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Hospital Accounting: It’s Complicated

By Lynn M. Petrovich for CommonSense2.com

For the Love of Universal Health Care

Some time ago I received a letter from my employer regarding its health insurance policy which said there would be some changes to it. First of all, that’s never good. Second, I wasn’t sure what the letter meant. I was confused. I thought it meant whatever I had been doing, I couldn’t do anymore, but I wasn’t sure. You see, I hadn’t been doing anything prior to receiving the letter, and I didn’t know if I should still not be doing anything or if I should start doing something. Actually, doing nothing is what I do best…well, when it comes to this health care thing, that is. If I don’t need to use it, then that is when it works best for me and my family.

I mean, trying to understand the mechanics of our current health care structure requires an advanced degree in doublespeak. There’s a contract but somehow it’s always subject to unilateral alteration, especially if profits start dropping, then these insurance companies look for ways to re-assess the relationship (According to MS magazine until the year 2014, domestic violence, pregnancy, and cesarean sections are pre-existing conditions which could render a claim denied).

And there are times, I admit, I have to hand it to our for-profit health insurance for their ingenuity. The aforementioned letter forewarned of a 12 page pamphlet entitled “Important Notice of Changes to Policy”. Among the 40 or so “revisions” (which all increased insured’s out of pocket costs) was a real gem: The Company would no longer reimburse policyholders for prosthetic devices not prescribed by a physician and for which there was no loss of limb.

I wonder how long that had been going on before someone became the wiser.

So you can see why I’m rather claim-shy; I avoid doctors and hospitals like the plague. That is, until one night several months ago when the ultimate crisis happened: A family member became ill, and we had to go to our local emergency room. A total of 37 hours, including one night, was spent in the hospital. Then we got the bill. It totaled $16,808.

After the deductible, our insurance company paid $2,739. That’s it. Which begs the question: Which was the cost of the hospital’s services, $16,808 or $2,739?

I’ve spent months trying to get an answer to this question. Everyone at the hospital from accounting, to billing, the doctors and nurses, employees, former employees, collection agents, even the hospital’s Executive Director have been unable to articulate the tabulation of this invoice. I’m told “it’s complicated, very, very complicated” and “no one knows exactly how the bills are computed because it’s complicated.” There’s the chauvinistic approach: “Mrs. Petrovich, you don’t need to know because it has nothing to do with you.” And the demeaning: “It’s something you wouldn’t understand.” Of course then there’s the ever lovin’: “It’s just something we do, an adjusting entry, and no one really knows how it’s done because [you got it] it’s complicated.”

Without the knowledge of exactly how hospital bills are calculated, how can we ascertain if medical costs are indeed increasing? I mean if they’re just throwing darts at a board, we have no control or foundation for determining medical cost trends.

And quite frankly, how difficult can it be? I mean pardon the analogy, but it’s not brain surgery. It’s cost accounting 101.

Reviewing the hospital’s detail of services rendered, among the charges were $8,786 for the room (one night), and another $2,609 for the emergency room (2 hours – ouch!), and $368 for one X-ray (was it printed on gold?).

Here’s an interesting tidbit: If you can afford health insurance, the hospital will accept $2,739 as payment in full; if you can’t afford health insurance, you’ll owe more, like $16,808.

That’s not complicated, that’s sick.

So in an effort to thwart my frustration with regard to how much the hospital’s services cost to the hospital and why they would negotiate with our for-profit health insurance conglomerates to accept a sum that is sixteen percent of what they billed, I decided to dive into their financial statements because, like most hospitals in America, it’s a non-profit 501(c)(3) institution. IRS Form 990s are public information.

There are strict guidelines for operating a non profit, 501(c)(3), which is understandable because non profit entities pay no income, property, or sales taxes. Contributions are tax deductible. Also, an important component is that earnings (not referred to as profits, but as “surplus”) may not benefit any individual or stakeholder and must be retained by the organization and used to further their cause, which must advance the welfare of the public.

The latest IRS Form 990 available, 2008, was very interesting. The hospital, whose mission statement is to provide “medically necessary health care services to all individuals regardless of race, color, national origin, religion, or ability to pay” had a loss of almost $10 million on revenues of $266 million (of course we don’t know which set of books were used to tabulate the revenue, the one showing $16,808 or the one booking $2,739). Despite this loss, they doled out bonuses to their (already) highly compensated employees. Since this hospital is part of a system of hospitals and that conglomerate paid its Executive Director in excess of $3 million (including half a million as bonus), I reviewed at least a dozen hospital’s financials in the Tri-State area (Among nine hospitals, compensation to highly salaried personnel totaled over $55 million).

This particular hospital wrote off almost $12 million as uncollectible. (In fact one of their collection agencies told me they typically see over 1,000 accounts per year which they deem as uncollectible.). This hospital had a cumulative net fund balance (what’s left over after subtracting what’s owed) of negative $48 million.

Here’s something worthy of note: Stuck to the hospital room’s pegboard was a flyer which said they were on a “cost-cutting” mission and had partnered with doctors in a “profit-sharing” measure (not sure how a non profit has profit sharing). This mission included several critical modifications to their policies – like not changing patients’ bed linens daily unless they were soiled. Hey, aren’t hospital infections one of the largest problems of staying in the hospital? Just thinking out loud here but maybe they could cut out bloated paychecks, bonuses, “incentive” compensation programs (apparently a quarter to half a million dollars salary isn’t enough enticement), severance packages, world class travel and hotel rooms; or advertising and 12 page glossy color brochures with pictures of happy people catching butterflies which I receive ad nauseam (and are nothing more than teasers to people who can’t afford healthcare).

Some of the other hospitals had investment losses in the millions on derivatives which have become totally worthless. I’d cut that shit out completely. I mean it seems to me for every dollar lost on derivatives, they’ve got to make that up by charging more from people who can’t afford to pay you in the first place.

And for goodness sake, change the bed sheets already!

Oh the interesting information I found when digging into Form 990s, that is, those hospitals that didn’t close their doors. Here are some more highlights:

A NJ regional trauma hospital (6 CEOs with compensation in excess of $4.4 million) had unrealized losses on investments of almost $60 million. It wrote off almost $50 million as uncollectible.

For some reason hospitals spend large sums on office supplies totaling in the hundreds of millions – comprising over 20% of overhead (I’m talking about for each hospital). That’s a lot of white out!

A central Jersey hospital gave its former CEO severance pay of $732,809; current CEO pay was half a million.

Here’s a good one: One hospital paid two non-medical (i.e. administrative) employees a combined total of $460,000 and yet felt the need to add another $3,000 so they could get their taxes done.

According to a 2/22/10 article in the New York Post, St. Vincent’s Hospital (which closed this year due to insurmountable debt of almost $1 billion) paid NFL Giant’s quarterback Eli Manning at least $600,000 in addition to “first class airfare, lodging, ground transportation and meals for his family” for media events. Mr. Manning is already independently wealthy with a 6 year deal worth almost $100 million and another $5 million a year in endorsements. An astute St. Vincent’s board member noted “Manning’s pact was a ‘bad deal at a bad time’ that could lead to ‘bad publicity” (thousands laid off).

Harlem’s North General Hospital couldn’t hold on either. An official announcement this past April stated: ”Like many health care providers, North General has to find ways to cope with dramatic changes to health care, state funding, the economy and our local area.” North General closed its doors July 2nd (thousands laid off)

In the last decade, Los Angeles County saw 14 hospitals, with emergency rooms, close down due to financial constraints (tens of thousands laid off).

It seems the expense side of hospital ledgers is amok with waste and what we in NJ recognize as “The Blob”, and there’s obviously a tremendous disconnect between what is invoiced by the hospital and what is paid.

According to a report by the Institute for Health & Socio-Economic Policy (IHSP) dated 12/13/2005 (you can find this report at www.calnurse.org), “The Third Annual IHSP Hospital 200: The Nation’s Most – and Least – Expensive Hospitals Fiscal Year 2003/2004″ [”The Report”]:

“When pressed, the hospital industry habitually states that gross hospital charges are irrelevant since actual payments from Medicare and other payers are reimbursed via fixed rates. The question left unasked and unanswered is, if reimbursement rates are absolutely fixed, then why are not hospital gross chares – the ‘list prices’ – fixed and indexed to the same rate?”

“The Report”, p. 5

Exactly. What this Report found in its study of 238 hospitals across America was a shell game referred to as “The Health Care War Economy”:

“High hospital charges have provided ideological cover for health plans to raise once again premium rates by double digits – and to dramatically increase their profits – thus increasing health care costs for large and small employers and federal, state and local government agencies. This has prompted a number of businesses to scale back on the quality of the plan available for their employees and has been a significant contributor to the growing ranks of the uninsured whose only recourse to care is the hospital emergency room – the most expensive form of care. Hospitals then cost shift that economic burden to other payers by raising charges in so far as possible, particularly drug, medical supply and operating room charges, contributing to a self-perpetuating and self-defeating Health Care War Economy of more expensive care, less care, higher premium rates, and more uninsured.

This brings us full circle and is exactly what one should expect as the necessary outcome of the ongoing but unwinnable battle within the Health Care War Economy struggles among pharmaceutical corporations, insurers and hospitals as they do their best to exploit each other in a market care-blind to the nation’s health needs.”

The Report, pgs 14 – 15

This Report details in Table 9, pages 34 through 38, the average total billings-to-cost-ratio of the top 100 Hospitals by State. Some of the most egregious offenders, at one thousand seventy five percent above cost, are Tenet Healthcare (for-profit corporation that owns or leases at least 50 hospitals, $9 billion in 2009 sales), and Temple University in Pennsylvania (nonprofit 501(c)(3), CEO compensation for 2007 was $1.1 million) at nine hundred ninety percent above cost.

The Report reviewed lawsuits filed on behalf of patients who claimed they were unfairly treated:

Scott Ferguson, a retired artist without health insurance, was billed $66,900 for treatment of a heart condition at St. Anthony Central Hospital in Denver last December [2004]. If he had had insurance, his attorneys claim the tab would have been about $10,000.

The Report, p. 94

This, our standard industry-wide “health care” practice, indicates health care costs are not necessarily increasing (unless CEOs wants bigger bonuses, severance packages, and maybe a pony), but instead are artificially inflated and in an effort to maximize revenues from those least able to pay for it.

So what do hospitals do when the uninsured or those with limited insurance can’t pay? They aggressively pursue patients – for the inflated billings – by contracting with collection agencies that use any tactic available to secure payment. Many patients end up with ruined credit ratings, garnished wages, high-interest rate credit card debt, or bankrupt.

According to an online news agency, over 62% of bankruptcies filed last year were due to high medical bills, three-quarters of those people had medical insurance: “Unless you’re a Warren Buffett or Bill Gates, you’re one illness away from financial ruin in this country” said Steffie Woolhander, M.D., of the Harvard Medical School (CNN.com 6/5/09).

So going back to the criteria for establishing and running a non profit 501(c)(3) entity, how does forcing people into poverty or insolvency by insisting on payment for a puffed up hospital bill advance the welfare of the public?

Under our current system, hospitals’ sources of revenue are multiple and costly to obtain. A great deal of overhead must be expended in the (timely) claim filing process in order to secure funds among various entities, to name a few:

(1) Medicare

(2) Medicaid

(3) TRICARE (military reimbursement to civilian hospitals);

(4) Matching State Medicaid

(5) SCHIP (States’ Children’s Hospital Insurance Plans)

(6) Charity Care,

(7) For-profit private insurance companies which all have their own processing procedures, paperwork, and deadlines

(8) Collection agencies

(9) Attorneys who have filed legal claims against patients.

The Patient Protection and Affordable Care Act, signed into law by President Obama in March, does nothing to stop this abusive health care practice; in fact it enables the dysfunction by forcing more people into it.

So what, as a nation, can we do?

The best solution is Universal Single Payer Health Care which considers health care a basic human right, “un-complicates” the system, and removes the profit motive.

(1) Universal – because everyone would be covered regardless of race, age, sex, employment or ability to pay. It would be publicly financed, privately delivered.

(2) Single Payer – because funding would originate from a single source, a small, fixed payroll tax as a percentage of wages which would be much smaller than what the majority of Americans now pay in insurance premiums (full disclaimer: LeBron James and Paris Hilton would pay more);

(3) Health Care – that is, actual accounting-determined-cost-controlled health care for individuals and not for the exploitation of hospitals, private profit-driven insurance conglomerates, and the pharmaceutical industries.

Under Universal Single Payer Health Care, hospitals would be paid a single sum, an amount that is equal to their annual operating costs. That’s it.

On the expense side, there would be no need for

(1) Billing

(2) Filing of claim forms

(3) Writing off uncollectible accounts,

(4) Collection costs

(5) Colorful glossy brochures

(6) Advertising

(7) Lobbying expenses

Of course there would have to be oversight to knock down those million-dollar compensation packages (think employment!).

The cost savings just from uncollectible accounts would be enough to open more hospitals (a review of 10 hospital’s financials showed they collectively wrote off over $212 million – think employment!).

Even better the States would not have to fund charity care, SCHIP, TRICARE, match Federal Medicaid dollars, and any other low-income specific health programs. Conservatively speaking the collective savings would be at least $60 billion.

So under Universal Single Payer Health Care, we are able to save billions of dollars, open new hospitals, increase employment, and streamline costs and funding.

Now that’s a change I wouldn’t mind receiving a letter about!

3 Comments

  1. Peter Robbins on August 4, 2010 at 3:56 pm

    This article nails the question I have help for a very long time. If we are worried about the rising costs of healthcare, what is the real cost of delivering care. I first became aware of this in 2007 when a local hospital billed the insurance company $6600 for in-out surgery and then took $4000 off as a contractual obligation. Then I was left with paying 30% of the difference. Nobody could provide any supporting information for these figures.
    We need a health care system that is paid to keep people healthy, not make money off illness.



  2. Mary Ann Freeman on August 9, 2010 at 4:29 pm

    Excellent article! This is very articulate and puts the case for a single-payer plan concisely. Two years ago my husband had surgery on his lung. The hospital bill came to over $50,000. The insurance paid less than $20,000 of that amount and the rest just “vanished”. I’ve often wondered what happened to the rest of the amount we owed.

    My husband is British and I lived in England with him for 13 years. I know full well that the single-payer system is far superior and more humane than the system we have here in the US. My husband often remarks that the first question a health care provider should ask a patient is “What can we do to help you feel better?” instead of “Who is your health insurance provider?”



  3. Mark on October 24, 2011 at 11:28 am

    This article is ridiculous. I can understand how so many want to point their fingers at hospitals, but that is a bad mistake. Hospitals are fighting like crazy to stay alive. They have to deal with insurance companies that want to pay them pennies on the dollar, with federal regulators who want to put tons of regulations on them, employees who have to be paid a competitive salaries and vendors who are constantly raising their prices. If anyone wants to blame the hospitals for the problem with the medical industry, then I suggest that you get educated and go talk to your local hospital CFO or Controller.