How much is that MRI in the Window?

Costs and charges in an academic medical center  

Memorial Day has come and gone and another Texas legislative session is winding down. As in previous sessions, the health components of the University of Texas System, including UT Houston, have reminded legislators of UT’s commitment to the health of all Texans. One of the ways that UT health professionals demonstrate that commitment is provision of healthcare to the indigent. Because UT’s health-related institutions depend heavily upon clinical revenue to cover administrative overheads and to make up for shortfalls in the funding of education and research, when we essentially give away free medical care, it has an impact upon our ability to perform our other missions and that is an important story to for us to tell. Inevitably, however, one or more senators or representatives will ask the fatal question: “so just how much does all of that indigent care cost you?” And, surprising as it may seem, that is one of the hardest questions for us to answer accurately so we default to the easy answer; we tell them the dollar value of our unpaid charges. So why is that such a bad answer? Well, believe it or not, our charges bear little resemblance to our costs or, for that matter our payments. That’s right, our costs, charges, and payments are only loosely related to one another. The reason stems from one of those unintended consequences that we all dread. Federal law prohibits us from charging anyone less than we charge Medicare. And, we can charge anything we want for our services but Medicare tells us what it will pay. So, we (and most other providers) tend to charge two to five times what Medicare allows, depending upon the procedure. Also, while it may be illegal for us to charge anyone less than we charge Medicare, it is perfectly legal for us to have a contract with an insurance company that offers said company a substantial discount off of our regular charges. In fact, in some parts of the country during the late Eighties and early Nineties, the heyday of managed care, some providers actually had contracts with managed care organizations with reimbursement rates less than Medicare rates for some procedures (though less common, such contracts still exist). These lower payments were usually, but not always, offset by richer reimbursement for other procedures. In the current era, only those patients who are paying out of pocket and those very rare individuals who have old-fashioned indemnity insurance can expect to pay anything close to our charges.

To show you how this works, consider the following example. Four women: Alice, Betty, Cathy, and Donna, all require the same procedure performed by one of our gynecologic surgeons. Alice is the oldest of the group by two years and, at age 66, she has Medicare. Betty still works and is covered by her employer’s policy with Big Green insurance company. Cathy and her husband own a small company and buy insurance from the Pretty Good HMO. Finally, Donna works for a retail company that does not provide insurance and she cannot afford to buy health insurance privately. So, she is one of the millions of Americans who are uninsured.

Let’s assume that we charge $1000.00 for the procedure in question. Medicare pays $250.00, so for Alice’s procedure we receive $250.00 as payment in full. Our contract with Big Green insurance company calls for us to be reimbursed for that particular procedure at 1.5 times what Medicare pays. So, Big Green pays us $375.00 on Betty’s behalf. The negotiators at Pretty Good HMO drove a hard bargain so, in exchange for some concessions for other procedures, we accepted 1.3 times the Medicare allowable payment from them. That means that Cathy’s HMO will pay us $325.00. Unfortunately, Donna will receive a bill for our full charges of $1000.00. Now, if Donna is unable to pay us for this procedure, have we lost $1000.00? That hardly makes sense when we are willing to accept $250.00 from Medicare and $325.00 and $375.00, respectively from an HMO and an insurance company. So how much have we lost? That is hard to say. In the “real world” we might have contracts with several payers and each contract might pay a different amount for the same procedure. To make things more complicated, for a subset of our patients we accept much lower rates from Medicaid. So, while we most certainly have lost some money from patients who cannot pay us, the complexity of the system makes the amount hard to calculate with any real accuracy.

If it is hard to calculate our losses from uninsured patients using reimbursements perhaps we can get closer using our costs. So how do we calculate our costs? Well, like any medical practice we have to pay the salaries and benefits of the staff who work in our clinics. We also have to pay the salary and benefits of our physicians. We have the costs of billing and collecting. Solo practitioners and small group practices have to rely on professionals outside of their practices for many administrative tasks or do these things for themselves. However, large group practices, like ours do have a substantial administrative overhead and those costs must be included.

Unlike most private physicians, however, our medical practice is not an end in and of itself. No, some of the money our clinicians generate goes to help us accomplish our other two missions: education and research. It takes a lot of people to manage the educational programs for close to 1000 medical students and, although some of this work is funded by the state, some is not. So, we use money from our practice plan to help insure that our students get the best training. Likewise, we use money generated in the practice of medicine to fund the early research efforts of promising investigators and to “bridge” productive investigators who are between extramural grants.

Certainly, we know these costs on a global level but the real questions are not about costs per se, the real questions are how many worthy projects did we delay or shelve because we could not afford them and how many of these delayed or shelved projects could we have accomplished if we had been paid by every patient? But in the end, these last two questions are, perhaps, impossible to answer. To quote a famous former UTHSCH administrator “there will always be more good to be done then we have the resources to do”. Costs are important to be sure, but the real message we should all give every day is that we do as much good as we can with the resources we have. We teach students and residents to become the physician workforce of tomorrow, we are engaged in finding effective treatments for diseases that cripple and kill our fellow citizens, and we care for many who will never be able to pay us. We do a lot of good and we have a right to be proud of that.