Prognosis: Profits

Doctors join hospitals, and prices soar

Patients and insurers pay vastly more for routine services

jneff@newsobserver.comDecember 15, 2012 

Some routine cardiac tests cost more than twice as much in hospital-owned clinics as they do in independent cardiology offices.

MCT GRAPHIC

  • The story so far In April, The News & Observer and The Charlotte Observer published a five-part investigation showing how nonprofit hospitals in N.C. cities have become hugely profitable. The investigation revealed that North Carolina hospitals have: • Generated large profit margins and amassed billions of dollars in reserves. • Have built up market power to negotiate higher payments from insurance companies. • Paid top executives millions. At least 25 North Carolina hospital executives have received total annual compensation exceeding $1 million. • Have aggressively pursued patients through collection agencies. The state’s largest hospital system, Carolina Health System in Charlotte, sued thousands of needy patients, frequently putting liens on their homes and damaging their credit. A follow-up investigation in September showed that large nonprofit hospitals in North Carolina are dramatically inflating prices on chemotherapy drugs at a time when they are cornering more of the market on cancer care. The newspapers found hospitals are routinely marking up prices on cancer drugs by two to 10 times over cost. Catch up: To read previous stories, visit newsobserver.com/prognosisprofits.

North Carolina patients pay more for many tests and procedures if their physician is employed by a hospital, an investigation by The News & Observer and The Charlotte Observer has found.

It’s true whether the health care offered is a heart stress test or a routine visit to a doctor’s office. And it’s part of a national shift that experts say is raising costs but not quality: Hospitals are increasingly buying doctors’ practices, then sending bills for routine services that are significantly higher than those charged by independent doctors.

By one count, the percentage of doctors nationally who are employed by hospitals has doubled over the past decade. No similar statistics are available in North Carolina, but it’s clear that more and more doctors are affiliating with hospitals.

For example, in the Triangle, about 90 percent of cardiologists work for hospitals, which can charge more for procedures than private practices.

As a result, the cost of many routine medical tests and services has soared, according to Medicare data and insurance claims reviewed by the newspapers.

The same service performed in the same location by the same doctor can cost more than double what it did just a few years ago.

“Prices are increasing, often for no other reason than the sign on the door changed,” said Robert Zirkelbach, spokesman for America’s Health Insurance Plans, a trade group representing the insurance industry.

Here’s why: Medicare and private insurers pay more for outpatient care – which includes an allowed facility fee for hospital infrastructure – than for the same procedure in a doctor’s office, which cannot charge a facility fee. A hospital can increase revenue by acquiring a practice and changing the billing to outpatient. Or the hospital can simply convert its doctors’ offices to hospital facilities.

In the Triangle, Duke University Health System has been most aggressive in converting its doctor practices to outpatient entities.

“Outpatient visits (in 2010) increased 12.1 percent over 2009, which was due entirely to converted clinics,” according to a 2011 Duke bond document.

One example: For a common echocardiogram procedure, Duke Hospital submitted 4,879 claims to Medicare in 2010, up 68 percent from the year before. Medicare allows $471 for outpatient echocardiograms, more than twice the $200 allowed for those performed in physician offices.

Hospital officials contend they deserve to be paid more because they have expenses and obligations not shared by independent physicians. They must comply with more regulations, keep many departments staffed at all times and treat all patients, regardless of ability to pay.

Experts agree that hospitals should be reimbursed for the extra services they provide.

But there’s a limit, said Robert Berenson, an analyst at the Urban Institute’s Health Policy Center. For many routine services, Medicare pays hospitals about 80 percent more than it pays independent doctors, he said. But he said the additional expenses for a hospital don’t justify that kind of payment difference.

The newspapers’ latest findings underscore the lessons of the newspapers’ previous investigations, which found that the growing market power of nonprofit hospital systems is one of the factors in the rising cost of health care.

Now some public officials are questioning whether hospital systems have grown too big for the public good. Among them is state Attorney General Roy Cooper, who is examining whether to use antitrust laws or push for new legislation to reduce health care costs.

In the meantime, experts say, it’s likely that hospitals will continue to buy doctors’ practices at a rapid clip.

“It’s only going to grow, and it’s going to grow substantially,” said Paul Ginsburg, president of the Center for Studying Health System Change. “It raises the amount people pay. And I don’t think there’s a redeeming benefit to it.”

Jenny Palmer of Durham had been seeing a Duke neurologist for years for her epilepsy. She was furious when her $50 copay turned into a $425 payment applied to her deductible. The visit was less than 10 minutes, Palmer said, as she told the doctor her health was good and she received a prescription for a year’s worth of medicine.

Her bill made no mention of a facility fee, but Duke confirmed it in a letter after she complained.

“This clinic is now owned by Duke University Hospital (DUH) and in addition to the professional fee, there is also a facility fee charged in conjunction with each visit. Both charges are billed as an outpatient service as opposed to an office visit.”

“It makes no financial sense for me to see Duke doctors now,” Palmer wrote to her neighborhood Listserv. “BUT there aren’t many non-Duke doctors in Durham. ARGH!”

Palmer, 41, an administrator of a nonprofit, eventually found a neurologist in Raleigh.

Duke would not comment on Palmer’s case. It has acknowledged the fees in the past but said they were legitimate because of the increased costs of running the doctors’ practices.

‘I was just shocked’

Gay Miller thought she knew what to expect when she received a heart test earlier this year – until she got the bill.

After a heart valve replacement eight years ago, she has been getting periodic echocardiograms at her cardiologist’s office in Shelby to ensure the valves still work properly. Under her insurance plan, the tests used to cost her a $60 copay.

Not this year. During Miller’s annual checkup at the Sanger Heart & Vascular Institute in February, her doctor told her she would need to go to nearby Cleveland Regional Medical Center for her echocardiogram.

At the hospital, Miller received the usual 30-minute test. And the usual technician conducted it.

But there was nothing typical about the bill: Miller wound up owing $952.

“I was just shocked,” said Miller, 64, who lives in Lincoln County west of Charlotte. “I feel like I got taken advantage of.”

Across North Carolina and the U.S., hospitals are increasingly billing for heart tests like these. Experts say the higher bills for those tests are a telling illustration of a structural shift that is leaving patients with higher bills for identical procedures.

In 2005, doctors with Sanger – Charlotte’s oldest and largest group of cardiologists and heart surgeons – became employees of Carolinas HealthCare System, the hospital system that runs Cleveland Regional.

At the time of the merger, officials said Sanger patients wouldn’t notice any difference. Now, however, some Sanger patients who need echocardiograms are diverted to higher-charging hospitals.

Officials for Carolinas HealthCare did not address questions about the case. But in general, the system said, Sanger has been nationally recognized “for cost effectiveness and delivering the most appropriate care to each patient.”

Flocking to hospitals

Until recently, the large majority of physicians worked in doctor-owned practices. But that’s swiftly changing.

Last year, 47 percent of physicians in the U.S. were employed by hospitals – roughly twice the percentage in 2002, according to surveys by the Medical Group Management Association.

That trend is expected to continue, with one health care recruiting company predicting that hospitals could employ as many as 75 percent of all doctors within two years.

About 35 percent of North Carolina cardiologists work for hospitals – almost three times the percentage who did so five years ago, according to a recent survey by the American College of Cardiology.

The irony, some doctors say, is that federal efforts to reduce health care costs have helped drive the trend.

In 2010, Medicare reduced payments to physicians for various cardiology tests while raising payments to hospitals. That prompted many independent doctors to sell to hospitals, which could collect significantly more for the same tests.

Many doctors, however, have been unhappy about the trend. In a recent Physicians Foundation survey, 75 percent of North Carolina doctors said they disagreed “somewhat” or “mostly” with the premise that hospital employment of physicians is a “positive trend likely to enhance quality of care and decrease cost.”

While money helps explain why many doctors have opted to join hospitals, other factors also play a role. By joining hospital systems, many overworked physicians have been able to shorten their workweeks and share on-call duty. Hospitals also take over the complicated back office functions such as billing, negotiating with insurance companies and managing the expensive transition to electronic medical records.

Hospital systems have plenty to gain as well. Purchasing doctors’ offices helps hospitals enlarge their referral networks and boost profitability. It will also help them become Accountable Care Organizations, networks of doctors and hospitals that the architects of President Barack Obama’s health care plan believe will improve quality and efficiency.

Many experts predict that hospital acquisitions of doctors offices will boost prices still higher.

“This is really a historic change in the practice of medicine in the U.S.,” said Dr. William Zoghbi, president of the American College of Cardiology. “It’s more costly to the whole health care system, including patients.”

Dr. Daniel Wise has been on both sides. He was an independent cardiologist, then an employee of Presbyterian Hospital in Charlotte, and now he’s independent again. He left the hospital because he didn’t agree with its priorities.

But the reduced Medicare reimbursements make him wish he had stayed.

Wise said cardiologists’ incomes have declined by 30 percent to 40 percent in the past three years. “It doesn’t make economic sense anymore to try and do it in the office,” he said.

Two labs, two prices

In late 2011, Bruce Stanley was invited to an open house at WakeMed’s new Brier Creek facility. He nibbled cookies and toured the facility. He liked the convenient location and pleasant staff.

In January, he had two routine blood tests done there. He did them in advance of a physical and wanted to be able to discuss the tests with his doctor.

The results pleased Stanley. The bill did not.

Stanley owed WakeMed $240.82 for two routine blood panels. Three months earlier, he had paid $13.73 for the same tests done at the LabCorp office near Rex Hospital. Stanley didn’t know he would be charged full hospital prices.

“I thought it was a satellite clinic,” said Stanley, 58, a Raleigh businessman.

Debbie Laughery, a WakeMed spokeswoman, said the hospital can’t compete with LabCorp, partly because hospitals have more expensive facilities. Laughery also pointed to the practice of “cost-shifting,” where hospitals pay for charity care for the poor by collecting more from insured patients.

“We have to pay for all of our indigent care somehow,” Laughery said.

Is cost bump justifiable?

For many tests and services, the difference between what hospitals and independent physicians can collect is vast.

Hospitals, for instance, can get about 80 percent more from Medicare than independent physicians for a 15-minute office visit – and more than twice as much for many cardiac tests.

The payments to hospitals are also higher from private insurers. For a common outpatient echocardiogram in 2012, Duke was paid an average of about $1,800 by a private health plan. WakeMed was paid about $1,500; UNC, about $900, according to thousands of private insurance claims reviewed by the newspapers.

The same data showed the average payment to an independent cardiologist for the same test was $480.

Experts say private insurers have little choice but to pay hospitals more. When negotiating contracts with health care providers, insurers can survive without a single doctor’s office in their networks. But they must be able to offer customers access to major hospitals. That gives hospitals power to negotiate higher payment rates.

The employers and workers who share costs for health insurance wind up footing much of the bill. Patients, meanwhile, are left with higher out-of-pocket costs.

Hospital officials say there are valid reasons they can collect more. They say they’re obligated to serve all patients, regardless of ability to pay, while independent doctors can be more selective about which patients they treat.

“Provider-based services are also under state and federal regulatory oversight, while free-standing physicians and clinics are not,” the N.C. Hospital Association said in a written statement.

The association stresses that its members are merely following Medicare rules. Doctors’ offices owned by hospitals are generally allowed to bill Medicare at the higher outpatient rates if they are within 35 miles of the hospital campus and integrate their operations with the hospital.

But some experts and insurers question whether that’s reason enough for patients and taxpayers to pay dramatically higher prices.

Margie Maxwell, president of Aetna’s Southeast market, said: “There is no logic and there is no reason to allow a higher payment because it has now become a hospital billing. … It should not be happening.”

‘Harming consumers’

In a review of Medicare and private health plan data, the newspapers found that North Carolina hospitals are increasingly billing for routine office visits and for echocardiograms.

The number of office visits that North Carolina hospitals billed to Medicare climbed by more than 40 percent from 2007 to 2010, according to data compiled by the American Hospital Directory. And at Duke University Hospital, the number more than tripled.

During the same period, the number of echocardiography claims that North Carolina hospitals billed to Medicare increased more than 20 percent. At Carolinas Medical Center in Charlotte, the number more than quadrupled.

Berenson, of the Urban Institute, sees nothing redeeming in the trend.

“That’s taking advantage of the payers and really harming consumers,” said Berenson, who previously served as a commissioner of MedPAC, which advises Congress on Medicare policy. “It is not promoting more efficient care.”

Neff: 919-829-4516

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