” prices. The proposed Medicare law changes should reduce one incentive to do so.