Healthcare econonics: A dismal science
Torrance Memorial CEO Craig Leach. Photo by David Fairchild
Torrance Memorial Medical Center CEO Craig Leach is a CPA known for his financial acumen and candor. The medical industry is known for accounting practices that are as unfathomable as those of the movie industry.
Leach offered to decipher a typical hospital bill, but cautioned that patients will have to live with the current billing practices for the foreseeable future.
Assume a hypothetical case in which a hospital patient arrives home to find a $10,000 bill.
The hospital’s cost to treat the patient would have been about $1,500, Leach said.
If the patient is indigent, Medicaid (MediCal in California) will reimburse the hospital roughly 65 percent of its $1,500 costs
If the patient is a senior on Medicare, the government reimbursement is slightly better, about 80 percent of the hospital’s cost.
In the case of Torrance Memorial, these losses are significant because 50 percent of Torrance Memorial’s patients are on Medical or Medicare, he said.
To make up these losses, hospitals negotiate higher payment schedules with private insurance companies. In the case of a $10,000 bill, an insurance company might reimburse the hospital about $2,500. The patient’s copay would be about $250.
Why bill $10,000 if the hospital’s cost is only $1,500?
“It’s complex,” Leach said. “But generally, insurance companies pay a percent of the bill. So hospitals need higher insurance payments to cover the underpayments from the government.”
Why do private insurance companies agree to subsidize underfunded government insurance programs?
“Because they know that otherwise the hospitals would go out of business,” Leach said.
“That’s just the way it works. It’s been this way since 1965, when Medicare began. Government funding has failed to keep up with inflation.
“I’d love for this part of the business not to exist. See that office,” Leach said pointing out his office window to a two story building. “The second floor is our patient billing office. It has 60 employees.”
No cure on the horizon
Leach doesn’t have a solution to hospital accounting problems, but said single payer isn’t it.
“Single payer is nothing more a top down financing system. It doesn’t address the underlying costs of healthcare and it doesn’t contribute to the science of taking care of patients. Many more people survive cancer now because of advances in treatment,” he said.
Nor does he support State Assembly Bill 3087, which would establish a commission to set hospital reimbursements.
“The bill is a poor approach to a complex problem,” he said. “It would be disastrous to have a reduction in the rates hospitals receive from insurance companies.”
Supporters of government regulating hospital reimbursement rates point out that health care insurance rose 240 percent over the past decade, when inflation rose just 40 percent.
Leach countered that CPI inflation, which represents changes in the prices of all goods and services, nationwide, cannot be compared to medical inflation, which is based on a narrow population, which is aging, and a narrow range of goods and services, which include increasingly better but also increasingly more costly medical services.
“To fix healthcare, the government and the insurance industry would have to agree on a solution. There are strategic risks and execution risks. Execution is the hard part,” he said. PEN