California Ballot Measure to Raise Healthcare Costs

The Service Employees International Union-United Healthcare Workers West are aggressively obtaining signatures for two California ballot initiatives. The Charitable Hospital Executive Compensation Act of 2014 puts a cap of $450,000 on the annual salary of executives at non-profit hospitals. The Fair Healthcare Pricing Act of 2014 prohibits hospitals from charging more than 25 percent above the estimated cost of goods and services provided to patients.

First of all, it’s supremely ironic that a union, whose collective bargaining raises the prices of all goods and services they touch, is complaining about anything costing too much.

More importantly, these two initiatives will not accomplish their stated mission:

Our union of healthcare workers is driven to improve the healthcare system. Our mission is to provide quality care for all patients, expand access to excellent, affordable healthcare for all Californians and improve living standards for all workers.

For people who work in healthcare, they know remarkably little about the economics of healthcare. Perhaps a short primer is in order. Most hospitals do not have accurate enough costing systems to really know what the cost of a specific service is. I’ll illustrate with an example. Say my Granny gets a hip replacement: this involves a surgical procedure at the hospital and several days stay after the procedure. The hospital knows the cost of the hip implant and the other supplies used in the procedure, and they know the cost of the medications they gave to Granny during her stay at the hospital. They can do a pretty good job of figuring out what percentage of their costs for buildings, utilities, hospital beds, and other equipment should be attributed to Granny’s bill. For the most part they can calculate the costs of the physicians, like the surgeon who placed the implant, and the attending physician who came to check on her every morning. However, they have no idea how to calculate the costs of all of their non-physician staff that cared for Granny. You know, like the admission clerk who checked Granny in to the hospital, the nurses and medical assistants who cared for her after the procedure, and the pharmacists who prepared and checked the medications Granny received. Coincidentally, many of these types of workers are members of the SEIU-UHW. These types of workers don’t track the time they spent caring for Granny. If Granny had complications and required the nurse to come in 5 or 6 times a day, the hospital has no way to account for the cost of that nurse’s time. Since labor is the single largest expense category in a hospital, the lack of data about which patient the majority of that labor was spent on makes it nearly impossible to accurately know what the true cost of Granny’s hip replacement was.

Hospitals could require these workers to accurately track which patient they spent each minute of their time on, but this would be a great burden on those workers, and hospitals have mostly decided that the juice isn’t worth the squeeze. If a hospital did require this of their workers, it’s almost a certainty that the SEIU-UHW would complain about it, and would rightfully say that this hair-brained idea from management would raise healthcare costs.

It is true that the “retail” prices charged by hospitals are absurdly high. The 18 dollar Tylenol is not an aberration. For reasons nobody fully understands, the prices on a hospital charge master (which is essentially their retail price list for all of their services) are many times higher that what that service costs, or what they expect to be paid for it. People who have insurance, either from a commercial insurance company like Aetna or United Healthcare, or from the government via Medicare or Medicaid, never have to pay the retail price charged by the hospital. The insurance companies sign a contract with the hospitals that they add to their network of providers (you know, the providers that they say you can go to). In that contract, the hospital and the insurance company agree on a price for every one of the services the hospital provides, and the insurance company makes the hospital agree not to charge you more than what that price says. The hospital also agrees not to charge the insurance company, or the patient for many of those services.

So when you go get a lab test, like a Complete Blood Count (a very common test) at the hospital, the hospital might charge the insurance company $35 for the lab test, and another $18 for a draw fee (i.e. the person who stuck the needle in your arm to draw the blood). The contract that hospital has with your insurance company probably says that the insurance company will pay $3.75 cents for the Complete Blood Count test, and they won’t pay for the draw fee. So the hospital charges your insurance company $53, and they get paid $3.75.

This means, that if you don’t have insurance, you get whacked twice if you require healthcare services: not only do you have to pay all of the costs, but you have to pay the retail price charged by the hospital, instead of the insurance negotiated price, which is much lower. The lesson here is that if you don’t have insurance and you get a big fat bill from the hospital, negotiate the charges down before you pay anything.

So, back to our union friends. Executive pay is such a small percentage of healthcare costs that it’s not even worth discussing. That ballot measure is about unions fighting with management, not about reducing healthcare costs.

Their ballot measure to cap hospital charges at 25% of costs will will be great for people who don’t have insurance. Hospitals won’t be able to charge them such high retail prices. And it will accomplish their stated goal of reducing bankruptcy filings by these uninsured patients. But that’s only 19% of the California population according to the Kaiser Family Foundation.

Let’s examine the other effects this ballot measure would have. Hospitals are not money making machines. According to the American Hospital Association’s annual survey of their members, 28% of hospitals lost money in 2011. Even worse, in aggregate, hospitals lose money on patient care, the only way hospitals survive is on non-patient revenue, i.e. investment returns from their endowment and donations.

Since the ballot measure does nothing to reduce hospital costs, hospitals will be have to make up the lost revenue somewhere. Hospitals can’t negotiate with the government on Medicare and Medicaid reimbursement, so they will have to raise their rates with commercial payers for the 51% of Californians who have insurance through their employer, or who purchased it directly from a commercial payer. Those higher premiums will cause some of those employers to stop offering insurance coverage for their employees.

In exchange for reducing bankruptcy filings for 19% of Californians, prices go up for 51% of Californians, and hospitals have yet another regulation to comply with, which increases their overhead and costs. If you live in California, remember that a vote for the Fair Healthcare Pricing Act of 2014 is a vote for increased healthcare costs for the majority of Californians.