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Posted: Saturday, Apr. 21, 2012

Why do patients’ costs keep rising?

By Ames Alexander and Karen Garloch
Published in: Prognosis: Profits
  • Prognosis: Profits

    A five-part series examining how N.C. hospitals profit at the expense of patients.

    Sunday: Nonprofits very profitable

    Monday: Charity care lacking

    Tuesday: Suing the needy

    Wednesday: Staying strong in Raleigh

    Thursday: Policies that could help

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    Even industry leaders say that hospital care has become profoundly expensive.

    The question is why. While there’s no single answer, experts point to many reasons, including high administrative costs, unnecessary procedures and a race for the latest medical technology.

    Increasingly, studies show, another key factor is also at work: Consolidation has given large hospital systems a stronger hand in negotiations with insurers. As these systems expand, experts say, insurers can’t risk excluding them from plans they offer businesses.

    That pattern is pronounced in the Charlotte region, which is dominated by two rapidly growing hospital chains: Carolinas HealthCare System and Novant Health.

    The two systems own all eight hospitals in Mecklenburg County, as well as most of the doctor’s offices, urgent care centers and outpatient facilities.

    In such cases, hospitals have insurance companies pretty much “over a barrel,” said Kevin Schulman, director of Duke University’s Center for the Study of Health Management.

    An insurer in the Charlotte area, for example, would be at a disadvantage if it couldn’t offer patients access to both systems.

    But unlike most businesses, Schulman said, hospitals don’t usually save money through layoffs or eliminating duplicate services when they merge. In fact, he said, one of the main reasons for hospital mergers is to increase market leverage.

    Who has the clout?

    Carolinas HealthCare officials disagree.

    “I can’t imagine anybody who knows anything about the health care industry saying that any health care provider has Blue Cross Blue Shield over the barrel,” said Russ Guerin, a Carolinas HealthCare executive vice president.

    Insurance companies are the ones with the clout, Guerin said. A recent study listed North Carolina eighth among states with the least competitive health insurance markets. Blue Cross and Blue Shield of North Carolina has about 75 percent of the state’s health insurance market.

    Hospital officials say some factors that boost costs – such as the price of pharmaceuticals and technology – are beyond their control.

    Prices are also pushed upward, they say, by the public’s demand for top-notch medical care close to their homes.

    Like hospitals elsewhere, North Carolina’s invest billions in life-saving staff and technology. But they’re also buying things that do little to improve outcomes for patients, experts say.

    “We basically don’t see any improvement in patient outcomes from the last 5 to 10 percent of spending by hospitals,” said Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management. “There’s a lot of unnecessary spending.”

    Recent estimates suggest that nearly 30 percent of U.S. medical spending is wasted on unnecessary tests and procedures. That’s partly why nine medical specialty groups this month cited 45 common tests and procedures patients often don’t need.

    Administrative costs

    Another factor driving up prices: the billions of dollars that U.S. hospitals spend on overhead.

    Novant spent 73 percent of its budget on health care services in 2010, the company’s financial statement shows. The rest – more than $900 million – went into “administrative and general” expenses, such as legal, finance and marketing costs.

    Carolinas HealthCare officials didn’t answer the Observer’s questions about how much is spent on administrative costs, saying they didn’t have the information on a systemwide basis. But federal data suggest the system spends hundreds of millions on administration.

    As the system has grown, so has its administrative staff. It employs about 29,000 people in the Charlotte region; about 150 of them have the title of vice president or above.

    Trimming administrative expenses could significantly lower prices. In a 2003 study, Duke University researchers found that controlling hospital overhead nationally could save more than $16 billion a year.

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