Haha Gotcha! Medical Pricing

By almost any measure, the U.S. health care system remains dysfunctional. If you apply some of its common practices to other industries, they sound ridiculous. Consider this hypothetical thought experiment. Suppose you made an appointment at a local dog kennel for them to keep your dog, Bowser, while you were on vacation. You asked if they could bathe and groom Bowser just prior to your return. As is standard practice, you probably had to sign a consent form agreeing to pay for the boarding and any additional fees insured. Maybe the grooming fees weren’t guaranteed ahead of time, but you were assured they were nominal and normal for the services. Among the forms you were asked to sign, there was some fine print that said should your dog become ill, the services of a veterinarian would be arranged at your expense.

During his stay Bowser seemed lethargic and a little anxious — and he wasn’t very interested in his food. Maybe you assumed this is normal for a dog left at a kennel for a week. But Doggie Spa & Canine Resort cannot take any chances. It called in a pet behavioral therapist to assess Bowser’s condition. The doggie shrink brought along a colleague for a second opinion. The pet behavior therapist recommended Bowser be walked twice a day to lift his spirits. However, another veterinarian — an orthopedist — had to assess Bowser’s gait to make sure he was healthy enough to be walked. A pet nutritionist analyzed Bowser’s diet and assessed his food intake. She sent a stool sample to a lab for analysis of food absorption. She ultimately decided that spoon-feeding Bowser might encourage him to eat.

Upon your return you pick up your dog expecting to pay for boarding, bathing and grooming. You know Bowser was well-taken care of, but the fees were much higher than expected. Within days of your return, itemized bills from vendors begin to arrive. The person who bathed your dog sent a separate bill from Doggie Spa’s bathing fee. A different bill from the person who applied the shampoo is in your stack of mail. Yet another bill arrives from the groomer. You discover the groomer also brought along an assistant groomer. She too submits a bill. The pet nutritionist and the lab both sent bills. A bill even arrived from another person who walked your dog twice a day while you were away. Spoon feeding Bowser twice a day for a week incurred 14 separate dietitian charges. Indeed, the pet behavioral therapist swung by Doggie Spa on his way home every night to make sure Bowser was doing OK — and you got charged for each visit. Worse, you discover some of the people who sent you a bill charged far, far more than the pet resort’s regular vendors. The on-call vendors called other vendors to assist. But these out-of-network vendors are not bound by Doggie Spa‘s standard rates, they can charge anything they want. You discover Doggie Spa actually encouraged these upcharges so it too could bill a separate facilities fees for them. Arranging for the dog activity therapist to assess your dog; that generated a separate charge for both the Doggie Spa and the dog walker.

Of course, this whole scenario sounds utterly ridiculous. You would never patronize a dog kennel that nickeled and dimed you that way — especially if their charges were outrageous and never discussed in advance. Yet, this scenario plays out every day somewhere in our health care system. A recent New York Times article discussed the case of a Peter Drier, who had surgery for a herniated disk surgery in his neck. Besides the regular surgeon, an assistant surgeon who was out of Peter’s network helped with the surgery. Whereas the in-network surgeon earned a discounted fee of about $6,000, the out-of-network assistant surgeon billed nearly $117,000. Had the patient been on Medicare, the assistant surgeon could have received no more than about $800. Being out of network meant the surgeon’s $116,862 charge was not subject to a negotiated discount. Gotcha!  You owe an extra $116,862 not covered by your insurance.

The article used a few other anecdotes of patients hit with unexpected bills for services that seemed trivial. Fees for the “nurse” who walks you to the bathroom may be billed as physical therapy: $400. The device to help you dress? It’s considered occupational therapy: $679. That friendly doctor who poked her head in the door a couple times and asked how you’re feeling? Gotcha! That will be $1,000 because she’s out of your network.

None of this rant is to suggest these medical personnel didn’t provide a valuable service. Mr. Drier didn’t complain about his medical care, just the way it was billed. Some of the services could have been provided by a resident physician for free, but none were available. Other services were trivial and could have been provided by a nurse or nursing assistant. Some services seemed unnecessary — but were billed at significant rates.

Why does this occur? Because over the past few decades third-party payment has insulated patients from the cost of medical services they receive. Thus, the providers of care don’t have to compete on price. Had this hospital been competing for patients on the basis of price, it would have looked for ways to boost efficiency. Rather than look for ways to pad the bill, it would likely have offered a package price. Doctors would have likely contracted with the hospital to provide services. At the very least, fees would have been transparent and discussed ahead of time.

So what is the solution? We often say that patients need to control more of their own health care dollars. But in the hospital they are usually spending someone else’s money. At the very least, hospitals, doctors, patients (and their insurers) need to agree in advance on a statement of work with a fairly binding estimate. With the exception of nominal services, patients should not face a Gotcha! that surpasses six figures. Does this sound like too much trouble? It shouldn’t. Most transactions involving large sums of money (e.g. like selling a house) involve clear disclosure and a statement of what each party expects.

Comments (21)

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  1. Ralph @ MediBid says:

    The solution is actually very simple, and it’s out there and working.
    1) Transparency and competition. The patient needs ot see several bids for their care the same way we get several bids on a kitchen renovation. These prices need to be firm, barring complications, and include quality and outcome metrics.
    2) A Health plan which keeps skin in the game and does not increase utilization. I like a plan which covers 50/50 of any medical procedure up to the first $2,000, and waives that, if a reward point price is negotiated.

    It’s really this simple. Waiting for the government to solve the problem is futile, when these solutions are out there.

  2. Devon Herrick says:

    Being out of network meant the surgeon’s $116,862 charge was not subject to a negotiated discount. Gotcha! You owe an extra $116,862 not covered by your insurance.

    As I suspect someone will remind me, Mr. Drier’s insurer Wellpoint ultimately agreed to pay the $116,862 out-of-network assistant surgeon’s fee — even though it didn’t have to. But that doesn’t mean this wasn’t egregious. Had the primary surgeon told Mr. Drier (and his insurer) that an extra pair of hands would be needed, the insurer would have likely contacted the assistant surgeon Dr. Mu. to negotiate for a reimbursed rate ahead of time.

    The $116,862 fee was literally a Gotcha! By that I mean a loophole that allowed one party to legally extort funds from another party. Of course, I have nothing against a doctor who believes he (or she) is worth $116,862 charging that much. But that assertion needs to be discussed ahead of time so the patient can engage the services of someone else if desired. Given that option, the agreed upon fee would likely have been less than the $6,000 the primary surgeon earned — rather than $116,862.

    • Perry says:

      I agree many surgeons are worth their salt, but a charge for one surgery as an assistant that’s just shy of what most family docs make in a year is just too much.

      • Devon Herrick says:

        The $116,862 charge was indeed high. I’m not suggesting I actually know what a fair price would be. However, what bothers me is that the amount charged would likely have been much lower had the assistant surgeon disclosed his fee ahead of time and asked the payer to agree on the amount. Being asked to assist without either patient or insurer’s knowledge, and billing nearly 20 times the primary surgeon’s negotiated fee is why I called it a gotcha! I’m not suggesting anyone should be compelled to work cheaper than they are willing to work. I’m only suggesting that the parties should agree on amounts.

  3. Don McCanne says:

    An excerpt from our blog on the case of Peter Drier:

    “Had the procedure been provided under Medicare, the assistant surgeon’s fee would have been determined automatically, and at a fraction of the billed price. An improved Medicare for all not only would have set the fee at a fair level, it also would not have had network issues to deal with since the entire health care system would be one single ‘network.’”


  4. Charlie Bond says:

    Hi John,

    You forgot the arborist–because the dog was barking up the wrong tree–
    as you might be.

    You are forgetting the most fundamental flaw in the whole system. There is no cost based pricing in health care. Each of the providers could charge whatever they wanted.

    You assume that consumers would have negotiating power if they only paid their bills directly, but the dog was in no position to bargain–as are most patients.

    While insurers can negotiate bulk prices, even those prices do not correspond to the real costs of goods and services. They may be lower prices, but still, health care charges are based on what the market will bear, not on the reasonable cost of providing the goods or services.

    Direct consumer payment (without a third party payor) at the lower end of the spectrum can help bring low-end prices in line, but high end prices need to be re-aligned with costs.

    Nonetheless, I liked your dog tale. You are quite a wag. The multispecialty aspect of the story is an accurate portrayal of the current system of health care. The absence of case management and coordinated care has me working consistently on coordination of care organizations or COCO’s that build in meaningful case management, especially for post-acute care. Such organizations promise to cut double digit points off the total cost of care, especially as the Baby Geezer generation ages.

    In the meantime, you forgot that Bowser’s owner was a trial attorney, who was able to launch a massive suit that yielded a multi-million dollar settlement–even though it was a dog of a case.

    Charlie Bond

  5. James R Chaillet, Jr MD says:

    One fix to the situation described in the NYT article would be for insurer companies to negotiate “hold harmless” type clauses in their contracts with in network hospitals/systems whereby a policy holder would not be on the hook for unexpected or out-of- network charges if he/she had the procedure at an in-network facility by an in=network surgeon. Might only work for non emergent situations; but the majority of procedures are non emergent anyway.

    Also, as a family physician, I am seeing patients balking at having elective procedures done when they, the patient, is on the hook for significant out-of-pocket costs due to deductibles and co-insurance.

    Some surgeons are noticing this same phenomenon.

    • John R. Graham says:

      Thank you. Do you have a theory why insurers are unable to get such clauses in their contracts with hospitals?

      • Devon Herrick says:

        If I were to venture a guess, it’s probably because physicians’ goodwill (especially orthopedic surgeons and neurosurgeons) is far more valuable to hospitals than insurers’ goodwill. A neurosurgeon may schedule surgeries that generate profits worth $50,000 apiece. Neurosurgeons are not someone a hospital wants to alienate. An insurer, on the other hand, has a hard time excluding entire hospitals from their networks. Plus, it’s not entirely clear to me that a hospital has much sway in the billing practices of physicians that are not employees.

        • allan says:

          Devon, we shouldn’t forget that neurosurgeons require a hospital in order to practice their trade. The hospital is providing a facility for the surgery and I wonder if the hospital should be made at least partially responsible for the extra costs. (just thinking, not proposing)

          If Dr. A (accepts insurance) is doing surgery it is known that it is likely that an assistant is needed. Hospitals control the credentialing so essentially the hospital knows that Dr. B (who charges $116,862) will possibly be assisting. An open hospital staff would permit Dr. C to do the assisting at a more reasonable price. Thus the hospital holds at least some culpability.

          Sometimes hospitals do not have adequate staffing. At that time the hospital is able to notify the public (in a difficult fashion) that they require a different hospital.

          • John R. Graham says:

            We are now in the world of licensing physicians, corporate practice of medicine, and that whole can of worms.

            I have been a Senior Fellow of NCPA for years. Until recently, I was a consultant on a fee-for-service contract. Today, I am an employee. None of our donors or readers knew or cared about my status.

            However, because of regulation of how hospitals and physicians interact, this type of bundling does not happen. That explains why physician-owned facilities are much more advanced at price transparency.

  6. James F says:

    The solutions mentioned in the comments above fail to address one large element: the average consumer is not aware of nor cognizant of these measures, especially when in need of treatment. Most consumers pay market prices for their goods and services believing that what they are being charged is cost and market based (Gotcha!). If the average American had the grasp of the health care market and underwriting that accompanies each prose above, I am sure there would be far less of these horror stories, but that simply isn’t the case. Herrick mentions housing/mortgage transactions as an example – a sector where the dealings are more “transparent” but consumers still fall victim to misinterpretation and transnational inconsistencies that generate a lot of overheads and fees. The state of health care described may as well be the world’s most convoluted real estate market; where Realtors don’t get you the best price because you don’t even know what the best price is and who will ultimately be charging you.

  7. Bob Hertz says:

    This spring, New York state passed a law to curb these awful medical surprises:


    I of course would favor such laws on a national level. Waiting for each state to pass such a law will take many years, leaving many patients to suffer financially.

    My comment to Ralph:

    You are right that health providers need to submit binding estimates. I differ from you only in that I think the government will have to make them do so.
    For many years, the maxim of health care has been that the more you charge, the more you make, even after giving discounts. (The events related in this post are a classic example of this.) I feel it will take strong consumer laws to change this.

    My comment to Devon:

    Thanks much for the post, but near the end you pull out your old comment that this occurs because patients are insulated from true medical costs.

    I disagree. Canadian, German, and French patients are totally shielded from true costs, but this kind of brutal price gouging never happens to them. In fact in Maryland there is less of this price gouging, because the state regulates hospital charges.

    The problem is not insulation. The problem is a radical lack of consumer protection.

    • John R. Graham says:

      We will see the effect of the NY law in years to come. However, anecdotes that I have gathered support Mr. Hertz’ suggestion that NY is one of the worst states for this.

      I have also heard (but cannot confirm) that NY laws on insurers’ providers’ networks prevent efficient contracting. If anyone is better informed, please weigh in.

  8. Hoards says:

    Anyone dealt with a pet medical emergency lately? It’s a cash business and you can be sure every medical intervention and supply is itemized and charged. “Packaged pricing” is nothing more than a consolidated itemized bill. That may be effective and efficient for some medical interventions, it is not conceivable for many more. There are just too many factors that can effect the outcome of a patient’s response to medical treatment.

    A contractor gives you a bid only after thoroughly evaluating the project at hand and then determining, based on his or her expertise, the amount of labor and materials that will be necessary to complete the job. Should unforeseen issues arise not amenable to observation at the time of bidding, the contractor presents the problem and solution with an addendum to the initial bid. You hopefully trust the contractor enough to feel confident in his judgement. Same thing with an auto mechanic. You take your car in with certain symptoms but have to rely upon the judgement of the mechanic to get the estimate for the repair which may change after he or she disassembles the parts necessary to reveal the underlying problem. These are issues that arise with inorganic materials in everyday life and we expect doctors to be willing to issue a “price” for fixing a human body with much more complex systems and risks related to differences in individual biological and psychological response?

    I’m all for posted pricing for common medical procedures and interventions but the human response to illness and injury is so variable that demanding a “package price” for most medical events is not only not practical, but ludicrous on it face. There needs to be rroom for independent medical judgement and appropriate reimbursement, otherwise, high acuity patients will not receive the care they need.

    • John R. Graham says:

      Thank you, Mr. Hoards. This is exactly why I have been skeptical of state laws mandating transparent prices. When you get down to it, most prices we face in markets are less transparent than we think.

      The solution more likely lies on the demand side: Giving patients more money to spend directly. NCPA has published articles on the effect of this for laser-eye surgery, for example.

  9. Ron says:

    The rip-offs are happening around the country as hospitals are buying up physician practices and changing normal office visits as “hospital out-patient” visits – 5-10 times an office visit charge.

    Seems like a good class action law suit for some aspiring trial lawyer.

  10. bob hertz says:

    What a country we have in America. Thousands of patients are abused financially, over many years, but Congress is too sluggish and lobbyist-ridden to pass consumer protection laws.

    So we have to wait for class action lawsuits. The plaintiff’s bar becomes the de facto consumer protection department.

    This has happened with numerous defective products, too.