[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]




                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION


                             JUNE 22, 2004


                           Serial No. 108-49


         Printed for the use of the Committee on Ways and Means

99-670                      WASHINGTON : 2005
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
RON LEWIS, Kentucky
PAUL RYAN, Wisconsin

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel


                       SUBCOMMITTEE ON OVERSIGHT

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    EARL POMEROY, North Dakota
JERRY WELLER, Illinois               GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado              MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida                  JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   MAX SANDLIN, Texas
PAUL RYAN, Wisconsin

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S



Advisory of June 15, 2004, announcing the hearing................     2


Adventist Health System, Richard Morrison........................   107
American Hospital Association Board of Trustees, David Bernd.....    98
Center for Studying Health System Change, Paul B. Ginsburg.......    17
The Commonwealth Fund, Karen Davis...............................    28
Hal Cohen, Inc., Harold A. Cohen.................................   111
Harvard Business School, Regina E. Herzlinger....................    53
Harvard School of Public Health, Department of Health Policy and 
  Management, Nancy Kane.........................................    13
Pacific Business Group on Health, Peter V. Lee...................    22
Southern Medical Health Systems, Inc., Randy Sucher..............   105

                       SUBMISSIONS FOR THE RECORD

Catholic Health Association of the United States, Michael D. 
  Place, statement...............................................   134
Community Catalyst, Boston, MA, statement and attachment.........   136
Mitchell, Geoffrey C., Columbus, OH, statement...................   138
Palmer, Pat, and Johnson, Nora, Caldwell, WV, statement..........   142
VHA, Inc., statement.............................................   144



                         TUESDAY, JUNE 22, 2004

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]


                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
June 15, 2004

            Houghton Announces First Hearing in a Series on

             Tax Exemption: Pricing Practices of Hospitals

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold the first in a series of hearings on tax 
exemption issues. This hearing will examine pricing practices of tax-
exempt and other hospitals. The hearing will take place on Tuesday, 
June 22, 2004, in the main Committee hearing room, 1100 Longworth House 
Office Building, beginning at 10:00 a.m.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives from a variety of health care 
groups and outside experts.


    Overall there are more than 300,000 reporting tax-exempt 501(c)(3) 
entities. Hospitals represented a small proportion (1.9 percent) of 
total reporting charitable 501(c)(3)s but, in 2001, constituted 41 
percent ($337 billion) of total expenditures. Under current law, 
hospitals are considered tax exempt because they promote the health of 
a class of persons broad enough to benefit the community as a whole. 
Such community benefit is deemed to be a charitable purpose. Another 
approach is to view tax-exemption as a subsidy for the costs that the 
Federal Government would otherwise incur, such as charity care.
    Hospitals bill for all the charges for items and services used by a 
patient after a hospital stay. Many hospitals increase their charges to 
shift the costs of treating the indigent onto public and private 
payors. In 2002, hospital charges exceeded their average costs by 118 
percent (Centers for Medicare and Medicaid Services (CMS)). Because 
they do not have a contract with a hospital, individuals without health 
insurance are billed full charges. Thus, the uninsured are liable for 
charges which were inflated to cover the costs of indigent medical 
care. In addition, taxpayers subsidize the $22 billion in costs of the 
indigent through $23 billion a year in special Medicare Part A payments 
and other government subsidies.
    Hospital charges are not transparent. So consumers, including the 
uninsured, do not have access to information on the costs of medical 
treatment across hospitals. Some advocate empowering consumers with 
information on hospital costs and quality will increase competition and 
slow medical cost inflation.
    In announcing the hearing, Chairman Houghton stated, ``The rising 
cost of health care is a concern. This is on everyone's mind. So what 
can we do to help? One thing is to look at ways to make hospital prices 
more transparent. Anything we are able to do to increase the amount of 
information available on health care so users can better make up their 
minds would, to my mind, help reduce costs.''


    The hearing will examine the current hospital pricing system and 
focus on the lack of transparency in hospital charges, which hinders 
consumers from making informed choices about where they get care and 
the options for increasing information about hospital pricing.


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noted above.
    Chairman HOUGHTON. Good morning, everybody. Thanks for 
being here today, an important meeting. During our hearing 
today we will look at nonprofit hospitals and also the larger 
issues of hospital pricing. I particularly want to thank the 
members of the panel for being here this morning. As we all 
know, or most of us know, there are 300,000 501(c)(3) 
organizations ranging from universities to blood donor 
organizations. Hospitals make up a significant part of total 
expenses in this category. As a part of our oversight agenda, 
it is important that we review topics such as tax-exempt 
hospital prices, charity care, quality of care, and the 
services offered by for-profits versus not-for-profits.
    Relating to the financial situation by hospitals in my 
district, just to give you an example, Standard & Poor's has 
recently reported that New York hospitals still have some of 
the weakest access to capital in the Nation, attributed in part 
to the former government-mandated rate regulation. Despite 
their finances, our local hospitals also provide charity care, 
and I am sure this is true in many other hospitals in different 
parts of the country. At Arnot Ogden Medical Center in Elmira, 
New York in upstate New York, the Community Care Program 
provides discounts up to 300 percent of the Federal poverty 
level. Information on the policy is publicly posted.
    Another example, F.F. Thompson Hospital in Canandaigua has 
a sliding fee policy that provides discounts up to 100 percent 
for persons with wages below 200 percent of the Federal poverty 
level. Still another example, at Jones Memorial Hospital in 
Wellsville, a small town in our area, a financial aid counselor 
will confidentially visit patients who are admitted with no 
health insurance, to make sure the patient knows that free or 
discounted care is available for patients in need. One topic we 
are going to be exploring today is hospital pricing. I have 
before me what is called a ``charge master.'' This makes for 
fascinating reading.
    I thought the Tax Code was complicated, but it is nothing 
like this. Hospitals seem to be stuck with a broken billing 
system and no one knows the cost of services in advance. So, 
people receive bills for services where the charges appear too 
high for a hospital gown or even an aspirin, and they do not 
understand that these amounts are not what insurance is going 
to pay for. People without health insurance individually 
negotiate payment with hospitals, a process that creates 
anxiety and a lot of uncertainty. If we could do it all over 
again, I am sure this is not a system that anyone in his right 
mind would dream up.
    Appearing before us today on the first panel are experts 
who can describe how we got where we are, and what we might do 
to change. On the next panel we have distinguished 
representatives from hospitals, as well as an expert on 
government pricing, who are able to bring real world experience 
to bear on this very difficult problem. I welcome you all. 
Thank you for being here, and I look forward to your testimony. 
I am now pleased to yield to our ranking Democrat, my 
distinguished associate, Mr. Pomeroy.
    [The opening statement of Chairman Houghton follows:]
   Opening Statement of The Honorable Amo Houghton, Chairman, and a 
         Representative in Congress from the State of New York
    Good morning. During our hearing today we will look at non-profit 
hospitals and at the larger issue of hospital pricing. There are many--
over 300,000--501(c)(3) organizations ranging from universities to 
blood donor organizations. Hospitals make up a significant part of 
total expenses in this category. As a part of our oversight agenda, it 
is important that we review topics such as tax-exempt hospital prices, 
charity care, quality of care, and the services offered by for-profits 
versus not for profits.
    I am familiar with the financial situation faced by hospitals in my 
district. Standard and Poors, the bond rating agency, recently reported 
that New York hospitals still have some of the weakest access to 
capital in the nation, attributed in part to the former government-
mandated rate regulation. Despite their finances, my local hospitals 
also provide charity care. For example:

      At Arnot Ogden Medical Center in Elmira the Community 
Care Program provides discounts up to 300% of the federal poverty 
level. Information on the policy is publicly posted.
      Similarly, F.F. Thompson Hospital in Canandaigua has a 
sliding fee policy that provides discounts up to 100% for persons with 
wages below 200% of the federal poverty level.
      At Jones Memorial Hospital in Wellsville a financial aid 
counselor will confidentially visit patients that are admitted with no 
health insurance to make sure the patient knows that free or discounted 
care is available for patients in need.

    One important topic we will explore today is hospital pricing. I 
have before me what is called a ``charge master'' for a small hospital. 
Now I thought the tax code was complicated, but much in these 200 pages 
does not make sense.
    Hospitals seem to be stuck with a broken billing system. No one 
knows the costs of the services in advance. People receive bills for 
services where the charges appear too high for a hospital gown or an 
aspirin. They don't understand that these amounts are not what their 
insurance will pay. People without health insurance individually 
negotiate payment with hospitals, a process that creates anxiety and 
uncertainty. If we could do it all over again, this is not the system 
that anyone--employers, insurers, consumers and hospitals--would dream 
    Appearing before us today on the first panel are experts who can 
describe how we got here and what we might do to change the system. On 
the next panel, we have distinguished representatives from hospitals as 
well as an expert on government pricing, who can bring some real world 
experience to bear on this very difficult problem. I welcome you all 
and look forward to your testimony.
    I am now pleased to yield to our ranking Democrat, Mr. Pomeroy.


    Mr. POMEROY. Mr. Chairman, thank you very much, and I am 
delighted to be participating in today's hearing. I do think 
that our work might have been achieved perhaps more 
successfully had the focus of this morning's hearing been a 
little more straightforward. I am not entirely clear whether we 
are exploring tax-exempt status or whether we are exploring 
hospital pricing practices, and I believe they are somewhat 
distinct points of inquiry. I think each represents an 
interesting area for us to explore, but to look at the pricing 
practices of tax-exempt hospitals seems unnecessarily 
confusing, leaves open the question of whether or not we are 
concerned about the pricing practices of non-tax-exempt 
hospitals, and leaves us somewhat wondering where this is going 
in the first place.
    I think that, as I mentioned, there are some interesting 
things we can pull out of it. Transparency in pricing has got 
great value, and not just for hospitals. Actually, we have to 
think about that a little more, in government as well. I voted 
for a Medicare prescription drug bill (P.L. 108-173) I thought 
cost $400 billion. Come to find out it cost $536 billion. You 
know, some might think I should not have voted for that bill. I 
just wished I had known the price, and made a determination in 
light of the true price, not the price that was represented, 
that maybe some representing it knew wasn't the actual price. 
So, transparency in pricing is an important business.
    I also think the business of how we establish pricing 
specifically in hospitals is quite interesting, because most of 
the people accessing hospital services have some kind of third-
party coverage. Obviously, Medicare sets prices for the part 
covered by Medicare. Private insurance companies negotiate 
prices for the people that access care under their health 
insurance coverage, for the portions of copays are now Health 
Savings Accounts (HSAs) first-tier exposure. They will still 
get the discounts negotiated by their insurance companies, and 
then that leaves the uninsured, Mr. Chairman, as you note, 
without someone negotiating those discounts, and they are 
subject to the charge master. I think that for a second, 1 
second, for anyone to suggest that the problems of the 
uninsured are really pricing practices misses the point. It is 
not whether there is transparency behind those prices, it is 
the reality that if you are uninsured you have pretty 
significant prospects. You cannot afford the cost of medical 
care in this day and age, and the problems of the uninsured 
deserve its whole additional focus.
    The pricing issue, in and of itself, is a creation of the 
fact that we have several different ways people are covered for 
health insurance, and some not covered at all. If we are going 
to really get to the bottom of that one, we might want to take 
it back to the Subcommittee on Health, the Subcommittee 
jurisdiction on this matter, and proceed an investigation of 
the uninsured. That might have some significant value as well.
    These are all kinds of questions swirling around in my 
mind. The tax-exempt status is another issue. If there is 
indeed a significant record to establish that institutions, 
charitable in construct, tax-exempt in status, are not meeting 
what is expected of them under the Code to achieve that status, 
that is an inquiry I think would have broad interest across the 
full Committee on Ways and Means, and I look forward to getting 
to the bottom of that. Again, trying to get to the bottom of 
that in a hearing on pricing practices, to me puts us on a 
circuitous route to that important question. In summary, Mr. 
Chairman, even though I feel like I am kind of climbing in a 
car I don't know where it is going, I am not even entirely sure 
why we are taking this trip, as long as I know you are along, 
Mr. Chairman, I am happy to be along for the ride. I yield 
    Chairman HOUGHTON. That is a pretty weak reed to lean on, I 
can tell you that. Mr. Thomas, the Chairman of the Committee on 
Ways and Means, would you like to make a statement?
    Chairman THOMAS. Just briefly, Mr. Chairman. Thank you for 
the beginning of what I hope is a long process, since this is 
the Subcommittee on Oversight, the Subcommittee correctly 
charged with reviewing for the Committee issues and items 
already on the Code, or the manner in which we should change 
differences in the Code.
    I listened with interest to my friend from North Dakota, 
Mr. Pomeroy, and the verbal statement that he delivered as his 
opening statement deviates from his written statement in 
referring to the $400 billion versus $500 something billion 
from the Administration. I guess that was necessary to insert 
in this hearing, but it really does underscore why hearings 
like this need to take place.
    The $400 billion was the number determined by the 
Congressional Budget Office (CBO). Those individuals and 
institution under the law, which we are required to rely on to 
provide us with estimates, not once, but twice. After reviewing 
the legislation, CBO said that it was going to cost $400 
billion. The gentleman is referring to another branch of 
government, the executive branch, which makes its own 
estimates, and I find it ironic that at times when they are 
arguing about particular policies or budgets, they prefer to 
hang on to CBO, rather than Office of Management and Budget 
(OMB). In this instance somehow, OMB is now the yardstick, and 
CBO is not. I find that when people choose different partners 
at different dances, it tells me something.
    In addition, I invite all of you to read the article in The 
Hill newspaper on Thursday, June 17, only to illustrate that it 
is possible to be consistently wrong over time. The gentleman 
who writes the article refers to me and my relationship on this 
issue to the late nineties. Someone needs to know I have been 
involved with this since the early eighties, and it seems to me 
that once every 20 years is not outlandish to review an area of 
government policy that involves billions of dollars.
    If you will go back and look at the history of the 501 or 
so-called charitable or nonprofit portion of the Tax Code, you 
see significant shifts in the 'thirties and in the 'fifties, 
and really no significant difference since the 'fifties.
    I have asked Chairman Houghton, and I hope the gentleman 
from North Dakota will be a willing partner, to investigate the 
entire 501(c) section. When examining the entire 501(c) 
section, it seems prudent that you would look at those areas 
that involve themselves most extensively in the expenditures 
which occur under 501(c). Hospitals comprise 41 percent of the 
expenditures in this area. Why wouldn't you start with the 
group that gets the biggest, largest break?
    The second reason I think it makes sense to go with 
hospitals is that when you look at other activities that are 
covered under 501(c)(3), there probably isn't as good an 
example, although 85 percent of the hospitals in the United 
States are not-for-profit. If I blindfolded you, took you into 
a hospital, took the blindfold off you and led you around to 
look at the hospital, you would be hard pressed to determine 
whether it's a 501(c) not-for-profit or a for-profit. In other 
words, here are two institutions structured fundamentally 
differently in the Tax Code, carrying out virtually identical 
duties, the responsibilities and functions as a hospital. The 
Chairman, in his opening statement, illustrated some things 
that not-for-profits do, which used to be called charitable--
now it is called community benefit--in nature. We don't know if 
for-profits do that either, and if in fact there are as many 
for-profits that can be shown to give a break to low income as 
not-for-profits, then that is not really a difference for 
receiving that tax benefit. What is it that they do differently 
than people who pay taxes? We owe it to the taxpayers to 
explore that question.
    When we were debating Medicare, a portion of Medicare that 
we talked about and got to know real well is a portion called 
bad debt. It is payment to hospitals in lieu of hospitals not 
being able to collect money from people who can't pay. 
Hospitals can't collect their bills, so taxpayers pay the 
money. If you pay the same amount to for-profit as not-for-
profit since not-for-profit gets a tax break that for-profits 
don't which is supposed to be under a community or charity 
concept? We don't know. I do not understand the resistance in 
the community to getting some knowledge to the Members of 
Congress who are charged with the responsibility of overseeing 
the Tax Code, and that if this hearing does not provide us with 
sufficient understanding of how someone who in one situation is 
not-for-profit and the other one is for-profit, and there is no 
real difference between the two, why the expenditures? If there 
is a difference, where is the difference? How is it a 
difference? How, in going through the rest of the 501(c) can we 
begin to build a case to see if others merit, if in fact not-
for-profit hospitals do, the differential that is in the Tax 
    Mr. Pomeroy, your concern about the pricing goes right to 
the heart of our problem to differentiate between not-for-
profits and for-profits, because you would at some time and 
under some circumstances, the not-for-profit aspect would 
display a different behavioral profile than the for-profits, 
and that is basically what we are going to try to do. We 
started with hospitals because they are the biggest chunk. They 
also give us an example to compare, ostensibly, to similar 
operations that are structured significantly differently under 
the Tax Code. So, I think it is most appropriate that we start 
with this area. One of the most confusing areas of hospitals, 
whether they are for-profit or not-for-profit is the pricing. 
So, if you are going to investigate how they are different or 
similar, it makes all the sense in the world to begin to talk 
about pricing.
    With those opening statements, Mr. Chairman, I want 
everyone to know that this is the beginning of a very long 
series of hearings dealing incrementally, moving down the tax 
expenditure amount structure, to a number of institutions that 
are in direct competition with for-profit institutions in this 
society for which they receive significant tax benefits under 
the 501 category, and what is it that taxpayers are getting for 
the billions of dollars that are forgiven because of the 
categorization one way or another. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you, Mr. Thomas. Mr. Stark, would 
you like to make a statement?
    Mr. STARK. Thank you, Mr. Chairman. Thank you for inviting 
me to join with you today. I too am confused. I have reviewed 
the testimony, and there is nobody that talks about the 
difference in prices except Ms. Davis, who happens to be our 
witness, and I am not sure she has any charts. So, if this is a 
hearing to determine whether there is a difference in pricing 
between profits and nonprofits, we should send the witnesses 
home and ask them to come back with some examples.
    There is a lot we could do to improve our health system, 
but I think we need to talk more about coverage for 44 million 
uninsured, not how to lower hospital bills. I think it is a 
given that patients don't select hospitals, their doctors do. 
Even if you had price transparency it would be foolish for 
people to choose a hospital on price alone without information 
as to what the quality of care is, and what happen--and most of 
us who are not physicians, don't have the foggiest idea of what 
is going to happen to us when we enter a hospital, so we 
wouldn't know what to ask or how to compare. It is one thing to 
compare a Chevrolet with a Ford with the help of the Internet, 
I suppose, but I would ask any of you to tell me what the 
difference is in a pap smear or a proctoscopic examination 
unless you have gone through it. Until we can determine the 
quality of services and combine that with cost, it seems to me 
we are wasting our time.
    As to whether or not we ought to give tax exemption to 
hospitals, that seems to me to be a whole other issue and I 
would suggest that the real burden is to define, which we have 
been unable to do, certainly in the 30 odd years I have served 
on this Committee and the previous experience on the Committee 
on Banking, which used to have jurisdiction over the 
nonprofits, there is no definition of charity care for 
hospitals that a Certified Public Accountant (CPA), that 
Financial Accounting Standards Board (FASB) has. Is it a bad 
debt forgiven or is it a scholarship when you walk in the front 
door? Absent that, which happens to drive the disproportionate 
share of discounts, it is an important thing for us to know.
    I would hope, Mr. Chairman, that we could look at that some 
more, so that we were able to define as to who gives charity 
care and who just doesn't have such good debt collectors, and 
that would be very useful to us in the future, but I hope maybe 
we can, in questioning, elicit some of that on some suggestions 
as to how we proceed from the witnesses. Again, thank you for 
allowing me to join you.
    Chairman HOUGHTON. Thanks, Mr. Stark. Mrs. Johnson, would 
you like make a statement?
    Mrs. JOHNSON. I thank you, Mr. Chairman, and indeed, I 
congratulate you on this hearing, and I am starting out on this 
thoughtful trek in terms of what does nonprofit status, which 
is a tax subsidy, gain us for those who enjoy it, and what is 
the relationship between those institutions that enjoy a 
privileged tax status and other institutions that provide like 
services that don't enjoy a privileged tax status.
    I am here not because I am a Member of the Subcommittee on 
Oversight, but because I am Chairman of the Subcommittee on 
Health, which has a different responsibility. One of our 
responsibilities that we are having great difficulty managing 
was well reflected in the Medicare Modernization bill. It asked 
for a number of studies and efforts for experts to better 
define that the information that we rely on in setting rates, 
and indeed, this afternoon we have a seminar of our 
Subcommittee with the Medicare Payment Advisory Committee (Med 
PAC) on their first report of how difficult it is to find data 
that will tell us what your financial circumstances are, and 
this issue of your having a defined amount that you charge 
people, that then varies all over the place, is one of the 
reasons it makes it very hard for us to figure out what your 
financial circumstances are. There is enormous conflict between 
what we call the Medicare margin and your total margin. This 
conflict has been so great, you can't make logical policy any 
more without better understanding these differences.
    We are going to be taking on a lot of the issues associated 
with how do we evaluate whether or not our hospitals are 
financially stable, doing well, and fairly rewarded, and part 
of that is the nonprofit benefits for those that are nonprofits 
versus the for-profits. So, this is a different angle on 
something we are interested in. We do not have time nor 
researchers to do it. I am glad they are doing it. I am here to 
listen to that. There are going to be many aspects to hospital 
financing that we are going to look at, and the reason we are 
going to look at them is that if we don't community hospitals 
are going to be destroyed by the public and private 
reimbursement systems that are supposed to support them.
    You look at what surgi-centers have done to hospitals in 
terms of taking out the simple programs, the simple cases. You 
look at what boutiques hospitals are positioned to do. You look 
at what competition for lab services are positioned to do, and 
you can't believe that community hospitals will be here for 
charitable or any other purpose if we don't get more honest and 
clear headed about what it is we are paying for and under what 
    So, this hearing, to begin to sort out what is the 
nonprofit subsidy that goes to hospitals and what is it related 
to, and what do we think of it, and what is it costing us, is 
all a very, very important piece of the program, and then we 
need to look at not only hospitals as nonprofits but the 
nonprofits across the board. I don't know what other Members 
are finding, but I am deluged with applications for 501(c)(3) 
status, and we need to understand as a tax writing Committee 
what is the effect of the nonprofit tax subsidy structure that 
we put in place many years ago with a very simple rationale, 
but which has absolutely exploded in multiple directions.
    I commend Chairman Houghton and Mr. Pomeroy for starting 
out this series of hearings which I think is extremely 
important for our tax writing Committee, and I am pleased to be 
here as the Chair of the Subcommittee on Health because these 
issues are always interrelated. I thank the Chairman for the 
courtesy of being able to make this comment on the record. 
Thank you.
    Chairman HOUGHTON. Thanks, Mrs. Johnson. Unless anybody has 
a burning desire to make an opening statement, I think we will 
go right to the panel.
    Mr. KLECZKA. Mr. Chairman, I don't have a burning desire 
except to insert two articles into the record at this point. 
Mr. Chairman, I would ask unanimous consent to put this hearing 
into perspective, that two articles be entered into the record. 
The first is The Hill article dated June 17, and it is 
entitled, ``Congressional Inquiry Triggers Hospital Angst.'' 
The second is a BusinessWeek article from June 7, and the 
article is entitled, ``Making Hospitals Cry Uncle.''
    Chairman HOUGHTON. Fine. We will put them in the record. 
Thanks very much, Mr. Kleczka.
    [The information follows:]

Congressional inquiry triggers hospital angst
By Bob Cusack
    In a move that has attracted attention on K Street, a powerful 
House lawmaker with a long memory has launched an investigation into 
the financial practices of the hospital industry.
    Hospital lobbyists fear that the scrutiny could eventually lead 
Congress to make changes to the industry's tax-exempt status.
    Some healthcare experts believe it is no coincidence that House 
Ways and Means Committee Chairman Bill Thomas (R-Calif.), who is 
spearheading a broad review of all 501(c)(3) tax-exempt entities, 
picked hospitals as his first target.
    Thomas and the hospital sector have had a complicated, roller-
coaster-like relationship. In the late nineties, Thomas protected the 
industry from proposed Clinton administration cuts in Medicare 
    But in 2002, the relationship soured after a draft of the House 
Medicare reform bill was leaked to the media. Thomas believed then--and 
believes now--that hospital Medicare payments have become bloated and 
need to be curbed.
    Hospital groups rallied against the 2002 measure, claiming that it 
could slash billions of dollars they receive from Medicare. The intense 
lobbying effort worked, and an infuriated Thomas was forced to rewrite 
the legislation.
    At the time, sources close to Thomas vowed that the lawmaker would 
get his way eventually--most likely in a nonelection year.
    ``Thomas remembers everything,'' an industry lobbyist said, adding 
that hospital groups are nervous that Thomas is laying the groundwork 
to scale back hospital payments next year.
    ``He may tell [hospitals], either accept Medicare payment changes 
or lose your tax-exempt status,'' the lobbyist said.
    A hospital lobbyist agreed, saying, ``That's Thomas's style.''
    On Tuesday, the largely inactive Ways and Means Oversight 
Subcommittee will hold the first of a series of hearings on tax-exempt 
issues. In announcing the hearing, the Committee took some veiled shots 
at the industry: ``Hospital charges are not transparent. So consumers, 
including the uninsured, do not have access to information on the costs 
of medical treatment across hospitals.''
    The release cited Medicare figures, claiming that ``hospitals' 
charges exceed their average costs by 118 percent.''
    There are more than 300,000 reporting tax-exempt 501(c)(3) 
entities. Hospitals represent 1.9 percent of total reporting charitable 
501(c)(3)s, but accounted for 41 percent ($337 billion) of total 
expenditures, according to the Ways and Means panel.
    ne healthcare expert estimated that 80 to 85 percent of all 
hospitals are tax-exempt.
    Thomas last month defended the inquiry, saying that taxpayers 
deserve to know what they are paying for. He told reporters, ``I know a 
lot of people don't want me asking these questions, but we are talking 
about billions of dollars.''
    Earlier this year, the hospital industry suffered a public-
relations hit when it claimed that government regulations were causing 
it to charge uninsured patients higher-than-normal prices. In a rare 
move, the Bush administration in February released the full text of its 
response letter to the American Hospital Association (AHA) disputing 
the contention government rules dictate hospital charges for the 
    Hospital lobbyists are anxious that Ways and Means aide Deborah 
Williams is taking the staff lead on the investigation. Williams, who 
helped draft the new Medicare drug law, is very familiar with the ins 
and outs of the hospital sector, having previously worked for AHA.
    But to the industry's dismay, Williams is a vocal proponent of 
slowing the growth of hospital reimbursements.
Making Hospitals Cry Uncle
Has insurer J. Patrick Rooney found an unorthodox way to turn up the 
    Conservative millionaire J. Patrick Rooney is on a mission from the 
Almighty: Bring down crushing and ``ungodly'' health-care costs. For 
more than a decade, he has worked to replace traditional insurance with 
tax-free health savings accounts (HSAS), which people can use to pay 
for their own medical care. ``I'm doing the right thing, and I think 
the Lord will be pleased about it,'' he says.
    Using his fortune to open doors in Washington, Rooney has 
relentlessly preached his gospel. Last year, Congress saw the light: 
GOP lawmakers inserted a $6.4 billion tax break for HSAs into a 
Medicare prescription-drug bill. And a recent survey by Mercer Human 
Resource Consulting says 75% of employers are likely to offer the 
accounts by 2006.
    A courtly 76-year-old, Rooney has never hidden the fact that he 
stood to profit from his crusade. After pioneering HSA sales with his 
old company, Golden Rule Insurance, he sold out to UnitedHealth Group 
Inc. (UNH) for $893 million just before Congress passed the tax break. 
He promptly founded Medical Savings Insurance Co. to sell more HSAs.
    But Rooney isn't relying on just the power of his ideas and 
political connections to make his company profitable. The Indianapolis-
based insurance entrepreneur also is backing a nonprofit group that 
uses hardball tactics to get hospitals to cut prices. The nonprofit, 
called Consejo de Latinos Unidos, campaigns on behalf of uninsured 
    Last year, Consejo pressured the nations' No. 2 hospital system, 
Tenet Healthcare Corp. (THC), to cut rates for uninsured patients and 
revamp its collection practices. At the same time, Rooney's Medical 
Savings won about $2 million in debt forgiveness from Tenet.
    Now, Consejo's leader, Republican strategist K.B. Forbes, has 
turned his attention to Florida. Hospitals being pilloried there say 
Rooney's company owes them millions in unpaid bills, too. And Rooney 
has suggested that a new Consejo target--HCA Inc. (HCA), America's 
largest hospital operator--could take a lesson from Tenet and shake its 
bad press by cutting a deal to forgive Medical Savings' debts.
    Rooney, who pledged seed money to Consejo and hired a Washington 
public relations firm to draw attention to its cause, says he doesn't 
control Forbes. ``K.B. has to paddle his own canoe,'' Rooney says. 
Besides, says Rooney, his drive to cut health-care costs, especially 
hospital fees, is about more than money: It's a moral crusade. As such, 
he makes no apologies for unorthodox methods.
    That includes backing Forbes, a onetime Medical Savings employee. 
``Forbes presents himself as an advocate of the consumer,'' says Linda 
S. Quick, president of south Florida Hospital & Healthcare Assn. But 
Consejo ``seems to be initiated and financed by Rooney and others 
selling individual insurance.''
    With his folksy demeanor, Rooney comes across as an endearing do-
gooder. He is also one of the most powerful voices on the Right. Since 
he pioneered HSAs in 1990, Rooney, his family, and employees have 
poured more than $5 million into Republican causes.
    Rooney's new model of health coverage, which has won support from 
President George W. Bush, replaces traditional insurance with tax-free 
health savings accounts and high-deductible policies. The argument: If 
patients must pay out-of-pocket for, say, the first $1,000 in bills, 
they will seek more cost-effective care. That, Rooney maintains, will 
unleash market forces to hold down costs. Big insurers, including Aetna 
Inc. (AET) and many regional Blue Cross Blue Shield Assn. plans, began 
rolling out HSAs this year.
    For hospitals, the plans pose a threat: bad debts. Patients 
accustomed to first-dollar coverage find they must pay before insurance 
kicks in, and many don't. In April, HCA blamed a rising tide of unpaid 
bills for its soft first quarter.
    It's not just patients who aren't paying. Medical Savings routinely 
marks down its policyholders' hospital bills by as much as 80%. ``Yes 
indeed, we're making unilateral decisions,'' Rooney says. ``But by God, 
we have to hold the hospitals down to a reasonable price.'' Medical 
Savings tells providers to accept its checks as full payment--or 
collect from patients.
    But as Forbes has demonstrated, hospitals pursuing low-income 
patients are vulnerable to attack. Last year, Consejo stoked press 
coverage of poor patients being hunted down by bill collectors. 
``Nobody wants these cases where someone was sick and the big, bad 
hospital is suing them,'' says Richard Morrison, a vice-president at 
Orlando's Adventist Health System, which says Medical Savings owes it 
some $1 million.
    Consejo zeroed in on Tenet in 2001 after Forbes uncovered examples 
of bare-knuckle collection practices--such as a lien on a Louisiana 
patient's beat-up mobile home. His timing was perfect. Tenet was trying 
to acquire hospitals in four cities and had drawn fire from the feds 
over its Medicare billing. At critical junctures, Forbes would trot out 
patients to portray Tenet as intent on gouging the poor. Tenet lost 
three of the acquisition deals.
    Behind the scenes, Tenet was in talks with Medical Savings over its 
unpaid bills. In January, 2003, Tenet caved. It forgave nearly all of 
Medical Savings' debt and lowered prices for the uninsured. In return, 
Consejo dropped 10 lawsuits. The deals with Consejo and Rooney were 
``contemporaneous and simultaneous,'' a Tenet executive says.
    Like Tenet, HCA has sought a truce. In mid-2003, Chairman and chief 
executive officer Jack O. Bovender Jr. set up a meeting with Rooney to 
explain HCA's discount policy in hopes that Rooney would persuade 
Forbes to back off. But prior to the meeting, Rooney forwarded a memo 
to Bovender from Medical Savings President Randy Suttles that drew 
parallels between HCA's situation and Tenet's. In the memo, which HCA 
made available to BusinessWeek, Suttles notes that Tenet had shaken 
some of its bad press after making a deal with Medical Savings. ``HCA 
is in similar circumstances,'' Suttles wrote. A livid Bovender canceled 
the meeting.
    When asked about the e-mail to Bovender, Rooney says: ``The one 
thing hospitals can't afford is a loss of public trust.'' And he isn't 
afraid to get in their faces. ``If we go to the hospital and beg, 
they'll say: 'We'll give you 20% off,''' says Rooney. ``Well phooey--
that's still an outrageous price. And we're not going to pay it.'' 
Indeed. More than 20 Florida hospital groups--including HCA--are suing 
Medical Savings for some $7 million in overdue payments.
    HCA and other Florida hospitals figure they have better odds of 
bucking Forbes and Rooney than Tenet did: They're not under serious 
regulatory scrutiny, and they're moving to help the uninsured. Rooney 
paints a different picture, saying hospitals are lining up to deal: 
``Tenet is not the only one.'' Both he and Forbes--independently, of 
course--predict victory.
By Lorraine Woellert in Washington


    Now, going to the panel. Nancy Kane, Professor at the 
Harvard School of Public Health in Boston; Paul Ginsburg, 
President of the Center for Studying Health System Change; 
Peter Lee, President of the Pacific Business Group on Health in 
San Francisco; Karen Davis, President of the Commonwealth Fund; 
and Regina Herzlinger, the Nancy McPherson Professor at the 
Harvard Business School in Boston. Please begin your testimony, 
and Dr. Kane, would you start?

                     BOSTON, MASSACHUSETTS

    Ms. KANE. Thank you. I just want to correct. I am a 
Professor at the Harvard School of Public Health, not the 
Harvard Business School. Mr. Chairman and Members of the 
Committee, thank you for inviting me to come and talk about 
medical bad debt and hospital tax exemption under the guise of 
hospital pricing practices.
    I think I wanted to start by talking a little bit about 
medical debt because it is a growing public health problem. 
Besides causing an enormous financial burden on some of our 
most vulnerable citizens, including personal bankruptcy and the 
loss of their homes, and the garnishment of their wages, it 
causes these people to be at an enormously greater health risk. 
The people who incur medical debt do not follow up on life 
threatening conditions such as getting the lump out of their 
breast for breast cancer and then not going back for the 
chemotherapy or the radiation therapy. People with less 
critical conditions don't go to the physician and do not fill 
needed prescriptions, and people who have incurred medical debt 
don't let their children participate in sports and do not 
undertake physical activity for fear of incurring an injury 
that might add to their medical debt. If we are concerned about 
obesity in this country, it doesn't help to have people afraid 
to undertake physical activity.
    Medical debt is related to the fundamental flaws in our 
health care financing system, which is both voluntary and 
extremely expensive, and increasingly out of the reach for a 
growing number of people in this country. Hospital pricing 
practices make a flawed system even worse by charging people 
who are self-pay, and therefore usually uninsured or at risk 
for a deductible or a coinsurance, it charges them the highest 
prices available. The hospital pricing system is now based on 
market-based negotiations, and the self-pay are not in a very 
good bargaining position when they arrive at the hospital door, 
or when they try to seek information on the Web, they are not 
asked what they would like to offer for that care when they are 
seeking care.
    So, the self-pay and only a few indemnity carriers are left 
paying on the basis of hospital charges, the charges are set 
indeed to cover the negotiated discounts of everyone else. 
Historically that made some sense, back when the discounts were 
around 16 percent, back in 1982, and many more payers were 
indeed paying on the basis of charges, and in fact, many 
hospitals were encouraged to do that by the rate setting 
systems in various States. However, rate setting has 
disappeared and negotiated pricing has taken place.
    Negotiated pricing now has brought those discounts up to 46 
percent in 2002--that is the median, by the way, not the 
average, which is probably higher--therefore, the markup of 
charges over hospital costs has grown from about 120 percent of 
cost to 180 percent, and again, that is the median. Fifty 
percent of hospitals are at or below, and 50 percent are above 
180 percent markup of their hospital charges over cost. 
Obviously, charges are wildly unrelated to cost, and other 
activities that hospitals undertake to specifically set charges 
to discriminate against either charge payers or Medicare 
outliers has made the charges even more wildly unrelated to 
    Now to talk a little bit about the medical bad debt and the 
free care. Free care is only about 1 percent of hospital 
charges. That is the amount that is forgiven by hospitals. The 
determination of who is eligible for free care is generally up 
to the hospital's board and the hospital's management. A few 
States regulate a minimum amount of eligibility in terms of a 
person's income level, and I believe one of the Members 
described some of the range in eligibility--actually, I think 
it was the Chairman. It is wildly variable from State to State 
and hospital to hospital whether an individual will be eligible 
for free care. You can be at 100 percent of Federal poverty 
level and still not be eligible for free care in some States 
and in some hospitals. Even if you are eligible, you may not be 
aware that free care is available.
    Bad debt is another 3 or 4 percent of hospital charges, and 
from the information I have gotten on some small surveys, 
definitely not a national database, about half of the bad 
debtors in hospitals are insured people trying to deal with 
high deductibles and coinsurance and copayments. The tax 
exemption, as I have just heard from the Members of the 
Committee, hasn't been reviewed in a long time, and clearly is 
not tied to the provision of charity care of community benefit, 
and it led to the kind of attitude that I got back in the years 
that I have been involved with local communities charging tax-
exempt challenges, a former hospital chief executive officer 
(CEO) informing me that it is just as charitable to serve a 
rich man as a poor man.
    Most of the challenges are coming from State and local 
authorities. The Federal government, the Internal Revenue 
Service (IRS) is really pretty weak in terms of encouraging 
greater charitable on the part of nonprofit hospitals. I see my 
time is up. In terms of transparency of pricing, you can see I 
don't think it is going to have a huge impact on the uninsured. 
Many of them are not allowed into the hospital until their care 
is an emergent condition. Therefore, shopping around for a 
price is really not going to help them, and I will end there. 
Thank you.
    [The prepared statement of Ms. Kane follows:]
 Statement of Nancy Kane, Professor, Harvard Business School, Boston, 

            Medical Bad Debt--A Growing Public Health Crisis

    Mr Chairman, Committee Members: Thank you for the opportunity to 
comment on pricing practices of hospitals, particularly in regard to 
their contribution to the growing public health problem caused by 
personal medical debt in the United States. Medical debt is the second-
leading cause of personal bankruptcy.\1\ Medical debt deters debtors 
from seeking needed medical care on a timely basis. It.also causes them 
to change their lifestyle in unhealthy ways, such as restricting their 
children's participation in sports for fear of an injury, not saving 
money for future retirement, and dealing with daily stress due to 
harassment of aggressive debt collection agencies who may put liens on 
their home or garnish their wages.\2\ Even insured people incur medical 
debts; low-income insured people, like low-income uninsured people, do 
not fill needed prescriptions, skip follow-up treatment for life-
threatening diseases like breast cancer, and do not see a physician 
when suffering acute illnesses.\3\
    \1\ Jacoby MB, Sullivan TA, and Warren E. ``Rethinking the debates 
over health care financing: Evidence from the bankruptcy courts.'' New 
YorkUniversity Law Review, Volume 26 (2), May, 2001.
    \2\ Daly HFT, Oblak LM, Seifert RW, Shellenberger K. ``Into the red 
to stay in the pink: the hidden cost of being uninsured.'' Health 
Matrix: Journal of Law-Medicine. CaseWestern ReserveUniversitySchool of 
Law. Volume 12 (1), Winter 2002.
    \3\ Commonwealth Fund Quarterly, Summer 2002, p.8

                 Hospital Pricing Policies--Background

    As you have become aware, hospitals charge self-paying patients 
based on their ``list prices'', known in the industry as gross charges. 
Hospital gross charges evolved in a different payment era, 30-40 years 
ago, when many more people were covered by commercial insurance under 
``indemnity'' products that allowed people total freedom of choice of 
provider; the insurer paid for unbundled units of service like lab 
tests and the recovery room. Charge masters were inches-thick books 
listing hospital charges for thousands of individual items. Because the 
patient could go anywhere for care, most commercial insurers did not 
have a meaningful context for contracting with a network of providers 
for discounted prices. Charges were set at a level for the hospital to 
recover ``shortfalls'' related to non-charge-paying insurers (Medicare, 
Medicaid, some Blue Cross Plans) and to patients who couldn't or 
wouldn't pay their bills. In the late 1970's and early 1980's many 
hospitals developed software that identified which hospital services 
were most heavily used by charge-payers, so that they knew where it was 
most profitable to raise charges; this ``revenue-maximization'' method 
of setting charges for individual units of service contributed to 
prices that today can be wildly unrelated to cost.
    In the 1990's, as privately-insured patients were driven into PPO 
(preferred provider organization) and HMO products with restricted 
networks, insurers were able to negotiate hospital payment terms based 
on bundled service units such as DRGs, all-inclusive per-diems, and 
capitation contracts, although some still use fee schedules and 
discounted charges particularly for outpatient care. Unfortunately, 
with no large insurers to represent them, self-paying patients were 
left paying on the basis of hospital gross charges. With fewer patients 
paying charges, many hospitals raised charges even higher above cost to 
cover ever larger contractual shortfalls. The median markup (the ratio 
of hospital gross charges to total cost) was only 120% in 1982, but 
gradually rose to 180% by 2002. At the same time, the median 
contractual ``discounts'' rose from 16% in 1982 to 46% of charges in 
    \4\ 1982 from Cleverley, WO, Hospital Industry Analysis Report, 
1979-1983; 2002 data from the Almanac of Hospital Financial 
Performance, Ingenix, 2004.
    Many self-pay patients do not have the resources to pay those 
bills; on average, patients classified into the bad debt and free care 
categories (``uncompensated care'') pay only about 20% of the cost (not 
charges) of their care.\5\ However, depending on how those patients 
were classified at the time they received their care--as bad debt or as 
free care recipients--their lives after receiving hospital care are 
dramatically different.
    \5\ See hospital payment-to-cost ratios by payer in the MedPAC June 
2000 Report to Congress, Table C12; bad debtors fall into the 
``uncompensated care'' payer category.

       Charity Care versus Bad Debt--Implications for the Patient

    If the patient is deemed eligible for ``charity'' or free care 
under the hospital's guidelines for eligibility, then the charges are 
not billed and the hospital does not attempt to collect from the 
patient. Policies determining eligibility for charity care are 
determined by individual hospitals in most states, although a few 
states regulate minimum standards. State or hospital eligibility 
guidelines range from a family income at or below 100% of federal 
poverty level to family incomes as high as 300% of federal poverty 
level; sometimes a sliding scale for discounts off hospital charges is 
available for families with incomes above some minimum, eg between 100 
and 300% of poverty level.
    If a person does not qualify for charity care, and is unable to pay 
the bills either because s/he is uninsured and not wealthy, or is 
insured but has copayments, deductibles, or coinsurance that are beyond 
his/her means, then the person becomes a medical debtor. Some hospitals 
turn late medical bills over to highly aggressive debt collection 
agencies, whose tactics have been well documented recently in the 
press. The bill to the uninsured bad debtor is based on hospital 
charges unless the hospital has a program of sliding scale discounts to 
assist patients who cannot afford their medical bills but are not 
eligible for charity care. The amount that insured patients owe 
reflects their insurance plan's deductible and copayment or coinsurance 
policies; policies with coinsurance and deductibles as high as $15,000 
are becoming popular in the individual market as deeper coverage 
becomes impossible to afford.
    Medical bad debt is a growing problem for both insured and 
uninsured families and individuals. In a recent survey of hospitals in 
Maine, for those hospitals that kept track of the source of bad debt by 
insurance status, 40-50% of the bad debt was owed by people with 
private health insurance. According to one study, 80% of families in 
bankruptcy due in part or in whole to medical bills had medical 
    \6\ See footnote 1, above

     Hospital Tax Exemption and the Provision of Uncompensated Care

    The provision of charity care or a sliding scale discount for 
patients deemed ``bad debtors'' is not a requirement for hospital tax-
exemption at the federal level. Some state and local taxing authorities 
have challenged hospitals that fail to provide a ``reasonable'' level 
of charity care to patients, but most states have been reluctant to 
specify a quantity of charity care that hospitals must provide in order 
to retain their state and local exemptions. Research done by myself and 
others in the mid-1990s indicated that the quantifiable value of 
hospital tax exemptions greatly exceeds the average cost of charity 
care provided. In my research sample in 1995, 75% of hospitals enjoyed 
tax benefits in excess of the average cost (not charges) of charity 
care provided. Even when the average cost of bad debt was included in 
my analysis, roughly one-third of hospitals in my national sample of 
521 hospitals had excess tax benefits.\7\
    \7\ See Kane NM and Wubbenhorst WH, ``Alternative Funding Policies 
for the Uninsured: Exploring the Value of Hospital Tax Exemption.'' The 
Milbank Quarterly, Vol 78 (2). 2000.

                      Multiple Transparency Issues

    The transparency problem in charity care is that many people who 
would have qualified for charity care didn't know that it is available 
because the hospital did not publicize it. Failure to inform patients 
of the availability of charity care is one of several reasons for 
recent lawsuits and tax-exemption challenges against Yale-New Haven 
Hospital and Provena Health in Illinois, among others.
    From a health policy perspective, a related transparency failure is 
the lack of a publicly available national data base on hospital free 
care, bad debt, and the other financial elements needed to estimate the 
value of hospital tax-exemptions. This committee would be doing a great 
public service if it were to recommend the creation of such a national 
data base, which could be relatively easily done through improved 
reporting on the Schedule G of the Medicare Cost Report.\8\ 
Policymakers at both state and federal levels would be better able to 
reform tax exemption policies or to challenge hospital practices if 
they could document current levels of bad debt, free care, and the 
value of tax exemption.
    \8\ See Report to the Congress, June 2004, Sources of Financial 
Data on Medicare Providers, Medical Payment Advisory Commission; also 
KaneNM and Magnus S. The Medicare Cost Report and the Limits of 
Hospital Accountability: Improving Financial Accounting Data. Journal 
of Health Policy, Politics, and Law, Feb. 2001:Vol 26 (1):81-105.
    Transparency of hospital charges would add some value to uninsured 
patients facing the possibility of medical debt--especially if prices 
can be stated meaningfully rather than in the form of a traditional 
hospital charge book. Already some medical information companies have 
developed web-based information tools for consumers to ``shop'' for 
specific, well-defined procedures and medical conditions for which 
consumers have time and incentives to do comparison pricing, 
particularly if they are at risk for co-insurance or the whole bill.
    For the uninsured, however, hospital price transparency may be of 
limited value except for predictable and urgent events like childbirth 
(which is a common reason for incurring bad debt among the uninsured). 
Many hospitals have a stated policy of not providing charity care and 
not extending credit to uninsured patients for non-urgent conditions; 
uninsured patients must pay cash up front before receiving ``elective'' 
treatment. The line between urgent and elective is subject to some 
interpretation, especially with the growing burden of chronic disease 
present in our society. In any case the result is that uninsured people 
avoid seeking care until the need is urgent or life-threatening, 
because the hospital must treat them, and some would then qualify for 
charity care. This pattern of behavior limits their options to 
hospitals in close proximity that are not on emergency diversion status 
at the time of their urgent medical need. Pricing considerations are 
not likely to influence where one ends up under these circumstances.


    Transparency in hospital pricing would be a useful supplement to 
stronger policies that reinforce the safety net for the uninsured. One 
such policy would be to strengthen the tie between hospital tax 
exemption and the provision of medical services to the uninsured. 
Hospitals could be required to demonstrate how they ``earn'' the value 
of their tax exemption, with higher priority, safety-net activities 
counting for more than those activities that primarily benefit insured 
populations, the hospital's competitive position, or the general 
public. Incentives for hospitals to provide preventive, primary, and 
chronic care to vulnerable uninsured populations could both save money 
and greatly reduce human suffering.
    Thank you for the opportunity to speak.


    Chairman HOUGHTON. Thanks very much, Ms. Kane. Dr. 
Ginsburg, you may begin your testimony.

                      HEALTH SYSTEM CHANGE

    Mr. GINSBURG. Mr. Chairman, Mr. Pomeroy, and Members of the 
Subcommittee, I appreciate the invitation to be here to present 
testimony on hospital pricing issues. I am President of the 
Center for Studying Health System Change, which is an 
independent nonpartisan health policy research organization 
funded principally by the Robert Wood Johnson Foundation.
    After a respite in the nineties, health care costs are 
rising rapidly again. In 2003 hospital price increases were an 
important factor behind the increases in costs faced by those 
who were privately insured. Employers have been changing their 
health benefit plans to emphasize patient financial incentives 
to use less care and to be sensitive to prices. With hospital 
pricing extremely complex, it is fortunate that at least 
insured people have more effective mechanisms to purchase 
hospital care than by attempting to compare incredibly complex 
hospital charge masters for the services that they are likely 
to be provided when they are hospital patients. Uninsured 
people do not have such advantages and unless the hospital 
offers a lower price on the basis of the patient's income, they 
pay the highest prices, as Nancy Kane pointed out.
    Consumers who are insured benefit enormously from relying 
on an intermediary to (a) negotiate prices with hospitals, and 
(b) analyze differences in negotiated prices among competing 
hospitals. Managed care plans negotiate prices with hospitals 
through formation of a network of hospitals that have agreed on 
rates. When the number of people enrolled in managed care plans 
expanded during the 19nineties, managed care plans were able to 
negotiate more favorable prices from hospitals. Pressure for 
broader hospital networks, increasing hospital concentration 
and capacity constraints have weakened plans' negotiating 
position with hospitals in recent years.
    In order to engage market forces while maintaining broad 
hospital networks, health plans have developed a new product, 
tiered hospital networks. Some of the hospitals in the network 
are labeled as preferred, and consumers are given financial 
incentives, usually lower copayments, to use them. High priced 
hospitals risk the loss of some patients, increasing incentives 
to agree on a lower price. This mechanism reflects a more 
refined device to incorporate patient financial incentives than 
say, deductibles, because tiered network incentives are aimed 
at situations at which patients have choices. Tiered networks 
accommodate both consumers who do not want their provider 
choice restricted, as well as those who want to avoid large out 
of pocket expenses. Nevertheless, tiered network products have 
grown slowly due to the complexity of the products, hospital 
resistance, and employer caution.
    Consumer-driven plans and HSAs have similar issues 
concerning hospital pricing. In most situations hospital prices 
are handled by Preferred Provider Organization (PPO) mechanisms 
through negotiation. Health savings accounts, I expect, will 
have networks of hospitals with negotiated prices, and these 
negotiated prices will apply to the deductible as well, which 
will be very important to those enrolled in HSAs and consumer-
driven plans.
    When coinsurance is used, there is a need for the plan to 
communicate to its enrollees the relative costliness of 
hospitals. Some plans have been pioneering this by providing 
ratings like Zagat's ratings of how expensive different 
restaurants are. For example, California Blue Cross giving from 
one to five dollar signs for each hospital in its network. 
Rating hospital costliness is better than revealing negotiated 
prices. For one thing they are easier for consumers to use, and 
second, I am concerned that disclosure of negotiated prices 
will lead to higher prices because of how hospitals will use 
that information.
    The bottom line for consumer-driven health plans, as well 
as for Health Maintenance Organizations (HMOs) and PPOs is that 
consumers are better off using their insurer as an intermediary 
to negotiate lower prices and inform them of the financial 
implications of choosing Hospital A over Hospital B.
    A closing thought: making consumers more sensitive to 
prices and providing better information on prices and quality 
can contribute to slowing health care costs, but we should not 
oversell the potential. In the long run we know that new 
medical technology is the dominant driver of increasing health 
care costs. Much of the new technology is terrific, but the 
lack of careful consideration of clinical effectiveness of new 
treatments in relation to existing ones leads to more waste and 
poor outcomes than should be the case. Increased public 
resources for developing information on effectiveness is 
critical to the long run slowing of cost increases. Thank you.
    [The prepared statement of Mr. Ginsburg follows:]
   Statement of Paul Ginsburg, Ph.D., President, Center for Studying 
                          Health System Change
    Mr. Chairman, Representative Pomeroy and members of the 
Subcommittee, thank you for the invitation to testify before you today 
about hospital pricing issues. My name is Paul B. Ginsburg, and I am an 
economist and president of the Center for Studying Health System Change 
(HSC). HSC is an independent, nonpartisan health policy research 
organization funded principally by The Robert Wood Johnson Foundation 
and affiliated with Mathematica Policy Research.
    We conduct nationally representative surveys of households and 
physicians and site visits to monitor ongoing changes in the local 
health systems of 12 U.S. communities. We also monitor secondary data 
and general health system trends. Our goal is to provide members of 
Congress and other policy makers with unique and timely insights on 
developments in health care markets and their impacts on people. Our 
various research and communication activities may be found on our Web 
site at www.hschange.org.
Rising Health Costs
    After a respite in the mid-1990s, health care cost trends are 
rising rapidly again, leading to growing health insurance affordability 
problems for employers and consumers. At the moment, rising prices for 
hospital care are an important factor in spending increases for health 
care covered by private insurance.\1\ Although rising input prices, 
especially for labor, are a factor in rising hospital prices, increased 
hospital consolidation and consumers' desire for broad hospital choice 
have enhanced hospital bargaining power with health plans. Engaging 
consumers through market forces to make more cost-conscious choices 
about hospital care offers the potential to slow this trend.
    \1\ Strunk, Bradley C., and Paul B. Ginsburg, ``Tracking Health 
Care Costs: Trends Turn Downward In 2003,'' Health Affairs, Web 
exclusive (June 9, 2004).
    In recent years, employers' main strategy to slow cost growth has 
been to give consumers financial incentives to use less health care and 
to be sensitive to prices for services. The most important changes for 
the health care system have involved changes in the benefit structure--
primarily increased patient cost sharing--for the health maintenance 
organization (HMO) and preferred provider organization (PPO) products 
that most privately insured people have, but consumer driven health 
plans (CDHP) and health savings account (HSA) plans, which push this 
approach further, have received more attention. Choosing hospitals on 
the basis of price, quality and amenities is potentially an important 
component of this approach. My testimony today focuses on the first--
helping consumers incorporate price considerations into their choice of 
    Because of the bewildering complexity of hospital pricing and the 
uncertainty of what services a patient will need, health plan network 
designs offer more effective opportunities to engage consumer-driven 
market forces than extensive publication of hospital price lists.
Putting Price Into the Consumer-Hospital Equation: Theory vs. Reality
    In theory, empowered consumers armed with precise information about 
what care they need would compare information about each hospital's 
quality, amenities and costs in relation to the benefit structure of 
their insurance. Their physician, who understands what services they 
will need, would advise them about what those services will cost at 
each hospital and quality differences among hospitals.
    The reality involved in these choices today is far from the theory. 
Information on what hospital care will cost is available only in forms 
that are so complex that even the most sophisticated consumers would be 
overwhelmed. Hospitals charge on a fee-for-service basis that is highly 
detailed--down to charges for each aspirin. Patients all have different 
needs, so developing an estimate of what the charge would be for any 
patient is something that hospitals have not been willing to do. 
Indeed, many patients are hospitalized to determine what is wrong with 
them and to determine what treatment is needed.
    A number of practical impediments concern the role of physicians. 
Doctors today know very little about either their patients' insurance 
coverage or hospital prices. They may have some sense of hospital 
quality, but this tends to be based on perceptions rather than 
objective data. Of course, if more of their patients had substantial 
financial incentives to choose lower-cost hospitals and if information 
technology were able to put the patient's insurance benefit structure 
at their fingertips, doctors might become better advisers on these 
    But doctors often do not practice in all of the hospitals that 
might be viable options for the consumer. This not only introduces a 
conflict of interest into the relationship of the physician acting as 
the patient's agent, but also poses to the patient the reality that 
choosing certain hospitals will require a change in physician. Indeed, 
with the increasing presence of physician-owned specialty hospitals, 
these conflicts are becoming more significant.
Consumer Choice Under Managed Care
    Under managed care, health plans serve as an intermediary between 
the consumer and hospitals to negotiate lower prices for hospital care. 
This is done not by providing the consumer with a great deal of price 
information, but instead by forming a network of hospitals that have 
agreed to a price schedule with the plan. So all managed care enrollees 
need to do concerning costs is decide whether to limit themselves to 
hospitals in the network. If consumers use a network hospital, they 
will in most cases know exactly what it will cost--often a fixed-dollar 
amount (sometimes zero)--for the hospital stay.
    In the 1990s, when most managed care plans had relatively 
restricted networks of hospitals and physicians, plans were successful 
in negotiating prices that were substantially lower than they would 
have been in the absence of managed care. But the lack of provider 
choice and suspicion that plans placed too heavy an emphasis on cost in 
developing networks contributed to a powerful backlash against managed 
care. Employers and consumers demanded broader provider networks, and 
managed care plans, which are essentially agents of employers, 
responded by broadening their provider networks. The mechanism of a 
network remained the same, except that consumers--and their doctors--
were happier about the broader choice and plans lost bargaining clout 
with hospitals because they could no longer credibly threaten to 
exclude hospitals from plan networks because hospital prices were too 
high. Tighter hospital capacity and increased hospital consolidation 
also contributed to declining plan leverage with hospitals. 
Nevertheless, managed care plans still maintain substantial discounts 
from what hospitals charge patients with traditional indemnity 
insurance or those without insurance.
    The managed care backlash and the loss of bargaining clout with 
hospitals from broader networks has led health plans to search for 
mechanisms that rely more on using financial incentives to steer 
consumers to lower-cost hospitals. The most important product that has 
evolved to date is the tiered-hospital network. Within their broad 
networks, health plans label some hospitals as ``preferred.'' Patients 
pay less if they choose a preferred hospital but their payments are 
still relatively modest if they choose nonpreferred hospitals in the 
network. This provides more bargaining leverage to health plans because 
hospitals that are not in the preferred tier will lose some volume.
    What is attractive about this development is that it can 
accommodate both consumers who will not accept restrictions on their 
choice of provider as well as those who are willing to make trade-offs 
between choice and out-of-pocket expense. Tiered networks are 
consistent with the newest directions in the use of patient financial 
incentives, which involve targeting incentives on care decisions where 
patients have alternatives.\2\ For a number of reasons, these tiered-
network products have developed slowly,\3\ but they eventually may 
become significant.
    \2\ Trude, Sally, and Joy M. Grossman, Patient Cost Sharing: 
Promises and Pitfalls, Issue Brief No. 75, Center for Studying Health 
System Change, Washington, D.C. (January 2004).
    \3\ Mays, Glen, Gary Claxton and Bradley Strunk, Tiered-Provider 
Networks: Patients Face Cost-Choice Trade-offs, Issue Brief No. 71, 
Center for Studying Health System Change, Washington,D.C. (November 
Hospital Choice and Consumer-Directed Health Plans
    The large deductible that is a defining characteristic of CDHPs may 
serve to discourage some hospitalizations, but once a patient is 
admitted, the deductible will almost always be exceeded. So having a 
large deductible does not provide much of an incentive to choose a less 
expensive hospital. Once the deductible has been satisfied, CDHPs 
typically function like a PPO, with similar incentives to use network 
hospitals. When there is cost sharing beyond the deductible, it can 
take the form of a fixed-dollar amount per admission or per day 
(copayment) or a percentage of the amount that the health plan pays the 
hospital (coinsurance). It is too early to get a sense of what benefit 
structures will prove most popular for health savings accounts linked 
to high-deductible policies, but I would expect them to also function 
like PPOs so that enrollees can take advantage of health plans' ability 
to analyze complex hospital price data and negotiate favorable 
    Getting hospital price data to the consumer is most important in 
insurance products that use coinsurance (patient pays a fixed 
percentage of the bill). If the patient is paying 20 or 30 percent of 
the bill, prices are relevant, although price differences are diluted 
by 80 or 70 percent. Blue Cross of California has many products with 
substantial coinsurance and provides enrollees with hospital cost 
information using a rating system--from ``$'' to ``$$$$$''--to give 
patients an idea of how much they will have to pay out of pocket. Such 
information, which is based on what the plan pays per episode of care, 
can be a major asset to consumers faced with these types of financial 
Price Transparency vs. Lower Prices
    When managed care plans negotiate prices with hospitals, both 
parties typically agree to keep prices secret. Each side is aware of 
the possibility that they can get a better deal if their counterpart 
can keep it secret from others in the marketplace. Whether this leads 
to higher or lower hospital prices on average in a community depends on 
whether the health plan or hospital side of the market is more 
concentrated. Transparency can benefit the more concentrated side of 
the market because it facilitates taking into account how competitors 
will respond to prices and aids any collusion. Since hospitals are 
often more concentrated than health plans at the market level, then 
transparency would tend to lead to higher prices for hospital care and 
thus higher health insurance premiums.
    The combination of the complexity of dealing with hospital prices 
and the pitfalls of making negotiated prices public argues for 
consumers depending on their health plans to negotiate contracts with 
hospitals and present them with information as to which hospitals will 
cost them more. This can be conveyed to consumers through differences 
in copayments (e.g. you will have to pay $300 more to be admitted to 
hospitals in group A than to hospitals in group B) or communicating 
which hospitals will result in larger amounts of coinsurance.
    A potentially even more powerful tool would be a return to hospital 
networks that provide less choice, such as the step that the California 
Public Employees Retirement System (CalPERS) announced on June 16. Some 
consumers--but not all--would be willing to sacrifice some provider 
choice to keep their out-of-pocket costs lower. My organization's 
surveys of consumers have shown a consistent result over time that a 
majority of consumers are willing to make these trade-offs.
Deja vu All Over Again
    In closing, I would be remiss in not pointing out that today's 
insurance benefit structures increasingly are returning to coinsurance 
models similar to traditional indemnity insurance structures. The 
failure of that insurance model to control costs led to the wide 
adoption of managed care practices, including restricted choice of 
providers and tighter administrative oversight of care use. There's no 
reason to believe that increased patient cost sharing will be 
substantially more successful this time around in significantly slowing 
health care cost trends, even if consumers miraculously had 
understandable price and quality information to help guide their 
    Over the long haul, advancements in medical technology are far and 
away the biggest factor in rising costs. And our current financing 
system facilitates the rapid diffusion of expensive new technologies by 
paying most of their cost--even in the absence of careful consideration 
of their clinical effectiveness relative to existing treatments. 
Fundamental change in this dynamic would require support for improved 
and more frequent evaluation of new technologies prior to decisions 
about coverage, as well as carefully differentiated incentives built 
into the financing system that encourage both providers and patients to 
evaluate the clinical effectiveness of a given course of treatment 
against its cost.


    Chairman HOUGHTON. Thanks very much, Mr. Ginsburg. Mr. Lee?


    Mr. LEE. Thank you very much, Mr. Chairman, and Members of 
the Committee for having me join you today on behalf of the 
Pacific Business Group on Health, which represents some of the 
Nation's largest purchasers of health care. Our members 
represent over 3 million Americans in our efforts to both 
improve health care quality while moderating cost.
    Rising hospital costs are a problem nationally, but events 
in California have underscored that there are three 
industrywide issues that reinforce Chairman Thomas's note about 
the blindfolded nature of walking into hospitals, we can't 
necessarily tell the experience between nonprofit or for-
profit. The three issues are first, staggering cost increases, 
second, huge variations in cost and quality of hospital care, 
and, third, the failure of the market to address these issues 
    While there are multiple issues for the reasons for rising 
cost, two in particular are the lack of transparency 
differentiating hospital quality and efficiency, and hospital 
consolidation, which in many markets has stifled competition. 
We see variations in cost between and within communities that 
defy any rational explanation and signal insufficiently 
competitive markets for hospital services. Gall bladder and 
heart surgery costs three times as much in Sacramento as it 
does in San Diego. Cesarean sections cost twice as much in 
Sacramento as in Los Angeles. The problem is not just high 
cost. It is also there is a total disconnect between cost and 
quality. There is no indication that cost differences have any 
relation to quality. A patient is about twice as likely to have 
a wound infected in the bottom 25 percent of hospitals as in 
the top 25 percent; a similar likelihood for getting pneumonia 
after surgery. Other avoidable complications, and there is no 
correlation between those quality indicators and cost.
    Purchasers do look to their health plans they contract with 
to ensure that the hospitals are not getting overpaid, and are 
being rewarded for performance, but also that they provide 
valid tools so consumers can make better informed choices. 
Nationally we should have the same expectation of the Center 
for Medicare and Medicaid Services (CMS) and its administration 
of Medicare, and I think the good news is we have seen CMS step 
up to this challenge in important ways. There are four things I 
think that we need to look at to improve hospital quality and 
the efficiency with which our care is delivered in our Nation's 
    First we have to expand the availability of standardized 
performance information. We currently have a Tower of Babel of 
conflicting and incomplete measures to report on hospital 
performance. The path to resolve this problem is to support and 
accelerate the efforts of the National Quality Forum. At the 
same time, CMS should be not only applauded for its focus on 
the importance of transparency, but urged to accelerate its 
efforts to make sure that there is usable information on 
hospitals and physician performance, and that the information 
is in the hands of consumers, purchasers and providers. One key 
element of that transparency is that we must have standards for 
measuring the relative efficiency with which care is delivered, 
looking beyond mere unit price to assess the full associated 
health insurance cost or the longitudinal efficiency with which 
care by hospitals and doctors is delivered. That is a key 
measure to be able to understand the difference between for-
profit and nonprofit hospitals.
    Second, we need to reward better hospital performance. 
There are large-scale pay-for-performance initiatives in the 
private sector for medical groups and physicians, and CMS has a 
new initiative for incentives at the hospital level. Those 
efforts are promising. Center for Medicare and Medicaid 
Services (CMS) should not only continue that innovation, but 
should look actively at how to innovate in partnership with 
private and State-based public purchasers.
    Third, information must be provided along with incentives 
to consumers to make better choices. Across the country there 
are a growing array of tools and insurance products provided to 
health care consumers to help them choose and understand the 
differences between hospitals, physicians, and treatment 
options. Consumers want and need this information. Our task is 
to make sure that that information is valid.
    Finally, we have to allow the market to function. We need 
to be sure that comparative performance information can be used 
in local markets. There is a danger that in communities that 
have had hospital consolidation, such efforts will be hindered. 
Hospitals creating networks is great if that consolidation will 
help the market to work. It is dangerous, however, if 
conglomerates of hospitals prevent individual hospitals from 
having their quality and efficiency show through separately. 
Conglomerates are dangerous if they prevent separate 
contracting arrangements with individual hospitals in local 
communities. I will just note that consumers need to have the 
information to make informed treatment choices. They don't. 
Providers need to be paid differently for better performance. 
Today they aren't. Without those two changes, we will never 
have a working market to reform hospital delivery. Thank you.
    [The prepared statement of Mr. Lee follows:]
Statement of Peter V. Lee, President and CEO, Pacific Business Group on 
                   Health, San Francisco, California
    Thank you for the opportunity to speak on behalf of the Pacific 
Business Group on Health, which includes many of the nation's largest 
purchasers of health care. PBGH represents both public and private 
purchasers who cover over 3 million Americans, seeking to improve the 
quality of health care while moderating costs. The members of PBGH 
range from large public and private purchasers such as Bank of America, 
CalPERS and FedEx, to thousands of small businesses in California that 
we serve through our small employer purchasing pool--PacAdvantage. I 
welcome the opportunity to speak to you about how leading purchasers 
are working with consumers and providers to create market solutions for 
a very troubled health care system.
The Problem of Rising Hospital Costs and Quality Shortfalls
    Rising hospital costs are a problem nationally, but California has 
been in the news recently on two fronts related to hospital pricing and 
the impact on consumers and purchasers. Last year, the big story was 
the pricing and patient selection practices for cardiac care of a Tenet 
hospital in Redding, California; more recently the news has been about 
the action of one of our members, CalPERS, to exclude some high cost 
hospitals from one of its HMOs offered to beneficiaries. Both stories 
underscore the need for change and dramatize three industry-wide 
issues--staggering cost increases, huge variations in the cost and 
quality of hospital care, and failure of the market to address these 
    In California, hospital costs are growing at almost twice the rate 
of the national average. Expenditures for inpatient services in 
California rose at an annual rate of 11.3%\1\ from 1998 to 2001, the 
second highest rate in the nation, almost twice the average of 5.9%\2\ 
and nearly four times the general inflation rate of 2.9%. The picture 
is even worse for employers and their employees with commercial 
insurance--they have faced hospital cost increases of up to 20% as 
cost-shifting from uninsured or underfunded public programs hits 
employers and their employees.
    \1\ Hay, Joel. Hospital Cost Drivers: An Evaluation of State-Level 
Data. University of Southern California. October 15, 2002. Page 14.
    \2\ Ibid. Page 1.

      Staffing costs, especially the shortage of nurses 
combined with a staff ratio mandate;
      Need for investments in infrastructure and new 
technologies--driven in part by need for seismic retrofit, but also by 
a period of underinvestment in 90s;
      Increased admissions and lengths of stay;
      Hospital consolidation, which has stifled market 
competition; and
      Lack of transparency differentiating hospital quality and 

    Why are high costs a problem? Health care consumers, our members' 
employees, are footing the bill, whether through increased cost-
sharing, larger contributions to their employer's premium or a smaller 
paycheck. Hospital consolidation and the rapid acceleration of hospital 
cost trends not only impacts affordability, but access. Rising hospital 
costs drive a cycle of cost-shifting: as hospitals and doctors raise 
rates to recover the cost of unpaid or under-paid services. As we see 
cutbacks in support for public programs, the commercial market picks up 
a disproportionate share of hospital cost increases. Subsequent cost 
shifting onto premium-paying employers and consumers accelerates a 
vicious, self-perpetuating cycle as large employers struggle to 
maintain comprehensive coverage and some small employers drop coverage 
altogether, leading to higher rates of uninsured. Again, this is 
particularly true in California, where Medi-Cal--our Medicaid program--
has one of the lowest reimbursement rates in the nation.
    The problem is not just high cost--it is the variation in cost, and 
the fact that there is a total disconnect between cost and quality of 
care. We see variations between and within communities that defy a 
rational explanation and signal insufficiently competitive markets for 
hospital services. Gall bladder or heart surgery costs three times as 
much in Sacramento as in San Diego; Caesarian-section costs twice as 
much in Sacramento as in Los Angeles.\3\
    \3\ Rapaport, Lisa. Region feels pain of high hospital bills. 
Sacramento Bee. November 10, 2002.
    Reasons for California's growing hospital costs include:
    We also see enormous cost variations within a single community. 
According to data collected by the state and reported by HealthShare 
Technology--based on billed charges:\4\
    \4\ Sacramento Hospital Comparison: Full Year 2000 Inpatient Data. 
HealthShare Technology, Inc. November 14, 2002.

      The average charge in Sacramento (before insurer 
discount) for a hysterectomy ranges from $13,921 at the lowest-charging 
hospital to $43,931 at the highest;
      For gall bladder surgery, from $17,826 to $61,095;
      For kidney transplant, from $115,096 to $184,183; and
      For bypass surgery, from $131,735 to $225,678.

    And, there is no indication that these cost differences have any 
relation to different levels of quality of care. Wide cost variations 
reveal insufficient market competition and the gap is just as large 
when we look at hospital quality:

      A patient is about twice as likely to have a wound 
infected in the bottom 25% of hospitals as in the top 25%;\5\ a similar 
likelihood exists for getting pneumonia after surgery and other 
avoidable complications;
    \5\ Kane, Nancy M. Siegrist, Richard B. Understanding Rising 
Hospital Inpatient Costs: Key Components of Cost and the Impact of Poor 
Quality. August 12, 2002. Page 30
      We now have a limited set of hospital outcomes data, such 
as for heart surgery, which also shows wide variation in quality;
      And we know that the extent to which hospitals have in 
place systems to avoid medical errors, such as having adequate 
intensivist coverage in intensive care units or computer physician 
order entry, varies dramatically and is generally insufficient.

    Consumers and purchasers need--and are beginning to demand--
transparent cost and quality information on individual hospitals and 
doctors. We want to know whose care leads to better clinical outcomes. 
We want to know whose care leads to how much total spending for a 
hospital procedure or a years' chronic illness care, and why. We need 
to be able to know when high hospital or physician fees enable lower 
total health insurance spending over an episode or year of illness and 
when they merely ``pile on'' or exacerbate higher total health 
insurance spending.
    Solving the problem of hospital cost and quality variation will 
require participation by all parties. Hospitals and physicians must 
embrace a culture of accountability in which their payable charges, 
``longitudinal efficiency'' with respect to total health insurance 
spending, and quality are transparent to consumers. Purchasers must 
create an environment where hospitals compete on and are paid for 
performance excellence.
The Market is Failing to Assure Excellence by Hospitals and Physicians
    Large employers and consumer organizations agree with the Institute 
of Medicine's reports in 1998, 1999 and 2001 that there is a wide gap 
between the health care that Americans are getting and what health care 
could and should be. The following figure summarizes current research 
and expert opinion on the approximate percentage point size of the gap.

    Large employers also agree with the Institute of Medicine that 
closing the gap requires that purchasers and insurers correct serious 
flaws in the market for doctor and hospital services via two actions: 
(1) creating precise streams of public performance measurement of 
doctors and hospitals; and (2) rewarding doctor and hospital excellence 
via performance-based payment; and/or insurance plan designs which 
encourage consumer selection of better performing providers.
    To accelerate these two foundations of a market solution to weak 
health care industry performance, large American employers launched two 
linked ``pro-competitive'' initiatives: the Consumer and Purchaser 
Disclosure Project (``the Disclosure Project''); and the Leapfrog 
    The Disclosure Project is an informal partnership of large 
employers, business coalitions and consumer advocacy and labor that 
includes AARP, General Motors, Motorola, the Pacific Business Group on 
Health, the AFL-CIO, the Employer Health Care Alliance Cooperative 
(``The Alliance'') in Madison, WI, the American Benefits Council, and 
the National Partnership for Women and Families. These groups share a 
commitment to health care performance accountability and the Disclosure 
Project's goal that ``by January 1, 2007, Americans will be able to 
select hospitals, physicians, integrated delivery systems and 
treatments based on public reporting of nationally standardized 
performance measures for clinical quality, patient experience, equity 
and efficiency.''
    The Disclosure Project is promoting the National Quality Forum's 
(NQF) multi-stakeholder consensus process to define valid and feasible 
standardized performance measures and assure routine reporting by 
doctors and hospitals. If NQF-mediated progress proves insufficient, 
Disclosure Project members are committed to pursuing other options for 
performance reporting. The personal and economic consequences for 
consumers and purchasers of continued performance-blind selection of 
hospitals, doctors and treatments have become intolerable.
    The Leapfrog Group is a private, non-profit organization of more 
than 130 of America's largest private and public employers and unions 
which provide over $56 billion in health benefits annually. Members 
commit to encouraging their employees to select, and/or their insurers 
to reward, better-performing hospitals, doctors, and treatment options. 
The ``Frogs'' initially focused on identifying and rewarding hospitals 
that excelled in three important patient safety features. The Leapfrog 
Group is now expanding its focus beyond patient safety and aligning its 
market rewards with doctor and hospital excellence across all of the 
performance domains advocated by the Disclosure Project.
    The Disclosure Project and the Leapfrog Group are creating the 
national groundswell that is being translated into real first steps for 
both consumers and providers. I heartily recommend MedPAC's June 
report, which not only highlights innovative strategies undertaken by 
purchasers, but underscores how Medicare--like much of the private 
market--falls short by providing few incentives to providers or 
consumers; and does too little to encourage efficient delivery and 
organization of care.
Solutions To Reforming the Market
    Purchasers look to the health plans we contract with to ensure that 
hospitals are not being overpaid, are being rewarded for better 
performance, and to provide valid tools so consumers can make better 
informed choices. Nationally we should have the same expectation of CMS 
in its administration of Medicare. And, the good news is that in recent 
years we have seen CMS step up to this challenge in important ways. The 
four elements needed to promote higher quality and more efficient care 
delivery in our nation's hospitals are:
1. Expand the Availability of Standardized Performance Information
    We currently have a Tower of Babel of conflicting and incomplete 
measures to report on hospital performance. The path to resolve this 
problem is to support and accelerate the National Quality Forum's 
efforts to identify consensus performance standards. Core funding for 
the National Quality Forum's efforts should come from the federal 
government. At the same time, CMS should not only be applauded for its 
focus on the importance of performance transparency, but urged to 
accelerate its efforts to insure that useable information on hospital 
and physician performance gets into the hands of consumers, providers 
and purchasers.
    The National Quality Forum has endorsed 39 measures for hospital 
performance, as well as a set of 30 patient safety practices. The 
National Quality Forum has also endorsed 15 nursing sensitive measures 
and 28 serious reportable events, such as wrong-site surgery. Ten of 
the NQF's measures of hospital performance are currently being used for 
the National Voluntary Hospital Reporting Initiative (currently 
addressing three conditions--heart failure, pneumonia and acute 
myocardial infarction). States are also embracing these standards--lead 
by Minnesota which requires all hospitals to publicly report on NQF's 
serious reportable events.
    To move beyond the Tower of Babel we need to:

    1.  Rapidly adopt a standardized hospital patient experience survey 
and quickly get H-CAHPS into the market--building on the independent 
good works done by CMS and AHRQ;
    2.  Expand endorsed hospital measures that provide better global 
pictures of hospital quality, such as surgical infection rates;
    3.  Develop standards for measuring the relative efficiency with 
which care is delivered. While this hearing is titled ``Hospital 
Pricing''--we need to get beyond looking at mere unit price, to assess 
the full associated health insurance costs or ``longitudinal 
efficiency'' with which care by hospitals and doctors is delivered. 
Such a measure would reflect not only the price charged for an 
admission or procedure, but also costs related to readmission, 
complications and post-hospital care; and
    4.  Make routinely available to the private sector, patient 
identity-encrypted version of the full Medicare claims data base, so 
private health plans can more precisely measure hospital and physician 
performance over longitudinal periods of illness (which most private 
sector plans do not have sufficient data with which to do on their on).
2. Reward Better Hospital Performance
    There are large scale pay for performance programs that are 
starting to change the market by rewarding better performance of 
individual physicians and medical groups. The Integrated Healthcare 
Association's pay-for-performance initiative in California brings 
together seven health plans with purchasers and over two hundred 
medical groups--with an estimated $100 million in bonus payments based 
on common measures of clinical performance, patient experience and IT 
reengineering. Another example is the Bridges to Excellence program--a 
collaborative of national employers and some health plans, that uses 
nationally standardized certification projects from NCQA to reward 
better performing physicians in the areas of diabetes and cardiac care, 
as well as for their overall office practices.
    At the hospital level, the Leapfrog Group has lead the way in 
identifying better performing hospitals based on valid comparative 
information--these Leapfrog measures are increasingly one of the core 
elements of health plans' efforts to include quality dimensions in 
hospital tiering or design of narrow networks--as has been done 
numerous health plans, such as Blue Shield of California, PacifiCare 
and Health Net.
    Nationally, CMS's Premier Hospital Quality Incentive Demonstration 
is important both because it will reward hospitals based on their 
performance related to six common and expensive conditions, but also it 
is setting the stage for sharing with consumers information that they 
can and will use. The recent efforts of CMS point to a promising future 
if CMS continues to not only innovate and explore how best to reward 
higher value providers, but does so in concert with private and state-
based public purchasers.
3. Provide Information and Incentives to Consumers
    Across the country there is a growing array of tools being provided 
to health care consumers to help them make better choices. Many members 
of the Pacific Business Group on Health, such as Wells Fargo, the 
University of California and Intel, provide their employees with health 
plan chooser tools. These tools help consumers weigh the financial 
impact of their choosing a particular plan--based on their likely 
health care utilization--along with physician availability information, 
and plan quality. In addition, many employers are looking to their 
health plans to provide tools to help consumers choose and understand 
    In the hospital arena, we are using first generation tools that 
give consumers information on how hospitals meet Leapfrog standards and 
provide other information such as patient experience data, when 
available, or complication rates. At the same time, CMS is testing how 
it can best convey comparative hospital performance information to 
consumers. Consumers want and need this information; our task is to 
ensure that these tools provide valid reflections of hospitals' 
performance--either globally or by particular treatment.
    While we develop the full dashboard of performance information--
purchasers must be working today to bring together cost and quality 
information for their employees. We cannot pretend that all hospitals 
are delivery the same performance. CalPERS, a member of PBGH that is 
the third largest purchaser of health care in the United States, is 
continuing its leadership in health care by recently making the 
decision to exclude 38 hospitals across California from their Blue 
Shield HMO based on these facilities being substantially higher cost 
than comparable available hospitals--considering a dozen quality 
indicators in their determination. Through this action, CalPERS created 
a ``virtual tiering'' since beneficiaries that wanted these higher cost 
hospitals could still get them through their PPO--but they would pay 
4. Allow the Market to Function
    Finally, we need to be sure that comparative performance 
information can indeed by used to help consumers make better choices 
and to reward better performing hospitals. There is a danger in many 
communities that hospital consolidation will hinder these efforts. 
Hospitals creating networks for their joint purchasing and negotiating 
is fine IF those consolidations allow the market to work. A working 
market means:

      Allowing individual hospitals within a network to be 
priced differently, whether through tiers or coinsurance. Conglomerates 
should not be able to prevent separate tiering by quality and 
      Conglomerates of hospitals should not be able to use 
their market power to prevent health plans from using their data to 
better define higher value hospitals;
      Conglomerates of hospitals should not be able to set one 
rate for all of their hospitals--different quality and cost should be 
able to show through; and
      Conglomerates should not be able to require inclusion of 
all hospitals in their network as a condition for accessing any of 

    Sadly, the examples of intensified market competition catalyzing 
hospital performance breakthrough remain the exception rather than the 
rule. For those American's fortunate enough to have health coverage, 
the vast majority are totally disconnected from the true costs of care 
and are making life and death choices with virtually no information. 
They have neither incentives nor information with which to make better 
hospital choices. Similarly, hospitals--like other health care 
providers--are not recognized or rewarded if they deliver higher 
quality care more efficiently.
    We are still almost performance blind. The market's invisible hand 
requires standardized performance information for hospitals across the 
six IOM performance domains--safety, timeliness, effectiveness, 
efficiency, equity and patient-centeredness. The good news is that we 
are making progress and much of the credit for this lies with CMS' 
engaged commitment, demonstrated through their work with the National 
Voluntary Hospital Reporting Initiative; developing the national 
standard patient-experience survey--H-CAHPS; testing consumer 
presentations of quality information; and promoting pay for performance 
    Most consumers today don't have the information to make informed 
decisions about treatments or providers. Most providers are paid the 
same whether they deliver the highest quality or the lowest quality 
care, irrespective of their cost-effectiveness. The only solution to 
reforming health care over the long term is to change these two 
dynamics--consumers must have the information and incentives to make 
the best choices for them; and providers need to be rewarded for doing 
a better job. Thank you for the opportunity to be with you today.


    Chairman HOUGHTON. Thank you, Mr. Lee.
    Ms. Davis?

                         YORK, NEW YORK

    Ms. DAVIS. Thank you, Mr. Chairman. Hospitals play a 
pivotal role in making health care accessible to those who 
cannot pay, but they also need to be financially viable. 
Nonprofit hospitals do charge patients less and collect lower 
payment rates than for-profit hospitals. I cite in my testimony 
a meta-analysis that summarizes all of the studies over the 
last 40 years, and they do conclude that net collected prices 
are lower in nonprofits.
    Nonprofits admit more uninsured patients and they provide 
more uncompensated care than for-profit hospitals. Pricing 
uncompensated care and bill collection practices do vary widely 
across nonprofit hospitals, and the financial stability of 
hospitals also vary widely. About a third are in serious 
financial difficulty, a third are on the margin, and a third 
are doing well. Hospitals that do the best are not necessarily 
the most efficient or the highest quality. They are the ones 
providing the most uninsured care.
    On the issue of price transparency, some witnesses on the 
panel today support it because they think it will improve cost 
conscious behavior by consumers. I agree that the real issue is 
not individual prices, but longitudinal efficiency, as Mr. Lee 
has said. It is the total cost over your hospital stay, really 
over the episode of your illness. That is what you want to 
know, not how much it is per day of intensive care.
    I am more skeptical than my fellow panelists about whether 
consumer financial incentives can really drive improved quality 
and efficiency performance, but I think there are other 
compelling rationales for transparency in health care financing 
and reasons why we need information on quality and efficiency. 
For example it would help providers improve. It is hard to 
improve if you don't know how you stand. It would help, as Mr. 
Lee says, for purchasers to financially reward hospitals, 
health systems, and group practices that provide higher quality 
care more efficiently, and I think it is important for public 
    Why am I skeptical about consumer-driven health care? One 
form of this, for example, is called tiered cost-sharing. What 
that means: if you are burned in a major fire, or if you have a 
heart attack, if you have a stroke, and you go to the wrong 
hospital--you don't go to the cheapest hospital or the best 
hospital, you go where you are taken--you can be charged $400 a 
day extra for every day you are in that hospital. That is not 
humane, and it is not going to make those hospitals higher 
quality or more efficient.
    Having said that, I think there are solutions to trying to 
make care higher quality and more efficient. We can look at 
international examples. We can look historically at what has 
been tried in the United States, and the basic lesson that 
comes from those experiences is that government leadership 
matters. When government establishes a payment framework for 
purchasers and uses collective purchasing power to obtain 
better prices from providers, the rise in hospital costs is 
slowed, there is greater equity and there is better access to 
care for the uninsured.
    The greatest promise for improving the performance of the 
health care sector lies in public information of quality and 
longitudinal efficiency, so I am very much for Medicare. The 
Federal government needs to take a leadership role and really 
put together the information on longitudinal efficiency over 
time, over the course of an illness in the following categories 
(by provider, by hospital, by medical group, by health system, 
and by private and public purchasers). As a result, Medicare, 
Medicaid, and private insurers have incentive payments that 
reward hospitals and other providers who demonstrate superior 
quality and efficiency. Purchasers are in a far better position 
to promote better quality and efficiency than are patients.
    It also might be considered to set at least limits or bans 
on how much discounted prices can vary across payer source or 
patient. Certainly, it is reasonable not to charge uninsured 
patients more than other patients. I think it is important to 
preserve and strengthen a predominantly nonprofit hospital and 
health care sector, and think it would be reckless to undo tax 
preferences for nonprofit hospitals, given that they are a 
major source of uncompensated care and community benefit.
    I think we need more creative ideas about how to create new 
financial incentives for the provision of charity care such as 
the idea of a Hill-Burton Act to provide capital funds for 
information technology in exchange for charitable care or 
better targeting of disparate proportionate share allowances. 
Ideally what we would have is a system of automatic and 
affordable health insurance coverage for all. Thank you.
    [The prepared statement of Ms. Davis follows:]
       Statement of Karen Davis, President, The Commonwealth Fund

                           EXECUTIVE SUMMARY

    When a family member is seriously ill, we all expect that the 
benefits of modern medicine will be available to provide the finest 
care possible. Yet, the cracks in our fragmented health care financing 
system are jeopardizing the health and financial security of millions 
of Americans. Hospitals play a pivotal role in making care accessible 
to those who cannot pay, but they also need to be financially viable. 
It is especially important to scrutinize hospital financing and pricing 
practices in the current environment. Hospital costs are accelerating. 
At the same time, 71 million Americans are experiencing problems paying 
medical bills or are paying off accrued medical debt. Access to care 
among the uninsured and underserved in this country is threatened, and 
pricing practices at selected hospitals are placing vulnerable patients 
at financial risk. We need major reforms to improve the performance of 
the health care sector.

      Hospital Pricing Behavior
          Nonprofit hospitals charge patients less than for-
        profit hospitals (including effective net prices after 
          Nonprofit hospitals admit more uninsured patients and 
        provide more uncompensated care than for-profit hospitals.
          Prices bear little relationship to the actual cost of 
        care. Some specialized services, such as burn units and 
        neonatal intensive care are ``money losers''; others, such as 
        cardiac surgery and radiological imaging services, are highly 
          Pricing, uncompensated care, and bill collection 
        practices vary widely across nonprofit hospitals. The burden of 
        caring for patients who cannot pay is unevenly borne; academic 
        health center hospitals provide more uncompensated care than 
        community hospitals.
          The financial stability of hospitals varies widely. 
        Some are in serious financial difficulty, others are on the 
        margin, and others are doing well. Hospitals in the best 
        position are not of the best quality or the most efficient, 
        while those doing the worst are largely shouldering a 
        disproportionate share of charity care.
      The Market for Hospital Services Is Different
          Hospital care is not like consuming other goods and 
            Key differences include lack of information, 
        limited choice, complexity and life-critical importance of 
        health care treatment decisions, physicians' decision-making 
        role, and the need for insurance to protect financial security.
            Trying to make the market work by shifting costs to 
        patients will inflict greater financial burdens on the sickest 
        and most vulnerable people. Doing so does not lead to better 
        decisions about seeking ``appropriate'' or ``inappropriate'' 
        care and will not solve the fundamental problems of access, 
        quality, and efficiency in the health care system.
      Consumer-Driven Health Care
          High deductibles, cost-sharing tiering, or premium-
        tiering are unlikely to be effective in improving health system 
        performance. They run the risk of increasing financial burdens 
        on the most vulnerable patients.
          Tiering, or varying cost-sharing according to 
        hospitals' quality and efficiency, requires detailed 
        information on cost and quality at the hospital or diagnostic 
        level. For the most part, these data are not systematically 
        available. Even were such data available and accurate, this 
        presumes that very ill hospitalized patients are able to 
        evaluate cost and quality tradeoffs, have a wide range of 
        options about where to go when hospitalized, and are able to 
        make cost-conscious choices. Furthermore, the administrative 
        costs of such a system would be high.
      International Experience
          The United States has much higher hospital costs than 
        any other country. The cost per day is three times the OECD 
        median country cost per day, and cost per capita is twice the 
        OECD median country.
          Other countries have a greater role for government in 
        establishing hospital budgets or payment rates. They have also 
        done more to rationalize care through disease management, cost-
        effectiveness reviews of drugs and procedures, and regional 
        hospital authorities, and have much lower administrative costs 
        because they have one system of payment.
          The Commonwealth Fund 2003 International Health 
        Policy Survey of hospital CEOs in five countries found that:
            The United States is the only country where 
        respondents cited the cost of indigent care and care for the 
        uninsured as major problems.
            U.S. hospitals are more concerned about stand-alone 
        diagnostic or treatment centers and about freestanding 
        ambulatory care centers that ``cream'' profitable patients.
            U.S. hospital CEOs are less open to public 
        reporting of quality information than CEOs in other countries.
            Hospital CEOs in all countries would make it a high 
        priority to invest in information technology if resources 
        became available to do so.
      Historical Perspective on How We Got Where We Are
          Hospital costs grew at a slower rate during the Nixon 
        Economic Stabilization Program, legislative consideration of 
        the Carter hospital cost-containment bill, enactment of the 
        Medicare DRG payment system, and, during the mid-1990s, under 
        the threat of health reform and expansion of managed care.
          Hospital costs grew most rapidly during periods when 
        prices were determined by health care providers rather than 
          All-payer strategies, especially those by selected 
        states in the 1970s and 1980s, were effective in slowing cost 
        increases, ensuring access to care, and improving equitable 
        payment across patients and insurance sources.
          The basic lesson from these experiences is that 
        government leadership matters. When government establishes a 
        payment framework for purchasers--whether Medicare, Medicaid, 
        or employer health plans--and uses that collective purchasing 
        power to obtain better prices from providers, the rise in 
        hospital costs is slowed, there is greater equity, and there is 
        better access to care for the uninsured.
          Large purchasers such as Medicare, national managed 
        care plans, and large employers can also obtain good deals on 
        their own, but they are less effective both in controlling 
        overall cost increases and in ensuring equitable payment and 
      Achieving a High-Performance Health Care System
          Given the resurgence in health care costs, the 
        increasing numbers of uninsured, abundant evidence that the 
        quality of care is not what we could have and have a right to 
        expect, and the fact that administrative costs are now the 
        fastest rising component of health care expenditures, it is 
        time to consider a leadership role for the federal government 
        in promoting efficiency and quality in the health care system.
          The greatest promise for improving the performance of 
        the health care sector lies in:
            Public information on quality and longitudinal 
        efficiency (i.e., total cost of care over an episode of 
        illness) of all health care providers.
            Private and public insurance incentive payments 
        that reward hospitals and other providers demonstrating 
        superior quality and efficiency. Purchasers are in a far better 
        position to promote better quality and efficiency than are 
        individual patients.
            Limits or bands on how much prices can vary 
        depending on payer source. Net charges to uninsured American 
        patients should not be higher than discounted charges to 
        insured patients.
            Preserving and strengthening a predominantly 
        nonprofit hospital and health care sector. It would be reckless 
        to undo tax preferences for nonprofit hospitals, given that 
        they are a major source of uncompensated care and community 
        benefit. Such hospitals may reasonably be asked not to charge 
        uninsured patients more, to work out feasible repayment plans, 
        and not to employ unreasonable collection tactics.
            Investing in the capacity to adopt modern 
        information technology and systems to ensure safe care. It 
        might be useful to consider a new ``Hill-Burton'' act--perhaps 
        one that, in exchange for a new charitable patient care 
        obligation, provides grants and loan capital funds for 
        investment in information technology and systems to ensure 
        patient safety.
            A system of automatic and affordable health 
        insurance coverage for all.


                              Karen Davis

    Thank you, Mr. Chairman, for this invitation to testify on the 
issue of hospital pricing practices. When a family member is seriously 
ill, we all expect that the benefits of modern medicine will be 
available to provide the finest care possible. Yet, the cracks in our 
fragmented health care financing system are jeopardizing the health and 
financial security of millions of Americans. Hospitals play a pivotal 
role in making care accessible to those who cannot pay, but they also 
need to be financially viable. A strong hospital system--well equipped, 
professionally staffed, and ready to be of assistance in any 
emergency--is essential to a strong nation. To the extent that a flawed 
financing system undermines the financial security of the hospital 
sector, we are all at risk.
    It is especially important to scrutinize hospital financing and 
pricing practices in the current environment. Hospital costs increased 
at an annual rate of 9.5 percent in 2002, accounting for the largest 
share of increases in total health expenditures.\1\ Managed care has 
reduced the ability of hospitals to cross-subsidize care for the poor 
and uninsured through higher charges to privately insured patients. 
Hospital rates vary widely by patient and by source of insurance 
coverage. In fact, uninsured patients may be charged higher prices than 
better-off patients who are covered by private employer health 
insurance. In response to rising insurance premiums, employers are 
shifting more costs to employees, and patients are at greater financial 
risk.\2\ A recent Commonwealth Fund survey found that 71 million 
American adults under age 65 are experiencing problems paying medical 
bills or are paying off accrued medical debt.\3\ Not surprisingly, the 
public is very concerned about the affordability of health care.\4\
    \1\ K. Levit et al., ``Health Spending Rebound Continues in 2002,'' 
Health Affairs (January/February 2004): 147-159.
    \2\ Kaiser Family Foundation/Health Research and Educational Trust, 
Employer Health Benefits 2003 Annual Survey, September 2003.
    \3\ The Commonwealth Fund Biennial Health Insurance Survey (2003).
    \4\ Sara R. Collins et al., The Affordability Crisis in U.S. Health 
Care: Findings from The Commonwealth Fund Biennial Health Insurance 
Survey, The Commonwealth Fund, March 2004.
    Today, I would particularly like to address current concerns about 
hospital pricing practices as they affect patients; review why the 
market for hospital care is fundamentally different from that of other 
goods and services; place the U.S. hospital cost experience in an 
international context; and provide a historical perspective on how we 
got where we are today. I would also be pleased to share some thoughts 
on issues regarding price transparency, pay-for-performance pricing, 
pricing guidelines, the importance of the safety net provided by 
nonprofit hospitals, and health care financing. In particular, the 
greatest promise for improving the performance of the health care 
sector lies in:

      public information about the quality and efficiency of 
all health care providers;
      private and public insurance incentive payments that 
reward hospitals and other providers demonstrating superior quality and 
      preserving and strengthening a predominantly nonprofit 
hospital and health care sector;
      investing in the capacity to adopt modern information 
technology and systems to ensure safe care; and
      a system of automatic and affordable health insurance 
coverage for all.
    Thirty-five years ago, I wrote an economics doctoral dissertation 
on the economic behavior of nonprofit hospitals.\5\ It was the first 
systematic examination of this issue in the newly emerging field of 
health economics. In my paper, I concluded that nonprofit hospitals 
have more complex motivations than simply providing care to the 
community while breaking even. Rather, these hospitals attempt to 
generate surpluses on some services so that they can expand, add new 
facilities and services, and attract practicing physicians to their 
staffs. In short, they want to be the best, biggest, and most well-
equipped facilities possible, while remaining financially viable. For-
profit hospitals, on the other hand, are more strongly motivated by 
profit-maximizing goals and returns to owners or investors. The 
resulting difference is that nonprofits are more willing to provide 
care that is marginally profitable or loses money in order to advance a 
broader mission of excellence in patient care, medical education, and 
cutting-edge research.
    \5\ Karen Davis, A Theory of Economic Behavior in Non-profit, 
Private Hospitals, doctoral dissertation in economics, Rice University, 
May 1969.
    In the intervening years, numerous studies have confirmed these 
basic conclusions. A recent meta-analysis of studies on payments for 
care at for-profit and private not-for-profit hospitals from the mid-
1960s to the early 2000s concluded that nonprofit hospitals tend to 
charge less and collect lower payment rates from patients than for-
profit entities do.\6\ For-profit hospitals have higher profits and 
administrative expenses.\7\ A meta-analysis has also shown that quality 
of care is better in nonprofit hospitals, resulting in lower risk-
adjusted mortality rates.\8\
    \6\ P.J. Devereaux et al., ``Payments for Care at Private For-
Profit and Private Not-for-Profit Hospitals: A Systematic Review and 
Meta-Analysis,'' Canadian Medical Association Journal, 170(12):1817-
1824, June 8, 2004.
    \7\ J.M. Watt et al., ``The Comparative Economic Performance of 
Investor-Owned Chain and Not for Profit Hospitals,'' New England  
Journal of Medicine, 314(2):89-96, January 9, 1986.
    \8\ P.J. Devereaux et al., ``A Systematic Review and Meta-Analysis 
of Studies Comparing Mortality Rates of Private For-profit and Private 
Not-for-Profit Hospitals,'' Canadian Medical Association Journal, 
166(1):1399-406, 2002.
    Despite the recent publicity about selected cases of nonprofit 
hospitals' billing and collection practices for uninsured patients,\9\ 
it remains the case that nonprofit hospitals are more likely to care 
for uninsured patients than for-profit hospitals.\10\ Further, academic 
health centers are more likely to care for such patients than community 
hospitals.\11\ In recent years, care for the uninsured has been 
increasingly concentrated in fewer institutions willing to provide that 
care. Public academic health center hospitals provide the highest 
levels of charity care among all hospitals, while private nonprofit 
academic health centers provide twice as much free care as other 
private hospitals.
    \9\ Reed Abelson and Jonathan D. Glater, ``Nonprofit Hospitals Said 
to Overcharge Uninsured,'' New York Times, June 17, 2004; Wall Street 
Journal Staff Reporters, ``Lawsuits Challenge Charity Hospitals on Care 
for Uninsured,'' Wall Street Journal, June 17, 2004; Carol Pryor et 
al., Unintended Consequences: How Federal Regulations and Hospital 
Policies Can Leave Patients in Debt, The Commonwealth Fund, June 2003; 
Carol Pryor and Robert Seifert, Unintended Consequences: An Update on 
Consumer Medical Debt, Commonwealth Fund, June 2004.
    \10\ L.S. Lewin, T.J. Eckels, and L.B. Miller, ``Setting the Record 
Straight: The Provision of Uncompensated Care by Not-for-Profit 
Hospitals,'' The New England Journal of Medicine, 1212-1215, May 5, 
1988; Bradford H. Gray, ``Conversion of HMOs and Hospitals: What's at 
Stake,'' Health Affairs, 29-47, March/April, 1997; Gary Claxton, Judith 
Feder, David Shactman, and Stuart Altman, ``Public Policy Issues in 
Nonprofit Conversions: An Overview,'' Health Affairs 9-28, March/April 
1997; David Shactman and Stuart H. Altman, ``The Impact of Hospital 
Conversions on the Healthcare Safety Net,'' in Stuart H. Altman, Uwe E. 
Reinhardt, and Alexandra E. Shields (eds.), The Future U.S. Healthcare 
System: Who Will Care for the Poor and Uninsured? Health Administration 
Press; Institute of Medicine Committee on Implications of For-Profit 
Enterprise in Health Care, Bradford H. Gray (ed.), For-Profit 
Enterprise in Health Care, National Academy Press, 1986.
    \11\ Commonwealth Fund Task Force on Academic Health Centers, A 
Shared Responsibility: Academic Health Centers and the Provision of 
Care to the Poor and Uninsured, Commonwealth Fund, April 2001.
    Also troubling is that hospital charges bear little relationship to 
the actual cost of care--some services are very profitable and others 
are not. Specialized services such as burn units and neonatal intensive 
care are ``money losers,'' while cardiac surgery and radiological 
imaging services are highly profitable.\12\ Not surprisingly, ``niche 
providers,'' such as heart hospitals, orthopedic hospitals, surgical 
hospitals and ambulatory surgery centers (ASCs), cancer hospitals and 
centers, dialysis clinics, pain centers, imaging centers, and 
mammography centers, have been created to provide only those services 
that are highly profitable. This further reduces the ability of ``full-
service'' hospitals to cross-subsidize care that is unprofitable.
    \12\ Commonwealth Fund Task Force on AcademicHealth Centers, Health 
Care at the Cutting Edge, Commonwealth Fund, July 2000.
    In addition, managed care has made it more difficult for 
institutions that provide care to the uninsured to cross-subsidize 
uninsured care from payments for insured patients. Hospitals charge and 
collect very different prices for the same service depending on the 
source of insurance--in-network commercial insurance, out-of-network 
commercial insurance, negotiated contracts with different insurers and 
managed care plans, Medicare, or Medicaid--or the lack of any coverage. 
This practice might be viewed as equitable if net prices (after 
discounts) were systematically lower for poor patients and vulnerable 
elderly patients. However, uninsured patients are sometimes charged 
higher prices than privately insured patients, and some insurers get 
better breaks than others regardless of their enrollees' income. This 
is one factor in the higher premiums charged for small businesses than 
for large businesses for the same benefits.\13\
    \13\ Jon R. Gabel and Jeremy D. Pickreign, Risky Business: When Mom 
and Pop Buy Health Insurance for Their Employees, Commonwealth Fund, 
April 2004.
    The financial stability of hospitals also varies widely. Some are 
in serious financial difficulty, others are on the margin, and others 
are doing well. In a 2003 Commonwealth Fund survey, 30 percent of 
hospital CEOs reported that the current financial situation in their 
hospital was insufficient to maintain current levels of service; 38 
percent reported it was sufficient to maintain current levels of 
service; and 32 percent said their financial situation allowed for some 
improvements or expansion of care.\14\ Those hospitals in the best 
position are not necessarily the best-quality or most efficient ones. 
Instead, the hospitals that are faring worst financially are largely 
those shouldering a disproportionate share of charity care without 
adequate compensation for fulfilling this responsibility.
    \14\ Robert J. Blendon et al., ``Confronting Competing Demands to 
Improve Quality: A Five-Country Hospital Survey,'' Health Affairs 
23(3):119-135, May/June 2004.
    It is easy to say patients should act like consumers, choosing 
among various hospitals on the basis of cost and quality. Hospital 
care, however, is not like other goods and services. Key differences 

      lack of information
      lack of choice
      the complexity and life-critical importance of health 
care treatment decisions
      physicians' decision-making role in health care
      the need for insurance to protect financial security.

    Simply stated, patients do not have the information to make 
informed choices in health care. Information on the total bill for a 
hospital stay is almost never known in advance, nor are the associated 
charges from physicians caring for the hospitalized patient. Even less 
is known about the quality of care for the condition for which the 
patient is being admitted.
    Patients also often have little choice about where to go for care. 
Many communities are served by only one hospital. In emergency 
situations, patients may arrive by ambulance at the nearest equipped 
facility. For elective procedures, patients can be admitted only to 
hospitals where their physicians have privileges.
    Decisions about care are often made at a time of great stress 
(e.g., heart attack, stroke, diagnosis of breast cancer, trauma). The 
acuity of illness of hospitalized patients has increased markedly in 
recent years as hospital stays have shortened and discretionary care 
has shifted to outpatient care. Most inpatients are very sick, and they 
and their families are hardly in a position to make rational economic 
calculations. Hospital care is not bought frequently like groceries, 
for which trial and error can lead consumers to find the best value for 
their dollars. In fact, most decisions about care are made by 
physicians. Doctors decide whether patients are admitted to a hospital, 
where they go, and what is done to them while there.
    The presence of health insurance also makes the market for health 
care fundamentally different. Hospital care is typically covered by 
insurance, subject to deductible or coinsurance amounts. Protection 
against most of the cost of hospital care is essential to achieve one 
of the basic goals of insurance--to ensure financial security in the 
event of a serious illness or injury. Increasing how much patients have 
to pay out-of-pocket puts the patient at greater financial risk and may 
undermine the basic purpose of having insurance. Furthermore, cost-
sharing for hospital care puts greater financial burdens on the sickest 
and most vulnerable people who have the least discretion in their use 
of care.
    Increasing the out-of-pocket cost of hospital care is not likely to 
lead patients to seek care at more efficient or higher-quality 
hospitals. Most health care expenses are incurred above a dollar 
threshold exceeding most caps on out-of-pocket liability. For example, 
5 percent of patients account for 55 percent of all health care 
outlays, and all of these patients have high total expenses (in excess 
of $8,000 in 1997).\15\ Nearly all of these patients would exceed 
insurance deductibles, and most would exceed maximum out-of-pocket 
liability limits.
    \15\ A.C. Monheit, ``Persistence in Health Expenditures in the 
Short Run: Prevalence and Consequences,'' Medical Care 41, supplement 7 
(2003): III53-III64.
    Nor are higher deductibles the answer. One-third of insured 
hospitalized patients with a deductible of $1,000 or more would spend 
more than 10 percent of their income out-of-pocket.\16\ This is a 
financially burdensome exposure; it effectively leaves people 
    \16\ S. Trude, Patient Cost Sharing: How Much is Too Much? Center 
for Studying Health System Change, December 2003.
    There is growing evidence that health care is unaffordable today 
for many Americans, both those who are uninsured and the increasing 
numbers of people who are underinsured. The Commonwealth Fund Biennial 
Health Insurance Survey in 2003 found that two of five adults under age 
65 are experiencing problems paying medical bills or have accrued 
medical debt.\17\ Undoubtedly, hospital costs are playing a significant 
role. This is not just a problem for the uninsured. Among those with 
medical bill problems or accrued medical debt, 62 percent reported 
those bills were generated when they were insured. Even among people 
who are insured all year, over a third are experiencing medical bill 
problems or accrued medical debt. Raising patient cost-sharing would 
exacerbate the growing unaffordability of care due to already 
inadequate insurance protection.
    \17\ Sara R. Collins et al., The Affordability Crisis in U.S.  
Health Care: Findings from The Commonwealth Fund Biennial Health 
Insurance Survey, The Commonwealth Fund, March 2004.
    The United States is again flirting with a ``new'' private market 
strategy for controlling health care costs called ``consumer-driven'' 
health care. This takes several forms: large-deductible insurance plans 
combined with health savings accounts or health reimbursement accounts; 
``tiered'' cost-sharing, with patients paying more when they obtain 
care from a higher-cost hospital, physician, or other provider; or 
tiered premiums that let consumers pick their own package of benefits 
and networks of providers, with varying premiums based on 
comprehensiveness of benefits and costliness and/or quality of 
    The high-deductible form of consumer driven health care is 
predicated on the notion that health care services are overutilized, 
and that giving financial incentives to patients will reduce use of 
services that are marginal or of no value. But the U.S. already has 
relatively low hospital admission rates and short length of stays 
compared with other countries. While there is certainly evidence of 
overutilization of some services, underutilization appears to be a far 
greater problem.\18\ Patient cost-sharing, moreover, is not an 
effective mechanism for differentiating appropriate and inappropriate 
care but tends to lower use of both kinds of care.\19\
    \18\ E.A. McGlynn et al., ``The Quality of Health Care Delivered to 
Adults in the United States,'' New England Journal of Medicine, 
    \19\ K.N. Lohr et al., ``Use of Medical Care in the RAND HIE,'' 
Medical Care 24, supplement 9:S1-87, 1986; Karen Davis, ``Consumer-
Directed Health Care: Will it Improve Health System Performance,'' 
Health Services Research, forthcoming, August 2004.
    Most preferred provider organization plans (PPOs) that offer high-
deductible plans also extend their negotiated rates to services 
received before the deductible is met. As long as patients obtain care 
from in-network providers, they receive the discounts that have been 
negotiated by their plan. Such deductibles, however, may reduce use of 
preventive care and may lead patients to forgo filling prescriptions 
for medications required to keep their conditions under control. 
Several recent studies, in fact, have found that tiered cost-sharing 
for prescription drugs has caused patients to simply not fill 
prescriptions written by their physicians.\20\
    \20\ R. Tamblyn et al., ``Adverse Events Associated With 
Prescription Drug Cost-Sharing Among Poor and Elderly Person,'' JAMA 
285, no. 4 (2001): 421-429.; H.A. Huskamp et al., ``The Effect of 
Incentive-Based Formularies on Prescription Drug Utilization and 
Spending,'' New England Journal of Medicine 349(23):2224-32.
    The real problem, though, is that the deductibles themselves add to 
patient financial burdens. Only about 7 percent of privately insured 
individuals, or 8 million adults under age 65, now have deductibles of 
$1,000 or more.\21\ Increasing such deductibles would add considerably 
to medical bill problems and accrued medical debt, which already affect 
two of five Americans.
    \21\ Sara R. Collins et al., The Affordability Crisis in U.S. 
Health Care: Findings from The Commonwealth Fund Biennial Health 
Insurance Survey, The Commonwealth Fund, March 2004.
    Consumer-driven health plans are still in their infancy and not a 
great deal is known about them.\22\ Fewer than 3 million people were 
enrolled in such plans in 2003, out of more than 160 million enrollees 
in employer health plans. In general it appears that enrollment is 
relatively limited when such plans are offered as an option; healthier 
and higher-income individuals are more likely to enroll; and those who 
do enroll are relatively satisfied with the choice and reenrollment 
rates are high.\23\
    \22\ James C. Robinson, ``Hospital Tiers in Health Insurance: 
Balancing Consumer Choice with Financial Incentives,'' Health Affairs 
Web Exclusive, W3-135-146, March 19, 2003; Jon R. Gabel, Anthony T. Lo 
Sasso, and Thomas Rice, ``Consumer Driven Health Plans: Are They More 
Than Talk Now?'', Health Affairs Web Exclusive, November 2002; J. R. 
Gabel, H. Whitmore, T. Rice, and A. T. Lo Sasso, ``Employers' 
Contradictory Views About Consumer-Driven Health Care: Results of a 
National Study,'' Health Affairs Web Exclusive (April 21, 2004): W4-
    \23\ Karen Davis, ``Consumer-Directed Health Care: Will it Improve 
Health System Performance,'' Health Services Research, forthcoming, 
August 2004.
    Tiered cost-sharing plans are particularly problematic.\24\ They 
require detailed information on cost and quality at the hospital or 
diagnostic level--data that for the most part are not systematically 
available. Even were such data available and accurate, this presumes 
that very ill hospitalized patients are able to evaluate cost and 
quality tradeoffs, have a wide range of options about where to go when 
hospitalized, and are able to make cost-conscious choices. 
Administrative costs would be high, as hospitals would need to vary the 
amount they collect from patients, depending on the particular plan in 
which they are enrolled. A hospital may not be equally efficient or 
high quality on all kinds of diagnoses or conditions, leading to the 
need for detailed disaggregated data on each service or kind of 
    \24\ Robert Steinbrook, ``The Cost of Admission: Tiered Copayments 
for Hospital Use,'' New England Journal of Medicine 350(25):2539-2542; 
Thomas M. Priselac, ``The Erosion of Health Insurance: The Unintended 
Consequences of Tiered Products by Health Plans,'' Health Affairs Web 
Exclusive, W3-158-161, March 19, 2003; Marjorie E. Ginsburg, ``Hospital 
Tiering: How Will it Play in Peoria,'' Health Affairs Web Exclusive, 
W3-154-157, March 19, 2003.
    Tiered premiums have advantages over tiered cost-sharing in that 
they require decisions at the time of insurance enrollment rather than 
hospital admission. However, they have many of the same information 
requirements and would need to be structured in a way that does not 
penalize those who cannot afford a higher-quality, but higher-cost, 
    It is not the case that high out-of-pocket spending is necessary to 
control health care costs. Other countries manage to spend considerably 
less on health care and have little or no patient cost-sharing. Nor has 
managed care in the U.S. provided a magic bullet to control health care 
spending. U.S. health expenditures over the 1990s went up the same as 
the average for all industrialized nations (3.1 percent annually in 
real terms in the U.S. vs. 3.0 percent for the median OECD 
country).\25\ Canada and Germany had markedly slower health expenditure 
growth rates between 1991 and 2001 (2.1 and 2.4 percent annual real 
growth, respectively).
    \25\ Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, 
``U.S. Health Spending in an International Context,'' Health Affairs, 
May/June 2004.
    In particular, the U.S. has much higher hospital costs than any 
other country. But this is not because Americans get more hospital 
care. In fact U.S. hospital admission rates are below the average of 
all industrialized nations, and lengths of stay are shorter.\26\ Yet, 
in the U.S., hospital cost per day is very high--three times the OECD 
median cost per day--and overall the U.S. spends twice the OECD 
hospital cost per capita.
    \26\ Gerard F. Anderson, Varduhi Petrosyan, and Peter S. Hussey, 
Multinational Comparisons of Health Systems Data, 2002: Based on Data 
from the Organization for Economic Cooperation and Development, The 
Commonwealth Fund, October 2002.
    The difference is that in all other countries, the government has a 
major role in setting hospital budgets or payment rates. Other 
countries also regulate the supply of hospital capacity, specialized 
facilities, and specialist physicians. The U.S. has more specialist 
physicians, and they are compensated more highly. U.S. specialist 
physicians are typically paid on a fee-for-service basis, whereas 
specialists in other countries are typically salaried under negotiated 
agreements and work full-time for a hospital. Other countries also have 
much lower administrative costs, because they have a single system of 
payment with a single set of rules and payment rates for all 
    \27\ Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, 
``U.S. Health Spending in an International Context,'' Health Affairs, 
May/June 2004.
    Other countries also have done more to rationalize care, through 
disease management, cost-effectiveness reviews of drugs and specialized 
procedures, and regional hospital authorities.\28\ This is not to say 
that it is desirable or feasible to adopt all of the features of other 
systems. Most Americans, for example, would be unwilling to accept the 
longer waiting times for elective procedures typical in budgeted 
systems. But we could learn from international innovations and benefit 
from that experience.
    \28\ See for example, Reinhard Busse, ``Disease Management Programs 
in Germany's Statutory Health Insurance System,'' Health Affairs, May/
June 2004. Steven Morgan et al., ``Outcomes-Based Drug Coverage in 
British Columbia,'' Health Affairs, May/June 2004.
    It is also not the case that spending more on health care 
necessarily leads to higher quality care.\29\ A recent international 
comparison of quality indicators found that quality of care is not 
systematically better in the U.S. The U.S. is in the mid-range on many 
health outcome and quality of care indicators--better than other 
countries on some measures, worse on others.\30\ For example, five-year 
survival rates following kidney transplants are 13 percent better in 
Canada than in the U.S., while five-year survival rates for breast 
cancer are 14 percent better in the U.S. than in England.
    \29\ Karen Davis, et al., Mirror, Mirror on the Wall: Looking at 
the Quality of American Health Care through the Patient's Lens, The 
Commonwealth Fund, January 2004.
    \30\ Peter S. Hussey et al., ``How Does the Quality of Care Compare 
in Five Countries?'' Health Affairs, May/June 2004; The Commonwealth 
Fund International Working Group on Quality Indicators, First Report 
and Recommendations of the Commonwealth Fund's International Working 
Group on Quality Indicators: A Report to Health Ministers of Australia, 
Canada, New Zealand, the United Kingdom, and the United States, The 
Commonwealth Fund, June 2004.
    A recent survey of hospital CEOs in five countries provides 
interesting insight into how U.S. hospitals compare with those of other 
countries.\31\ The Commonwealth Fund 2003 International Survey of 
Hospital CEOs found that:
    \31\ Robert Blendon et al., ``Confronting Competing Demands to 
Improve Quality,'' Health Affairs, May/June 2004;David Blumenthal, et 
al., A Five-Nation Hospital  Survey: Commonalities, Differences, and 
Discontinuities, The Commonwealth Fund, May 2004.

      U.S. hospital CEOs are much more negative than their 
counterparts in Australia, Canada, New Zealand, and the U.K. about 
their nation's health care system
      The U.S. is the only country where hospital CEOs cite the 
cost of indigent care and care for the uninsured as major problems
      U.S. hospitals are in somewhat better financial position, 
on average, than hospitals in other countries, but this varies across 
      U.S. hospitals are more likely to experience emergency 
room diversions and turn patients away
      U.S. hospitals are more concerned about stand-alone 
diagnostic or treatment centers and freestanding ambulatory care 
centers ``creaming'' profitable patients
      U.S. hospital CEOs are less open to public reporting of 
quality information than CEOs in other countries
      Hospital CEOs in all countries would place a high 
priority on investing in information technology should resources become 
available to do so.
    While other countries have long been comfortable with a more 
activist role for government in health care financing, the U.S. has had 
only sporadic, mostly short-lived attempts to shape the health care 
sector through governmental policy.\32\ Instead, we have primarily 
relied on private markets to determine hospital prices and hospital 
capacity. Only for patients covered by public insurance programs--
Medicare and Medicaid--has government had a major role in establishing 
payment rates.
    \32\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. 
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990; 
Karen Davis et al., ``Is Cost Containment Working?'' Health Affairs, 
4(1):81-94, Fall 1985; Drew E. Altman and Larry Levitt, ``The Sad 
History of Health Care Cost Containment as Told in One Chart,'' Health 
Affairs, January 23, 2002
    Yet, the historical record of government intervention in hospital 
pricing, when it has happened, has been positive for the most part. The 
first major intervention occurred under President Nixon with the 
establishment of economy-wide price controls under the Economic 
Stabilization Program (ESP) from August 1971 to 1975. In the period 
prior to ESP, hospital expenses were increasing considerably faster 
than overall price inflation.\33\ When hospitals and other providers 
autonomously set prices, the average real annual rate of increase in 
community hospital expenses from 1950 to 1965 was 8.3 percent, fueled 
by growth in private insurance paying hospitals on the basis of charges 
set by hospitals. From 1966 to 1971, real hospital expenses increased 
11.6 percent annually, spurred upward by introduction of Medicare and 
Medicaid. Even though Medicare and Medicaid reimbursed on the basis of 
costs, hospitals were assured reimbursement for incurred expenses. By 
contrast real hospital expenses grew by ``only'' 6.1 percent during the 
ESP period. When controls were lifted, hospital costs again 
accelerated, averaging a real increase of 8.7 percent over 1975 to 
    \33\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. 
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990.
    The second attempt by the federal government was the proposed 
Carter Hospital Cost Containment Act, which was considered by Congress 
from 1977 to 1979. The legislation would have placed a limit on the 
rate of increase in payments to hospitals tied to market basket 
inflation. But the legislation failed when the hospital industry 
mounted a ``Voluntary Effort'' to control costs. During this period, 
increases in hospital costs adjusted for economy-wide inflation rose 
3.1 percent annually. But defeat of legislation ended the ``Voluntary 
Effort'' and hospital costs subsequently rose 7.8 percent in real terms 
in the 1981-1983 period.\34\
    \34\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. 
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990; 
Karen Davis, ``Recent Trends in Hospital Costs: Failure of the 
Voluntary Effort,'' testimony before U.S. House of Representatives, 
Committee on Energy and Commerce, Subcommittee on Health and the 
Environment, hearing on ``Increase in Hospital Costs: Is the Voluntary 
Effort Working?'' December 15, 1981.
    The rise of hospital costs when the threat of controls was 
removed--and particularly the implications for Medicare budgetary 
outlays--led to enactment of the Tax Equity and Fiscal Responsibility 
(TEFRA) legislation in 1982. TEFRA established Carter-like limits on 
increases in hospital payments only for Medicare. This was followed by 
legislation in 1983 creating the Diagnosis-Related Group (DRG) method 
of Medicare prospective hospital payment. Again hospital costs 
stabilized, increasing by 3.2 percent annually in real terms in the 
immediate post--Medicare PPS period (1984-86). One major effect was a 
sharp decline in average length of stay--undoubtedly related to the 
shift in Medicare payment methods from cost to a fixed rate for 
hospital stay.\35\
    \35\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. 
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990.
    But holding down Medicare payment rates did not succeed in 
controlling costs to private insurers, leading to a resurgence in total 
spending. The Clinton Health Security Act legislation in 1993 again 
proposed a major role for government in controlling health care costs. 
In the wake of its failure, employers turned to managed care plans to 
ameliorate health care cost inflation. In the mid-1990s, the threat of 
health reform, combined with the expansion of managed care, led to a 
marked slow-down in health care spending, most notably in hospital care 
spending.\36\ Managed care plans used their negotiating power to obtain 
discounted payment rates from hospitals, physicians, and other 
providers. The discounted rates reduced physician real incomes and 
hospital margins, but they proved to be unsustainable.\37\ A pushback 
by providers led to a resurgence of health care costs in the early 
    \36\ Drew E. Altman and Larry Levitt, ``The Sad History of Health 
Care Cost Containment as Told in One Chart,'' Health Affairs, January 
23, 2002
    \37\ Karen Davis and Barbara S. Cooper, American Health Care: Why 
So Costly? Testimony for the Senate Appropriations Subcommittee, June 
    \38\ Karen Davis and Barbara S. Cooper, American Health Care: Why 
So Costly? Testimony for the Senate Appropriations Subcommittee, June 
    Several state governments also stepped forward to fill the void in 
federal policy, particularly in the 1970s and 1980s. The most prominent 
of these were ``all-payer rate setting'' programs, particularly those 
in Connecticut, Maryland, Massachusetts, New Jersey, New York, and 
Washington. While in effect, these states experienced increases in 
hospital costs three to four percentage points a year lower than other 
states.\39\ Between 1976 and 1984, the rate of increase in hospital 
expenses per adjusted admission was 87 percent less in rate-setting 
states than in non-regulated states.\40\ The programs also helped 
stabilize hospital finances and contributed to fairly equitable payment 
rates across patients insured by different insurers. Many created 
mechanisms for explicitly cross-subsidizing hospitals providing 
uncompensated charity care. Yet, the anti-regulatory mood of the era 
led to the repeal of these efforts, with the notable exception of 
    \39\ Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. 
Steinberg, Health Care Cost Containment, Johns Hopkins Press, 1990; 
Karen Davis, ``Recent Trends in Hospital Costs: Failure of the 
Voluntary Effort,'' testimony before U.S. House of Representatives, 
Committee on Energy and Commerce, Subcommittee on Health and the 
Environment, hearing on ``Increase in Hospital Costs: Is the Voluntary 
Effort Working?'' December 15, 1981.
    \40\ Carl J. Schramm, Steven C. Renn, and Brian Biles, 
``Controlling Hospital Cost Inflation: New Perspectives on State Rate 
Setting,'' Health Affairs, 5:22-33, Fall 1986.
    The basic lesson from this historical experience is that government 
leadership matters. When government establishes a payment framework for 
purchasers--whether Medicare, Medicaid, employer health plans--and uses 
that collective purchasing power to set or negotiate prices from 
providers, the rise in hospital costs is slowed, there is greater 
equity by income of patients and across different sources of coverage, 
and better access to care for the uninsured. Large purchasers--
Medicare, national managed care plans, large employers--can also obtain 
good deals on their own, but they are less effective both in 
controlling overall cost increases and in ensuring equitable payment 
and access. A fragmented financing system, with each payer setting its 
own rules, also inflicts a toll in the form of higher administrative 
costs. On the flip side, if purchasers join together to exact steep 
discounts, this system may undermine the financial stability of the 
hospital sector, dampen investment in innovation such as information 
technology, and undermine important social missions, including the 
promotion of cutting-edge research, education, and excellence in 
patient care.
    Given the resurgence in health care costs, the increasing numbers 
of uninsured, abundant evidence that the quality of care is not what we 
could have and have a right to expect, and the fact that administrative 
costs are now the fastest rising component of health care expenditures, 
it is time to consider a leadership role for the federal government in 
promoting efficiency and quality in the health care system.\41\ Many 
health care market participants are now willing to consider strong 
governmental intervention to repair the health care system.\42\ Neither 
the market reforms of the last two decades nor consumer-driven health 
care provide the needed impetus for fundamental change in the quality 
and efficiency in the U.S. health care system.
    \41\ Karen Davis, ``Achieving a High Performance Health System,'' 
Commonwealth Fund 2003 Annual Report, January 2004; Stephen C. 
Schoenbaum, Anne-Marie J. Audet, and Karen Davis, ``Obtaining Greater 
Value from Health Care: The Roles of the U.S. Government,'' Health 
Affairs, November 2003; Karen Davis, Cathy Schoen, and Steve 
Schoenbaum, ``A 2020 Vision for American Health Care.'' Archives of 
Internal Medicine, December 2000.
    \42\ Len M. Nichols et al., ``Are Market Forces Strong Enough to 
Deliver Efficient Health Care Systems? Confidence is Waning,'' Health 
Affairs 23(3):8-21, March/April 2004.
    My own view is that the greatest promise lies in a combination of 
improved information on quality and efficiency, pay-for-performance 
purchasing by private and public insurers, and investment in the 
capacity to modernize the health care system. Most fundamentally, we 
need a streamlined, automatic health insurance system that ensures all 
Americans have access to affordable health care.
Price Transparency
    It is hard to improve if you have no idea how you are performing or 
the results that others are achieving. While I am skeptical about the 
ability of consumer financial incentives to bring about fundamental 
change in health care, I do think that information on quality and 
efficiency at the individual provider level is absolutely essential if 
health care organizations are to improve their performance.
    What is needed is not so much information on prices of individual 
hospital or physician services--which are often meaningless--but 
information on the total cost of care over an episode of illness or 
period of time. If a patient goes to a hospital where he or she will be 
seen by 10 different physicians and spend a long time in the intensive 
care unit, it is the total bill for hospital, physician, and other 
services that is of concern to the patient, not the daily room rate or 
the charge for a day of intensive care. Further, if a hospital 
discharges a patient quickly but fails to help the patient learn 
effective self-care techniques, the patient may be quickly readmitted. 
So it is not the price per service or the total hospital bill for a 
stay that is relevant, but the total charges for all services over a 
period of time for the kind of condition and complexity faced by the 
    John Wennberg and colleagues recently demonstrated that use of 
hospitals, intensive care days, physician visits, number of physicians 
involved in care, and use of hospice care in the last six months of 
life varied widely for the 77 leading U.S. hospitals.\43\ Days in 
hospital per decedent ranged from 9.4 to 27.1; days in intensive care 
ranged from 1.6 to 9.5; number of physician visits ranged from 17.6 to 
76.2; percentage of patients seeing 10 or more physicians ranged from 
16.9 percent to 58.5 percent, and hospice enrollment ranged from 10.8 
percent to 43.8 percent. In short, it is ``practice style'' that leads 
to wide variations in the use of health care resources. Patients have 
almost no ability to know how they will be treated, what services they 
will need, or what the total bills will be when they experience a life-
threatening condition. Generating information on provider 
``longitudinal efficiency''--that is, the total cost of care over an 
episode of illness or over a period of time--could begin to shed light 
on ``best practices and lead hospitals to emulate the practices of 
high-performing organizations.
    \43\ John E. Wennberg et al., ``Use of Hospitals, Physician Visits, 
and Hospice Care During Last Six Months of Life Among Cohorts Loyal to 
Highly Respected Hospitals in the United States,'' British Medical 
Journal 328:607:1-5, March 13, 2004.
    But efficiency is not the only important dimension. Quality is 
equally important. Steven Grossbart at Premier, Inc., recently 
demonstrated wide variation in both cost and quality across Premier 
hospitals.\44\ For example, he found a five-fold variation in poor 
outcomes adjusted for complexity for coronary artery bypass graft, and 
a two-fold variation in cost per case, similarly adjusted for case-mix 
    \44\ S. Grossbart, Ph.D., Director, Healthcare Informatics, 
Premier, Inc., The Business Case for Safety and Quality: What Can Our 
Databases Tell Us,'' Fifth Annual National Patient Safety Foundation 
Patient Safety Congress, March 15, 2003.
    One of the difficulties with generating this information is the 
absence of a multi-payer claims data base with unique provider 
identification. One important step would be for Medicare to lead in 
forging a collaboration among Medicare, Medicaid, and private insurers 
to assemble such a multi-payer claims database and make it widely 
available to researchers and providers. After improving the accuracy 
and validity of the data, public information on provideuld be a very 
strong motivator for improvement. A thoughtful middle ground has been 
proposed that would:

      engage providers as ``coauthors'' working to improve the 
quality of the tools and to ensure that appropriate caveats about 
weaknesses in the analyses are on prominent display;
      include a multidimensional approach to reporting on 
quality to help ensure that various dimensions and attributes are 
      not tying consumer copayments to tiers;including both 
quality and cost in financial rewards for providers;
      transparency to purchasers, providers, and 
patients;physician data aggregated at the physician group level; and
      collaboration among payers, purchasers, patients, and 
providers in development of systems of public accountability.\45\
    \45\ Thomas H. Lee, Gregg S. Meyer, and Troyen A. Brennan, ``A 
Middle Ground on Public Accountability,'' New England  Journal of 
Medicine 350:23:2409-2412, June 3, 2004.
Pay for Performance
    The natural desire of physicians and other health care leaders to 
provide high-quality care may be adequate to stimulate improvement once 
such a database is created. However, it would also be important for 
purchasers (Medicare, Medicaid, private insurers) to reward high 
performance hospitals that demonstrate better quality and efficiency, 
as well as high-performance integrated health systems and accountable 
physician group practices. Purchasers are in a far better position to 
promote better quality and efficiency than are individual patients.
    There are more than 75 pay-for-performance programs across the U.S. 
including those that are provider-driven (e.g., Pacificare), insurance 
driven (Blue Cross/Blue Shield in Massachusetts), and employer driven 
(Bridges to Excellence).\46\ The new Medicare Modernization Act also 
calls for demonstrations to provide bonuses to physicians on a per-
beneficiary basis when quality standards are met. Several states have 
built performance-based incentives into Medicaid contracts, including 
Iowa, Massachusetts, Rhode Island, Utah, and Wisconsin.
    \46\ Leapfrog Group, draft report to The Commonwealth Fund, 2004.
    The U.K.'s new contract with general practitioners also includes 
bonuses pegged to quality performance.\47\ Up to 18 percent of 
physician practice earnings will be at risk. Physicians were heavily 
involved in selecting the 146 performance measures.
    \47\ Peter Smith and Nick York, ``Quality Incentives: The Case of 
U.K. General Practitioners,'' Health Affairs May/June 2004.
Pricing Guidelines
    The current system of hospital pricing is clearly inequitable and 
administratively inefficient. A major effort should be mounted to 
identify ways of reducing providers' administrative costs and 
simplifying payer rules and pricing practices.
    It will also be important to address in some way the wide 
disparities in prices faced by different sets of patients. It would be 
reasonable to consider limits or bands on how much prices can vary 
depending on payer source (perhaps pegged to a percentage of Medicare 
DRG payment rate). Given urgent concerns about the financial burdens on 
uninsured and low-income underinsured Americans, net charges (after 
discounts) to such patients certainly should not be higher than those 
charged insured patients.
    We should also remember that all-payer rate-setting worked well in 
the past. It was much simpler administratively than our current system, 
much more equitable, and more effective in controlling costs. It may 
need to be revisited if upward cost pressures and financial instability 
in the hospital sector persist.
Preserving and Strengthening the Safety Net
    In the current environment, nonprofit hospitals that provide 
uncompensated care to the uninsured and fulfill other vital social 
missions should be preserved and strengthened. It would be reckless to 
undo tax preferences for nonprofit hospitals. They are a major source 
of uncompensated care and community benefit. The current community 
benefits standard is broader than just charity care--some hospitals 
make a contribution through provision of high-cost ``unprofitable'' 
services such as burn care and trauma care; others make a contribution 
through medical education and training health professionals.
    It may be reasonable to refine expectations about what nonprofit 
hospitals should contribute to their community. It is reasonable to ask 
that the uninsured not be charged more than other patients, and that 
hospitals work out feasible repayment plans and not employ unreasonable 
collection tactics. Certainly if there is a major emergency, whether a 
fire in a nightclub or a terrorist attack, we want hospitals to open 
their doors to all victims regardless of their ability to pay.
    At one time, hospitals had an obligation to provide charity care in 
exchange for grant and loan capital funds received in the past. It 
might be useful to consider a new ``Hill-Burton'' act, perhaps one 
that, in exchange for providing charitable care, would make available 
grants and loan capital funds for investment in information technology 
and systems to enhance patient safety.
    Alternatively, the disproportionate share allowance for hospitals 
could be better targeted, for example, providing payments at some 
percentage of the Medicare DRG payment rate for each uninsured patient 
served. Some portion might be specified for investment in modern 
information technology or systems to prevent medical errors.
    These measures are not just important in the short term. Even as we 
move to improve insurance coverage, it is important to preserve the 
safety net to ensure that health care is open to those who are 
difficult to insure--immigrants, the homeless, the mentally ill--and 
that all patients can receive patient-centered, culturally competent 
    We also need to ensure that our nation's academic health centers 
are able to continue their vital social missions of investing in 
cutting-edge research, providing specialized care that may not be 
profitable but is nonetheless valued by society, and training new 
generations of medical leaders and health professionals.
Insurance Coverage and Access to Care for Vulnerable Populations
    We will never have an efficient and equitable system so long as 
millions of Americans go without health insurance coverage. Over 85 
million Americans are uninsured at some point over a four-year 
period,\48\ and millions more are underinsured. Two of five Americans 
are struggling with medical bill problems or paying off medical debts. 
Tinkering with hospital prices and cost-sharing will do little to solve 
this problem. A bolder strategy is urgently needed. Fundamental reform 
requires automatic and affordable insurance coverage for all. Thank you 
for the opportunity to be here today.
    \48\ Pamela Farley Short, Deborah R. Graefe, and Cathy Schoen, 
Churn, Churn, Churn: How Instability of Health Insurance Shapes America 
's Uninsured Problem, The Commonwealth Fund, November 2003.























    Chairman HOUGHTON. Thanks very much. Dr. Herzlinger.


    Ms. HERZLINGER. Thank you so much. I am honored to be here. 
It is very nice to see you again, Chairman Houghton. I last saw 
you at the 2000 Harvard Army Reserve Officer Training Corps 
induction ceremonies, and you gave a very moving and eloquent 
speech there, and my son, Captain Alexander Herzlinger, is now 
with the 101st Mountain Division in Iraq.
    I would like to talk about how we get to this position. In 
most of our economy prices continually go down, quality 
continually goes up, and people have good access, so whether 
you are Jane Doe or a Member of this Committee, the elite of 
the United States, you have the same kind of access.
    Why don't we look at those sectors and compare them to 
health care and see what they have that health care does not? 
Let's look at the automobile sector where prices have gone 
down, quality has gone up, and even poor people can buy very 
good automobiles. What happened?
    First of all, consumers are in charge so the market is 
tailored to them and not to intermediaries like insurers. 
Second, providers are free to price as they want. Right now, 
for example, it is a good time to buy an Impala because the 
Chevrolet company has over produced its Impalas and it is 
cutting the prices. Thirdly, those markets have terrific 
information, so even though Congressman Stark may have ease in 
buying an automobile, I find it terribly complicated, but I 
have great information about the quality of cars that comes 
from sources like Consumer Reports and J.D. Power.
    What happens when we have this kind of consumer-led system 
in health care? There are great things for the uninsured. For 
example, there is a company called Health Allies, which is a 
subdivision of United, which is the largest health insurer in 
the United States. Health Allies offers insurance from $500 to 
$3,000 for the uninsured, and the insurance is very good 
insurance. It is called essential coverage, and Health Allies 
negotiates on behalf of its individual members, and it gives 
them the market power that big insurers bring to their 
    Congressman Stark asked why there were no data on prices. 
In fact, getting the price of a hospital procedure is akin to 
getting the battle plan for Iraq, it is very difficult right 
now, but there are private sector companies like Ingenix that 
make such data available. It is again a subdivision of 
    So, what is the role of government in solving the problem, 
the terrible problem that people who lack health insurance face 
when they enter hospitals? I think it is to enable a consumer-
driven system that makes it possible for everybody to be on the 
same footing. Through the leadership of Congressman Thomas and 
Congresswoman Johnson, we have gotten HSAs and tax credits. 
Those are huge benefits for uninsured people, and give them tax 
support to buy health insurance. The providers must be free to 
price just like other providers in the United States are free 
to price, and the micro-management that we now have of provider 
pricing can't be anything but harmful.
    The third and most important is to shed some sunlight in 
this market. A very good model is the Securities and Exchange 
Commission. When President Franklin Delano Roosevelt was 
elected President there was no transparency in the capital 
markets. There were no annual reports. There was no information 
that shareholders had. President Franklin Delano Roosevelt was 
urged, like you are, by various Members of this Committee, to 
regulate the business community more closely. He very wisely 
and presciently demurred, and what he chose to do was foster 
the Securities and Exchange Commission Act, and he said, 
approximately, ``Sunshine is the best disinfectant.''
    What does the Securities and Exchange Commission do? It has 
fostered the lauded transparency and efficiency of our capital 
markets. It does not dictate what is to be measured. It does, 
however, require disclosure and dissemination of data. I hope 
and urge you that this model is followed in health care because 
sunshine is the best healer.
    [The prepared statement of Ms. Herzlinger follows:]
   Statement of Regina E. Herzlinger,* Nancy R. McPherson Professor, 
             Harvard Business School, Boston, Massachusetts
    Consumer-driven markets succeed when good price and quality 
information is available. Consumers reward those who provide good 
values for the money and penalize the others.
    * Professor Regina E. Herzlinger, the Nancy R. McPherson Professor 
of Business Administration at Harvard Business School, is the author of 
the best-selling Market-Driven Health Care (Cambridge, MA: Perseus, 
paperback, 2000) and Consumer-Driven Health Care (San Francisco, CA: 
Jossey-Bass, 2004).
    Thus, when, in the 1970s, Consumer Reports began its favorable 
ratings of Japanese cars, the American manufacturers controlled 90% 
plus of the market. By 2003, Japanese cars, which continued to dominate 
the best-value-for-the-money ratings, had a 35% market share. But the 
Americans improved. By 2000, U.S. cars equaled European ones in 
reliability. The Japanese cars had only a small edge. Quite a change 
from 1980, when U.S. cars were three times as unreliable as Japanese 
ones and twice as unreliable as European vehicles.\1\
    \1\ ``Twenty Years of Consumer Reports Surveys Show Astounding 
Gains,'' Consumer Reports, April 2000, p. 12.
    Last, automobile prices are currently the lowest in two decades. In 
1991, for example, the average family required 30 weeks of income for 
the purchase of a new vehicle; but by 1999, a new vehicle required only 
24 weeks of their income--a 20% decline.\2\ Simultaneously, automobile 
quality is at an all-time high. The range of choices is better too, as 
the quality differences between the best and worst manufactures have 
    \2\ Auto Affordability Index, accessed August 21, 2003.
    Why does the car market work so well--increasing quality, 
widespread ownership, decreasing price--in contrast to the health care 
markets, whose cost increases substantially outstrip income; whose 
quality is unknown; and where the uninsured pay much higher prices than 

    1.  Consumers are the buyers.
    2.  Manufacturers can freely vary prices in response to changes in 
their production and sales. For example, they currently are slashing 
the prices of cars with large inventories, such as the Impala.
    3.  Consumers have access to excellent information on both prices 
and quality from private sector organizations, such as Consumer Reports 
and J.D. Power.

    All of these attributes are missing in the hospital market:

    1.  The hospitals sell mostly to third-party insurers, not to 
individual consumers. As a result, consumers lack market power. In 
2000, more than 90% of expenditures for hospitals came from third-party 
    2.  Hospitals cannot vary their prices to these third parties as a 
result of changing market conditions during the course of the year. 
Because prices are determined annually, hospitals cannot cut their 
prices during periods of low occupancy to attract patients who need 
nonemergency services.
            Further, because many of the third-party insurers demand 
        discounts off list prices, hospitals raise the prices to 
        convince the insurers that they are receiving substantial 
        discounts. For this reason, hospital charges have risen three 
        times faster than their costs from 1995-2002. These list prices 
        are then typically charged to individual uninsured consumers 
        who lack market power.
    3.  Price information is very difficult to obtain and quality data 
are virtually nonexistent.

             The Solution to Price Gouging of the Uninsured

    To help the individual, uninsured hospital customer to be as 
capable of receiving good value for the money as a car buyer requires 
replicating its essential characteristics in the health care sector.

    1.  Consumers buy insurance for themselves in an individual market. 
Tax-credits and HSAs are critical to this transformation.
    2.  Providers are free to quote their own prices and to change them 
as circumstances vary in the individual market.
    3.  Information on health care prices and quality is freely 
Band-Aid solutions to Price-Gouging of the Uninsured
    Other well-intended solutions to the problems of the uninsured are 
unlikely to be as effective as a consumer-driven health care system.
    Transparency--Many would require hospitals to post price 
information prominently. But what use is information in the absence of 
consumers' market power?
    Charity Care Reminders--Others would require hospitals to inform 
uninsured patients that charity care is available. The proposal creates 
nightmarish auditing requirements and does not help the uninsured who 
are not poor enough to qualify for charity care.
    Rate Setting--Yet others would extend governmental power to setting 
all hospital prices. This proposal extends the present micromanagement 
and further limits productivity-enhancing innovations.

                    How Consumer-Driven Markets Work

    How do consumers cause products to be better and cheaper? After 
all, the average person is not an expert about most purchases and 
represents only one buyer.
    One reason that average people can reshape whole industries is that 
markets are guided not by the average consumer, but by the marginal 
one. In English, this economic jargon means that producers respond to 
their last customers, not to their average customer. Typically the last 
ones to buy drive the toughest bargain; they are the show-me crowd. 
These hard-nosed buyers are the heavy consumers of information who are 
most adept in interpreting and using it. Below I will illustrate this 
mechanism in the automobile and finance sectors.
The Automobile Sector
    To understand how this market mechanism works, consider my purchase 
of a car. I confess: I have only the dimmest notion of how a car 
functions. After all, a car is a high-tech device, studded with 
microchips. My notions of the mechanical compression and ignition of 
gasoline that lead to an explosion whose energy ultimately rotates the 
wheels of a car are as dated as my first car, the 1957 Dodge that I 
purchased in 1966. It got seven miles to the gallon, rivaled a stretch 
limo in length, and belched pollutants.
    I do not think that I am alone in my ignorance. When I see someone 
in an automobile showroom peering under the hood of a car, I think to 
myself, ``What the heck are you looking at?'' Nevertheless, like all 
Americans, I can now readily find the kind of car I want at a price I 
am willing to pay. Two ingredients are crucial.
    One is information. It enables me to be an intelligent car shopper, 
despite my ignorance.
    How does it work? It's simple. I review the rating literature to 
look for a car that embodies the attributes I seek: safety, 
reliability, and price. Thus, when I studied Consumer Reports for cars 
with these attributes, two brands caught my eye: Volvo and Buick. I 
confess. I skipped the earnest reviews of how the engines work, the 
fuel-efficiency, the comfort, the handling, the styling, etc. Safety, 
reliability, and price--that is what interests me. And objective 
information about the attributes in which I am interested is easily 
available to me.
    I opted for the Buick. Although it was not as reliable as the 
Volvo, it was cheaper and had more of the heft that I associate with 
    But many of those who shared my views of a car's desired 
characteristics opted for the Volvo. It grew from being an obscure 
Swedish brand to a substantial one with sales of 100,000 cars in 
2001.\3\ During this growth period, Volvo's rivals understood that a 
meaningful number of their customers were interested in safety and 
reliability and introduced these qualities into their cars. In the 
quest for safety, some of them acquired rival brands, such as Ford's 
1999 acquisition of Volvo.\4\ Other automobile manufacturers improved 
their reliability.\5\
    \3\ Ward's Automotive Yearbook (Detroit, MI: Ward's Reports, 2002), 
p. 202.
    \4\ Kathleen Kerwin, ``At Ford, the More Brands, the Merrier,'' 
BusinessWeek, No. 3675 (April 3, 2000), p. 58.
    \5\ ``Twenty Years of Consumer Reports Surveys Show Astounding 
Gains,'' Consumer Reports, April 2000, p. 12.
    So that is how cars became better even when the consumer is a 
doofus like me.
    Information makes dumb people like me smart.
    But what stops the car manufacturers from refusing to cut their 
    After all, I am only one person.
    At a high price, there are only a few buyers who are more-or-less 
indifferent to price. The good news is that they are willing to buy at 
a very high price. The bad news is that there are only a few of them. 
As providers reduced their prices, they attract more and more 
customers. The increased volume of customers more than compensates for 
the cut in price. Providers continue to reduce their price until they 
hit a brick wall: the last picky, tough-minded customers who set the 
price. At this price, the extra revenue the providers generate from 
sales to the hard-bargain drivers is roughly equal to the extra cost of 
manufacturing their purchases. All the rest of us benefit from the 
assertiveness of the last-to-buy crowd.
    This relatively small group of demanding consumers seek out the 
suppliers who will reduce price and improve quality. For example, a 
McKinsey study showed that a small group, only 100 investors, 
``significantly affect the share prices of most large companies.'' \6\
    \6\ Kevin P. Coyne and Jonathan W. Witter, ``What Makes Your Stock 
Prices Go Up and Down,'' The McKinsey Quarterly, No. 2, 2002, pp. 29-
    In the auto market, and most others, these three characteristics--
information, a group of picky consumers, and the ability of 
manufacturers to quote prices freely--enable the rest of us to obtain a 
good product at a good price.

           Average Janes and Joes and the Health Care Market

    When they have good information and freedom to choose health care 
plans and providers, consumers optimize in classic Economics 101 
fashion. For example, the consumer-control, providers freedom to price, 
and satisfaction data collected by the Twin Cities' employer coalition, 
the Buyers Health Care Action Group, helped to cause a nearly 20% drop 
in high-cost/low-satisfaction plans and a 50% increase in low-cost/
high-satisfaction plans.\7\ Information exerts powerful effects even in 
the absence of consumer control. When New York provided standardized 
measures of the open heart surgery performance of hospitals and 
surgeons, for instance, statewide death rates dropped.\8\ Low-
performance providers exited and others improved. Market share growth 
was inversely related to the mortality statistics.\9\
    \7\ Slide presented by Steve Wetzell of the Buyers Health Care 
Action Group in a February 1999 meeting of the American Medical 
Association in Palm Beach, Florida.
    \8\ Mark R. Chassin et al., ``The Urgent Need to Improve Health 
Care Quality,'' Journal of the American Medical Association, vol. 280, 
no. 11 (September 16, 1998), p. 1003.
    \9\ Dana Mukamel and Alvin I. Mushlin, ``Quality of Care 
Information Makes a Difference,'' Medical Care, vol. 36, no. 7 (July 
1998), pp. 945-954.
    Nevertheless, some policy analysts argue that a consumer-driven 
health care system cannot work because average consumers will be 
stymied by the process of selecting among differentiated health 
insurance products. Instead, the process must be increasingly 
centralized into their able hands. Notes one: ``The approach of trying 
to give people the purchasing power to operate in the current insurance 
market assumes too much about individual purchasing abilities.''\10\
    \10\ New York Business Group on Health Care (NYBGH), Conference 
Proceedings, ``The Nation's Health Insurance System'' (New York: NYBGH, 
1992), p. 61.
    Although it is hard to understand why we should continue to entrust 
the selection of health insurance to those who have made such a hash of 
15% of our GDP to date, critics like this raise an interesting 
question: how do average consumers fare when they buy other complicated 
products, such as cars and mutual funds?
    As discussed above, information and a group of assertive consumers 
are key. Yet another critical element is the changing face of the 
American consumer. Current generations of Americans are much better 
educated than prior ones. In 2000, 25.6% of the population had attained 
a college education or more and 84.1% were high school graduates. In 
1960, in contrast, fewer than half the people were high school 
graduates and only 7% had a college education.\11\ Higher levels of 
educational attainment increased their ability to obtain and interpret 
information at least as much as their self-confidence. One example of 
this change is manifested by the Christians who increasingly stand 
rather than kneel at church, likely to express their notion that a 
service provides an opportunity for a personal encounter with God, 
rather than for reverential worship. About 80% of the pews ordered from 
the country's largest manufacturer now come without kneelers.\12\
    \11\ U.S. Census Bureau, Statistical Abstract of the United States 
: 2001 (Washington, DC: Government Printing Office, 2002), Table No. 
215, p. 139.
    \12\ ``An Uprising in the Pew,'' USA  Today, April 16, 2001, p. 1.
    Affluent Web surfers also typify the characteristics of this 
group--they spend much more time than others searching for information 
on the net before making a purchase and are much more likely to buy, 
once they have found a good value for the money.\13\ Those who focus on 
their affluence miss the point. Affluent or not, they eat the same 
bread, buy the same appliances, wear the same t-shirts, and use the 
same gasoline and oil as we. Their activism improves these products for 
the rest of us.
    \13\ Forrester Research, ``The Millionaire Online'' (Cambridge, MA: 
Forrester Research, May 2000), p. 11.
    Do not get me wrong. If I were Queen, I would push hard to insure 
universal literacy. But markets function well in the absence of these 
characteristics, as long as they contain information and a small group 
of smart, picky, I-want-what-I-want-when-I-want-it-at-a-rock-bottom-
price consumers who force providers of goods and services to offer many 
choices from which they can select.
    Health care consumers who typify these characteristics abound. Some 
express their activism directly by mastering medical skills, such as 
CPR and the use of external defibrillators.\14\ Others search for 
information, such as the 1.8 million people who spent an average of 20 
minutes at the government's National Institute of Health web site, 
studded with arcane medical journal articles.\15\ A 2002 report found 
that 73 million people in the United States used the Internet for 
health information, 6 million of them daily.\16\
    \14\ ``Just Another Day at the Office,'' USA  Today, April 16, 
2001, pp. 1-2b.
    \15\ PricewaterhouseCoopers, HealthCast 2010 (New York: 
PricewaterhouseCoopers, November 2000), p. 22; Scott Reents, Impact of 
the Internet on the Doctor-Patient Relationship: The Rise of the 
Internet Health Consumer (New York: Cyber Dialogue, 1999), p. 4.
    \16\ Susannah Fox and Lee Rainie, How Internet Users Decide What 
Information to Trust, May 2002.
    The assertiveness and self-confidence that typify American 
consumers are even more strongly evident in the health care Internet 
users. They agree more than average U.S. adults with the following 
statements: ``I like to investigate all options, rather than just ask 
for a doctor's advice'' and ``people should take primary responsibility 
and not rely so much on doctors.''\17\ Their pragmatism is apparent 
too. They do not search idly. More than 70% want online evaluations of 
physicians,\18\ and when they obtain the information, they use it.\19\ 
Nor is consumer assertiveness limited to the United States. For 
example, 70% of Canadian doctors note that their patients are briefed 
by Internet information.
    \17\ Scott Reents, Impact of the Internet on the Doctor-Patient 
Relationship, op. cit., p. 4.
    \18\ Ibid., p. 2.
    \19\ Thomas E. Miller and Scott Reents, The Health Care Industry in 
Transition: The Online Mandate to Change (New York: Cyber Dialogue, 

            Opponents of Consumer-Driven Health Care Systems

The Technocrats
    Technocrats who favor centrally controlled systems often doubt the 
intellectual prowess of anyone other than themselves. They feel 
obligated to oversee consumers because, in their eyes, consumers are 
too weak-minded to respond appropriately to information and too timid 
to help themselves.\20\
    \20\ David Burda, ``What We've Learned from DRGs,'' Modern 
Healthcare, October 24, 1993, p. 42; ``Wrestling with Medicare Doc Fee 
Schedules,'' Modern Healthcare, October21, 1996, p. 88.
Health Policy Perennial Favorite: The Stupidity of Health Care 
    We live in an information age, surrounded by ubiquitous newspapers, 
televisions, telephones, computers, radios, magazines, and books, 
available worldwide, round-the-clock, that address three of our 
senses--sound, vision, and, for the vision--and hearing-impaired, 
touch. The ubiquity of information clearly responds to people's 
desires. When there is no demand, there is no supply.
    People use information to inform and amuse. The best information 
sources combine the two: Morningstar's cute little stars help them buy 
mutual funds. The pithy reviews in Zagat's restaurant guides help them 
find restaurants. J.D. Power's powerful brand name helps them select 
automobiles and airlines. And Consumer Reports' accurate, comprehensive 
ratings help them buy virtually everything.
    Those who do not like these sources can find many others. If they 
judge Morningstar excessively terse, the SEC's EDGAR system contains 
much more information about publicly-traded corporations.\21\ If Zagat 
is too trendy, they can turn to the Boston Globe's ``Cheap Eats'' 
section, or its equivalent in their own hometown paper. If they 
question J.D. Power's objectivity, they can turn to the federal 
government's data about cars and airlines, such as those provided by 
the National Highway Traffic Safety Administration and the Federal 
Aviation Administration.\22\ And, if they feel the Consumer Reports' 
articles are biased against American cars, they can turn to other 
sources of consumer information, such as Car & Driver Magazine and 
Consumer's Digest.
    \21\ (EDGAR stands for ``Electronic Data Gathering, Analysis, and 
Retrieval'' system.)
    \22\ See, for example, safety data for cars at and for planes at.
    People use information to improve themselves too. In 2004, Bill 
Gates was the world's richest man because he helped people to become 
more productive by organizing and processing their information easily 
and efficiently. Michael Bloomberg became a billionaire because his 
Bloomberg provided information that helped people to invest in 
financial instruments with confidence.\23\ The endless line-up of self-
help gurus, from Dale Carnegie, author of How to Win Friends and 
Influence People, to Steve Covey, of The Seven Habits of Highly 
Effective People fame, helped themselves to a tidy fortune, too, as 
they helped people to help themselves become more effective.\24\
    \23\ Felicity Barringer and Geraldine Fabrikant, ``Coming of Age at 
Bloomberg L.P.,'' The New York Times, March 21, 1999, p. 1.
    \24\ Dale Carnegie, How to Win Friends and Influence People (New 
York: Simon & Schuster, 1937). Stephen R. Covey, The Seven Habits of 
Highly Effective People (New York: Simon & Schuster, 1989).
    When it comes to health care, the health care-equivalents of J.D. 
Power and the Zagats can provide the useful, pithy ratings that people 
crave. And health care entrepreneurs in the Bloomberg and Gates mold 
can help people to help themselves.
    But some of the health care policy crowd have their doubts. They 
question whether average Americans can use health care information to 
help them help themselves.
    The reason?
    Well, to put it bluntly, the average American is not nearly as 
smart as they.
    Then, too, they doubt that good information can be provided. To 
them, the effect of health care, unlike all other human activities, 
cannot be adequately measured.
Does the Health Care Market Work Like Other Markets?
    The Federal Reserve's chairman, Alan Greenspan, would likely be 
surprised by this dour assessment of the intellectual ability of the 
average American. For one thing, the percentage of workers with post-
high school education has risen 15% in the past two decades.\25\ And in 
Congressional testimony, Greenspan attributes the surge in the U.S. 
economy's productivity to Americans' remarkable interest in education: 
``The average age of undergraduates in school full time has gone up 
several years. Community colleges have burgeoned in size and on-the-job 
training has gone up very substantially. They are pressing very hard 
for higher levels of education and capacity and ability. (Education) 
has induced a significant increase in their real incomes.''\26\
    \25\ ``Blunt Portrait Drawn of U.S. Work Force in 2000,'' The New 
York Times, August 30, 2002, p. C4.
    \26\ ``State of the Economy,'' Federal News Service,January 20, 
    Further, the technocrats' critique implies that professionally 
trained people are more capable of interpreting complex information. 
But the technocrats who pooh-pooh others' abilities are not necessarily 
wizards when it comes to information. For example, in a simple algebra 
test, only 53% of health care providers--doctors, nurses, and Ph.d.'s--
could answer all the questions correctly.\27\ After all, if the experts 
who control the health care system are so wonderful, how did we get 
into the present mess?
    \27\ Carlos Estrada, Vetta Barnes, Cathy Collins, and James C. 
Byrd, ``Health Literacy and Numeracy,'' Journal of the American Medical 
Association, Vol. 282, No. 6 (August 11, 1999), p. 527.
    Yet, many studies demonstrate the consumers' ignorance of the ABCs 
of health care. A perennial favorite in the health policy press is a 
paper devoted to the subject. The writers cluck about the American 
public's ignorance of the most rudimentary aspects of health care. For 
example, in 1995, the experts tsk, tsked that 60% of the public were 
found to think that the health care system was changing slowly or not 
at all, in direct contradiction to the experts' view of the subject; in 
1997, researchers found that many could not explain the terms ``HMO'' 
and ``managed care'' to their satisfaction;\28\ and a 2001 report 
updated this perennial favorite topic with findings that ``fewer than 
one-third of all consumers accurately reported all four health plan 
    \28\ Robert Wood Johnson Foundation, Community Snapshots Consumer 
Survey (Princeton, N.J.: Robert Wood Johnson Foundation, 1995); 
Princeton Survey Research Associates, National Survey of American 
Views' on Managed Care (Princeton, NJ: Princeton Survey Research 
Associates, 1997), p. 44.
    \29\ Peter J. Cunningham, Charles Denk, and Michael Sinclair, ``Do 
Consumers Know How Their Health Plan Works?'' Health Affairs, Vol. 20, 
No. 2, March/April 2001, p. 159.
How would you perform on these tests?
    In the eyes of these experts, consumers are not only ignorant but 
also obdurate, failing to heed useful health care information. For 
example, consumers' are legendarily indifferent to the health plan 
performance data contained in HEDIS, a survey by the industry's quality 
enforcer, the NCQA, that tracks process measures, such as the health 
plan's rates of immunizations and mammograms.\30\
    \30\ Jon R. Gabel, Kelly A. Hunt, and Kimberly M. Horst, KPMG Peat 
Marwick, When Employers Choose Health Plans (New York: The Commonwealth 
Fund, 1998).
    To my mind, these judgments ignore the fundamental tenet of 
information-seeking behavior:
Consumers seek only the information that is directly pertinent to their 
    I cannot describe exactly how cars work. Nevertheless, I am an 
intelligent buyer of cars because I seek the information that assesses 
those qualities of an automobile in which I am interested.
    Similarly, health care consumers are most interested in provider 
outcome data for medical conditions similar to their own, treated in a 
population they consider as peers.\31\ Thus it should come as no 
surprise that Americans cannot describe an ``HMO'' to the questioners' 
satisfaction, or that they are uninterested in data about their health 
plans. Consumers clearly attribute health quality to their providers, 
not to their health plans.\32\ And they are much more impressed by 
outcome data than by reports on process measures. Indeed, NCQA rankings 
had no correlation with consumers' assessments of care by their health 
    \31\ See, for example, Judith H. Hubbard and Jacqueline Jewett, 
``Will Quality Report Cards Help Consumers?'', Health Affairs, Vol. 16, 
No. 3 (May/June 1997), pp. 218-228.
    \32\ See, for example, Pacific Business Group on Health, Report on 
Qualitative Research Findings: California Health Care Smart Shopper 
Public Education Campaign (San Francisco, Calif.: Pacific Business 
Group on Health, March 1998).
    \33\ Bruce E. Landon, Alan M. Zavlosky, Nancy Dean Beaulieu, James 
A. Shaul, and Paul D. Cleary, ``Health Plan Characteristics and 
Consumers' Assessments of Quality,'' Health Affairs, Vol. 20, No. 2, 
March/April 2001, p. 274.
    Is the lack of use of the available information an indictment of 
consumers or an indictment of the poor quality of the data provided?
    Two authors concluded that the fault lies largely with information 
which frequently is not sufficiently comprehensive and relies 
excessively on the process of care (e.g., mammograms received), rather 
than its outcome (e.g., breast cancer mortality statistics by 
provider). And when outcome data are available, they are ``so broadly 
aggregated that the results may be of only limited value to 
consumers.''\34\ Further, many users do not trust the data and cannot 
readily access it; for example, Pennsylvania's risk-adjusted cardiac 
surgery outcomes by hospital were mailed out only once.\35\ Last, most 
consumers cannot act on the data because they lack choice and control.
    \34\ David W. Bates and Atul W. Gawande, ``The Impact of the 
Internet on Quality Measurement,'' Health Affairs, November/December 
2000, p. 106. For an expanded discussion of this topic see also Regina 
E. Herzlinger and Seth Bokser, ``Note on Health Care Accountability and 
Information in the U.S. Health Care System,'' Harvard Business School 
Case No. 302-007 (Boston, MA: Harvard Business School Publishing, 
    \35\ Bates, ibid.
The Quality of Health Care Quality Information

    The most serious objection is voiced by those who point out that 
quality measures will not be as accurate in 2002 as in 2020.\36\ First, 
the very language for measuring performance has yet to be defined. 
Second, the risk-adjusters that would make it possible to compare the 
performance of high-risk specialists to those who treat less-severely 
ill patients are in an early state of development. Third, the raw data 
are flawed. For example, the U.S. General Accounting Office found 
severe flaws in the federal government data bank of the adverse actions 
taken against physicians and dentists.\37\
    \36\ Joseph P. Newhouse, ``Risk Adjustment: Where Are We Now?'' 
Inquiry, Vol. 35, No. 2 (Summer 1998), pp. 122-129.
    \37\ Susan J. Landers, ``Physician Data Bank Records Found 
Inaccurate, Incomplete,'' American Medical News, Vol. 43, No. 47, 
December 18, 2000, pp. 1-2.
    These are substantial issues. In the absence of solutions, quality 
measures will be seriously distorted. For example, a study that 
compared the rates of caesarian sections in hospitals, with and without 
adjustment for the patient characteristics that affect the likelihood 
of needing the procedure, found that risk adjustment caused the 
performance of five of the twenty-one hospitals in the study to change 
dramatically; among other changes, two hospitals originally classified 
as outliers were reclassified as normal and some that were classified 
as normal were reclassified as outliers.\38\ The impact of imperfect 
measures extends to providers too. Physicians may be dissuaded from 
caring for very sick patients because of their concern that their 
outcome measures will not correctly reflect the severity of illness.
    \38\ David C. Aron, Dwain L. Harper, Laura B. Shepardson, and Gary 
E. Rosenthanl, ``Impact of Risk-Adjusting Caesarian Delivery Rates When 
Reporting Hospital Performance,'' Journal of the American Medical 
Association, 279 (4), June 24, 1998, pp. 1968-1983.
    Measurement issues like these can be solved with time. Among 
others, prescient employers in Florida and payors in Washington have 
already used risk-adjusters successfully.\39\ The continually evolving 
measures of performance of investment management--such as generally-
accepted accounting principles and beta, the measure of risk of 
different investments--provides a good example of how difficult 
measurement problems are solved. Beta has been continually refined 
since it was first suggested in 1952. Similarly, the system used by 
Morningstar to rate the investment performance of mutual funds evolved 
over time. Moreover, as the refinement of these measures of financial 
performance continues, investors have had access to ever-better data 
with which to evaluate the performance of their mutual funds and 
    \39\ Regina E. Herzlinger, Consumer-Driven Health Care, op. cit., 
see papers by Becky Cherney, ``Demanding Quality for Health Care 
Consumers: The Half-Billion Dollar Impact of Information about 
Quality,'' pp. 457-474; Lisa Iezzoni, ``Risk Adjustment and Three Case 
Studies,'' pp. 242-261; and Vickie Wilson, Jenny Hamilton, Mary Uyeda, 
and Cynthia Smith, ``Health-Based Premium Payments and Consumer 
Assessment Information as Tools for Consumer-Focused Purchasing,'' pp. 
    Patients who put their health on the line deserve no less. As 
former U.S. Representative Thomas Bliley (R-Va.) noted, the best way to 
improve the quality of these data is not to suppress them, but, rather, 
to open them to the public.\40\
    \40\ Landers, op. cit.

         How to Obtain Consumer-Driven Health Care Information

    Absent governmental involvement that requires dissemination to the 
public, information that evaluates providers will not be forthcoming. 
Most voluntary efforts are typically duds--employers simply are not 
that interested in the data and unclear about how to interpret it and 
powerful providers may try to suppress it.

The Failure of Voluntary Action

    Consider the case of the voluntary Cleveland Coalition to collect 
hospital performance data. The effort was widely lauded. For example, 
one hospital claimed that the decrease in its rate of Caesarian 
Sections from 30% of all births to below 20% were ``purely driven by 
the Cleveland Health Quality Choice.''\41\ One evaluation concluded 
that reductions in risk-adjusted mortality rates and lengths of stay 
were linked to the performance reports.\42\ Nevertheless, the effort 
collapsed when the Cleveland Clinic left the group, allegedly because 
it did not like the performance ratings it received. Notes a local 
doctor ``What the Clinic really didn't like is that they weren't shown 
to be the best at everything.''\43\ The employer community that 
sponsored the effort did not actively use its results. For example, the 
only hospital to achieve better-than-expected ratings hoped that the 
results would yield many new patients as employers referred their 
enrollees there; but the predicted surge never materialized. Notes one 
employer, ``We weren't that aggressive.''\44\
    \41\ ``Project's Collapse Shuts Off Information on Hospital Care 
Quality,'' The Plain Dealer, August 23, 1999, p. A1.
    \42\ Carl A. Sirio and Dwain Harper, ``Designing the Optimal Health 
Assessment System: The Cleveland Quality Choice Example,'' American 
Journal of Medical Quality Care, 11 (1), Spring 1996, pp. S66-S69.
    \43\ ``Operation that Rated Hospitals Was a Success, but the 
Patient Died,'' The Wall Street Journal, August 23, 1999, p. A1.
    \44\ Ibid.
    As for the voluntary, industry-led mechanisms for accountability, 
they are so weak that, for example, Modern Healthcare, the industry's 
leading journal, has repeatedly demanded the resignation of Dennis 
O'Leary, the head of JCAHO, the national hospital-accreditation group 
whose governance is dominated by providers. Notes the editorial: 
``O'Leary and JCAHO have . . . repeatedly failed at initiatives 
designed to judge hospitals and other healthcare providers based on 
their performance--how well they take care of sick people. The projects 
always are announced with much fanfare and heady names such as ``Agenda 
for Change.'' And they're invariably scrapped, watered down or 
delayed.''\45\ An evaluation headed by University of Michigan Professor 
John Gifford found no correlation between JCAHO scores and outcome 
measures, including mortality and complications, for the hospitals 
    \45\ ``Another Provider Files Antitrust Suit,'' Modern Healthcare, 
December 10, 2001, p. 34.
    \46\ ``Good Scores Don't Equal Good Care,'' Modern Healthcare, 
January 14, 2002, p. 7.
    Organizations conducting voluntary efforts also frequently dilute 
their reports to consumers. In Cleveland, for example, the data 
revealed to consumers were not nearly as precise as those provided to 
payers. The hospitals agreed not to use them in advertising. As one 
Cleveland Clinic official noted, ``They could confuse the public.''\47\ 
Finally, industry--focused efforts rarely reflect the diverse 
perspectives of all the participants in the system; but these can 
differ significantly. Consider, for example, the evaluation of 
Washington, D.C. HMOs that found Kaiser rated near the top by 
employers, in the middle by users, and near the bottom by doctors.\48\
    \47\ ``Operation that Rated Hospitals Was A Success, but the 
Patient Died,'' The Wall Street Journal, August 23, 1999, p. A1.
    \48\ Watson Wyatt, ``Purchasing Value in Health Care'' (Bethesda, 
Maryland: Watson Wyatt, 1997).
    One of the most important reasons for the absence of provider 
performance ratings may lie with the providers' considerable political 
power. ``We don't do anything to make providers mad,'' explained an 
official about his state's ban on publishing such data.\49\ Similarly, 
the executive director of a Cleveland business council felt that the 
Cleveland Clinic opted out of an areawide process of measuring hospital 
outcomes because ``they could. They do have a third of the hospitals in 
Northeast Ohio.''\50\
    \49\ ``Data Needs for Measuring Competition and Assessing Its 
Impact,'' News & Progress (Washington, DC: Health Care Financing & 
Organization, July 1999), p. 3.
    \50\ Regina McEnery and Diane Golov, ``Project's Collapse Shuts Off 
Information on Hospital Care,'' The Plain Dealer, August 23, 1999, p. 
Information as a Public Good
    In any consumer-driven system, the government typically plays three 
crucial roles: overseeing the solvency and integrity of the 
participants; providing transparency in the market; and subsidizing the 
purchase of needed goods or services for those who cannot afford them. 
These are critical for consumer-driven health care.
    But the role of government in providing accountability is 
surprisingly controversial when it comes to health care. Many complain 
about the absence of good consumer quality information. For example, in 
a poll performed by a Democratic think tank, nearly 60% of the 
respondents agreed with a statement that ``health care companies and 
doctors should disclose how well they perform so consumers can judge 
where to spend their money.''\51\ The wired generation is even more 
demanding--80% of respondents noted that the absence of quality 
information was the most negative aspect of ehealth plans.\52\ But not 
all agree on the role of government in providing it.\53\
    \51\ ``Health Care Is Back,'' Blueprint, Spring 2000, p. 71.
    \52\ Bradford J. Holmes, ``HMOs' eHealth Plan Threat,'' 
Techstrategy Report, Cambridge, MA: Forrester Research, January 2001, 
Figure 2.
    \53\ No less an observer than the Nobel laureate economist George 
Stigler argued against a governmental role in providing data. In his 
view, the truth will out in markets as competitors expose each others' 
weaknesses or market analysts dig it up. (See, for example, Stiglitz, 
J.E., Jaramillo-Vallejo, J., and Park, Y.C. ``The Role of the State in 
Financial Markets.'' World Bank Research Observer, 1993, pp. 16-61; 
Dutt, J. ``Unlikely Adversaries: Top Regulators in Dispute over Plan to 
Change Accounting Rule on Derivatives.'' Washington Post, Aug. 24, 
1997, p. H1.) Stigler's analyses concluded that government regulation 
of information disclosure was not essential to the efficiency of 
markets. In this view, if information is beneficial to the firm, its 
managers will advertise it; if it is detrimental, the firm's 
competitors will trumpet it; and if it exists, whether good or bad, 
analysts will ferret it out. No need for government. (John Carey, The 
Rise of the Accounting Profession (New York: American Institute of 
Certified Public Accountants, 1970), pp. 1-16.)
    As is usual with works of such significance, Stigler's analysis and 
similar research were widely tested. (Joe Seligman, The Transformation 
of Wall Street (Boston: Houghton-Mifflin, 1982), p. 41; Regina E. 
Herzlinger, ``Finding the `Truth' About Managed Care,'' Journal of 
Health Politics, Policy, and Law, 24 (5) (October 1999), pp. 1077-
1093.) Yet, the abundant, intelligent empirical research examining the 
necessity of government action to ensure an efficient market has not 
yet settled the question.
    The debate must fundamentally be resolved on a theoretical basis: 
government's presence in the information market relies on the fact that 
information disclosure is a public good in the sense that it enables 
free riders. Because disclosers cannot charge all users for the 
benefits they derive, they lack incentives for full disclosure. Absent 
government regulation, the quantity of publicly available information 
may be undersupplied or issued selectively, favoring some recipients 
and excluding others.\54\
    \54\ Eventually, of course, all users could share the same 
information, but some would gain temporal advantage because they 
learned special information earlier than others; however temporary, 
this advantage violates our national notions of equity.

                   The Promise of Government: The SEC

    Every interest group that has been required to measure its outcomes 
has likely claimed that its work is so diffuse that its impact cannot 
be measured. Such claims delayed the measurement of the performance of 
business enterprises until the mid-1930s. The delay is surprising 
because accounting, the measurement tool of business performance, has 
existed since the middle of the fifteenth century when double-entry 
bookkeeping was first codified.\55\ But, executives' claims that 
accounting could not accurately measure company performance and that 
the cost of measurement exceeded its benefits prevented the widespread 
measurement of the economic performance of the firms they led.
    \55\ Michael Chatfield, A History of Accounting Thought 
(Huntington, NY: Robert E. Krieger Publishing, 1997), p. 32.
    U.S. President Franklin Delano Roosevelt (FDR) finally forced their 
hand when he promulgated the laws that created the U.S. Securities and 
Exchange Commission (SEC). Bucking powerful business opposition, 
inconsistent state involvement, and his own advisors' counsel that he 
grade the firms in the security markets, FDR instead created the SEC to 
compel audited disclosure, using generally accepted accounting 
principles (GAAP), about the performance of publicly traded firms. The 
SEC requires regular compilation of financial statements and their 
broad dissemination by publicly-traded firms.\56\
    \56\ Joel Seligman, The Transformation of Wall Street (Boston: 
Houghton-Mifflin, 1982), p. 41.
    Governmental regulation of securities is nothing new. As early as 
1285, King Edward I required licensure of London brokers.\57\ But FDR's 
SEC differed from traditional regulation that relied on authorities to 
evaluate the worthiness of a security. He opted for sunlight. As he 
noted: ``The Federal Government cannot and should not take any action 
that might be construed as approving or guaranteeing that . . . 
securities are sound. . . .'' Rather, his SEC was a ``truth'' agency to 
insure full disclosure of all material facts. In Roosevelt's words, 
``It puts the burden of telling the truth on the seller.''\58\
    \57\ Fred Skousen, op. cit., p. 2.
    \58\ Joel Seligman, op. cit., pp. 54-55.
    As in health care, there was plenty of truth waiting to be told. 
Requirements for listing securities on the stock exchange were minimal 
and there was no source of generally accepted accounting principles. In 
1923, only 25% of the firms traded on the New York Stock Exchange 
provided shareholder reports.\59\
    \59\ Joel Seligman, op. cit., pp. 43-48.
    To put teeth in its mission, the SEC was given the power to enforce 
``truth in securities'' and to regulate the trading of securities in 
markets through brokers and exchanges. While the SEC requires 
disclosure, the promulgators of GAAP have been housed in private, 
nonprofit, standard-setting organizations, such as the Financial 
Accounting Standards Board (FASB). The successful European Union model 
for setting standards in health, safety, environment, and consumer 
protection follows a similar public-private structure.\60\
    \60\ Walter Mattli, ``Global Private Governance for Voluntary 
Standards Setting: National Organizational Legacies and International 
Institutional Biases,'' Regulatory Policy Program Working Paper RPP-
2001-06, Center for Business and Government, John F. Kennedy School of 
Government, Harvard University (May 2001).
    Like all human endeavors, the SEC is not without faults. The 
accounting and governance problems of Enron--a firm that, by 2002, was 
the nation's largest bankruptcy--were exacerbated by laxity in SEC 
enforcement.\61\ Nevertheless, the transparency created by the SEC 
enabled the celebrated broad participation of average Americans in the 
securities markets and their legendary efficiency.\62\
    \61\ Bethany Mclean, ``Why Enron Went Bust,'' Fortune, Vol. 144, 
No. 13 (December 24, 2001), pp. 58-68.
    \62\ See, for example, Joel Seligman, The Transformation of Wall 
Street (Boston: Northeastern University Press, 1995), pp. 561-568.
    Accounting was not nearly an accurate a measure of performance in 
1934 as it is now. And no doubt accounting will become much better 
still in the future. That is the way it is with all measuring tools: 
they improve with use. In 1687, Newton first measured gravity. By 2000, 
physicists could measure the minute energy of a tau-nutrino buried deep 
within an atom.\63\ In 1953, Crick and Watson first measured the 
structure of DNA. By 2001, biologists could measure the structure of 
individual genes.\64\
    \63\ Bertram Schwarzschild, ``The Tau Neutrino Has Finally Been 
Seen,'' Physics Today, Vol. 53, No. 10 (October 2000), pp. 17-19.
    \64\ Leslie Robert, ``A History of the Human Genome Project 2001,'' 
Science, Vol. 291, No. 5507 (February 16, 2001), pp. 1195-1200.
    So too, with health status measures. Epidemiologists can now create 
relatively crude measures of health quality. But, with practice and 
patience, they will refine those measures of outcomes and relate them 
more accurately to their causal agents.

              Private Sector Sources of Health Information

    Surprisingly, much of the information that lies at the heart of the 
efficiency of the markets wells not from the SEC but from three private 
sector groups: the firms, FASB, and accounting profession. The 
interaction among these groups promotes fuller consideration of diverse 
points of view. Unlike a government agency, they do not sing out of one 
hymnal. And their private-sector nature requires the political and 
financial backing of supporters for their continued existence. The 
predecessors to the FASB collapsed because their GAAP pronouncements 
could not find such broad-based supports.
    The independent accountants who audit the financial statements are 
usually professionals who must pass examinations and fulfill stringent 
educational requirements.Many work in one of the large accounting firms 
that audited nearly 80% of the publicly traded firms.Accounting firms 
may be held legally liable for negligence, fraud, and breach of 
    Initially, in abdicating some of its authority to set accounting 
standards to the private sector, the SEC recognized the following 
advantages:\65\ (1) Practicing accountants were closer to the firms and 
thus could more accurately identify emerging issues; (2) private sector 
involvement encouraged greater compliance than government mandates; and 
(3) the SEC could more readily audit the work of the private sector 
information disclosers than its own, thus resolving a conflict of 
interest. But the accounting abuses that emerged in 2001 and 2002 
caused a shift in this stance. It appeared that the financial 
statements of massive firms, such as Enron and Global Crossing, did not 
accurately reveal their underlying economic status, despite audits by 
leading accounting firms and reviews by the Audit Committee of the 
Board of Directors.\66\ In Enron's case, for example, much of the 
company's debt was lodged in special-purpose entities that were not 
consolidated in the financial statements.
    \65\ Richard E. Baker, ``Accounting Rule-Making--Still at the 
Crossroads,'' Business Horizons, vol. 19, no. 5, October 1976, p. 66.
    \66\ Steve Pearlstein, ``The Whole Story?'' The Washington Post, 
May 12, 2002, p. H01.
    Many blamed the structure of the accounting firms for these 
debacles, citing the conflict of interest created by their 
simultaneously offering lucrative consulting and low-profit auditing 
services to their clients. Past SEC attempts to bar accountants from 
offering consulting contracts were stymied by the Congress.\67\ This 
time around, the SEC relied on its internal rule-making authority to 
reclaim some of its powers. In 2002, it introduced rules to prompt 
faster, more complete disclosure and to create a new entity to oversee 
the accounting professionals.\68\ Similarly, the rule-making Financial 
Accounting Standards Board hoped to simplify and streamline its 
occasionally complex rules.\69\
    \67\ ``SEC Chief to Impose `Stringent' Rules on Accountants,'' The 
Buffalo News, May 24, 2002, p. A9.
    \68\ ``SEC Seeks Reform in Financial Disclosure and Auditor 
Oversight,'' Chemical Market Reporter, March 4, 2002, p. 18; Jonathan 
D. Glater, ``SEC Proposes a New Board to Oversee Auditors,'' The New 
York Times, June 21, 2002, p. C1; Richard Simon & Walter Hamilton, 
``Accounting Reform Bill Gets a Boost; Regulation: Senate Panel 
Approves Measure That Would Create Oversight Board and the SEC Pushes 
Parallel Proposal,'' Los Angeles Times, June 19, 2003, part 3, p. 1; 
and John Labate, ``Plan Supports Proposals by SEC Chairman Harvey 
Pitt,'' The Financial Times, March 8, 2002, p. 7.
    \69\ ``FASB: Rewriting the Book on Bookkeeping,'' BusinessWeek, May 
20, 2002, p. 123.

                          The Health Care SEC

    The U.S. securities markets have precisely the characteristics that 
health care consumers want: (1) prices are fair in the sense that they 
reflect all publicly available information; (2) buyers use this 
information to reward effective organizations and penalize ineffective 
ones; and (3) information and competition continually reduce costs.
    If these characteristics were present in health care, they would 
achieve an important social goal: They would divert resources from 
health insurers and providers that offer a bad value-for-the-money to 
those that offer a good one. Poor-value-for-the-money insurers and 
providers would shrink or improve. Good-value-for-the-money insurers 
and providers would flourish.
    Currently, health care consumers have better information about the 
price and quality of the jar of tomato sauce they buy than for the 
surgeon who will operate on their breast or prostate cancer. 
Publication of price and quality data for individual providers, as 
measured by generally accepted health care outcome principles and 
audited by certified, independent appraisers of such information, will 
help ameliorate this problem. Eventually, independent analysts will use 
this information to compile readily accessible ratings of providers, 
just like Morningstar's excellent system for classifying and rating 
mutual funds.
    New York State experience illustrates the results when government 
requires meaningful health care information.  Using his clout, in 1989 
New YorkState's commissioner of public health requested data about the 
risk-adjusted death rates of open-heart surgeries performed by 
different surgeons and hospitals. As a result, by 1992, the state 
achieved the lowest risk-adjusted mortality rates in the country.\70\ 
Physicians and hospital executives with low-performance scores 
typically revamped their protocols in response to these data.\71\ Most 
studies found that the fears that surgeons would abandon sick patients 
to improve their performance ratings to be unfounded: To the contrary, 
the severity of illness among New York patients having coronary artery 
bypass graft (CABG) surgery increased.\72\ Although one excellent study 
concluded that the ratings led to ``a decline in the severity of 
illness'' of CABG patients, it cautioned: ``Our results do not imply 
that report cards are harmful in general. . . . [R]eport cards could be 
constructive if designed in a way to minimize the incentives and 
opportunities for provider selection.''\73\
    \70\ Edward L. Hannan, Albert L. Siu, Dinesh Kumar, and Mark R. 
Chassin, ``The Decline in Coronary Artery Bypass Graft Surgery 
Mortality in New York State,'' Journal of the American Medical 
Association, Vol. 273, No. 3 (1995), pp. 209-213; S.W. Dziuban, ``How a 
New York Cardiac Surgery Program Uses Outcome Data,''Annals of Thoracic 
Surgery, Vol. 58, No. 6 (1994), pp. 1871-1876.
    \71\ Mark R. Chassin, ``Achieving and Sustaining Improved Quality: 
Lessons from New York State and Cardiac Surgery,'' Health Affairs, Vol. 
21, No. 4 (July/August 2002), pp. 40-51.
    \72\ E.D. Peterson, E.R. DeLong, J.G. Jollis, L.H. Mulbaier, and 
D.B. Mark, ``The Effect of New York's Bypass Surgery Provider Profiling 
on Access to Care and Patient Outcomes in the Elderly,'' Journal of the 
American College of Cardiology, 32 (8), October 1998, pp. 993-999.
    \73\ David Dranove, Daniel Kessler, Mark McClellan, Mark 
Satterthwaite, ``Is More Information Better? The Effects of `Report 
Cards' on Health Care Providers,'' National Bureau of Economic 
Research, working paper w8697, January 2002.
    Similar results were obtained in other instances of required 
performance disclosure. When Minnesota's state government required all 
insurers who served state employees to be evaluated by their enrollees 
in a report card, some plans restructured significantly to improve 
their quality ratings.\74\ Similarly, the Pennsylvania hospitals whose 
performance data were measured and disseminated by a public agency used 
the results to change their patient care and governance to a greater 
extent than neighboring New Jersey hospitals whose performance data 
were not released. The important changes included Board reviews of the 
data and reworkings of the patient care procedures.\75\ And all these 
results were obtained in the absence of consumer control.
    \74\ ``Health Plan Report Cards May Influence Insurers More than 
Consumers,'' Findings Brief, Health Care Financing & Organization, Vol. 
3, No. 3, April 2000.
    \75\ J. Margin Bentley and David B. Nash, ``How Pennsylvania 
Hospitals Have Responded to Publicly Released Reports on Coronary 
Artery Bypass Graft Surgery,'' Journal on Quality Improvement, 24 (1), 
January 1998, pp. 49-49.
How To Make It Happen
    The key to achieving these desirable characteristics in health care 
is legislation that replicates these essential elements of the SEC 

    1.  Registration: The SEC requires firms that trade their 
securities in interstate markets and all such market-makers to register 
with the agency. A corresponding health care agency would oversee the 
integrity and require the public disclosure of information for health 
insurers and providers, the policies they issue, and the interstate 
markets in which such insurance policies and services are sold. It 
would be armed with powerful penalties for undercapitalized and 
unethical market participants.
    2.  Private Sector Disclosure and Auditing: The SEC relies heavily 
on private sector organizations. The new health care agency would 
delegate the powers to derive the principles used to measure the 
performance of insurers and providers to an independent, private 
nonprofit organization that, like the FASB, represents a broad 
constituency. The agency would require auditing of the information by 
independent professionals, who would render an opinion of the 
information and bear legal liability for failure to disclose fairly and 
    3.  Private Sector Analysis: The evaluation process is primarily 
conducted by private sector analysts, who disseminate their frequently 
divergent ratings. To encourage similar private sector health care 
analysts, the new agency would require public dissemination of all 
health insurance prices, related transaction costs, and the 
characteristics of the policies and providers, such as clinical 
measures of quality.

                   Private Sector Sources of Analysis

    Will private sector intermediaries emerge to provide the 
information that consumers need? Some examples of the entrepreneurial 
health care quality information providers who already exist are 
described below.
    Andy Slavitt is an early-thirties California type and an MBA all-
star, with Wharton and HarvardBusiness School degrees and a spell at 
McKinsey's famed Los Angeles health care practice.
    Slavitt was propelled by a personal loss into founding a firm that 
empowers health care consumers with information. His inspiration came 
when a friend's wife turned to Slavitt for help after her husband died 
of cancer. She was surrounded by mounds of medical bills, whose bulk 
was matched only by their incomprehensibility. Slavitt, the MBA all-
star, was a sensible choice to help her plow through the paper. But 
Slavitt, the social activist, was an even better choice. He is as 
intense about his societal interests as his business ones. For example, 
Slavitt traveled to El Salvador to help build housing in that war-
ravaged country.
    These two sides of his being meshed as he organized her medical 
bills. On the social side, Slavitt wondered if the bills' lack of 
transparency and sheer volume seemed to be designed to take advantage 
of a vulnerable, grieving person. On the business side, he was outraged 
by charges to an individual that vastly exceeded the charges for the 
same services to large groups. And, try as he might, Slavitt could not 
link the charges to the actual care received.
    If Andy Slavitt, all-star MBA and health care analyst, could not 
analyze these questions, who could?
    HealthAllies, the firm Slavitt created for uninsured or 
underinsured people, helps answer these questions. For one, it empowers 
its users by providing information about the prices for medical care 
alongside the credentials of those providers. It also offers them 
discounts on health care prices similar to those obtained by large 
groups. And consumers can obtain prices for bundles of care, rather 
than a la carte services. For example, a pregnant woman can obtain a 
discounted fee for the entirpe maternity and birth process from her 
choice of providers through HealthAllies. Last, the website provides 
links to information about providers.
    Had the HealthAllies site been available to the wife of Slavitt's 
friend, she would have received one bill for the bundle of care given 
to her husband, rather than hundreds of individual ones; she could have 
easily compared her price to those charged by other providers, and she 
could have obtained the same discounted rate as large group buyers.
    Consider the following illustrative case:

       A woman who needs a hip transplant inquires about the charge at 
an academic medical center. She is quoted a price of $35,000. (In 
hotels, this kind of price is known as the ``rack rate'' quoted to 
individual customers who lack the bargaining power of a group.) She 
then logs on the HealthAllies site to search for a better hip-
transplant price. In response to her specifications about the type of 
providers she wants (for example: a surgeon who has performed more than 
75 hip transplants and who operates in an academic medical center that 
has performed more than 500 hip transplants last year and that is 
located within 30 miles of her home), she chooses a hospital that 
quotes a price of $25,000. Ironically, it is the same hospital that 
initially quoted the $35,000 price.

    To insure that its interests are squarely lined up with the user, 
HealthAllies' revenues are derived from savings it creates for the 
consumers and their em- 
    \76\ Michael Sherman and Regina E. Herzlinger, ``Health Allies,'' 
Harvard Business School Case No. 302-019, Rev. September 2002 (Boston, 
Mass.: Harvard Business School Publishing, 2001).
    In 2003, United Healthcare purchased HealthAllies. It now offers 
essential health coverage policies at prices ranging from $500 to 
$3,000 to the uninsured in the costly New York market.
    Ingenix, another subsidiary of United, has total cost estimators 
that represent the average annual treatment cost for chronic diseases 
and conditions, as well as length-of-episode treatment for acute 
diseases and conditions with drill down capability, by zip code. The 
cost ranges represent aggregated and scrubbed billed charges as they 
appear on claim forms submitted by the health care professional or 
facility, as well as net of reductions for invalid or ineligible 
charges, such as non-covered consumers, services, etc. Costs are 
displayed as point estimates using relative and actual charge data, 
along with allowed charges. In-Network averages are calculated at the 
50th percentile of allowed charges and Out-of-Network averages are 
calculated at the 80th percentile of billed charges. Ranges indicate 
the inherent variability in health-care costs.\77\ Acton, 
Massachusetts-based HealthShare has similar data for 30 health plans.
    \77\ Ingenix, communication to author, June 18, 2004.
    As of yet, firms do not offer their data to consumers because of 
the high cost of customer-acquisition. But a consumer-driven health 
care would open up the entire, large U.S. insurance market to them. In 
the United Kingdom, similar services are already marketed to self-pay 
patients who wish to avoid the NHS waiting lists. They include 
HealthCare Navigator and Medical Care Direct, firms similar to 
    \78\ ``The Good Hospital Guide,'' Sunday Times, April 6, 2003 and 
``Private, I?'', accessed June 20, 2004.

Other Health Care Information Services

    Many other sources of information exist. Indeed, clinical health 
information sources are so easy to find that they are virtually 
unavoidable. They appear regularly on radio and television, typically 
in patronizing lectures from your local blank-eyed, blow-dried hair, 
reading-off-the-Teleprompter ``Health Beat'' type of announcers (ugh); 
in newspaper features (good); and in magazines devoted solely to the 
topic (better still). For example, Prevention sold more than 3 million 
copies a month in outlets such as the check-out area in a supermarket 
in 2001.\79\ Many authoritative health care books are available as 
well, including best sellers such as Mayo Clinic Family Health 
    \79\ Audit Bureau of Circulation (ABC), published on AdAge.com, 
January 17, 2003.
    \80\ David E. Larson, Mayo Clinic Family Health Book (New York: 
William Morrow, 1996).
    The web is a major source of health information. It not only 
enables mass-customization of information, but also facilitates 
consumers' feedback about the quality of their health care experiences. 
This kind of information is much valued. For example, a KPMG survey of 
almost 15,000 employees of the Fortune 1000 revealed that they placed 
the highest trust in information received from friends and family.\81\
    \81\ ``A New Direction for Employer-Based Health Benefits,'' KPMG, 
LLP, publication 99-12-05, November 1999.
    Nevertheless, substantial market needs remain largely unserved. A 
2000 survey revealed that the information that consumers sought most 
was largely unavailable.

While most of the available information focuses on diseases, over 50% 
of respondents wanted additional information: evaluations of doctors, 
hospitals, and insurers, e-mail reminders, and personal medical 
reports.\82\ A 2002 review of 40 physician directory websites found 
many incomplete, inaccurate, and out-of-date.\83\
    \82\ Scott Reents, Impact of the Internet on the Doctor-Patient 
Relationship: The Rise of the Internet Health Consumer (New York: Cyber 
Dialogue, 1999), p. 5.
    \83\ The Commonwealth Fund, ``Accessing Physician Information on 
the Internet'' (New York: Author, January 2002).
    A number of web sites serve the general ``rating'' market. For 
example, consumers can post their reviews of products and retailers on 
Epinions.com, BizRate.com, and ConsumerReview.com. There are even 
professional raters of the raters. For example, a New York Times 
article critically evaluated the sites that rated cars, including the 
web site of the Kelley Blue Book, lycos.com Auto Section, and the 
ultimate winner of that evaluation, the venerable 
consumerreports.org.\84\ The felicitously named Quackwatch.com is among 
those which perform this review function for health care. Formed by a 
retired psychiatrist, it features more than 100 doctors on its board. 
The organization cooperates with the National Council Against Health 
Fraud and Consumer Reports.\85\
    \84\ Michelle Slatalla, ``Turning the Tables to Rate the Raters,'' 
The New York Times, March 23, 2000, p. D4.
    \85\ ``Quack Patrol At Your Service,'' Los Angeles Times, March 23, 
1998, p. S1.
    Nevertheless, good sources for health care information are hard to 
find. As the old blues song noted of men, you always get the other 
kind.\86\ Sure, plenty of data are available; but absent requirements 
to disclose it, information about the quality of health care providers, 
which is what people want and need to make intelligent decisions, 
remains notable for its absence.
    \86\ Dagmara Scalise, ``Who's Rating You?'' Hospitals & Health 
Networks, December 2001, 
pp. 36-40.

                       How Not to Make It Happen

    Unfortunately, many well-intended proposals undermine one or more 
of the essential characteristics of the SEC. All-too-often, they 
require that the health care regulator(s) evaluate and micromanage 
health insurers and providers and the markets in which they 
operate.\87\ One proposal, for example, blurs the distinctions between 
information and evaluation, between oversight and micro-management: Its 
FASB analogue evaluates quality and its SEC analogue evaluates health 
care benefits and coverage problems. But the real FASB does not assess 
the quality of the output produced by corporations, nor does the real 
SEC evaluate whether the markets for the products that corporations 
sell yield effective, efficient outputs. Instead, they ensure the 
provision of reliable, useful information that private sector 
intermediaries analyze and present to other investors.
    \87\ See, for example, ``Bush Is Said to Be Set to Back Patient's 
Bill,'' New York Times, June 7, 2002, p. A16.
    Other proposals create conflict-of-interest by requiring that 
existing governmental purchasers measure quality. In recent testimony, 
for example, the head of AHRQ, the HHS agency charged with researching 
quality, presented a bone-chilling description of Federal government 
efforts not only to measure but also to design the information highway 
on which quality data would travel. Everybody knows that Medicare's 
actions are soon followed by the other insurers. Her description thus 
amounted to allowing the single largest payer to dictate the components 
of health care quality and the IT system that transmits it. No 
competition, lots of politics--is this anyway to run a market?\88\
    \88\ Carolyn M. Clancy, ``AHRQ: A Tradition of Evidence,'' Health 
Management Technology, 
Vol. 24 (8), August 2003, pp. 26-31; Patrick S. Romano, Jeffrey J. 
Geppert, Sheryl Davies, 
Marlene R. Miller, et al., ``A National Profile of Patient Safety in 
U.S. Hospitals,'' Health Affairs, Vol. 22 (2), March/April 2003, pp. 
154-163; and Barbara Morris, ``AHRQ's New Prevention Quality 
Indicators,'' International Journal of Health Care Quality Assurance, 
Vol. 15 (2/3), 2002: 1-2.
    The much-abused U.S. uninsured health care consumer needs, and 
wants, quality health care at an affordable price. We know that the SEC 
model works in providing such information to investors. We just need to 
take advantage of it in a consumer-driven health care system.


    Chairman HOUGHTON. Thank you very much, Dr. Herzlinger. I 
would like to yield to Mr. Thomas.
    Chairman THOMAS. Thank you very much, Mr. Chairman. Dr. 
Kane's statement is just classic, that it is just as charitable 
to charge a rich man as a poor man, which may be the theme of 
why we are looking at pricing under the 501(c) section of the 
    Ms. Davis indicated that she could quantifiably 
differentiate between a not-for-profit and for-profit in terms 
of charitable activities. I am going to ask each of you if you 
believe you have seen sufficient data in which you can create a 
clear separation between not-for-profit and for-profit 
hospitals broken along a charity of a community service line. 
If you don't have that information, that is fine. I just need 
to know if everyone agrees with that particular position based 
upon the data and the evidence that you are familiar with. Dr. 
Kane, yes or no?
    Ms. KANE. Yes, I have seen a difference. Generally the 
nonprofits do provide more free care, although the 
uncompensated care totals can be quite similar. The problem 
with nonprofit, it is hard to generalize about them. I think 
there are quite a few more of them, and so you will see a wider 
range in behavior.
    Chairman THOMAS. I agree, and I have additional questions 
to follow up on that. Dr. Ginsburg, yes or no, in terms of a 
differentiation, in terms of charitable or community service 
between not-for-profits and for-profits?
    Mr. GINSBURG. Yes. My recollection of the research 
literature is similar to Dr. Kane's, that we do see charitable 
care by for-profit hospitals, but we see more by nonprofits.
    Chairman THOMAS. Mr. Lee.
    Mr. LEE. Defer to my research experts up here. It is not an 
area that we have looked at closely.
    Chairman THOMAS. That is fine. Dr. Herzlinger?
    Ms. HERZLINGER. I think the question is: do nonprofits give 
enough charitable care----
    Chairman THOMAS. That is my next question.
    Ms. HERZLINGER. To render their tax exempt----
    Chairman THOMAS. That is exactly the next question.----
    Ms. HERZLINGER. I think that is--Ms. Davis is quite 
correct. Nonprofit hospitals do give more charitable care, but 
of course they should. They are tax exempt. We give them major 
tax subsidies to provide charitable care. We don't give those 
to for-profit hospitals.
    Chairman THOMAS. Doctor, thank you for the bridge. That is 
exactly the question that I now need to ask, because all of you 
felt fairly comfortable, and one of you deferred to the others 
on the information that is available, that there is a 
difference between the not-for-profits and the for-profits.
    My next question, obviously, then is: do you think it is 
measurable enough to deal with the significant difference in 
the way not-for-profits and for-profits are handled under the 
Tax Code? I will start again with Dr. Kane. Yes, no, or not 
enough information to make a decision?
    Ms. KANE. Could you rephrase your question, please?
    Chairman THOMAS. If in fact we all agree that not-for-
profits do carry out charitable or community services that give 
us an ability to differentiate, perhaps not across the board, 
but substantially between the not-for-profit hospital group and 
the for-profit hospital group. Do you believe we have 
sufficient information, or are you comfortable in saying, yes, 
you can differentiate between the two, and the not-for-profit 
status of the 501(c) tax-preferred status of the not-for-
profits is therefore appropriate, given the difference in the 
charitable services of the not-for-profits versus the for-
    Ms. KANE. You don't have enough information. First of all, 
I don't think you can even tell what the value of tax-exempt 
status is for a lot of these hospitals, and then again, the 
transparency issue, the lack of reporting and information, 
makes it very difficult right now to tell. In the research I 
have done, most nonprofit hospitals do not earn the value of 
their tax exemption through the provision of charity care. They 
do provide other community benefits. It is differential. It 
varies a lot across the population. We do not know how to 
properly value some of those services, so we don't have the 
    Chairman THOMAS. Dr. Ginsburg.
    Mr. GINSBURG. I don't have anything to add to what Dr. Kane 
    Chairman THOMAS. Mr. Lee.
    Mr. LEE. I don't have an answer relative to the specific 
qualification, but I would add one other element to your 
question if I could, Mr. Chairman, which is to consider not 
just the relative contribution to charity care, but also how 
nonprofit hospitals play in the market as they too, may act as 
over-consolidated entities which look very similar to for-
profit entities, and that is another element to consider.
    Chairman THOMAS. I can assure the gentlemen we are going to 
get there.
    Mr. LEE. Okay.
    Chairman THOMAS. Ms. Davis.
    Ms. DAVIS. There is evidence that charity care is being 
increasingly concentrated in fewer and fewer hospitals, not all 
of them do it. Certainly there is evidence on other community 
benefits that are provided in the form of standby capacity 
    Chairman THOMAS. The focus of the question was do you have 
enough information to say you feel comfortable that the 
difference between the tax treatment of not-for-profits and 
for-profits is justified based upon the charity or community 
work they do?
    Ms. DAVIS. We do have quantitative estimates of community 
benefits for medical education, standby capacity and charity 
    Chairman THOMAS. In your opinion, is it enough to justify 
the tax difference?
    Ms. DAVIS. Yes, on the whole.
    Chairman THOMAS. Okay doctor, I understand where you are. 
Very quickly. On page 6 of your testimony, Dr. Ginsburg, I do 
have to fundamentally disagree with you, where you say that 
over the long haul advancements in medical technology are far 
and away the biggest factor in rising costs.
    One of the difficulties I have had is assuming that somehow 
medical technology is always a cost driver and not a cost 
saver. I really believe the problem is that you are introducing 
medical technology in fundamentally a cost plus structure. In a 
cost plus structure, medical technology will always cost more, 
but if you deal with a comprehensive payment in which you have 
accepted responsibility and your profit is what is left over, 
that cost structure is a significant driver to use medical 
technology to save money, i.e., increase your profit, and so I 
am very concerned that people automatically dismiss medical 
technology as though medical technology itself was the problem. 
It is not.
    In my opinion, it is the payment structure in which medical 
technology is introduced. I just wanted to clarify that because 
people so often say medical technology is the reason costs are 
going up. No, it isn't. It is the structure and the mechanism 
by which we pay and utilize medical technology.
    Mr. GINSBURG. I would differentiate between the capitated 
environment which has the incentives to use only valuable 
technology, and the fee-for-service environment, which 
unfortunately is our dominant payment mechanism, which tends to 
accept almost all technology.
    Chairman THOMAS. Doctor, I accept that correction, but your 
statement is a stand-alone flat-out statement. That is all, and 
I just said that I would have some concern with that statement 
as a stand-alone statement.
    Mr. GINSBURG. I think the other point I want to make is 
that there is so much dynamic in medical care, so that the 
services that people are getting over time are changing. People 
are getting more medical care, much of it valuable, and this is 
the key reason why spending per person increases.
    Chairman THOMAS. I agree. Increased usage isn't necessarily 
medical technology. It is awareness, availability, education. 
All of those are factors that have dollar values to them. I was 
just focusing on the medical technology statement that you 
    I also have to say that your statement, disclosed prices 
will lead to higher prices, is about the most anti-market 
statement I have heard in a long, long time, because what 
hospitals receive and what third-party payers, the primary 
function of paying, is a negotiated price. When you talk about 
disclosing prices, those are mainly out there to make sure you 
get more payments from the government, not that they are any 
real standard of what the prices are. In attempting to 
determine the initial statement that I asked, whether or not 
there was a differential that could be seen and value gotten 
from the tax treatment, prices are fundamental to what we need 
to focus on. Let me ask only one additional question. Thank 
you, Mr. Chairman, for the time. Mr. Lee, when you looked at 
the differential in quality and cost on a quintile or a 
quartile structure, did you break it down between not-for-
profit and for-profit as well as the structure that you 
    Mr. LEE. We have not done a full review of that, but we 
have that information, and right now when you look at this 
quartile mix, it is really sort of a scatter all across the map 
of where hospitals fall on efficiency and quality. I will look 
at it more closely and follow up with you, Mr. Chairman. My 
recollection that it is a mix among nonprofit and for-profit, 
where they are scattered amongst this mix of efficiency and 
    Chairman THOMAS. Mr. Chairman, as we examine the question, 
we shouldn't just focus on community or charitable care as it 
may be defined. It seems to me that given the significant tax 
break that not-for-profits provide, we should see to a certain 
degree discernible differences among a number of axes that you 
would examine the materials, and I would submit that that is 
not the case now, or we don't have enough evidence to make that 
decision, and I would hope people don't believe as a general 
position that transparency and knowledge to consumers is a 
dangerous thing. It is the most important thing to getting some 
rational payment and quality structure in this area as far as I 
am concerned. Thank you very much, Mr. Chairman.
    Chairman HOUGHTON. Again, I turn to Mr. Pomeroy. Mr. 
Thomas, I thought we would have a second round with the 
exception of you, because you had two positions here. Is that 
all right with you?
    Chairman THOMAS. I am under the complete control of the 
    Chairman HOUGHTON. Okay, Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. Well, we have a rich 
stew of health policy ideas bubbling in this hearing, not 
really leading any direction, but we got a rich stew on our 
hands. I guess to the extent it relates to this issue of not-
for-profit and their role in providing charity care, the panel 
is in agreement that there is a distinction in the market 
practices of not-for-profit versus proprietary institutions. 
There also seems to be agreement that not-for-profit, the basis 
for not-for-profit status as a hospital, ought to be considered 
beyond the issue of charitable care or uncompensated care, role 
in the community, community service, or other things 
appropriately considered. Any objection with those kind of 
general conclusions so far?
    [No response.]
    All right. I think a third point of consensus that I 
understood is more data to the public in understandable ways 
involving cost, but very importantly, also involving quality 
would be of great value.
    [No response.]
    Consensus again. All right. Well, let us kind of wade into 
areas where we might have some differences of opinion. Ms. 
Herzlinger, first of all, congratulations on raising a fine 
son, and our full support is with Captain Herzlinger and his 
important responsibilities on behalf of all of us in Iraq 
    Ms. HERZLINGER. Thank you.
    Mr. POMEROY. It seems to me that you place a very important 
role on market dynamics. If we could get market dynamics into 
health care providing, it would be a big step forward. Do you 
believe abolishing employer-based health insurance for some 
other kind of comprehensive coverage is then a step in that 
    Ms. HERZLINGER. I think it is very important that people 
have access to money that enables them to buy health insurance. 
Right now that money comes from employers, but it is really 
paid by employees. They just get paid in the form of health 
insurance rather than getting paid in the form of salaries.
    Mr. POMEROY. Although there are some marketplace dynamics 
that captures. I mean distribution, discounts.
    Ms. HERZLINGER. Perhaps. Although if the distribution were 
so powerful we would have our employers buying our cars for us, 
they would buy our food for us, they would buy our housing for 
    Mr. POMEROY. I am not sure of this car deal. I mean I kind 
of think, I like my car, Ford Escort, runs fine, but I think 
quite differently about health.
    Ms. HERZLINGER. Yes, but that is----
    Mr. POMEROY. I buy a cheap car because it gets me around. 
When it comes to my health, I don't want cheap. I want good.
    Ms. HERZLINGER. You want value for the money.
    Mr. POMEROY. I think that this analogy just didn't quite go 
all the way, but I was trying to get to what you imagine as a 
perfect coverage scheme.
    Ms. HERZLINGER. Correct.
    Mr. POMEROY. Would it be government provided?
    Ms. HERZLINGER. My point was, Congressman, that the idea 
that big is beautiful, that big buyers create efficiencies in 
the market. If that were so, then all consumer goods would be 
purchased through big buyers rather than through consumers. 
Yet, most consumer goods are purchased, you and I buy our own 
clothes, we buy our own house, we buy our own food. We buy many 
things for ourselves, and we get good values for the money.
    Mr. POMEROY. This is an interesting discussion in 
economics. I don't quite understand its application to what we 
have before us as a point of inquiry.
    Ms. HERZLINGER. Well, you----
    Mr. POMEROY. I really don't have time, unfortunately, to 
ferret it all out, because there is a couple things I want to 
get to beyond that. Probably, Dr. Kane. It seems like our 
pricing, it has had an evolution. Hospitals are, from the 
beginning of time, I suppose, they get paid by some, not for 
others, got to provide care for all. So, over time they 
developed a pricing way of making sure they recovered enough 
from those who paid to cover those who didn't pay, and in the 
era that we are in, be it Medicare on one hand or third-party 
payers on the other, they have been pretty effective at 
ferreting out where the cross-subsidies are for those not 
paying, and they don't pay for them anymore. They pay cost, not 
this cost plus a subsidy for those not paying and at the end of 
the line is the hospital, therefore, as you point out, charging 
the private uninsured more, because there is no discounts 
attached, than the others now pay.
    However, as this has evolved where those with coverage used 
to pay more to cover those without coverage, now the uninsured 
are billed more than those with coverage. The difference for a 
hospital is that they are very unlikely to recover from those 
without coverage. So, although they are billed more, they are 
not paid more from this group; is that correct?
    Ms. KANE. I think the average amount you recover from your 
people who would classify as uncompensated care is around 20 
percent of cost, and that is the hospital's side of the 
experience. If you are a medical debtor, you have a very 
different experience even if you don't pay your full bill. You 
still can get harassed. You can still lose your house. You can 
still have your wages garnished. You can still be afraid to go 
back into the health care system for the next round. So, even 
though they don't pay their full costs, most of those who are 
eligible for medical bad debt or free care don't pay their full 
cost, they are still, particularly the bad debtors, 
experiencing financial angst.
    Mr. POMEROY. Absolutely. In North Dakota, where I am from, 
I mean it is our leading cause of bankruptcies among farmers. 
It is a big deal. I will look forward to the second round, Mr. 
Chairman. So, much more to cover.
    Chairman HOUGHTON. Thank you very much. I would like to ask 
a question of Dr. Ginsburg. I think you mentioned two things, 
one, using the insurers more to determine the pricing strategy, 
and also you talked about the hospital networks. Do you want to 
elaborate on those two things?
    Mr. GINSBURG. Yes. I think one of the most important 
innovations associated with managed care has been in 
purchasing, in a sense by developing a network of providers who 
have come to an agreement with the insurer about rates. This is 
a very effective mechanism for obtaining a lower price for the 
policy holders, and probably a lot better than they could do on 
their own even if they had a lot more price information than 
they do.
    Chairman HOUGHTON. Any more?
    Mr. GINSBURG. I would say that the--obviously the----
    Chairman HOUGHTON. You don't have to go on. That is fine.
    Mr. GINSBURG. Well, let me say that the one other point is 
that the network tool starts breaking down to the degree that 
consumers or employers demand that all hospitals be in the 
network, then that removes the leverage that the health plan 
would have with the hospital, and that issue is what the tiered 
network is trying to respond to.
    Chairman HOUGHTON. All right. Mr. Stark, would you like to 
    Mr. STARK. Thank you, Mr. Chairman. Dr. Kane, in your 
review of foregone taxes, I guess, are you taking into account 
only Federal income taxes, or do you take into account real 
estate taxes paid locally, or forgiven locally?
    Ms. KANE. The study I did it about, using '95 data, so it 
is old, was property tax, sales tax, State income tax, and 
Federal income tax, not including the value of tax exemption, 
the value of donations, the overall value of research grants 
and other tax-exempt benefits that come from being a 
charitable, the market value of the reputation of being 
charitable, none of that is in there, just the quantifiable 
numeric values.
    Mr. STARK. I am just guessing here, but were the real 
estate and sales taxes the largest?
    Ms. KANE. Yes. The real estate was the largest.
    Mr. STARK. By far?
    Ms. KANE. By far, yes.
    Mr. STARK. So, that in effect, in the community, if you let 
the Federal income tax go away, which I don't think is very 
significant, if the local community, for example, were to apply 
real estate taxes to the institution, and then give them a 
voucher for every local resident that they treated who was 
indigent, say, and if they got enough vouchers, they could pay 
their real estate taxes. We would have a little bit more 
accurate way to measure what we in our respective communities 
were getting out of these hospitals, would it not?
    Ms. KANE. It would help to be able to at least quantify the 
value of the real estate taxes. I just want to point out that 
when local tax authorities do challenge a hospital's tax 
exemption, as in Pennsylvania, what they ask for instead of 
vouchers for free care, is they ask for dollars to support 
highways and schools, so it doesn't get translated back into 
health care.
    Mr. STARK. Okay. I suppose that happens with all of our 
real estate taxes, and squeaky wheel theory that I am sure you 
all teach in your various Ph.D. courses. Mr. Lee, are you 
acquainted with the Maryland Hospital Plan at all?
    Mr. LEE. I am not sure what you are referring to, sir.
    Mr. STARK. Well, Maryland has, I believe now, a unique 
system for reimbursing hospitals that I think would put many of 
your fears or your concerns to rest. Free advice, it is worth 
what you pay for it. We did have the California Hospital 
Association Board of trustees here to review what they do in 
Maryland. It probably would help California, but it is 
something you might want to take a look at just to get an idea 
of how some of the concerns that you have might be addressed. I 
guess this is just in the way of disclosure here, but do any of 
you have either a financial interest in, or a large consulting 
contract with any for-profit plans, any large ownership, 
contractual--you sit on any boards? None of you?
    [No response.]
    You are all pure as the driven snow. Good.
    Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you very much. Mrs. Johnson, would 
you like to inquire?
    Mrs. JOHNSON. Just briefly, what do you know about another 
aspect of the issue of charity care and nonprofits? One of the 
key differences between a nonprofit and a for-profit is that 
the for-profit is more agile and can simply close up and move 
out if the charity care is overwhelming their bottom line. We 
have some indication, at least I have seen some evidence that 
for-profits are doing better in part because they have rebuilt 
hospitals in the suburbs and left the inner cities.
    I would guess that part of the reason they have done that 
was because of the overwhelming concentration of charity care 
in the inner cities, though I don't know that. What do you know 
about this subject? Are mergers, are for-profits moving to 
avoid high volumes of charity care and leaving for-profits with 
greater charity responsibilities? Anyone of you who would like 
to respond that.
    Mr. GINSBURG. Well, actually, I could say from our visits 
to communities around the country, we see both for-profit and 
nonprofit hospitals focusing their expansions in suburbs where 
there are large numbers of privately insured patients. It seems 
as though there are market incentives out there, and they are 
being responded to by both for-profit and nonprofit hospitals 
in many cases.
    Mrs. JOHNSON. With no differentiation? There is no 
predominance of one versus another in their movement?
    Mr. GINSBURG. Well, I am sure there is a differentiation. 
In a sense, I think the shareholders of a for-profit company 
wouldn't forgive them if they located new hospitals in areas 
where most of the people were uninsured. Some nonprofit 
hospitals that have good assets have that option of focusing 
more on their mission to provide care to the uninsured and 
other community services.
    Mrs. JOHNSON. Anyone else? Ms. Davis?
    Ms. DAVIS. If you look at the major provider in inner 
cities, those are either academic health centers or public 
hospitals. Historically, that has been the case, and they are 
the ones that wind up with large proportions of uninsured 
patients, large proportions of Medicaid patients. They are the 
dominant provider in those communities.
    Mrs. JOHNSON. Anyone else care to comment? Yes, Dr. 
    Ms. HERZLINGER. There is an interesting example of the 
hospital system in Milwaukee, a nonprofit hospital system which 
is the main provider of charity care in the inner city. It has 
formed a for-profit joint venture with its cardiologists to 
open a heart hospital in the suburbs. The cardiologists control 
the majority share, so they are, as you so aptly put it, nimble 
and responsive to the market. The hospital owns the minority--
and the rest of the community, the minority share, and the 
hospital uses--the nonprofit hospital uses the profits from its 
for-profit venture to subsidize charity care in the inner city. 
I think it is an important and an instructive example.
    Mrs. JOHNSON. Thank you very much. Dr. Ginsburg, just one 
comment on your technology issue. You know, the current payment 
system rewards expensive technology for diagnosis or treatment. 
It does not reward systemic technology that would reduce 
overhead costs or improve quality or eliminate duplicate care. 
So, I think right now we see technology as a big cost driver, 
but it is because the system is selecting the most expensive 
technology, and the technology most easily subject to overuse.
    Mr. GINSBURG. That is right, and I think we have a problem 
just as far as medical services of inadvertently overpaying for 
some services, usually the newer ones where there are still 
productivity increases and underpaying the others. When it 
comes to things like information technology, which I believe 
has enormous potential to improve care and quality, often the 
business case is negative, that because of the fee-for-service 
payment system, often what hospitals or physician practices can 
do to avoid complications and errors hurt them financially 
rather than reward them.
    Mrs. JOHNSON. Thank you, Mr. Chairman, for your courtesy.
    Chairman HOUGHTON. Thanks very much, Mrs. Johnson. Mr. 
    Mr. KLECZKA. Thank you, Mr. Chairman.
    Ms. Herzlinger, I happen to represent Milwaukee.
    Ms. HERZLINGER. I know that.
    Mr. KLECZKA. I think your analysis of what is going on with 
the boutique heart hospitals is not really accurate. In fact, 
since they are investor owned, there is not that much coming 
back to the hospital. It is going to the physicians who are the 
owners in part of the specialty hospital.
    I should point out that we have two in Milwaukee, and I do 
not think it is a model to brag about for a profit hospital 
care, because what they are doing is not only from the 
nonprofits but also the for-profit hospitals, they are taking 
or cherrypicking not only the patients, but they are also 
taking out of these hospitals that provide charity care one of 
the big profit centers, and that is the heart.
    I am happy to relate to you that both are doing very poorly 
in Milwaukee, and, in fact, they are having a problem getting 
patients and are today they are running specials. You can get a 
Magnetic Resonance Imagery (MRI) for $49.95. So, let me just 
say for those of you who shop at Kmart, come to Milwaukee and, 
even though you do not need one, we can get you a real cheap 
MRI for $49.95. So, you all come down, hear?
    The problem I am having with this hearing is that we need 
this to find out more information on what is going on, and I 
guess that is fine, if the Committee were consistent on that. 
Know full well that last week we passed a tax bill which 
contained a $9 billion tobacco buyout for the tobacco farmers 
of the country, and this Committee never met and had a hearing 
on it. The full Committee never had a hearing on it, so we 
passed this blindly with no input from the public and it went 
through Congress--it went through the House, anyway, by a vast 
    Today, we read in the Washington Post that the bulk of that 
$9 billion is going to go to the big, big, big tobacco 
producers, and the Ma-and-Pa farmer who has 10 acres or so of 
tobacco, they are going to get $1,000 a year. For the Chairman 
to come here and say, gosh, we have to do this, the Committee 
is so knowledgeable, we were not last week when we took $9 
billion of your money and just dumped it down the ashtray.
    I have a real problem, Mr. Chairman, with equating health 
care with buying a car, because when I bought my Jeep, I could 
kick the tires, but when I went for my colonoscopy last week, I 
couldn't kick my colon. I had to have someone who is an expert 
in that to do that, Dr. Herzlinger, so when you say that we 
have to provide the system in the country for health care 
consumers to get things cheaper, well, we have that for 
consumer goods. I can go buy a Digital Video Disc (DVD) for 
$39.95, pretty cheap, but where am I buying it from? I have to 
go to Kmart for that, who buys DVDs by the zillions from China 
and sells them cheap. However, if I go down to my local 
electronics store two blocks away from home, I am going to have 
to pay $129 for the same DVD because they don't volume purchase 
and things of that nature and that is our current health care 
    Ellen Bradley from Milwaukee has 5,000 employees and they 
go either to the hospital and the health care system and say I 
want to make you a deal, I have 5,000 people I want insured. Or 
they can go to a third-party insurer like Blue Cross or Aetna. 
That is where I as the consumer get my deal, through volume 
purchasing. I do not think we are going to see this through 
this much-touted HSA problem. In fact, it is going to probably 
add to the bad debts for the hospitals because until I have my 
account established, my high deductible has to be paid out of 
my pocket. For someone who is living on the edge and, you know, 
bought that car that you talked about so cheap, the Impala that 
they are giving away, they are not going to have money after 
they pay their Impala monthly payment to pay the hospital the 
$2,000 for the one visit or one episode. What we are looking at 
is destroying the employer-based insurance system of the 
country, and we, my friends, are going to live to regret it.
    Now, if, in fact, we want nonprofit hospitals to do things 
on the cheap, as Dr. Ginsburg pointed out--and it was disputed 
by the Chairman, but I do not believe the Chairman or agree 
with the Chairman--a lot of the hospital costs and doctor costs 
are related to new technology, which we all want. So, we are 
going to say to the nonprofits, We want you guys to do it on 
the cheap so you can give more health care away and forget the 
new MRI because you should not be having that because you are 
billing these patients as Dr. Herzlinger said in her 
statement--in fact, what she referred to in the statement is 
price gouging of the uninsured. Well, that has not been proven 
by any of the panelists today. It is a nice thing to say. 
Again, I have to refer you to the article I put in the record, 
and this was the one I asked you to read, and it is a Business 
Week article, and it is entitled ``Making Hospitals Cry 
`Uncle.''' If you ask me, it is not the nonprofit, tax-exempt 
status that is up today for a hearing. It is this article here 
which talks about a large contributor to the Republican Party 
and what he is doing to hospitals by grabbing them by the neck 
and shaking them until they call ``Uncle.'' Thank you.
    Chairman HOUGHTON. All right. Uncle Ryan, would you like 
    Mr. RYAN. What was the question? I, too, represent 
Milwaukee, Milwaukee County, seven suburbs in Milwaukee and I 
would argue that there is a different story behind these 
specialty hospitals. The MRI center in question, they are 
providing a service to the Milwaukee area residents, same MRI, 
same General Electric MRI device, same kind of skilled MRI 
radiologists, and they are doing it at lower cost. They are 
actually on radio and television saying, ``If you want an MRI 
and you want it today, if you need it, or you want it the next 
day or the day after, we will give it to you instead of having 
to have the long waits that you have at hospitals, and we will 
do it at a fraction of the cost.''
    Mr. KLECZKA. Will the gentleman yield?
    Mr. RYAN. So, I only get 5 minutes, so, no, sorry, Jerry, 
not this time.
    Mr. KLECZKA. I will tell you the rest of the story when you 
are done.
    Mr. RYAN. Okay. The point is that that is injecting 
competition in the marketplace, and those people in the 
Milwaukee area who have these consumer-directed plans are 
actually saving money. What we are finding with HSAs, one of 
our big Milwaukee insurance companies that is selling these 
things has shown that 42 percent of the people who bought their 
HSAs, many of whom are from Wisconsin, are people that did not 
have health insurance before. We are finding that people care 
about cost because they now have products that allow them to 
save money, and then we have competition in the marketplace 
where we are getting the same quality or better quality 
delivered to people at a faster time frame at lower cost. So, 
this form of competition is actually working, and we see it in 
Milwaukee. I did not want to give a speech. I wanted to ask a 
    Ms. Davis, I wanted to ask you a quick question, and then 
Dr. Herzlinger. You stated that other countries had a greater 
role for the government in establishing hospital budgets or pay 
rates. Moreover, other countries have done more to rationalize 
costs than the United States has, as you have mentioned. You 
know, I have seen so many cases, in the United Kingdom, in 
Canada, where we see these global budgets in place, we see 
rationalized costs, but they are accompanied with long waiting 
lists and higher mortality rates and lower-quality care. Could 
you comment on that?
    Ms. DAVIS. In terms of waiting lists, you are right. 
Waiting times for elective procedures in the United Kingdom are 
much longer than in other countries. They are longer in Canada, 
and the United States is very low on waiting times for 
surgeries that are elective procedures.
    In terms of quality and outcomes, we just recently released 
a report that was put together by an international working 
group on quality indicators, and they looked at 21 different 
quality indicators across the United Kingdom, Canada, 
Australia, New Zealand, and the United States. The United 
States is kind of in the middle. It is better on some things, 
and worse on other things. We are the best on breast cancer of 
those five countries and 13 percent better than the United 
Kingdom. On 5-year survival rates for kidney transplantation, 
Canada is the best, and the United States is the worst. Canada 
is 14 percent better than the United States.
    It is a narrow difference, 10, 15 percent. We are usually 
in the middle, better on some things, though not on everything. 
Certainly in terms of convenience and waiting time for hospital 
care, we are better. On waiting times for physician care, we 
are actually not better. The United States and Canada are 
toward the bottom. In other places, you can get physician care 
the same day if you are sick and need care. Here, you wind up 
waiting a week, 2 weeks, to get----
    Mr. RYAN. Well, is it not true that the average waiting 
time in Canada is 6 weeks for primary care and 7 weeks for a 
specialist on top of that?
    Ms. DAVIS. The U.S. waiting time for physician appointments 
are long also, which is surprising to me----
    Mr. RYAN. In HMOs or PPOs or every instance?
    Ms. DAVIS. Well, for most, the non-elderly population, they 
would be in managed care.
    Mr. RYAN. Okay. Just because I am running out of time, Ms. 
Herzlinger, I want to ask you, you know, I think one thing that 
we are all probably agreeing on here--and Congressman Stark and 
I had a hearing on this in our other Committee, the Joint 
Economic Committee--is transparency on price. I think that is 
something that everybody here, every witness from all different 
sides of this debate spectrum have agreed, let's have 
transparency on price. That is something that I think we can 
get consensus on, and I have always said to my hospital friends 
that either they are going to come up with a way of doing it 
or, unfortunately, the government is going to have to do it for 
them. I would hope that the industry would figure out a way of 
doing it. My question to you, Ms. Herzlinger, is: does the 
current lack of price transparency benefit hospitals? Since 
this is the tax status hearing, how does that play into their 
hands on pricing strategy, if it does at all? Could you comment 
on that?
    Ms. HERZLINGER. I think lack of transparency in a market 
always hurts consumers. If people do not know what something 
costs, they are not going to be good shoppers and when they are 
not good shoppers, we have misallocation of resources. So, 
whether it hurts or helps hospitals, I do not know, but it 
certainly hurts consumers. If I needed to have a mastectomy, I 
would know more about my tomato sauce, my car, my pantyhose, 
than about the quality and the cost of the surgeon and hospital 
in which that mastectomy is to be done right now.
    Mr. GINSBURG. If I could add something, I am certainly in 
favor of consumers having as good, accurate, and accessible 
price information as possible when they have incentives to 
choose lower-cost providers. We have to realize that in most 
markets, there is a lot of concentration on both the insurer 
and the hospital side. This is oligopoly and oligopsony, and it 
is not clear that actually announcing the results of 
negotiation between large insurers and hospitals is necessarily 
going to be better for the consumer. You know, if you think of 
cartel theory, public prices, it is a way of having--it 
facilitates the workings of a cartel. So, we need to be very 
careful that while we do want to provide a lot of relevant 
price information to the consumers, we do not want to also 
broadcast it around to make negotiations come out differently.
    Mr. RYAN. Thank you. That was insightful.
    Chairman HOUGHTON. Thanks, Mr. Ryan. Mr. Sandlin?
    Mr. SANDLIN. Thank you, Mr. Chairman, and thanks to each of 
the witnesses for coming today. Dr. Kane, in reviewing your 
testimony, do you think that the cost of the preferred tax 
status of the nonprofits outweighs the benefits that those 
hospitals provide to the communities?
    Ms. KANE. I think I mentioned we do not fully know how to 
value some of the benefits, some of the community benefits that 
hospitals do provide, including stand-by capacity, or some of 
the things that----
    Mr. SANDLIN. Stand-by capacity and, of course, saving 
people's lives and treating people and taking care----
    Ms. KANE. Well, nonprofit and for-profit hospitals save 
people's lives, so it is pretty hard--I hope.
    Mr. SANDLIN. Well, my point----
    Ms. KANE. It is a little hard to----
    Mr. SANDLIN. My point is----
    Ms. KANE. Just attribute that to tax-exempt status.
    Mr. SANDLIN. My point is this: it is not all about business 
and dollars.
    Ms. KANE. Absolutely.
    Mr. SANDLIN. It is about treating people in health care; 
isn't that correct? That is the first obligation. Isn't that 
    Ms. KANE. Both for-profit and not-for-profit hospitals do 
treat people and hopefully do the best they can.
    Mr. SANDLIN. Now, the Tax Code, I was looking at the 501(c) 
requirement, and it says that the hospitals have to provide a 
health benefit to the community at large, these nonprofits. Is 
that correct?
    Ms. KANE. Yes, they are expected to provide a health 
benefit, which is about the same thing that a for-profit does.
    Mr. SANDLIN. I understand that. My question to you is: does 
a 501(c)(3) nonprofit, are they required under the law to 
provide a health benefit to the community at large? That is my 
    Ms. KANE. Well, I believe so. I am not a lawyer.
    Mr. SANDLIN. Okay. Thank you. Now, these hospitals are 
providing a health benefit to the community at large, are they 
    Ms. KANE. The nonprofit and the for-profits are both 
providing a----
    Mr. SANDLIN. My question is: are the----
    Ms. KANE. Health benefit to the community at large.
    Mr. SANDLIN. Nonprofits providing a health care benefit to 
the community at large as required by the law? That is----
    Ms. KANE. I hope so.
    Mr. SANDLIN. Thank you. So, they are following the law, 
aren't they?
    Ms. KANE. Again, I think you are asking me the question in 
a way that is probably inappropriate----
    Mr. SANDLIN. No, ma'am. Here is my----
    Ms. KANE. In respect to the issue around tax exemption.
    Mr. SANDLIN. My question--no. My question is: they are 
following the law, are they not?
    Ms. KANE. As far as I know. I think some hospitals do not 
necessarily follow the law, but most do try to provide a health 
benefit to----
    Mr. SANDLIN. Do you think that nonprofit hospitals should 
provide a specific amount of charity care?
    Ms. KANE. I think they should provide a specific amount of 
community benefits, as more specifically defined than is 
currently defined in the Federal law.
    Mr. SANDLIN. Okay. Now, I have noticed that you have used 
some of your research, it says, and the materials we have to 
challenge the tax-exempt status of hospitals in Texas and 
Massachusetts and Idaho and Virginia, Ohio, Maine, and New 
Hampshire. Is that correct?
    Ms. KANE. I am sorry. What was the question?
    Mr. SANDLIN. Have you been involved, have you used research 
to challenge the tax-exempt status in those States that I 
    Ms. KANE. I have not actually been the challenger. Usually, 
the Attorney General or a local tax authority is the 
challenger, and I am hired as an expert witness to assist in 
those challenges.
    Mr. SANDLIN. So, basically you are an advocate for 
challenging the tax-exempt status----
    Ms. KANE. No. I am usually the expert witness for those who 
have already challenged the tax exempt status of a hospital, in 
general because even though it is providing health care for the 
good of the community, they have a bad habit sometimes of 
telling people who do not pay full charges or were not insured 
that they cannot get care in their emergency room until they 
are really, really, really sick and that is when they get 
    Mr. SANDLIN. Okay.
    Ms. KANE. There are some pretty egregious examples of that. 
I hope you are not trying to----
    Mr. SANDLIN. Well, that is a charming----
    Ms. KANE. Defend those.
    Mr. SANDLIN. Story, but that was not my question. Now, you 
said that you are not an advocate for challenging the tax-
exempt status of the hospitals, so could you tell me, in all 
the areas that you have worked to support or maintain the tax-
exempt status of a hospital? What States have you done that in?
    Ms. KANE. There usually are not challenges to support the 
hospital's tax-exempt status.
    Mr. SANDLIN. Have you--I did not--have you taken a position 
contrary, have you taken a position on the other side of the 
issue to say, no, the tax-exempt status should be maintained in 
any State?
    Ms. KANE. I have written about hospital tax--the whole 
article that I wrote that is cited in my testimony talks about 
the hospitals that do maintain their tax-exempt status through 
the virtue of providing charity. So, I do believe that most of 
my work is on measurement and reporting fact, and then----
    Mr. SANDLIN. My question is----
    Mr. MORRISON. If it happens to be useful to those who make 
a challenge, that is who calls me.
    Mr. SANDLIN. Well, thank you again, and you have a nice 
report. Here is my question: you said that your research has 
been used as an expert witness to challenge the tax-exempt 
status of certain hospitals. Has that research been used or 
have you been an expert witness on the other side to support 
nonprofits hospitals? In what States would that be?
    Ms. KANE. No, I have not.
    Mr. SANDLIN. Okay.
    Ms. KANE. Generally, people do not challenge hospitals if 
they think they are----
    Mr. SANDLIN. That was not my question----
    Ms. KANE. Already acting charitably.
    Mr. SANDLIN. I think we understand what you are saying. 
Now, in Texas, are you aware of what the Texas law is on the 
requirement for charitable----
    Ms. KANE. The Texas law was passed partly as a result of 
the challenge that I was involved in in Texas back in 19--
somewhere between 1989 and 1991 or 1992, I believe.
    Mr. SANDLIN. In 1993--well, the first I think was 1985 on 
indigent health care. In 1993, it was SB 427 and that requires 
charity care and government-sponsored indigent health care 
provided in an amount equal to at least 100 percent of the 
hospital's or hospital system's tax-exempt benefits, excluding 
Federal income tax, or charity care and community benefits are 
provided in a combined amount equal to at least 5 percent of 
the hospital's or hospital system's net patient revenue. Do you 
feel like that is an adequate amount?
    Ms. KANE. I felt that was a fair law. They had to define 
``community benefit'' in a way that leaves out things like 
Medicare contractual adjustments and medical bed----
    Mr. SANDLIN. One final question. I notice there are 
lawsuits filed against East Texas Medical Center Regional 
Health Center in Tyler, Texas. Are you an expert witness or 
consultant in that particular litigation?
    Ms. KANE. No.
    Mr. SANDLIN. Have you been consulted or talked to in any 
way about that particular litigation?
    Ms. KANE. No.
    Mr. SANDLIN. Did you know that system provided $91 million 
in charity benefits in 2003 and will pass $100 million in 2004?
    Ms. KANE. I am sorry. I did not hear what you said about 
    Mr. SANDLIN. I said were you aware that--you do these 
studies, and I just wanted to know if you were aware that that 
system provided $91 million in charity care in 2003 and will 
pass $100 million in 2004.
    Ms. KANE. No, generally the data I get has to be nationally 
available, and that may not be something that is in one of my 
data sets. It is pretty hard to get that data unless you are 
involved in a lawsuit in Texas.
    Mr. SANDLIN. Okay. Well, thank you for that. It just seems 
to me, Mr. Chairman--I am finished rather than attacking the 
hospitals, we should focus on coverage and if we focused on 
coverage, we could take care of these issues. Thank you, Mr. 
Chairman, and thank you, witnesses.
    Chairman HOUGHTON. Thank you. Mr. Johnson, Mr. Sam Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. I appreciate that. I 
would just like to say that we have specialty hospitals, 
numerous in our area, and they are all doing a great job. It 
seems to me that physicians do not get away from the regular 
hospital when they get into the specialty business. They still 
maintain their status with the regular hospitals. Would you 
think that the patient should or shouldn't have the ability to 
choose between a specialty hospital and a regular hospital if 
the physician operates at both of them? Anybody.
    Ms. DAVIS. The basic problem is that there are very 
different profitable returns on different services. So, the 
real problem is that you can make so much money on orthopedic 
care and cardiac care, yet you can lose so much money on burn 
care, and neonatal intensive care. If we had a more rational 
pricing structure, we would not have services being skimmed off 
into separate hospitals. It reduces the ability to cross-
subsidize both patients who cannot pay and important----
    Mr. JOHNSON. Okay. Let me ask you this question: why do you 
think they skimmed off to specialty hospitals? Because they 
were not getting the service at the hospital, which mostly are 
not-for-profit. My view. Excuse me. I interrupted you.
    Ms. HERZLINGER. Not at all, Congressman Johnson. I think 
that the specialty hospitals, just like specialization in the 
rest of the economy, make things more efficient and more 
effective. That is why General Motors spun off Delphi because 
it couldn't do everything. There is tremendous data to show 
that the patients are very satisfied and they are lower cost.
    The core problem is why do they set up specialty hospitals 
in heart and orthopedics owned in the Milwaukee area, to my 
knowledge, by the cardiologists in the area and the nonprofit 
charitable hospital system in the area. The reason is that we 
have these third-party payers who are setting the prices. 
Sometimes they set them too high, as in cardiology and 
orthopedics, and sometimes they set them too low, and sometimes 
they set them so that they stop the innovation, which is the 
key to raising productivity in the U.S. economy.
    For example, Ralph Snyderman, the chief executive officer 
of the Duke Medical Center, innovated a new treatment for 
congestive heart failure. Congestive heart failure costs $56 
billion. In 1 year, by focusing, by specializing on congestive 
heart failure, he reduced the cost by 20 percent in 1 year. The 
way he did it is, because he was specialized on congestive 
heart failure, he made people healthier. When they were 
healthier, they used the hospital less and they stayed for 
shorter amounts of time.
    In a normal marketplace, this kind of innovation would reap 
large rewards. Ralph Snyderman lost virtually all the savings 
because under a large third-party system, which is not agile 
and not responsive to innovations, he gets paid for treating 
sick people and the healthier they are, the more money he 
loses. That is the problem with a volume-based model that says, 
well, the big insurer can get big discounts. Perhaps that is 
so. The big insurer can also stifle the innovation, which is 
the heartbeat of the productivity in America.
    Mr. JOHNSON. Let me interrupt you. I am about to run out of 
    Ms. HERZLINGER. Sorry.
    Mr. JOHNSON. I want to hear from Dr. Ginsburg as well. 
Thank you.
    Mr. GINSBURG. Yes, I wanted to first say that I think the 
problem is not big insurers. It is fee-for-service payments. 
When you pay for delivering more care, it is never a hospitable 
system for excellence, for doing better with fewer resources.
    I just want to say something about specialty hospitals. 
There certainly are cases where specialty hospitals have 
innovated in care, but because of our financing system, because 
our reimbursement rates do not adequately reflect costs--and 
the Medicare Program needs to pay attention to this--because of 
the fact that we have different insurers paying different 
amounts, there is a potential that the technical success of the 
specialty hospital could cause irreparable harm to community 
hospitals, not because the specialty hospital is better, but 
because it is agile enough to concentrate on the inadvertent 
incentives that have been placed in the system to treat more 
cardiology and orthopedics, to treat privately insured patients 
instead of Medicaid patients. I am also concerned about the 
conflict of interest that physician owners of these facilities 
    Mr. JOHNSON. Can he answer? Go ahead.
    Mr. LEE. Congressman Johnson, I want to build on one other 
point about the issue both with specialty hospitals but also it 
goes to Congresswoman Johnson's question about the expansion of 
hospitals to suburbs, and so forth. One of the key problems we 
have driving hospital costs is supply driven demand. Where you 
have more hospital beds, more people use them. We had in 
Northern California, Redding, which got a lot of attention, a 
Tenet hospital, it was not just an issue of its outlier 
payments. They were having too many people getting cardiac 
care, and it is because if you have docs that want to fill up 
their portfolio, with all due respect to physicians, people 
will get more care--physicians will provide more care. One of 
the issues we have to get to consumers is information not just 
about whether this hospital doing a good job or not, but are 
they doing the right care at the right time. That is one of the 
concerns that I have about specialty hospitals.
    Mr. JOHNSON. Well, I will ask another question later, but 
it seems to me the not-for-profits are building more hospitals 
than the for-profits. You might answer that next time. Thank 
    Chairman HOUGHTON. All right, fine. Thanks, Mr. Johnson. 
Mr. Portman?
    Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the 
witnesses today. We have had a very interesting dialog about 
health care, haven't we? We have gotten to talk about costs and 
technology and its challenges as well as its opportunities. We 
have talked about pricing and transparency, and I do take some 
comfort, Mr. Chairman, in the fact that at least this panel, 
and I believe the panel that I am sitting on--perhaps there is 
not a consensus on this, but a majority of us, at least, seem 
to be focused on the fact that more transparency and more 
information will make not just a more efficient health care 
system, but a higher-quality health care system and that is 
encouraging. I do think that is a general direction that we 
should be able to move on a nonpartisan basis. Then the final 
issue is the tax-exemption issue, and they are all related, of 
course. Since that seems to be more of the focus of the 
hearing, let me focus my questions on that.
    I will start by saying I represent the greater Cincinnati 
area. We have three nonprofit health care networks who do a 
terrific job in our community. They are all involved in charity 
care, uncompensated care, but also community benefit. They are 
also businesses, and they are run more like businesses today 
than they were 10 years ago, even than they were 2 years ago. 
As a result, they have gotten over some very significant 
financial challenges. Mr. Lee talked about excess bed capacity 
and so on, and, we have gone through a pretty aggressive 
managed care revolution really in Cincinnati and back and 
forth. My point is they are businesses and they have a bottom 
line, and they must compete, and they do.
    Having said how important it is that they provide that 
community benefit--and it is--I also think it is appropriate 
for us to review and clarify the rules. We are basing most of 
our discussion today on, incidentally, a 1969 IRS ruling with 
regard to what, in fact, is a community benefit, which was a 
change from the charity definition and you know, probably once 
every--what would that be--35 years, it is time to review where 
we are, not that that has not been done periodically in the 
interim period, but I think it is appropriate that we talk 
about where we are.
    So, my question would be whether this panel would have any 
specific recommendations as to what the standard ought to be. 
Do you believe the community benefit standard is appropriate, 
again, dating back to 1969? Do you believe that there should be 
more specific standards? Which is something Dr. Kane alluded to 
earlier and if it is all right, I will just start with Dr. 
Herzlinger and go across the panel. The mother of Captain 
    Ms. HERZLINGER. Also Dr. Herzlinger, my daughter. I think 
businesses provide community benefits as well. They do provide 
employment. They pay taxes into the community. Nonprofit 
hospitals not only have tax subsidies; they also have capital 
market subsidies. They are entitled to issue municipal debt, 
which businesses cannot, and raise the cost of capital 
elsewhere in the economy.
    When we talk about community benefits, I think it is very 
important to identify those community benefits that are unique 
to nonprofits and that for-profit businesses, which, after all, 
are the cornerstone of our great economy and our great country, 
also generate.
    Mr. PORTMAN. Thank you. Ms. Davis?
    Ms. DAVIS. I think it is hard to quantify all of the 
community benefits, like the value of stand-by capacity. So, 
when you set an explicit quantitative goal, you wind up 
focusing on charity care because it is easier to measure. So, I 
think there are some problems with trying to set a specific 
quantitative goal.
    I do think one could work on better practices, for example 
not charging American uninsured patients more than the 
discounted rate you would give to an insured patient; not 
having certain kinds of collection practices, like liens on 
homes; and publishing the availability of charity care. So, I 
think that is kind of the area where I think the best 
improvement could be made in the near term.
    Mr. PORTMAN. Interesting suggestions. Just as an aside, the 
three major nonprofit networks in Cincinnati have just come up 
with a draft billings and collections principles and guidelines 
statement which they shared with me yesterday. In fact, I was 
going to ask it be made part of the record later, if I could 
ask unanimous consent, Mr. Chairman, to make it part of the 
record. It is currently being subject to a comment period, but 
it gets at those very issues, Ms. Davis, you talked about, 
including collections. Mr. Lee?
    [The information follows:]


Billing & Collections Principles and Guidelines for Low-Income, 
        Uninsured Patients
    All patients should be treated fairly, with dignity, compassion and 
    Hospitals have a financial responsibility to seek payment from 
patients in cases where the patient does not qualify for charity care 
and where the patient's income or other assets clearly indicate the 
ability to pay for the health care services provided.
    Each hospital should have clearly articulated, understandable 
financial assistance policies consistent with its mission and values, 
and which underscore the hospital's commitment to provide financial 
assistance to low-income patients.
    Financial assistance policies should be clearly communicated to 
patients and must be applied consistently to all patients.
    Financial assistance policies should apply to patients who cannot 
pay for any or all of the care they receive, and should balance the 
patient's ability to pay with the hospital's need to be fairly 
compensated for services rendered to ensure its on-going financial 
    Hospitals should assist patients with enrolling in Medicaid and 
other government--sponsored programs.
    Debt collection policies of the hospital and its debt collection 
agencies and attorneys must reflect the mission and values of the 
    Financial assistance policies do not preclude the patient from 
personal responsibility. Patients must communicate their financial 
situation to hospitals, must work together with hospital staff to 
receive financial relief, and must be expected to meet their financial 
responsibility based upon their ability to pay.
    Hospitals will not be able to reinvest in plant, equipment and new 
technologies to continue to provide the highest quality of care without 
being compensated for their services. Financial assistance from 
hospitals must be complemented by efforts of government, employers and 
others to expand access to health care coverage for all Tristate 
Financial Assistance Eligibility
    Each hospital should maintain, and update as appropriate, written 
financial assistance policies for low-income, uninsured patients 
including those eligible for charity care.
    Absent regulatory prohibition, hospitals should develop discount 
programs for low-income uninsured patients who do not meet Federal 
Poverty Guidelines (FPG) to qualify for charity care. These discount 
policies should be reevaluated periodically.
    Hospitals should work with patients who do not qualify for charity 
care to establish extended payment options including low interest loans 
that are appropriate given the patient's income and assets. 
Consideration should be given to prompt payment discounts and other 
means of relieving financial pressure on self-pay patients.
    Hospitals should ensure best efforts to apply policies consistently 
to all patients, and hospitals should clearly define the type and scope 
of services eligible for assistance.
    Hospitals should assist patients in determining eligibility for 
government-sponsored aid.
    Hospitals should continue to provide financial assistance to 
patients who have exhausted their insurance and who exceed financial 
eligibility thresholds for extraordinary medical costs, although 
hospital financial assistance is not a substitute for employer-
sponsored, public or patient-purchased insurance.
Communicating Financial Assistance Eligibility
    All financial assistance applicants should be treated with dignity, 
respect and with cultural sensitivity. Free interpretation and 
translation services should be made available as necessary.
    All patients regardless of income level or payment status (i.e. 
insured, Medicare, self pay) will receive access to the same 
information regarding services and charges.
    Hospitals should ensure that patient financial services personnel 
and financial counselors are fully trained on the hospital's financial 
assistance policies and can communicate those policies clearly to 
patients. Receptionists and switchboard personnel should be able to 
direct callers to hospital staff trained to provide financial 
    Communications to patients regarding financial assistance should be 
written in reader-friendly terminology and in a language the patient 
will understand.
    Financial assistance policies must clearly state eligibility 
criteria and the process used by the hospital to determine whether a 
patient qualifies for financial assistance. Eligibility requirements 
related to FPG should be clearly enumerated for patients, and patients 
should also be told how assets may be used in determining eligibility 
for financial assistance.
    Hospitals should have adequate, easily visible signage in 
appropriate areas of the hospital (i.e. Emergency Department, 
Admitting/Registration) informing patients and their families of the 
availability of financial assistance. Signs should include brief 
instructions about how to apply for financial assistance including 
contact information.
    Information regarding the availability of financial assistance 
should be included on hospital bills including who to contact to begin 
the eligibility determination process.
    Patients should be clearly informed about their obligations to 
complete eligibility documents and to provide financial documentation 
as necessary, as well as potential financial obligations they may 
    When applicable, patients should be referred to an enroller to 
apply for Medicaid or similar programs to assist in offsetting some or 
all of the patient's financial liability and to ensure that the 
hospital is fairly reimbursed for its services.
    Hospitals should share their financial assistance policies with 
appropriate health and human services agencies and other organizations 
that assist such patients.
    (The financial assistance and communications guidelines listed 
above apply to a hospital's treatment of patients seeking charity care, 
financial assistance, or discounts, as applicable. To receive such 
assistance, patients must comply with hospital financial assistance 
application requirements, including providing documentation as needed. 
Patients must also cooperate with hospital staff and provide needed 
information in a timely manner to enroll the patient in Medicaid or 
other programs as required.)
Collections Guidelines
    Hospitals will provide their mission statement and their billings 
and collections guidelines to their collection agencies and attorneys, 
and hospitals will secure their agreement to adhere to the same high 
standards incorporated in the hospital's policies. (Collection agency 
is defined as an outside agency engaging in bad debt collection 
services on behalf of a hospital as opposed to an outside agency 
contracted to manage the hospital's day-to-day billing activities.)
    No collections effort will be made by the hospital or its 
collection agency for patients who have completed the financial 
assistance application process and established their eligibility for 
charity care. If such a patient is mistakenly billed, hospital staff 
will apologize for their error and correct the mistake.
    Legal action, including the garnishing of wages, may be taken by 
the hospital only when there is sufficient evidence that the patient or 
responsible party has the income and/or assets to meet his or her 
    Hospitals will not force the sale or foreclosure of a patient's 
primary residence to pay an outstanding medical bill.
    If a patient is cooperating with an agreed-upon extended payment 
plan to settle an outstanding bill with a hospital, the hospital should 
not send the unpaid bill to a collection agency if the hospital is 
aware that doing so may negatively impact the patient's credit rating.
    (The above guidelines apply to a hospital's collections practices. 
However, patients who are financially obligated to pay for a portion of 
their care must cooperate with the hospital on establishing the best 
method of payment and then demonstrate good faith efforts to abide by 
that agreement.)
    In conclusion, these guidelines largely reiterate current policies 
and procedures of GCHC member hospitals. However, these guidelines may 
require some members to enact changes in their policy, which may 
require operational changes including, staff training, changes on 
invoices, contract revisions with collection agencies, and so forth. 
The Greater Cincinnati Health Council endorses these guidelines and 
encourages its acute care hospital members to ensure that their billing 
and collections policies are consistent with these guidelines as soon 
as possible.


    Mr. LEE. Also, Congressman Portman, California hospitals 
have come up with the same set of standards around billing 
practices for the uninsured. The only thing that I would add 
that is easily quantifiable is how nonprofit hospitals play in 
the market. As I noted in my remarks the concern is that 
hospital consolidation creates negotiating leverage that 
preclude insures from seeing differences in cost quality. Cost 
and quality do not show through because it is a take-one/take-
all on the same price basis. There is a problem in the market. 
I am concerned with having a separate set of standards for 
nonprofits, and I have the exact same concerns with the for-
profit systems. This is an element that I think is worth 
looking at.
    Mr. PORTMAN. Dr. Ginsburg.
    Mr. GINSBURG. My organization studies markets and the 
implications for consumers, but we do not take positions on 
policy, so I would just as soon pass on this.
    Mr. PORTMAN. Dr. Kane.
    Ms. KANE. I think there are new guidelines out by the IRS 
that correspond more closely with what Karen Davis just 
mentioned around practices that hospitals undertake to show 
that they have a charitable intent when they are providing 
care. I think that is an improvement over what it was 
    I have tried to quantify these benefits. It is difficult. 
It is also difficult to quantify the benefit of the exemption 
in any meaning--you know, without missing some large amounts of 
benefit that you cannot quantify. I do think the IRS is paying 
attention, and I think a stronger standard that allow States 
and local communities to play a role in what constitutes a 
community benefit is important. Hospitals in some States now 
work with their local community health agencies to say, what is 
important in our community for health, and if we do that, will 
that be considered toward our charitable status? For instance, 
in New Hampshire, that was part of their community benefit law.
    I think there is a need to be more clear, perhaps, about 
what practices and what types of activities would constitute or 
count toward tax exemption and have some flexibility in how the 
hospitals choose to play that out. I think just the disclosure 
and the transparency of trying to do that will improve the way 
hospitals behave at this point.
    Mr. PORTMAN. Thank you, Dr. Kane. Just quickly, Mr. 
Chairman, again, our three networks in Cincinnati are working, 
in fact, right now with our City Council, which would represent 
part of the population served, and with some of the health care 
providers for uncompensated care, health care clinics and so 
on, to try to determine what some of those needs are on a more 
regional basis and be responsive to that. The question is 
whether that is happening around the country. I cannot speak to 
that, but that is an interesting part of the equation given the 
fact that it is not just about Federal income tax; it is about 
property tax and other exemptions. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you. I am going to ask a question, 
and then I know Mr. Pomeroy wants to. I would like to step back 
a minute and move away from profits, and return on investment 
and community involvement and just take all those very 
difficult to generalize in terms of the two categories, the 
profit and not-for-profit. When you take a look at the cost 
structure of medicine, you want to have the toughest, most 
able, most precise financial people looking to make sure that 
the equipment is there, the care is there, the pricing is 
right. You would sort of instinctively go to the for-profit 
    Yet at the same time, there is another element in the not-
for-profit, which is community involvement. People feel part of 
the hospital. They want to play a part in the whole overall 
medical element in the community. They feel it is part of them 
and I don't know why there is any inconsistency in not having a 
very sharp, driving, cost-conscious direction of a nonprofit 
hospital versus the profit hospital. Maybe you would have some 
comments to make on that.
    Ms. DAVIS. Well, I think one of the basic differences in 
just what motivates nonprofits versus for-profits--and it is 
something I happened to look at 35 years ago in an economics 
doctoral dissertation--is they are motivated to be the best, to 
be the best equipped, and often to be the biggest, and, 
therefore, they will do things that do not make sense to a for-
profit hospital because something they do may lose money. You 
have got the very best burn unit. You have got the very best 
neonatal intensive care unit. You do the best research. You are 
there for the community and always known as, when anything 
really bad goes wrong, this is the go-to place that leads 
nonprofit hospitals to try to do things, even if they lose 
    Now, in the past, they were able to cover that because they 
could cross-subsidize it out of charges to privately insured 
patients. As that has come down relative to costs under managed 
care, they are less able to provide those kinds of services. 
For the most part, they are the ones that will do things that 
we as a society want done but that are not profitable. I used 
the example of a major fire in a nightclub. Those burn patients 
went to certain hospitals, and those hospitals provided care. 
They are not going to make money on those patients. They are 
going to lose a lot of money on those patients. We all want 
those patients taken care of. That is the sort of thing that a 
nonprofit will do because they take great pride in having 
responded to that community emergency and were there at a time 
when patients need them. Obviously, they get some publicity out 
of it in local papers, and it helps their image as an 
institution. That is one of the reasons the nonprofit nature of 
this industry is so important.
    Chairman HOUGHTON. If I could just sort of cut in here a 
minute, to flip my argument, if you take a look at many of the 
corporations in this country, they are enormously generous in 
terms of what they do and contribute into the community. So, I 
just do not understand the consistency here. Maybe you would 
like to discuss this.
    Ms. HERZLINGER. Well, on the for-profit side, clearly in a 
well-managed, socially responsible corporation, its aim is to 
maximize the return for the shareholders within the norms of 
society. So, given a nonprofit and a for-profit, the for-profit 
aim is clearly to be as efficient as possible, and for-profits, 
especially if they are publicly traded, are much more 
transparent than nonprofits. I can get the financial statements 
of the Hospital Corp. of America (HCA) just by flicking on my 
computer. I would have a great deal of difficulty getting 
comparable statements for nonprofit hospitals. That kind of 
transparency in the market is an incentive for efficiency. I 
think the fair thing to do is to measure the costs and quality 
of both of them and let people make their own decisions about 
which ones gives them the best value for the money.
    Chairman HOUGHTON. That is difficult when you are in a 
small community. Would you like to add something?
    Mr. GINSBURG. The perspective I would like to point out is 
that nonprofit hospitals today account for, I think, upward of 
85 percent of the beds. They are the core of the hospital 
system. This percentage has been quite stable over time, and it 
seems as though, this is a country where not-for-profit 
hospitals are the norm. I think the major success that for-
profit hospitals have had has been, first, in areas where there 
has not been a lot of local resources to support the 
development and expansion of nonprofit hospitals. So, in a 
sense, they have provided capital and I think that some of the 
for-profit companies have been skilled and effective at 
identifying failing not-for-profit hospitals that are failing 
because they are not managed well and purchase them and manage 
them well, and then often sell them back to a nonprofit entity. 
We have to realize that the nonprofit hospitals have this very 
dominant position. Whether it is the tax-exempt status, whether 
it is people's comfort, whether it is their philanthropy that 
leads to it, they are the central system.
    Chairman HOUGHTON. All right. Does anybody have any other 
comments? If not, then we will go on.
    Mrs. JOHNSON. Mr. Chairman.
    Chairman HOUGHTON. Yes?
    Mrs. JOHNSON. I thought you were closing this panel.
    Chairman HOUGHTON. No, no. Go right ahead because I wanted 
to ask Mr. Pomeroy--go ahead, please.
    Mrs. JOHNSON. I will not be able to stay for the second 
panel, but I will review the testimony. I want to mention 
something that has come out of this panel, although it is not 
central to your responsibilities in testifying here. Ms. Davis, 
you mentioned the stability that Medicare has provided to the 
health care system. I would say that that is absolutely no 
longer true. You look at the physician payment law. Talk about 
creating instability. It is astounding. You look at our ability 
under Medicare to reimburse accurately, and if you take the 
newly proposed outpatient and inpatient reimbursements--these 
are new regulations. They are precipitated by the big increases 
we provided in the last Medicare bill and by the census 
automatic action every 10 years, and you go through what is the 
interaction between the census redefinitions, the increases we 
gave them, the this is and the that's and the other things. 
When I ask the experts, who have spent their lives on this, 
``what is the outcome? how many of the hospitals in the rural 
areas that we gave big increases are going to get those 
increases?,'' they cannot tell me. When I ask them, ``what is 
going to be the impact on these small urban hospitals that, 
frankly, are most disadvantaged in the reimbursement system?'' 
they cannot tell me.
    How can I make policy when we fight for a 4-percent 
increase for hospital reimbursements, and then we do not know 
whether they get them. My hospitals came in last week and 
documented that for the first time under Medicare, in spite of 
the big increases that we gave, the work we did on Indirect 
Medical Education (IME), on market basket, the first time we 
have ever given full market basket 2 years in a row, every 
single hospital in Connecticut is going to get an absolute 
reduction. A reduction. When their malpractice premiums are 
zooming, when their nursing costs are going up, when their 
technology costs are going up, and so on and so forth.
    So, what drives me--and I am going to be looking at these 
pricing issues. I want you to give me anything you know about 
what we should do about how we price in Medicare, because every 
aspect of the system is wrong. You cannot set a price and keep 
it for 20 years. Volume increases; it should be declining. What 
should we do about that? What should we do about these special 
services? I mean, ironically, we have no cost base. We do not 
know what anything costs. We have an arbitrary base that we set 
in a certain year, and we have adjusted it by inflation. This 
is no way to run a railroad. Whether it is hospitals, whether 
it is technology, whether it is this, whether it is that, you 
know, we are--just when you adopt a transfer policy and you 
reduce benefit for short stays in a system based on averages, 
this is a travesty. It is a travesty of logic and it is a 
travesty of fairness to the hospitals.
    So, whether it is doctor payments, whether it is hospital 
payments, whether it is boutique hospital payments, whether it 
is surgery center hospital payments, we do not know what we are 
doing. The terrible proof is that this new regulation that has 
come out, after the biggest increases we have ever passed 
across the board, the first time we have just said the whole 
rural system does not work because we cannot deal with low 
volume so we are just going to increase payments, knowing that 
it costs more for low volume. This is--I mean, I cannot tell 
you. There is no logic. There is no structure. There is no cost 
basis from which we can work. In the oncology area where I am 
absolutely insisting that practice expense bear some reality to 
practice expenses, I am being told, ``why should we do it there 
when we routinely reimburse at 70 percent of practice expenses 
for everybody else?'' What a bankrupt logic. What a quick way 
to destroy the quality of health care.
    So, I am very interested in this nonprofit/for-profit, who 
is getting paid to provide uncompensated care. To think that 
Medicare payments are stabilizing our health care system is to 
put your head in the sand. I am sorry, but in every sector we 
are destabilizing the system, eroding quality, and driving the 
development of boutique hospitals and so on, in my personal 
    We do not have time to go into all that, but I invite every 
one of you to work with me on how do we change the way we price 
in Medicare. Because if we do not, we will destroy community 
hospitals, we will drive the good-quality physicians out of the 
system, and, frankly, it is only because of the 
administration's good sense and forbearance that we haven't 
acted to destroy key home health providers who clearly are 
providing more services for less acute care patients. You would 
think we might want to know.
    Ms. DAVIS. If I could respond quickly to that, I agree with 
you. Most of my focus is on the patient and what is good for 
the patient.
    Mrs. JOHNSON. Right.
    Ms. DAVIS. I did testify at the time of the Balanced Budget 
Act that the proposed cuts to the health care sector were 
simply unprecedented and much too deep. The effect of those 
cuts and other changes in the late nineties was to take over a 
10-year period $1 trillion out of the health care sector.
    Mrs. JOHNSON. Right, but it is also true----
    Ms. DAVIS. So, a lot of the problems we are seeing--and you 
see it a little bit in my charts 3 and 5 on pages 25 and 26. 
Medicare cut, Medicaid cut, managed care cut, and the 
cumulative effect of that has not been helpful to the----
    Mrs. JOHNSON. I agree that the system is far more fragile 
than 10 years ago. It is also true that what we did in 1997 was 
limit the rate of growth for the next 6 years to the rate of 
growth of the preceding years.
    What we are seeing now, because we limited that rate of 
growth, because Medicaid, a publicly funded system, is 
underpaying dramatically, and because of managed care's 
pressure, we are seeing a very fragile system now, and we 
cannot keep our head in the sand about the inaccuracy of our 
payment structure any longer. So, I invite your input. I know 
that you are concerned about this, and I just wanted to note 
that we are--you know, I see this as the first hearing in this 
venue, but we will be hearing these other things that are 
intimately related, too much for one Committee, and I invite 
your cooperation and input. Thank you very much, and thank you, 
Mr. Chairman, for your indulgence.
    Chairman HOUGHTON. Thank you. With all of that good news, I 
now turn to Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. Well, we have been at 
it a couple of hours, and I think so far this hearing has 
established that a hearing undertaken without a rational focus 
is unlikely to produce a clear record. That said, I want to 
respond to the Chairman Thomas charge that we can try to make 
some sense of all this. I believe that we have established in 
this discussion that pricing alone is not a very effective sole 
indicator of whether tax-exempt status for hospitals or not is 
being appropriately fulfilled in the exercise of their 
operations. Is that correct? Is that a consensus across the 
panel? Any objection to that suggestion? Okay.
    Then let me ask you this: do you think there would be--I 
have seen--I used to be an insurance commissioner for 8 years. 
I have seen all kinds of things in terms of hospital practices, 
proprietary and nonprofit. I have seen some wonderful 
commitment to the charitable mission of these nonprofit 
institutions, and I have seen some exercised, on the other 
hand, incompetently and less rigorously.
    Is there something that ought to happen, that Congress can 
contribute to the nonprofit hospital world by way of surveying 
best practices, establishing a matrix of things that might be 
present in an exemplary nonprofit hospital institution, not to 
enforce but that maybe a hearing record would contain and it 
might provide some guidance to hospital executives and boards 
of directors in terms of things they ought to be keeping an eye 
on to make certain they comport with what is expected of best 
practices within the nonprofit hospital status? Would that have 
some value? Let's just run right across the table and start 
with Dr. Kane.
    Ms. KANE. I think if Congress can come to some consensus on 
what best practice is, other than simply providing care to the 
public, it would be helpful. I am not sure you can come to 
consensus, having just heard the debate on the panel here of 
the Members. I think it would be helpful to clarify what 
Congress thinks merits tax exemption, at least at the Federal 
level. It would be helpful to go beyond that and say, you know, 
here are best practices and how we expect you to provide those 
types of activities, if they are community-based activities, if 
they are the way you do billing and collection, if it is the 
way you make people eligible for charity care and at what 
income levels. All of that guidance would certainly help to 
make it more standard across the country in terms of what a 
citizen can expect if they do need a health care intervention 
in their lives.
    Mr. POMEROY. So, maybe right topic as we discuss tax-exempt 
status, but we have to go far beyond pricing to capture maybe a 
solution that has value.
    Ms. KANE. Pricing is not really the--not where I would go 
    Mr. POMEROY. Dr. Ginsburg.
    Mr. GINSBURG. Yes, I think pricing is a different topic. I 
think that it really would be useful to have expressions from 
the Congress about what it expects hospitals to be doing for 
the tax-exempt status because the Congress has not spoken to 
this for a long time.
    Mr. LEE. Congressman Pomeroy, the only thing I would add is 
a best practice area that Congress could make advice on is 
around not just what the hospitals do but how we pay hospitals. 
We have heard that one of the other consensuses here is a 
dysfunctionality in our payment system, a discussion that we 
need to reform. I would actually recommend to this Committee 
the Medical Payment Advisory Commission's (MedPAC) June report 
which actually talks about forward-thinking purchasing 
practices that is going to be the driver, I think, of changing 
hospitals' performance.
    Ms. DAVIS. I think you have put your finger on a very good 
idea. We have supported a case study of exemplary hospitals, 
which we will be releasing in August. It started with a 
database on hospitals in 21 States and found those in the best 
quartile on efficiency and the best quartile on quality 
measures, risk-adjusted for different diagnoses; out of that, 
it identified the 30 best hospitals and did case studies on 
four of them.
    There are certain characteristics that are common to all of 
those best hospitals. It has to do with starting at the top, 
with the chief executive officer's real commitment to quality. 
It has to do with something called true resource management in 
airlines, but it means that you listen to everybody you listen 
to the nurses when they say there is a problem, and you fix it. 
Everybody is free to speak up when they see a problem, and it 
gets addressed. I think that is just the beginning. That was 
conducted for us by Jack Meyer at the Economic and Social 
Research Institute. Other work in that area, whether it is on 
quality, efficiency, or access, would be very valuable.
    Ms. HERZLINGER. I think it is very important that the 
Federal government insist on measures of quality by provider, 
by hospital, by procedure for diseases over the long term. That 
is what transparency is all about. That is what the American 
people are interested in, as well as price data. The quality 
data are very important.
    However, I think it is very dangerous for the government to 
get involved in specifying the processes of care. Best 
practices are the consensus of the majority, but the real 
innovations come not from the majority; they come from 
iconoclastic outliers. For example, the----
    Mr. POMEROY. I agree. My time is up. By best practice, I 
mean, you know, consensus that we ought not attach houses of 
people that----
    Ms. HERZLINGER. Oh, of course.
    Mr. POMEROY. Not at all medical----
    Ms. HERZLINGER. I misunderstood. Certainly.
    Mr. POMEROY. Thank you very much.
    Chairman HOUGHTON. Mr. Ryan.
    Mr. RYAN. Are we doing a full round?
    Chairman HOUGHTON. A very quick second round, please. Go 
    Mr. RYAN. Okay. Let me see if I can widen the focus here a 
little bit from the beginning statements of this hearing. Do we 
have good measurement as to the value attributed to this tax 
status? Obviously, I think everybody agrees we do not have 
that. Do we think that public value comes from this tax-exempt 
status? I think so. What is the measurement of that? Who knows? 
Is that measurement so great that the costs do not outweigh the 
benefits? We don't know the answer to that question. Perhaps 
with better available data we will get the answer to that 
question. It is a question that ought to be asked of all of us 
in the public for the public good.
    I guess the question is: you cannot get away from the whole 
uninsured question when you talk about this. I mean, if we are 
talking about the system today where we have to rely on the 
public charity of nonprofit organizations who have to cross-
subsidized in order to pick up those who do not have insurance, 
that is the system we are working in today. So, is this a 
rational delivery system within this use of this tax 
expenditure to get the care to those who are uninsured? Or 
should we try and focus on getting insurance into the hands of 
those who do not have insurance so that this method of 
redistribution and cross-subsidization is not necessary?
    I would like to ask you to sort of pull that focus back a 
little bit and answer it this way: are we better served, 
quantitatively, economically, by fixing this uninsured problem 
we have in this country so you can focus on competition, on 
transparency, on making the market work? Or is the current 
system of using a tax expenditure on an ad hoc, individual 
hospital-by-hospital basis, cross-subsidizing and picking up 
the slack better than fixing this uninsured problem? Let me ask 
it that way and we will just start left to right, Dr. Kane and 
then to the right.
    Ms. KANE. I think probably the obvious answer is it would 
be great if everybody was insured. This is something that I 
think--didn't Harry Truman suggest that? I mean, I am trying to 
think of how far back--I mean, it was before I was born, 
    Mr. RYAN. We have to----
    Ms. KANE. I agree that----
    Mr. RYAN. Focus on direction of public policy.
    Ms. KANE. Absolutely. We would love to see everybody 
insured in some type of universal coverage. I don't think you 
dare leave out the interim steps that we have in place for the 
safety net, because we haven't gotten there yet, and I think in 
1969, the IRS and whoever set the laws misunderstood the impact 
of Medicare and Medicaid, thinking it would eliminate the 
uninsured. Guess what? They have come back.
    I think we always have to be aware that, you know, until we 
are truly universal, we really will have people who are at risk 
who are not covered, and that we do need a system, a safety net 
for those people. Yes, absolutely, the bulk of public policy in 
my mind should be toward insuring everybody.
    Mr. GINSBURG. It is really inconceivable that someone can 
be seen as having access to medical care today without having 
insurance and that should be the first priority. What I would 
say is that what we are seeing as our health care system 
becomes more competitive, it is becoming more difficult to 
continue the cross-subsidies that we have historically depended 
on to serve uninsured people or low-income people. As Nancy 
Kane says, we still have to do it, but in a sense, I think the 
priority for taking steps to expand health insurance is that 
much greater today because our cross-subsidy mechanisms are 
breaking down.
    Mr. LEE. Congressman Ryan, I think the first step-back 
point is the tax benefit relative to uncompensated care 
distracts a little bit from the fact that most hospitals, for-
profit and nonprofit, are compensated for that care from 
commercial private payers. This is one of the dysfunctions of 
our payment system. We have a vicious cycle caused by uninsured 
and underinsured costs in hospitals being picked up by 
employers, by those that have insurance, driving those prices 
up, driving to more uninsurance.
    Mr. RYAN. So, let me ask you this: you are saying that it 
is the private dollars from the purchasers of health care that 
are paying for those uninsured, not the tax expenditures that 
are flowing through?
    Mr. LEE. I am saying it is both, and I don't know the 
quantity of which is bigger, but it is absolutely a huge 
portion, which is hard dollars being paid by insured Americans, 
which is picking up a substantial portion of the uncompensated 
care costs in hospitals. Although the question that much of 
this hearing is focusing on is the tax status, the issue 
underlying driving hospital costs is part of a vicious cycle 
that is discouraging small employers from stepping up to the 
plate and getting insurance because it costs more. So, that is 
an important observation, I believe. The other is in terms of 
it isn't either-or----
    Chairman HOUGHTON. Will you please be quick on this? 
Because we have got another panel.
    Mr. LEE. That is my main observation on that question.
    Chairman HOUGHTON. Fine. Thanks very much. Mr. Stark?
    Ms. DAVIS. I think the answer is hands down it would be 
better if we would work on the problem of the uninsured. I 
mean, it is just a massive problem. It affects every----
    Chairman HOUGHTON. I thought I had cut this off.
    Ms. DAVIS. I would like to say, even if we----
    Chairman HOUGHTON. Could we come back to you? Thank you 
very much. Go ahead, Mr. Stark.
    Mr. STARK. I just had a comment for Mr. Lee on the idea of 
not-for-profits banding together to set prices. I believe that 
we certainly saw that in California. That was a reaction to the 
original move by Aetna and others to gouge big discounts out of 
separate units. So, this was the not-for-profits pushing back 
after they had been told that they would lose a lot of their 
patient base if they did not subscribe to discounts which were 
arguably too deep. So, it is kind of a bounce back and forth as 
the pendulum swings. Ms. Davis, of the 30 best in your study, 
how many were for-profit hospitals?
    Ms. DAVIS. Those were nearly all nonprofits, but as Dr. 
Ginsburg said, most hospitals are nonprofit and all of the top 
four studies were nonprofit.
    Mr. STARK. They are, and we did our own study to try and 
find in all of the for-profits, if any of them--this was just 
with U.S. News and World Report's study. The closest we can was 
one of two of them got a ninth ranking in orthopedic surgery, 
and that was about as close as any quality hospital got in the 
profit group. None of them are teaching hospitals, to my 
knowledge, and then, of course, we have the example set by HCA, 
HealthSouth, and Tenant, who are the largest criminals, Tenant 
in California recently having killed 167 people by unnecessary 
heart procedures. I don't think you can make a very good case 
for the for-profit community based on the record that they have 
established in this country to date. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you very much. Mr. Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. You know, since 
enactment of the Medicare bill last year, many employers have 
expressed interest in offering high-deductible insurance plans 
along with HSAs to their employees. You know, employees will be 
paying out of their pocket for their hospitals expenses. How 
important is transparency to them? Can you tell me if there is 
any transparency between doctors' costs, too?
    Ms. HERZLINGER. Health Allies was started for just that 
purpose. It was started with the idea that there would be high-
deductible accounts with Health Risk Assessments (HRAs) that 
the employer, employee, or somebody else funded, for which they 
could use the resources to pay part of that deductible. Health 
Allies, which is what I referred to in my testimony, does is it 
makes transparent to the user what the prices are for different 
procedures and for different physicians. It also negotiates a 
discount on their behalf. So, by aggregating individuals, it 
makes these individuals as powerful as a group in seeking 
    Mr. JOHNSON. Yes, sir?
    Mr. LEE. Congressman Johnson, we have a problem with the 
lack of transparency of hospitals. It is a real crisis at the 
physician level, and generally there is not good information 
there. There are a few very small, baby steps. The National 
Committee for Quality Assurance has physician recognition 
programs for physicians that provide diabetic care or cardiac 
care, that provides a bundle of measures to say this doctor is 
really good for these areas of care. Among the issues we happen 
to be working on with CMS is to get to the physician level of 
measurement and choice so consumers can get that information of 
who should do my knee surgery. We are not there today.
    Mr. JOHNSON. Yes, sir?
    Mr. GINSBURG. I think a limitation of HSAs, according to 
the way the legislation is written, is defining HSAs in terms 
of a deductible and if you talk about someone who is being 
hospitalized, inevitably they exceed that deductible. So, the 
only price incentives they face, other than whether to go into 
the hospital or not, is just if they have coinsurance where 
they will bear, say, 20 percent of the price differences across 
hospitals or if they have co-payments.
    I think that there is some potential, which perhaps future 
revisions of HSAs could address, about some incentives to 
choose better providers or, in a sense, to make choices which 
do not involve a large deductible and which would not qualify. 
We published something in December reflecting a conference on 
what are the innovative ideas in patient cost sharing. I am 
concerned that many of those ideas just would not fit under the 
way that the Congress has defined HSAs, and it is an area that 
you might look at.
    Mr. JOHNSON. I alluded to the fact that not-for-profits 
were building more buildings, more hospitals--they are in our 
area, for sure, and you all nodded yes--over the for-profits. 
Are those beds going to be usable? Hospitals where I am are 
turning those bed into family rooms, for crying out loud, 
because they cannot fill them. Do you think that the 
construction of not-for-profit hospitals is too high? If they 
were taxed, they wouldn't be building them, would they? Does 
somebody want to respond?
    Mr. LEE. I would just respond, Congressman Johnson, that 
health care very much is local, and in some communities there 
is undercapacity because of lack of building, but in many 
communities, there is overcapacity. So, I think that needs to 
be looked at on a community-by-community basis in terms of the 
need for new hospitals beds or not.
    Mr. JOHNSON. Yes, but are not-for-profits building more 
than for-profits? Because it used to be the other way around, 
it seems to me.
    Ms. KANE. It really is a function of your local market. 
That is who is there, perhaps you know, that is where they tend 
to stay. For-profits can really cruise the country and look for 
a location they want to locate. Nonprofits tend to stay local 
and look for local opportunities, so they may be more likely to 
build in your market because that is where they are.
    Mr. JOHNSON. Thank you. I appreciate your comments.
    Chairman HOUGHTON. Thanks. Mr. Sandlin?
    Mr. SANDLIN. Thank you, Mr. Chairman. I just have one 
question. Dr. Ginsburg, from the information that has been 
provided to me, most of these tax-exempt hospitals are 
currently running at about a 5-percent margin, and if we change 
the tax-exempt status of those hospitals, do you think we run 
the risk of those hospitals closing or going bankrupt, and then 
obviously not being able to provide services to the 
    Mr. GINSBURG. Yes, well, nonprofit hospitals need to earn a 
margin if they are to have capital to expand and replace 
themselves. So, because they cannot get equity capital, they 
have to rely on their retained earnings and debt. So, just 
seeing a nonprofit hospital earn a return is not a sign that it 
is going awry. Certainly, anything which took away the tax-
exempt status would certainly hurt the abilities of these 
hospitals to either continue operating or certainly to have 
capital investment to expand.
    Mr. SANDLIN. If, in fact, it is only 5 percent, not only 
would it take away, but it might drive the stake in the heart 
to kill the hospital by taking away the tax-exempt status. Is 
that correct?
    Mr. GINSBURG. I do not have information to be able to agree 
or disagree about how important that would be.
    Mr. SANDLIN. Would you think that taking away the tax-
exempt status is a larger financial penalty than the 5-percent 
margin under which they are currently operating?
    Mr. GINSBURG. That is really a quantitative question as to 
how valuable that tax----
    Mr. SANDLIN. Would you rather have a 5-percent margin or 
the tax-exempt status?
    Mr. GINSBURG. I am not prepared to speak to that.
    Mr. SANDLIN. You do not know if you would rather have a 
tax-exempt status or a 5-percent margin?
    Mr. GINSBURG. No, I do not know and they have both now.
    Mr. SANDLIN. Well, I think that answers the question. Thank 
    Chairman HOUGHTON. Well, thank you very much. This is the 
beginning of a long process. I appreciate your expertise and 
your frank discussion. Good luck and we will be in touch with 
you later. Thanks very much. I would like to ask the second 
panel to come up here. That is David Bernd, who is Chair of the 
American Hospital Association (AHA) Board of Trustees; Randy 
Sucher, Executive Vice President and Chief Operating Officer 
(COO) of Southern Medical health System, in Mobile, Alabama; 
Richard Morrison, Regional Vice President, Florida Hospital for 
government; and also Harold Cohen, Dr. Cohen, a consultant with 
Hal Cohen of Baltimore. I am sorry that Ben Cardin is not here, 
Doctor, wherever you are, because he wanted to introduce you, 
but I am sure he will have something to say when he comes back. 
He is managing a couple of bills on the floor.
    All right. We are going to try to do this a little more 
expeditiously because we do have votes coming up in about an 
hour. If we could have your testimony, and I think the panel 
has thinned out a little bit so we will not have quite as many 
questions. I really appreciate your being here, and, Mr. Bernd, 
will you begin?

                       BOARD OF TRUSTEES

    Mr. BERND. Thank you, Mr. Chairman. My name is David Bernd. 
I am president and CEO of Sentara Healthcare in Norfolk, 
Virginia, and chairman of the board of Trustees of the AHA. 
Sentara began in 1888 as a 25-bed retreat for the sick and now 
serves more than 2 million people in the Hampton Roads area. 
That is a big change, but what has not changed is the caring 
and compassion with which our people do their jobs. All the 
good things that hospitals do are done in the face of mounting 
challenges; 44 million uninsured Americans is one of them. It 
is a fundamental problem that permeates every aspect of our 
health care delivery system. We recognize that hospital billing 
and collection policies have come under increased scrutiny. 
Hospitals, led by the AHA, are taking substantial steps to 
demonstrate that their compassion extends from the bedside to 
the billing office.
    The AHA board recently developed a set of principles and 
guidelines to help hospital leaders as they struggle to help 
patients of limited means. My written testimony has details, 
but the guidelines cover topics such as offering discounts to 
patients who do not quality for charity care and making sure 
patient accounts are pursued fairly and consistently. As of 
today, over 2,500 hospitals have signed a confirmation of their 
commitment to follow these guidelines, and the number is 
    With recent guidance that we requested from the Federal 
government, it is now clear that fear of violating Federal 
regulations no longer should impede hospitals' charity care 
efforts. At the same time, we know that the transparency factor 
is also important. We are attacking this issue on two fronts: 
we are working with CMS, the Joint Commission, and other 
organizations on the quality initiative to make information 
about hospital quality available in a useful way to the public. 
Nearly all hospitals eligible to take part in the initiative 
are doing so. A consumer-oriented website will be up early next 
    The important goal of transparency is pricing information. 
Our principles and guidelines include this statement: hospitals 
should make available for review by the public specific 
information in a meaningful format about what they charge for 
services. The key word, Mr. Chairman, is ``meaningful.'' 
Publishing our list of master charges would require patients to 
sift through a document containing tens of thousands of 
diagnostic codes. There are better, more meaningful ways to do 
this, and I will outline some of these suggestions in my 
    Regardless of how prices are displayed, hospitals have 
always helped patients who cannot pay. At Sentara, for 
instance, 63-year-old Cora Brown came to us without insurance 
and was diagnosed with colon cancer. Our staff treated her with 
the respect and compassion every human being deserves, helped 
her apply for Medicaid, and covered most of her medical 
expenses that were not covered. Cora is just one example of a 
patient who received care regardless of her ability to pay, and 
we are just one example of how so many hospitals extend their 
compassion to the financial side of caring.
    Some have claimed that hospitals are subsidized for this 
kind of care through special payments from Medicare. This is 
inaccurate. While every hospital in every community serves 
patients who are unable to pay, Medicare's disproportionate 
share payments and indirect medical education payments, while 
important to the industry, do not go to every hospital. They 
are targeted only to specific hospitals, and they are not 
intended by Congress to offset or subsidize the actual costs of 
uncompensated care that individual hospitals incur.
    Finally, let me touch on the tax-exempt status, Mr. 
Chairman. Hospitals are the lifeline of many communities, and 
not-for-profit hospitals, which receive certain tax exemptions, 
are governed by the community and exist to meet the community's 
needs. Since 1969, the promotion of health has been explicitly 
recognized as a purpose meriting tax exemption. In 2002, 84 
percent of community hospitals reported that they work with 
other providers or public agencies to conduct community health 
assessments. They determine what services are needed, and then 
they work together to make those services happen. From homeless 
shelters to school vaccination programs to free health 
screenings, hospitals take medical care far beyond the hospital 
walls to get at where it is needed--in the community.
    To close, let me again stress that the people of America's 
hospitals work hard every day to meet the needs of their 
communities. They are why our Nation has the best health care 
in the world. Making sure all Americans can take advantage of 
that health care is a huge challenge. Hospitals are working 
diligently to address the specific issues that I have outlined 
here today, and nothing will make a greater improvement than 
all of us working together to address the real need: health 
insurance coverage for everyone. I will be happy to respond to 
your questions. Thank you.
    [The prepared statement of Mr. Bernd follows:]
Statement of David Bernd, Chair, American Hospital Association Board of 
    Good morning, Mr. Chairman. I'm David Bernd, president and chief 
executive officer of Sentara Healthcare in Norfolk, Virginia. I also 
serve as chairman of the American Hospital Association's Board of 
Trustees. On behalf of our almost 5,000 hospital, health care system, 
network and other health care provider members, the AHA appreciates the 
opportunity to testify today on ``Tax Exemption: Pricing Practices of 
    Sentara Healthcare began in 1888 as a 25-bed Retreat for the Sick. 
Today it is the largest not-for-profit, integrated health care provider 
in southeastern Virginia and northeastern North Carolina, serving more 
than 2 million people. Our facilities include six acute care hospitals, 
one extended stay hospital and more than 70 other sites of care, 25 
primary care practices and a full range of health coverage plans, home 
health and hospice services, physical therapy and rehabilitation 
services, urgent care facilities, ground medical transport services, 
mobile diagnostic vans, and two health and fitness facilities. We are 
also the region's only Level One Trauma Center.
The Effect of the Health Insurance Crisis on Patients and Hospitals
    Mr. Chairman, our nation's health care system is in desperate need 
of repair. Medicare and Medicaid, two government programs that support 
half of the care hospitals provide, reimburse hospitals at less than 
the cost of providing those services. Insurers negotiate big discounts. 
Meanwhile, rapidly rising technology costs, aging facilities in need of 
repair, and a shortage of workers all place increasing burdens on 
hospita l resources that are already struggling to meet rising demand. 
T hese factors combined make it difficult for the people of America's 
hospitals to continue meeting the growing health care needs of their 
    But more important are the nearly 44 million Americans whom the 
Census Bureau estimates have no health insurance coverage--although as 
many as 82 million, according to a recent report, lack health insurance 
coverage at some point during the year. Millions more are underinsured. 
Mr. Chairman, we lack a social policy in America that provides health 
care coverage for all. In the meantime, hospitals are asked to fill the 
gap, and they try to, for everyone who walks through their doors. In 
fact, in 2002, hospitals absorbed more than $22 billion in 
uncompensated care costs for patients who couldn't pay for the care 
they needed. But more is required to meet the health care needs of the 
uninsured, and America's hospitals cannot solve the problem on their 
own. To do so would jeopardize their ability to survive and serve the 
health care needs of everyone in their community, especially with one-
third of hospitals losing money overall, and another third on the 
financial brink.
    The AHA is a national partner in the Cover the Uninsured effort, 
sponsored by the Robert Wood Johnson Foundation to shine the national 
spotlight on the plight of the uninsured. Of the more than 2,300 local 
events held nationwide during Cover the Uninsured Week last month, 
hospitals sponsored or took part in many of the more than 1,000 health 
and enrollment fairs that included helping eligible residents sign up 
for coverage programs.
    And many hospitals have staff on duty who are dedicated to helping 
patients of limited means identify and sign up for Medicaid or other 
programs, or to access charity care in other forms.
The AHA's Principles and Guidelines
    Recognizing that the growing problem of the uninsured was demanding 
national leadership as hospitals struggled to help their patients who 
could not pay, the AHA convened a broad-based advisory group of 
hospital leaders to develop comprehensive principles and guidelines 
around better hospital billing and collections practices. These 
guidelines were discussed by hospital leaders across the country and 
approved by AHA's Board of Trustees. This effort to provide 
comprehensive guidance to the hospital field will make a positive 
contribution to helping many Americans better afford hospital care.
    The principles and guidelines (attached), sent to all hospitals in 
December 2003, put patients first and embody the longstanding mission 
and goals of every hospital:

    1.  Treat all patients equitably, with dignity, with respect and 
with compassion.
    2.  Serve the emergency health care needs of everyone, regardless 
of a patient's ability to pay for care.
    3.  Assist patients who cannot pay for part or all of the care they 
    4.  Balance needed financial assistance for some patients with 
broader fiscal responsibilities in order to keep hospitals' doors open 
for all who may need care.

    The document also includes specific guidelines on:

    1.  Helping Patients with Payments for Hospital Care, which 
includes making available to patients and others in the community 
meaningful information about the hospital's charges;
    2.  Making Care More Affordable for Patients with Limited Means, 
which includes offering discounts to patients who don't qualify for 
charity care; and
    3.  Ensuring Fair Billing and Collection Practices, which includes 
ensuring that patient accounts are pursued fairly and consistently, 
reflecting the public's high expectations of hospitals.

    Some state hospital associations have developed similar guidelines 
to help uninsured and underinsured people. The Healthcare Association 
of New York State (HANYS), for example, issued guidelines in January 
2004. HANYS firmly asserts the principle that ``fear of a hospital bill 
should never get in the way of a New Yorker receiving essential health 
services.'' The guidelines help hospitals meet that commitment, 
including a sample document to guide hospitals in communicating 
consumer-friendly financial assistance policies to the public in 
language that the patient can understand.
    HANYS surveyed its members to ascertain their status with 
implementing HANYS' financial aid/charity care guidelines, and to date 
has received responses from almost 70% of the hospitals. About 80% of 
respondents indicated they have updated their policy within the last 
six months. More than 75% have eligibility standards at or above 200% 
of the federal poverty level. And more than 95% initiated staff 
training programs on charity care policy.
    Clearly, the hospital field is responding to the problems at hand 
and to the AHA and state hospital association guidelines. In May, we 
asked hospitals to share, in writing, their commitment to fulfilling 
the AHA's principles and guidelines. Just weeks later, more than 2,300 
hospitals have signed an AHA Confirmation of Commitment, pledging that 
they either meet or exceed these guidelines or are working diligently 
to do so.
    The AHA guidelines have also met with support from consumer groups. 
Families USA, a leading consumer health care advocacy organization, 
said ``our organization believes the Principles and Guidelines adopted 
by the AHA Board of Trustees--are an important and commendable 
initiative.'' The Access Project, committed to improving access to care 
for uninsured and underinsured people, wrote, ``We applaud the American 
Hospital Association's Principles and Guidelines--We believe that 
American hospitals and patients would benefit from their full 
implementation.'' And the National Alliance for Hispanic Health 
commended the guidelines, calling them a critical step toward better 
serving the uninsured.
    Sentara Healthcare is a strong supporter of these guidelines, and 
as AHA Chairman I was proud to be the first to sign the Confirmation of 
Commitment. But we are certainly in very good company.
    Cooley DickinsonHospital, a 125-bed community hospital in 
Northampton, Massachusetts, is just one example of a hospital that 
exceeds the guidelines. Working with Hampshire HealthConnect, a 
community grassroots organization dedicated to helping uninsured 
people, Cooley Dickinson has established a program to reach out to 
uninsured patients who need help with their medical bills. At 
registration, patients are provided a one-page flyer describing how 
they can get assistance. Hampshire HealthConnect staff, which initiates 
contact with patients during their stay in the hospital, provides a 
full range of services to help patients qualify for coverage under a 
variety of programs. In 2003 the program assisted 1,428 uninsured and 
underinsured patients, connected 879 patients to free or reduced cost 
medication programs, helped 479 patients gain approval for ``Free 
Care'' to cover their hospital bills, and provided 125 patients with 
access to mental health counseling.
The Challenge of Federal Regulations
    In working to fashion the AHA's principles and guidelines it became 
clear that hospitals were concerned about violating federal regulations 
governing billing and collections that had accumulated over many years. 
This became an impediment to hospitals' efforts to assist patients of 
limited means with their hospitals bills. The rules are numerous, often 
confusing and, as even the administration acknowledged, ``scattered'' 
among many different official publications.
    The AHA sought to address that issue and asked the administration 
to bring new clarity to the rules to assist hospitals in their efforts 
to improve their charity care and other payment policies for patients 
of limited means. We produced an analysis of the rules and asked the 
administration for help in clearing away the unneeded regulatory 
    Thanks to Secretary Thompson's leadership, the Centers for Medicare 
& Medicaid Services (CMS) and the Office of Inspector General (OIG) 
released guidance addressing many of the concerns AHA raised on behalf 
of the field. The agencies recently followed up on that guidance at a 
forum that gave hospitals an opportunity to ask specific questions. 
Because of these efforts, hospitals are moving ahead to improve their 
charity care and financial assistance policies and practices and make 
them available to even more patients of limited means.
Empowering Patients With Useful Information
    Mr. Chairman, hospitals are committed to increasing the 
transparency of our efforts to best serve our patients. We agree that 
the current health care ``system'' does not serve Americans well in 
many ways, and that there must be more information available to 
consumers so they can make better decisions about their care. We're 
committed to working with the committee and others to develop these 
methods. One way we're already doing this is on the issue of quality.
    For the last two years, we've worked with the Association of 
American Medical Colleges, the Federation of American Hospitals, CMS, 
the Agency for Healthcare Research and Quality, the Joint Commission, 
the National Quality Forum, AARP, AFL-CIO, the Disclosure Project, the 
American Medical Association and National Association of Children's 
Hospitals and Related Institutions on the public-private project, The 
Quality Initiative. The Quality Initiative has one goal: to provide 
patients and families with information to help them make decisions 
about care choices. It has already begun to collect and display 
hospital performance information about 10 measures of pneumonia, heart 
attack and heart failure care, and will soon expand to include more 
measures of heart attack, heart failure and pneumonia, and will add 
measures on the prevention of surgical site infections. Currently, the 
data are being displayed on CMS.HHS.gov in a manner that is designed 
for use by health care professionals. A more consumer-friendly display 
will appear on Medicare.gov early next year.
    The Medicare Modernization Act of 2003 required that hospitals paid 
under the inpatient perspective payment system (PPS) report on these 
same measures in order to receive the full Medicare inpatient PPS 
inflation update for fiscal years 2005-2007. Even before this 
requirement was enacted, more than two-thirds of PPS hospitals had 
committed to participate in this project and to provide the public with 
useful information on hospital quality. Today, virtually all of the 
eligible hospitals are participating.
    We're working to ensure transparency on other fronts as well. The 
government believes hospital pricing information should be transparent 
and so do we. We encourage all hospitals to communicate pricing 
information effectively with their patients. Our principles and 
guidelines include this statement:
    ``Hospitals should make available for review by the public specific 
information in a meaningful format about what they charge for 
    The key word here, Mr. Chairman, is ``meaningful.'' Publishing our 
master list of charges would mean patients would have to sift through a 
document containing tens of thousands of diagnostic codes, know all of 
the care that might be required for a specific condition and then piece 
together the information to arrive at a price.
    While it is difficult for physicians and health care 
professionals--let alone a non-medical person who suddenly is dealing 
with a medical crisis or condition--to predict the specific course of 
care and the associated charges, we agree that it is important for 
patients and families to have access to meaningful information on what 
their bill might be. Fear of a hospital bill should not deter a person 
from seeking medical care. Such information will help patients better 
understand their financial obligations and plan, with the hospital, for 
any financial assistance they may need.
    There are many ways hospitals can share meaningful charge 
information with patients. One approach is to make available the 
average charges for the top 20 diagnostic related groups and top 20 
outpatient procedures performed by the hospital, or itemize the charges 
by category of service, i.e., room and board, operating room, 
laboratory, etc. Providing patients with a range of charges for a 
particular condition also can help them understand how the actual 
services provided and associated charges may vary.
    Another approach provides information for a hospital's average, low 
and high charge, broken out by severity for each of the 20 top 
conditions and 20 top outpatient procedures. This type of detailed 
charge information will provide a more definitive perspective on the 
range of charges for the most common services in the hospital.
    The AHA's principles and guidelines also state that:
``Hospitals should make available to the public information on 
hospital-based charity care policies and other known programs of 
financial assistance.''
    At Sentara, we routinely assist patients who may not have the 
ability to pay for medical care, like 63-year old Cora Brown. She came 
to our hospital without insurance and was diagnosed with severe anemia. 
Subsequent medical tests revealed colon cancer that required surgery 
and chemotherapy. Later tests revealed liver cancer, and required yet 
more surgery and treatment. Sentara staff treated Ms. Brown with the 
utmost respect and compassion--as they would any patient--even while 
her medical bills continued to grow, and helped her apply for Medicaid. 
Sentara has covered most of Ms. Brown's medical expenses.
    We helped Kathy Sievert, a Virginia Beach accountant who declined 
COBRA coverage after she was laid off following a company takeover. Ms. 
Sievert's rationale was that she was healthy and wasn't in need of 
medical care. That changed, however, on the day she was hit by a truck, 
and woke up at Sentara Virginia Beach Hospital with her bones 
surgically repaired and a $12,000 piece of titanium implanted in her 
leg. One of our patient advocates attempted to help her apply for State 
and Local Hospitalization assistance, but no funds were available. In 
the end, Sentara covered almost $45,000 of Ms. Sievert's medical care. 
And today, she has a new job with health insurance.
Government Special Payments to Hospitals
    Some have claimed that special payments made through Medicare PPS 
and through the Medicaid program and other government programs are 
taxpayer-provided ``subsidies'' for the uncompensated care provided by 
hospitals--care for which no payment is received. While hospitals in 
every community serve patients who are unable to pay for their care, 
not all hospitals receive these special payments; they are targeted 
only to specific hospitals or other providers. A recent study prepared 
for the Kaiser Commission on Medicaid and the Uninsured showed that, in 
2004, the Medicare program, the federal portion of the Medicaid program 
and several other government programs together provided $23.5 billion 
in additional payments to care providers. However, these payments are 
not intended to offset or subsidize the actual costs of uncompensated 
care that hospitals incur.
Medicare Disproportionate Share (DSH) Payments
    Medicare disproportionate share payments are made to some, but not 
all, hospitals that serve low-income patients. While all hospitals 
provide uncompensated care, about 2,724 hospitals, or 55 percent, 
receive DSH payments. In 2004, according to the Kaiser Commission 
report, hospitals received $7.6 billion in DSH special payments. There 
is a minimum threshold that a hospital must meet to receive this 
special payment and a formula that calculates the amount a hospital 
receives. The formula combines two measures: the percentage of 
inpatient hospital days attributable to Medicare patients in the 
Federal Supplemental Security Income (SSI) program, and the percentage 
of inpatient days attributable to Medicaid patients. There is currently 
no measure for uncompensated care in the DSH payment formula.
    In the Balanced Budget Refinement Act of 1999 (P.L. 106-113), 
Congress directed the HHS Secretary to collect data from hospitals on 
costs incurred in both the inpatient and outpatient settings for which 
the hospitals are not compensated, including non-Medicare bad debt and 
charity care. This is the first year that hospitals' data will be 
available for analysis.
Medicare Indirect Medical Education (IME) Payments
    The Medicare program makes special payments to teaching hospitals 
under the inpatient PPS. A portion of these payments, directed to the 
1,112 hospitals (23 percent of all hospitals) that train our future 
physicians, was $2.9 billion in 2004, according to the Kaiser 
Commission report. Indirect medical education payments compensate 
teaching hospitals for the costs they incur in training physicians. As 
a result of their education and research missions, teaching hospitals 
must offer expensive, specialized, and sophisticated services that may 
not be utilized optimally. Often, teaching hospitals care for the most 
medically complex and costly patients in our health care system. The 
Medicare inpatient payment system does not adequately measure and 
compensate teaching hospitals for these additional patient care costs. 
The IME payment adjustment is designed to account for patients' 
severity of illness and the inefficiencies in operating a hospital 
where teaching and research occur. For example, physicians-in-training 
may order extra lab or other diagnostic tests because they are 
inexperienced in practicing medicine. They may also ask questions and 
rely on other health care personnel in the hospital for help, thus 
making professional staff less efficient in delivering patient care. 
IME payments are calculated using a formula that is based on an 
individual hospital's resident-to-bed ratio. It does not include a 
measure of uncompensated care.
    Today, even including the targeted payments mentioned above, 
Medicare pays only 98 cents for every dollar of care provided by 
hospitals to Medicare beneficiaries. If Medicare DSH and IME funds were 
to somehow be redirected to cover hospitals' uncompensated care costs, 
rather than their current purpose of helping hospitals provide care to 
Medicare beneficiaries, the Medicare reimbursement would drop to an 
estimated 91 cents for every dollar of care provided by hospitals.
Tax Exempt Status--Key to Community Care
    The underpinning for charitable tax exemption is public support for 
activities that serve the larger good--a concept that encompasses the 
broadest range of public purposes. The governing body of a charitable 
organization is based in the local community, and has a fiduciary duty 
to see that the organization is organized and operated to fulfill its 
charitable mission.
    Since 1969, the promotion of health has explicitly been recognized 
as a purpose meriting tax exemption. Health care organizations may be 
awarded tax-exempt status by demonstrating that they promote health in 
a manner that benefits the community as a whole. The premise underlying 
the community benefit standard is that the promotion of health in a 
manner that benefits the larger community serves a public purpose. The 
promotion of health alone is not sufficient, however; how it is done, 
when, and for whom are important factors. Tax exemption requires more. 
The focus is not on what the hospital does but whether those actions 
respond to community need. Providing charity care has been only one way 
to demonstrate that benefit.
    The community benefit test is still a sound and viable basis for 
awarding tax-exempt status to hospitals. It places the focus at the 
local level and examines the merits of individual situations against 
the community environment in which they serve. The issue has been and 
should continue to be whether they are providing public benefit. 
Exemption is given in return for responding to the community's needs.
    Hospitals are open 24 hours a day, seven days a week. The women and 
men who work there--on the day shift, the swing shift or the night 
shift--provide compassionate care and help bring new life into the 
community. They provide medical care both within our four walls and in 
other settings.
    Hospitals provide emergency department care to all, regardless of 
their ability to pay. Hospitals' uncompensated care, as well as 
Medicare and Medicaid payment shortfalls, are costs absorbed in an 
effort to serve our communities.
    But hospitals across the country also provide a wide-range of 
services for the benefit of those who don't seek care from the 
emergency department, the pediatric unit or any other hospital 
department. Instead they take the care to those who need it, delivering 
charity care and offering special non-compensated services and 
programs, including community education and outreach programs, health 
screenings, and subsidized medical education and research. The Cover 
the Uninsured Week activities I mentioned earlier are a good example of 
these efforts.
    Most hospitals work with local providers and organizations to 
assess community status and needs. In 2002, 84 percent of hospitals 
reported that they worked with other providers or public agencies to 
conduct health status assessments of their communities. These 
assessments help them determine what programs and services should be 
targeted at various populations, such as minority, elderly or low-
income, as well as to the broader populations.
    In South Bend, Indiana, St. Joseph RegionalMedical Center works 
with more than 45 community agencies and businesses to provide health-
related services to the working poor and underserved--those who do not 
have insurance and are not eligible for governmental assistance. Their 
program includes 65 volunteer physicians and almost 100 community and 
student volunteers providing a range of special services such as eye 
care, on-site mental health care, access to a food pantry, and 
assistance with food stamp applications. And St. Joseph's takes care of 
physician visits, lab work, medications, and inpatient and outpatient 
medical care.
    Trinity Regional Medical Center in Fort Dodge, Iowa, created the 
CAN, the Community Action Network. Working with schools, government, 
law enforcement, local businesses and human services, CAN provides 
community health and wellness screenings, free health screening, and 
substance abuse and positive parenting programs.
    These are just two specific examples of what hospitals around the 
country are doing to ensure the health of their communities. Others 
partner with community members to operate homeless shelters. They take 
medical care where it is needed, collaborate with others in their 
community to determine what non-medical services might be needed, and 
then work to provide it--all in an effort to do what it takes to 
improve the health of their communities.
    Mr. Chairman, the people of America's hospitals work very hard, 
every day, to get high-quality care to all who come through their 
doors. They do it with caring and compassion that extend from the 
bedside to the billing office. And they do it in the face of mounting 
challenges. They are a key reason why our nation has the best health 
care in the world. But ensuring that all Americans can take advantage 
of that health care when they need it is a huge challenge. We can take 
a giant step forward by working together to address the problem of the 
uninsured. We look forward to working with you to help solve that 
problem, and helping all Americans get the health care they need, when 
they need it.


    Chairman HOUGHTON. Thanks very much, Mr. Bernd. Mr. Sucher?

                        MOBILE, ALABAMA

    Mr. SUCHER. Thank you, Mr. Chairman. I come from Southern 
Medical Health Systems, a small for-profit company in Mobile, 
Alabama. We operate Springhill Medical Center, a private for-
profit hospital. Establishing prices for hospital procedures 
has changed a lot, as we have talked today, as the practices of 
insurers and Medicare have evolved.
    When Medicare adopted DRGs (diagnosis-related groups) in 
the eighties as the basis for payment, this generally 
introduced the concept of incentives for hospitals to control 
costs. At the same time, it reduced the impact of the line-item 
as that became less important because individual prices have a 
minimal effect on payments to hospitals except in the rare 
cases that an insurance company, HMO, or PPO paid for services 
based on a negotiated percentage of charges.
    So, why do hospitals charge for every item and service? 
One, we still have to Medicare cost reports in order to 
properly allocate our costs. For those Medicare cost reports, 
we have to know the detailed charges to prepare those cost 
reports. We also identify the usage of items internally for 
internal control and internal costing purposes for hospital. We 
also provide those detailed items, in providing detailed bills 
with proper coding for insurance companies, as often requested 
by insurance companies or individuals. So, even though we do 
not like to, the practice of charging for every individual item 
still continues in health care today.
    Charges are generally developed based on detailed analyses 
of prominent payer fee schedules in the current market. For 
example, if Blue Cross were to pay us $2,400 for an outpatient 
cardiac catheterization and the standard discount for Blue 
Cross patients in Alabama is around 50 percent, the standard 
charge may be 200 percent of that fee schedule amount. 
Determining the allocation of that overall intended charge to 
the components of care is difficult because every case is so 
different. As we have already talked today, health care is not 
like an assembly line in an automobile manufacturing plant. 
Every patient is very different, with varying complications, 
comorbidities, and severity of illness. Every physician is also 
different in their treatment protocols for each patient, using 
various supplies, pharmaceuticals, and diagnostic tests. 
Hospital care is really much more akin to a chef making seafood 
gumbo where almost all the outcomes are successful, but no two 
taste or cost exactly the same, and there are very large 
variations. In fact, hospitals have little control over the 
costs since only physicians and not hospitals order the tests 
and ultimately determine the cost and what is done for each and 
every patient.
    So, why do hospital charges vary so much from costs? One 
reason is that every payer contract we have includes a 
provision that for any particular individual patient, the payer 
will pay the hospital the lesser of the negotiated rate or the 
hospital's customary charges. Negotiated rates for each payer 
are generally a fixed rate that the insurer pays for an average 
episode of care across a broad spectrum of patients. For those 
patients that require a lot of extra care, like a heart cath 
patient requires a lot of stents, hospitals take a terrible 
beating when they take that average payment. So, hospitals 
cannot afford to not make money on the low-end cases by ever 
having their charges be less than the negotiated rates. High 
charge markups generally help hospitals avoid that catch-22.
    The second reason for high hospital charges, as we already 
talked about a lot today, is cost shifting. It has occurred for 
many years in the industry and will continue to occur until 
massive changes occur. To make up for those payers that often 
pay hospitals below our actual cost--Medicare and HMOs 
included--and to be able to provide some level of free care, 
hospitals must shift unfunded cost to payers--generally PPOs, 
commercial insurance, and the uninsured--that pay some 
percentage of charges. In our case, these payers represent less 
than 10 percent of our revenue, but they comprise most or all 
of our profits.
    The aforementioned item in the requirements that hospitals 
charge all patients the same price for the same services 
results in high prices for the uninsured. Until recent proposed 
changes in regulations, hospitals have been very concerned with 
giving discounts to patients other than as the result of 
contractual requirements. Now most hospitals, including ours, 
have a financial screening preregistration process whereby an 
uninsured patient can receive a discount based on ability and 
willingness to pay.
    One thing we have talked a little about is efficiency. A 
lot has been said about rewarding hospitals for efficiency. One 
of the most perplexing aspects of Medicare, which espouses to 
reward efficiency through the DRG system, is that the 
application of the wage index guidelines actually penalizes 
hospitals like those in Alabama for providing a lower cost of 
care. We actually get much lower payment than most other 
hospitals in the Nation, even though we are, in fact, a low-
cost provider State. Thank you very much.
    [The prepared statement of Mr. Sucher follows:]
Statement of Randy Sucher, Executive Vice President and COO of Southern 
              Medical Health System, Inc., Mobile, Alabama
    Establishing prices for hospital procedures has changed as the 
practices of insurors and Medicare have evolved. Before Medicare 
converted to payment to hospitals based on DRG's (diagnosis related 
groups) in the 1980's, charges for individual items involved in 
providing care were calculated as a markup of estimated or actual 
costs. Individual item costs didn't matter too much because Medicare 
(and other payors) paid their pro-rata percentage of a hospital's total 
costs based on a ratio of costs to charges or average cost per day. 
This payment often included an add-on for uncompensated care at all 
hospitals and a return on equity for for-profit hospitals.
    When Medicare adopted DRG's as the basis for payment, this 
introduced incentives for hospitals to control costs. Line-item pricing 
became even less important because individual item prices have a 
minimal effect on payments to hospitals, except in the rare cases that 
an insurance company, HMO or PPO paid for certain services based on a 
negotiated percentage of charges. But in order to be able to allocate 
costs for Medicare cost reporting purposes, identify the usage of items 
involved in providing care to a patient for hospital internal costing 
purposes, and to provide a detail bill as often requested by insurance 
companies, the practice of charging for every individual item consumed 
by or for the patient has continued.
    Charges are now developed based on detailed analyses of prominent 
payor fee schedules by procedure code. If Blue Cross pays $2400 for an 
outpatient cardiac catherization and the standard discount for Blue 
Cross is 50%, the charge (allocated to major components) may be 200% of 
the fee schedule amount. But the allocation of the intended overall 
charge to the components of the care is difficult because every case is 
so different. Health care is not like an assembly line at an auto 
manufacturing plant. Every patient is different with varying 
complications, co-morbidities and severity of illness. And every 
physician is different in their treatment protocols for each patient 
using various supplies, pharmaceuticals, and diagnostic tests. Hospital 
care is much more akin to great chefs making seafood gumbo, where 
almost all outcomes are successful, but no two taste or cost the same.
    So, why do hospital charges vary so much from costs? One reason is 
that every payor contract includes a provision that for any particular 
patient, the payor will pay the hospital the lesser of the negotiated 
rate or the hospital's customary charges. Negotiated rates are 
generally a fixed rate that the insuror pays for an average episode of 
care (for example, a heart catheterization). Hospitals take huge losses 
on cases when complications occur, or when routine heart caths wind up 
involving expensive stents. So, Hospitals cannot afford to not make 
money on the low-end cases by having the charges be less than the 
negotiated rates. High charge markups generally help hospitals avoid 
this Catch 22.
    The second reason for high hospital charges is cost shifting which 
has occurred for many years in the industry. To make up for those 
payors that often pay hospitals below our total cost (Medicare and 
HMO's included), hospitals must shift some of these cost to payors 
(generally PPO's) which sometimes pay a percentage of charges. Although 
these payors usually represent less than 10% of a hospital's revenue, 
they can comprise a fair share of hospital profits.
    The requirements that hospitals charge all patients the same price 
for the same services results in high prices for the uninsured. Until 
recent proposed changes in regulations, hospitals have been very 
concerned with giving discounts to patients other than as the result of 
a contractual requirement. Now, most hospitals, including ours, have a 
financial screening process whereby an uninsured patient can receive a 
discount based on ability and willingness to pay.
    As you know, hospital pricing policies are very complex and greatly 
misunderstood by the general public and many Medicare beneficiaries. 
Patients tend to focus on the detail bill, whereas hospitals and 
insurers look at the total bill for the services rendered. The industry 
is very interested in finding a solution to simplify and clarify our 
billing practices.
    Mr. Chairman, thank you for the opportunity to testify before you 


    Chairman HOUGHTON. Thank you so much. Mr. Morrison?

                        ORLANDO, FLORIDA

    Mr. MORRISON. Mr. Chairman and Members of the Subcommittee, 
I am Richard Morrison. I am with the Adventist Health System 
based in Orlando, Florida. We started out in 1908 with one 
hospital. We now have 38 hospitals in 10 States. We believe we 
provide a significant amount of community benefit in the areas 
that we have our hospitals and nursing homes. I am not here 
today to talk specifically about that. I am appearing today to 
discuss the relationship between hospital charges and costs.
    In my remarks, I would like to touch upon the relationship 
between cost and charges, charges and payment. Do charges 
differentially impact the uninsured? What does it cost to 
maintain a current charge structure? Do charges serve a 
purpose? Can the current system be changed? Can transparency be 
    There is, as has been noted, a very tenuous relationship 
between cost and charges in the health care industry. It should 
be noted, however, that this relationship did not come about 
overnight. It has taken place over a 30-year period and has 
been in response to changes in a Federal policy as it relates 
to Medicare and Medicare reimbursement, industry policy, and 
responses by the hospital industry in and of itself.
    Hospitals do have charge masters, as, Mr. Chairman, you 
noted. Some may be as much as 25,000 items. This is the list 
from which the bills are created. The bills are not necessarily 
what gets paid. Everyone gets billed the same amount. What 
people pay or what the expectation of payment is is what 
differs greatly.
    Medicare does not negotiate. It pays a flat amount based on 
a diagnosis. Medicaid pays a per diem. Health Maintenance 
Organizations (HMOs) and PPOs may pay on a Medicare-based DRG, 
they may pay a per diem, or in our case, they pay a discount 
off of charges. Almost all of our accounts with managed care 
companies are a discount off the charges, with a cap on the 
amount that we can increase our charges year to year.
    The system of payment for the uninsured is a little more 
complex. For non-elective care and all admissions that come 
through the emergency room, we have the expectation of payment 
of zero for those with incomes under 150 percent of poverty or 
less, and that expectation of payment can rise to 60 percent of 
charges for those up to 400 percent of poverty, or about 
$75,000 for a household income of four people. Overall, these 
expected payments are subject to a cap of 25 percent of 
household income.
    We also have methods available that can deal with those 
people who are above the 400 percent of poverty line so that 
they are not facing the full impact of high charges. We will 
work with these individuals and try to reduce their burden and 
can guarantee them a discount of 30 percent or more, depending 
upon their individual circumstances.
    Charges do have some utility in health care even though 
there is only a passing relationship to cost. As was noted, 
they are still required by Medicare and some insurance 
companies and form the basis of payment. Maintaining the 
complex charge structure is expensive. We have to have over 300 
people to track and audit the process of billing.
    The charging structure also creates confusion for the 
consumer. This goes beyond the oft-quoted $10 aspirin. This 
includes the problem of giving a bill to an individual that 
says that the bill is $25,000, your insurance company paid 
$12,000, you pay $500. The question is: what happens to the 
rest? It gives rise to the issue of charges are too high in 
health care.
    As we go to the high-deductible plans and the consideration 
of HSAs, hospitals must give consideration to extending 
discounts to the HSAs and the insurance companies themselves 
must begin to negotiate on behalf of the beneficiary so that 
discounts are passed on to the individual. Modifying our 
structure is going to be extremely complex. Even if we were to 
try to go to a diagnosis-based group, we are still going to 
have to maintain the tracking of resource consumption.
    If we look at the issue of transparency, I believe we do 
have transparency in outpatient services. Where it will become 
very, very difficult is looking at price transparency on the 
inpatient side because there is a tremendous amount of 
variation that can take place even for something so simply as a 
routine delivery. Cost can vary as much as 25 percent for 
something that you would expect to have a high degree of 
predictability. This is owing to the idiosyncratic factors of 
health of an individual as well as to practice patterns of a 
    To conclude, hospital charges today are a product of market 
and regulatory behavior over the last 30 years. The connection 
of charges to cost is tenuous. Charges do have some utility and 
are still required to be maintained. Hospitals can deal with 
the imbalance of cost and charges through aggressive 
discounting, particularly to the uninsured. Changing the system 
to something more understood and administered will take 
extensive work and creativity. Mr. Chairman, Members of the 
Committee, thank you for the opportunity to speak with you 
    [The prepared statement of Mr. Morrison follows:]
    Statement of Richard Morrison, Regional Vice President, Florida 
   Hospital for Government, Regulatory and Public Affairs, Orlando, 
    Mr. Chairman and Members of the Subcommittee:
    My name is Richard Morrison; I am Regional Vice President for 
Governmental and Regulatory Affairs for the Adventist Health System in 
Orlando, Florida. We own and operate 38 hospitals in ten states. Since 
1908 we have operated our flagship hospital, Florida Hospital, in 
Orlando. We established and operate our hospitals as part of our church 
mission to provide health and healing to our communities. From the 
beginning to the present day, Adventist Health System takes its 
obligation to meet the health needs of the communities in which we live 
seriously. In 2003, Florida Hospital provided uncompensated care to the 
uninsured/charity at a cost of $36 million dollars. In addition $29 
million in cost of care was provided to those classified as bad debt. 
Finally, we provided $45 million in uncompensated cost of care to 
Medicare patients and $4 million in uncompensated costs to Medicaid 
patients. Beyond the direct cost of providing care, the hospital is 
committed to providing needed services to the community. In 2003, we 
spent $100million in expanding emergency care and other capital 
improvements. Over the next seven years we expect to spend over $700 
million to expand capacity to meet the growing needs of our community.
    I am appearing here today to discuss the relationship between 
hospital charges and costs. A great deal of controversy has recently 
been created over hospital charges. Many believe that hospital charges 
are too high and that they do not have any rational relationship to the 
cost of health care. The observation that health care costs and charges 
have, at best, an attenuated relationship is essentially correct. 
However, this relationship did not occur arbitrarily, nor did it occur 
overnight. Rather, the disconnect between costs and charges evolved 
over the span of nearly 30 years as a result of pressures exerted by 
the insurance industry, the federal government and from within the 
health care industry itself. It would take too long to recount the 
history of costs and charges. I have provided a short history on the 
subject for your review. In my remarks today I would like to touch upon 
six questions:

    1.  What is the relationship between cost and charges, and charges 
and payment?
    2.  Do charges differentially impact the uninsured?
    3.  What does it cost a hospital to maintain the current charge 
    4.  Do charges serve a purpose?
    5.  Can the current system be changed and what are the barriers to 
    6.  Can transparency in pricing be improved?

    As I noted there is a very tenuous relationship between cost and 
charges. The relationship varies hospital to hospital and within a 
hospital itself the mark up for items will vary dramatically. 
Frequently, less costly items receive a greater mark up than more 
costly items. Furthermore, some charges for services, such as the cost 
for room and board and nursing care, understate the true cost. In 
short, in the hospital industry, as in every other industry, the 
practice of charging for individual items, is the chosen means, however 
imprecise, of allocating the cost and general overhead of the hospital 
and the overhead associated with a class of items.
    Hospitals have extensive charge masters that may list as many as 
25,000 or more line items. It is from this list that hospital bills are 
created. It is also the basis for information used in the quality 
assurance process, the utilization review process, cost accounting and 
for various reports to the state and federal government. All patients 
are charged on the same basis but all payers do not pay what is 
charged. Medicare pays based upon the diagnosis and sets the payment. 
Medicaid pays based upon a non-negotiated per day rate. Managed care 
companies pay upon a diagnosis basis, a per diem basis or a discount 
off of charges basis depending upon what is negotiated. I believe at 
this time almost all of the managed care (HMO and PPO) contracts at 
Florida Hospital are paid on a discount off charges basis. For our 
major contracts we also have a cap on the allowable increase in charges 
year to year. This cap is 5 to 6 percent. For those without health 
insurance the expectation of payment becomes a bit more complex. For 
non-elective care (and all admission through the emergency department) 
the expectation of payment can be $0 for those with incomes under 150% 
of poverty. The expectation rises to 60% of charges up to 400% of 
poverty or $75,400 for a family of four. Overall these expected 
payments are subject to a cap of 25% of household income.
    For those who are above these income thresholds and who are 
uninsured, there is the real potential of having to face the full list 
price for hospital care. In 2003, only nine per cent of the uninsured 
at our hospital paid more than 75% of charges. This nine percent of the 
uninsured represented less than one percent of our patient population. 
Adventist Health Systems does work with all of these patients to reduce 
the financial burden and does have policies that allow the individual 
to receive a 30% discount regardless of financial status.
    Charges still have some usefulness despite the fact that they vary 
significantly by institution and have only a passing relationship to 
cost. Charges are still required by Medicare and by some insurance 
companies. Medicare uses the reported charges to audit cost reports and 
as noted to calculate outliner payments. Insurance companies use the 
charges to project rates as well as to calculate payment in some cases. 
Internal to the hospital, charges give some measure of resource 
consumption but not one that is accurate at low units of analysis. At 
best charges give a relative comparison between services. They are not 
an elegant tool for management decisions. Maintaining the complex 
charge and reimbursement system is also expensive. Our organization has 
over 300 personnel whose primary responsibility is to track and audit 
the complex billing process. There are additional costs incurred as 
clinical personnel must record various charges for care taking away 
from actual clinical time.
    Charges can also be extraordinarily confusing for the consumer. The 
problem goes beyond the oft-quoted $10 aspirin. It makes little sense 
to the patient to see a statement that says the hospital bill was 
$25,000, the insurance company paid $12,500, and the patient owes his 
co-pay of $500--yet we are required to provide information on this 
basis. A new challenge will occur for hospitals and consumers with the 
advent of high deductible health plans and health savings accounts if 
the current charge structure is not modified. To the extent high 
deductible plans become a significant factor in the market place, 
hospitals will have to consider the extension of discount policies to 
these plans. We must also insure that any discounts given to plans are 
extended to the beneficiary. In principle, there is not reason that 
health plans with significant presence in a market cannot negotiate 
discounts with hospitals on behalf of their members.
    Modifying the current charging structure would be a complex task. A 
simple roll back of charges may work for some institutions that do not 
have discount based contracts and who do not have an extensive Medicare 
population. It would be more difficult to do this for those who have 
extensive contracts based upon discounts. In addition Medicare will 
need to adjust its method for determining outlier cases, as well as 
what it requires in its cost reporting methodology. Some have suggested 
that the hospital industry move toward a diagnosis based payment 
system. However, a diagnosis-based system will require some method of 
tracking resource consumption as well as a greater uniformity in 
physician practice patterns. The development of alternative 
methodologies will take time and resources. Remember it took thirty 
years to get us to where we are today
    The final issue to consider is transparency. Is there a better way 
to provide consumers with a clearer sense of what they will pay for 
care? For most outpatient services this is not a major problem. Tests 
are fairly discrete and outpatient surgery has more predictability. 
Inpatient care is far less predictable. Within a given institution the 
cost for treating a specific diagnosis can vary greatly. Even something 
as seeming routine as a normal delivery can vary in cost by as much as 
25%. This variance can be attributed to differences in physician 
practice patterns as well as the health condition of the individual. 
Further, a given diagnosis group may be made up of several different 
individual classification of disease codes. At the hospital level, 
there are generally not enough cases in a particular diagnostic 
category to provide a meaningful average.
    To conclude, hospital charges today are a product of market and 
regulatory behavior over the last thirty plus years. The connection of 
charges to cost is tenuous. Charges do have some utility and are still 
required to be maintained. Hospitals deal with the imbalance of cost 
and charges through aggressive discounting particularly to the 
uninsured. Changing the system to something more easily understood and 
administered will take extensive work and creativity.
    Mr. Chairman, members of the committee thank you for the 
opportunity to speak to you today.


    Chairman HOUGHTON. Thanks, Mr. Morrison. Dr. Cohen--and 
again, I am sorry that Ben Cardin isn't here to introduce you.

                      BALTIMORE, MARYLAND

    Mr. COHEN. Thank you, Mr. Chairman, Members of the 
Subcommittee. I am here today to testify regarding the 
experience of Maryland's Health Services Cost Review Commission 
(HSCRC), which is the State agency in Maryland which regulates 
hospital rates, as well as to answer any questions you might 
have regarding the lessons to be learned regarding hospital 
charge levels in the rest of the country.
    The commission was created by the Maryland legislature in 
1971 and began setting rates in 1974 for all acute care 
hospitals. In 1977, Maryland entered into a demonstration with 
Medicare and Medicaid whereby both government agencies agreed 
to waive Federal supremacy and to pay Maryland hospitals on the 
basis of rates set by the Health Services Cost Review 
Commission, subject to a waiver test. That Medicare waiver was 
later changed to an operating waiver subject to a payment test 
with the considerable support of Senator Mikulski.
    In setting rates, the commission's goal is to finance the 
mission of efficient and effective hospitals. Hospitals are 
expected to have missions that include care to the poor, and 
some hospitals' missions included teaching and research. The 
commission sets rates by comparing costs and making adjustments 
which are not all that dissimilar to the kinds that the 
Medicare system makes. I want to briefly discuss pricing 
levels, equity, and access, and, if there is time, talk about 
cost containment and data availability.
    Since pricing levels are a focus of this hearing, I am 
going to focus on them and the statistics that I present in all 
the exhibits come from the AHA's 2004 edition of Hospital 
Statistics, which has 2002 data. The national average markup, 
as it shows, was almost 131 percent, meaning, on average, 
hospitals charge about $23,100 for an admission that costs 
    There is a huge range in markups. Maryland has by far the 
lowest markup, and well below the next-lowest, largely because 
prices mean something. It is what, largely, everyone pays. In 
addition, there is a common method for setting rates in 
Maryland, along with pooling of uncompensated care, so that the 
markups of all hospitals are fairly similar. In other States, 
there is much greater variation in markups, with many 
hospitals' markups being much higher than the national or State 
average, some having charges more than 10 times their costs.
    For hospital services, the typical markup in Maryland is 
about 20 percent. That 20 percent roughly reflects about 8 
percent for uncompensated care, because hospitals have to get 
paid for the costs of the care, that they provide to the 
patients who don't pay; about 7 percent for approved discounts; 
and about 5 percent turns out to be for profits. That Exhibit 2 
shows the average charge per case for the Nation and each 
State. Again, Maryland has by far the lowest average charge, 
being $9,945, which is a little more than half the national 
average. New Jersey had the highest. The average charge per 
case was $18,100 in 2002; it is now over $20,000, which 
indicates that, as Paul Ginsburg mentioned in the first panel, 
that once a patient goes to the hospital, they are almost 
certainly going to exceed the deductible in a high-deductible 
    I want to discuss briefly--well, I am just about out of 
time, so you can see the data. People in Maryland--one example 
of the low charges in Maryland is that Medicare beneficiaries 
in Maryland pay 20 percent of charges, and 20 percent of 
charges is about $70 million less than paying the national co-
pays, which are based on 20 percent of national charges--though 
they are coming down. There is a huge savings to the 
beneficiary. Thank you very much.
    [The prepared statement of Mr. Cohen follows:]
     Statement of Harold A. Cohen, Ph.D., Consultant, Cohen, Inc., 
                          Baltimore, Maryland
    Good morning Mr. Chairman and members of the Subcommittee. My name 
is Hal Cohen and I am President of Hal Cohen, Inc., a healthcare 
consulting firm in Baltimore, Maryland.
    Before addressing the substantive issues, I would like to introduce 
myself to you. Healthcare consulting is my third career. I am an 
economist with a Ph.D. from Cornell University. My first career was 
teaching economics, primarily government and business courses at the 
University of Georgia, and doing research in health economics. My 
second career was as the Executive Director of the Health Services Cost 
Review Commission (HSCRC), the State agency that sets hospital rates in 
Maryland. I have been a full time consultant in health economics for 
the past 17 years, almost exclusively related to hospital financing and 
public policy issues. My clients have included almost all sectors of 
the industry, including the federal government, state governments, 
hospital associations, health systems, hospitals, insurers, HMOs, self-
insured companies, self insured Taft-Hartley plans, purchasing 
coalitions, and other consulting firms.
    Along the way I have served on three Federal Committees. I was an 
original appointee to the Prospective Payment Assessment Commission 
(ProPAC) and served as the Chair of its Committee on Hospital 
Productivity and Cost Effectiveness. I was a member of the National 
Committee on Rural Health and served as the Chair of its Finance 
Committee. I was also a member of the National Committee on Vital and 
Health Statistics. I was a Commissioner on the Maryland Health Care 
Access and Cost Commission, which established the Standard Benefit Plan 
for the small group market, produces hospital and HMO report cards, and 
maintains the state health expenditure accounts.
    I am here today to testify regarding the experience of Maryland's 
HSCRC and answer any questions you might have regarding lessons to be 
learned regarding hospital charge levels in the rest of the country.
    The HSCRC was created by the Maryland legislature in 1971 and, 
beginning in 1974, assumed authority to set the rates for all acute 
care hospitals in Maryland. In 1977, Maryland entered into a 
demonstration with both Medicare and Medicaid whereby both government 
agencies agreed to waive federal supremacy and to pay Maryland 
hospitals on the basis of the rates set by the HSCRC, subject to a 
waiver test. That ``Medicare waiver'' was later changed to an operating 
waiver subject to a payment test with the considerable support of 
Senator Mikulski.
    In setting rates, the Commission's goal is to finance the mission 
of efficient and effective hospitals. Hospitals are expected to have 
missions that include care to the poor and some hospitals' missions 
include teaching and research. The Commission sets rates by comparing 
hospital costs and making adjustments for hospital differences that are 
not significantly different in kind than the adjustments made under the 
Medicare system.
    I want to briefly discuss four areas of results: pricing levels, 
equity, access, and cost containment. I briefly touch on data 
Pricing Levels
    Because pricing levels are a focus of this hearing, I start with 
and emphasize this subject. Exhibit 1 shows the mark-up of charges over 
cost for the nation and for each state in 2002. All data used in the 
attached Exhibits are calculated from the American Hospital 
Association's annual publication, Hospital Statistics. The most recent 
data available are for 2002. The national average mark-up of almost 
131% means that, on average, hospitals charge 131% more than cost, so 
the average charge for an admission costing $10,000 would be $23,100.
    Note the range in mark-up for various states. Because all payers 
pay Maryland hospitals on the basis of charges, the mark-up is well 
below the national average and well below the state with the next 
lowest mark-up. In Nevada, the 213% mark-up means that the average 
charge for an admission costing $10,000 is $31,300. In Maryland, the 
average charge for such an admission would be $13,500. In addition, 
since there is a common method for setting rates in Maryland (and 
pooling of uncompensated care above the state average), the mark-ups of 
Maryland hospitals are very similar. In other states, there is much 
greater variation in mark-up among hospitals, with many hospitals' 
mark-ups being much higher than the national average, some having 
charges more than ten times cost.
    The 35% mark-up reported by the AHA for Maryland in 2002 is much 
higher than the AHA has reported in previous years and is much higher 
than the mark-up for regulated hospital services of 20% (per the 
HSCRC's annual disclosure). (For example, physician services are not 
regulated.) Maryland's mark-up on regulated services reflects three 
factors: uncompensated care--about 8%; contractual allowances 
(primarily Commission approved discounts, but denials, too)--about 7%; 
and profits--about 5%. Maryland, like everywhere else, has high mark-
ups (and high contractual allowances) associated with hospital billed 
unregulated physician services.
    Exhibit 2 shows the average charge per case for the nation and for 
each state. Again, Maryland had the lowest average charge ($9,945), 
little more than half the national average. New Jersey hospitals had 
the highest average charge at $27,200, or 1.5 times the national 
    I want to discuss two aspects of charge levels in Maryland. As part 
of the original negotiations with Medicare and Medicaid, those payers 
both pay 94% of charges. In order to allow Medicare and Medicaid 
Managed Care Organizations (MCOs) to compete fairly with their fee-for-
service counterpart, those MCOs also get the same 6% discount.
    Thanks in large part to Congressman Cardin, Maryland hospitals were 
included when Medicare began to pay hospitals directly for the costs of 
Graduate Medical Education associated with Medicare HMO members. In 
order to assure that Maryland hospitals did not get paid twice, and to 
attain Congress' intention that Medicare HMOs not be discouraged from 
using teaching hospitals due to higher costs, the HSCRC gave Medicare 
MCOs an additional discount to reflect those direct payments.
    One final example. Prior to Medicare's outpatient PPS, a Medicare 
beneficiary's co-insurance was 20% of hospital charges. In Maryland, 
that amounted to about 20% of Medicare's total obligation. For the 
nation as a whole, because of huge outpatient mark-ups and relatively 
low Medicare payments, 20% of charges amounted to 50% of Medicare 
obligations. When Medicare announced its outpatient PPS, it published 
the new national co-payment for each outpatient service in the Federal 
Register. Those co-payments were based upon 20% of national charges. I 
advised my client CareFirst Blue Cross Blue Shield, a major provider of 
Medigap insurance, that this proposed change would cost Medicare 
beneficiaries in Maryland approximately $80,000,000. CareFirst directed 
me to try to convince HCFA (now CMS) to allow Maryland's Medicare 
beneficiaries to continue to pay 20% of state controlled charges. Using 
Maryland's outpatient database, I showed HCFA officials that the impact 
of changing from 20% of Maryland charges to the new national co-pays 
based on 20% of national charges would increase the co-payments for 
Maryland beneficiaries by over 70%! HCFA determined that such an effect 
was contrary to Congressional intent. HCFA agreed that the outpatient 
co-pay is part of the outpatient payment system and, thus, covered by 
the Medicare waiver. As a result, Maryland beneficiaries still pay 20% 
of charges as set by the HSCRC. As noted earlier, this more appropriate 
division of payment obligation saves Medicare beneficiaries and those 
responsible for paying their co-pays close to $80,000,000--though the 
savings are somewhat reduced by the national co-payments moving closer 
to 20% of the Medicare obligation.
    In Maryland ``charges'' and ``prices'' have the same meaning for 
all payers. In other states ``prices'' paid are, typically, 
significantly lower than ``charges''. Since charges at each hospital 
are the same for the same services, and, in Maryland, all payers are 
responsible for paying charges, the uninsured face the same prices that 
everyone else does. Reasonable prices mean that co-insurance 
percentages associated with out-of-network care are equitable. 
Reasonable prices mean that when a covered person is taken to an out-
of-network hospital in an emergency situation, the rates faced by the 
insurer, HMO, self-funded plan, etc., are equitable. In other states, 
significant inequities and market distortions arise whenever the 
payment obligation is based upon charges, as in the examples above.
    As noted earlier, approved rates include uncompensated care. (In 
order to reduce the advantage of shopping to avoid hospitals with high 
mark-ups for uncompensated care, any approved uncompensated care above 
8% is financed via a pool financed through the rates of all hospitals.) 
All hospitals in Maryland share in the burden of care to the uninsured. 
There are no public hospitals; there were, but they have converted to 
private not-for-profit hospitals.
    One of my most enjoyable days at the HSCRC was at a Sunset Hearing 
before the Maryland legislature around 1986. At that hearing, the Legal 
Aid Society testified that its sister agencies in neighboring states 
had many cases associated with patient dumping, but that they had never 
had a case in Maryland due to the equitable funding of uncompensated 
care at Maryland hospitals. The Society urged the Legislature to not 
sunset the HSCRC.
Cost Containment
    The legislation made the financing of hospitals' missions dependant 
on Maryland hospitals being more efficient. In addition, as I 
mentioned, the Federal waiver comes with conditions regarding cost 
containment. Exhibit 3, also from AHA Hospital  Statistics, shows the 
rates of increase in cost per adjusted admission since Maryland began 
regulating hospital rates. (An adjusted admission is a standard measure 
used to account for outpatient activity.) Exhibit 3 shows that, since 
Maryland began setting rates in 1974, it has had the lowest rate of 
increase in cost per adjusted admission than any other state (with 
Arizona being second). Most importantly, during that period, Maryland 
costs went from 23.6% above the national average to 5.7% below the 
national average. Exhibit 4 gives the primary method by which Maryland 
hospitals achieved this cost improvement. Since 1981 (I did not have 
the older data available), Maryland hospitals had the second highest 
reduction in average length-of-stay (ALOS), moving from an ALOS 11.7% 
above the national average to 11.2% below the national average. During 
this entire period, as now, Maryland's rate setting system provides 
complementary incentives for both hospitals and payers to manage the 
care of inpatients. Payers benefit from managing care because they pay 
on the basis of the itemized charges to their patients. Hospitals 
benefit because they face the same set of incentives as is provided by 
Medicare's PPS. I believe this coordination of incentives at the level 
of the individual patient adds to the, largely, provider bases 
incentives upon which Medicare's PPS relies.
    In Maryland, information regarding hospital rates, charges, ALOS, 
and volumes by service is public and amazingly current. There are 
readily accessible inpatient and outpatient databases regarding charges 
and discharges by DRG by hospital. (Data are currently available 
through March 31, 2004.) The HSCRC has published reports showing each 
hospital's charges and number of discharges for common services. (There 
are only 47 hospitals in Maryland, making such undertakings relatively 
manageable.) I believe the Commission needs to work toward developing a 
publicly available database regarding clinical quality.
    I believe the outstanding achievements in equity and access and, to 
a lesser degree, in cost containment, demonstrate that the Maryland 
legislature created a good law that has worked for Maryland. The HSCRC 
has indicated its commitment to improving quality and must give high 
priority toward improving the incentives for more efficient delivery of 
outpatient care.
    Thank you for the opportunity to testify today. I would be happy to 
answer any questions.


    Chairman HOUGHTON. Thank you, Dr. Cohen. Mr. Morrison, you 
said in one of your statements something that I think is going 
to be hanging over us for years and years and years: the 
connection of charges to cost is tenuous. Are we always going 
to be arguing about that irrespective of transparency and 
fairness and the allocation of administrative costs and things 
like that? Isn't that always going to be a problem with us?
    Mr. MORRISON. Mr. Chairman, I believe it is. Just given the 
nature of the health care industry and the way health care is 
paid, you will always have arguments about what is the real 
nature and real relationship of charges to cost. So, yes, no 
matter what you do, I think we will still have that debate and 
that argument.
    Chairman HOUGHTON. Dr. Cohen, do the uninsured pay the same 
as the insured?
    Mr. COHEN. The uninsured frequently don't pay. The 
uninsured are charged the same as the insured----
    Chairman HOUGHTON. Is the concept that they pay the same as 
the insured?
    Mr. COHEN. The concept is that they are billed the same as 
the insured, but they don't frequently pay. Since they don't 
pay and there are resources used in providing them care, the 
rates that are charged to those who do pay have to cover the 
costs associated with their care.
    Chairman HOUGHTON. So, in effect, when an uninsured patient 
comes in the door of a hospital, they really don't have any 
information on how much the service is going to cost them?
    Mr. COHEN. In Maryland, they could if they want. I mean, 
there is a huge amount of data available as to what charges are 
by hospital, by DRG, and that data is current. As of now, it is 
available through March of 2004. It is extremely current if 
they wanted the information and if they ask the hospital what 
on average it charged, you know, the hospital would tell them 
if they knew in fact what DRG they were going to be in. 
Patients don't always know, and their doctors don't always 
know, exactly what they are going to have.
    Chairman HOUGHTON. I guess that is my point. I am sick, I 
am uninsured, I go into the hospital. I am really not 
interested in the costs, I am interested in getting cured. 
There is no sort of general framework which I can use as sort 
of a cost estimate.
    Mr. COHEN. I think if you ask the--I mean, typically, 
certainly in Maryland, if you ask the hospital what do you 
charge for this kind of procedure, the hospital could give you 
an estimate, we charge about from this to this. You never know 
what kind of complications might arise in a particular 
instance, so you can't give a firm quote under those 
    Chairman HOUGHTON. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. My questions, really, 
get to the issues of trying to get our hands around some other 
points of fulfilling the nonprofit mission. I am very 
interested, Mr. Bernd, in your testimony, where you indicate 
that AHA has kind of set forward a number of things that 
basically are expected of its members, particularly those 
enjoying the nonprofit status. Would you expand on that a bit?
    Mr. BERND. Certainly. We would expect all of our members to 
have indigent care policies and to take care of the poor in our 
communities. We would also expect them to endorse our policies 
around discounts for patients that fall outside of charitable 
care and have higher income levels than what is ascertained for 
charity care normally. We also expect our community 
institutions, not-for-profit institutions, to serve the larger 
community through such things as health education, wellness 
programs, outreach programs. I think the not-for-profit mission 
is much wider than just providing indigent care, and we expect 
that of our not-for-profit members.
    Mr. POMEROY. The earlier panel, to a person, seemed to 
agree with the proposition that looking at legitimacy of tax-
exempt status solely through the prism of pricing practices was 
too narrow, there were other things involved. Do you agree with 
    Mr. BERND. I certainly would agree. Our health care is a 
good example. For instance, 3 years ago, our epidemiologists 
determined that in our community there was a higher use of 
antibiotics in our community. We actually started a community-
wide campaign with physicians in the community called 
``Resistance Kills.'' This program costs us a considerable 
amount of money, but we were actually able to show in 2 years a 
significant reduction in the use of antibiotics. In fact, this 
program has been picked up by other insurance organizations, 
BlueCross BlueShield in other states. So, I think the not-for-
profit mission is much wider than the indigent care, though 
indigent care is obviously the cornerstone of our not-for-
profit mission.
    Mr. POMEROY. Mr. Morrison, your experience in nonprofit 
care delivery--do you have any responses to those questions?
    Mr. MORRISON. Yes, sir, I do. Thank you, Congressman. We 
need to look beyond just the charity care, and I think we do 
need to look at the broader issues of what is provided as well 
as the issue of opportunities that may be foregone and the 
willingness of institutions to undertake services that you 
would not do if you were just looking at this from a profit 
motive. Because one of the things that I think you will find 
historically is that the not-for-profit institutions will take 
on services that do not necessarily provide a bottom line, but 
are necessary for the community. Not-for-profit institutions 
will also take on related issues, such as what we are doing in 
our community, a looking at the root causes, for instance of 
health disparities in various ethnic populations, and then 
working directly with the community to solve those issues.
    We are also looking at, and it would be almost counter-
intuitive, but we are looking at how do we reduce utilization 
of health care, how do we reduce chronic care, how can I reduce 
the admissions to my institution. If I was just in this for the 
profit, I would not be doing those things. I think there is one 
of the distinctions that is very, very difficult to measure but 
that you have to look at over the course of time.
    Mr. POMEROY. I have no quarrel at all with the Chairman's 
statement that this is something we ought to look at once in a 
while, a tremendous tax expenditure going in this area in terms 
of revenue foregone to the nonprofit status. It is only 
appropriate to keep an eye on whether or not the ultimate 
marketplace performance is as we expect for that status. Is 
this something within AHA or within the community of hospitals, 
there is discussion? Do you sense that there is a higher 
sensitivity in these days about trying to be--making certain 
that your operations lend a distinct character in light of a 
nonprofit status? Mr. Bernd? Maybe right across the panel on 
that one.
    Mr. BERND. I would certainly agree with that statement. I 
think the fact that we have so many uninsured in this country 
has exacerbated the problem of trying to provide adequate 
health care. With 44 million people without health insurance, 
it has become a larger issue for all of us, and how do we take 
care of those people appropriately and can we give them 
discounts off these charges we've talked about, which I know 
our institution certainly does. To give you an example, we have 
a sliding scale that goes up to 500 percent of the Federal 
poverty level and give up to 45 percent discounts. This is 
widely available. We make it available to all of our patients. 
So, it is an issue that I think is in the forefront and I think 
it is a healthy discussion and I think it is something we need 
to talk about openly, and I think this is a really good topic.
    Mr. POMEROY. I had asked to go across the panel, but I have 
taken too much time already, Mr. Chairman. I will yield back.
    Chairman HOUGHTON. Thanks very much, Mr. Pomeroy--Chairman 
    Chairman THOMAS. Thank you, Mr. Chairman. The only medical 
professionals that are truly trying to work themselves out of a 
job are dentists, based upon the way in which we now treat 
their area of expertise. I clearly think it is always smart 
business to assist people in being around longer to utilize 
services rather than intense interventions for short periods of 
time so we could always try to get to a bottom line.
    I guess I am most concerned about the arguments that the 
not-for-profits are doing something, for example, the 
``Resistance Kills'' on the antibiotics or the example of 
attempting to reduce the needed services and that somehow that 
was associated with your not-for-profit status. Is the reverse, 
then, to be assumed, that if you were a for-profit you wouldn't 
care about that? Or would the Hippocratic oath and the 
commitment to helping people have something to do with that, 
rather than your not-for-profit status. Mr. Sucher, would you 
have anything to say about that, since I think you are a for-
profit operation?
    Mr. SUCHER. I think it is incumbent upon the industry as a 
whole, regardless of profit or not-for-profit status, that we 
all seek quality probably even more than you can imagine. We 
fiercely chase quality every day in everything we do in trying 
to provide services to our patients, irregardless of our 
    Chairman THOMAS. Let me ask you a follow-up question, 
because I know pricing has been somewhat of a concern. There 
was a statement earlier that in fact if you had disclosed 
prices, would drive prices up. I have difficulty discerning 
just what a price on a price list or a master charge list is 
comprised of. If you ask most businesses, you would start with 
materials and overhead and add labor and then perhaps put a 
profit margin in there. Are any of your prices on your price 
list constructed that way?
    Mr. SUCHER. I think they were at one time. I think we have 
gotten so far away from that and being so reliant on the 
insurers for establishing procedure-based payments and 
procedure codes that we now look to them to, really, tell us 
what they are willing to pay and kind of establish our charges 
accordingly. We want to make sure we are not charging less than 
they are willing to pay, certainly.
    Chairman THOMAS. Mr. Bernd, do you take a look at 
materials, labor, overhead, and then add a profit margin, 
notwithstanding the fact that you are not-for-profit?
    Mr. BERND. Well, no, sir, I don't think we look at that 
that way. I agree with what Mr. Sucher said, it is a matter of 
negotiated price, so it may or may not reflect your costs.
    Chairman THOMAS. Then what is the value of a price list if 
everything winds up being negotiated?
    Mr. BERND. That is a good question. Its relevancy is 
probably not as much as it used to be.
    Chairman THOMAS. Well, I think the proper answer is that it 
is important when you deal with government as to what payment 
you are going to get from government. We have seen enormous 
increases in the price lists, and as you indicate, they have no 
relationship to the actual payment made. Do you believe that 
when you negotiate a price, you have a pretty good idea on what 
your costs of materials, overhead, and labor are so that you 
won't negotiate a price less than those costs?
    Mr. BERND. I would say with commercial payors that is true. 
With the government, we can't negotiate price.
    Chairman THOMAS. Therefore a price list creates a value for 
you if it continues to go up, notwithstanding the fact it has 
no relationship to what you are really getting compensated for 
by other players. Is that one of the reasons why the price list 
goes up?
    Mr. BERND. Probably.
    Chairman THOMAS. Probably? Do you believe that if prices 
were disclosed it would drive prices higher?
    Mr. BERND. We disclose our prices to our customers. Again, 
they are very complex, but we do disclose them.
    Chairman THOMAS. Do you believe that has caused pressure to 
drive the prices higher?
    Mr. BERND. No.
    Chairman THOMAS. If all hospitals disclosed prices, much as 
you do for virtually any other commodity or service, would that 
be a benefit to the consumer, or would it make it more 
difficult for the consumer to make a decision?
    Mr. BERND. I think we should be totally transparent on our 
pricing to all of our customers.
    Chairman THOMAS. Okay. In trying to determine structures 
between not-for-profit and for-profit, Mr. Bernd, I notice that 
on the Form 990 filed by Sentara Health Care in 2002, that in 
your role as the president and chief executive officer, you 
received $908,684, with an additional $236,000 in deferred 
compensation and $12,840 in expenses, which is $1,160,000 in 
salary and deferred compensation. Have you ever done 
comparisons with for-profit systems, and do you believe that 
that is kind of where the pricing for executives in your 
capacity, given your responsibilities, are paid?
    Mr. BERND. Well, first of all, I do not set my own salary. 
I have an independent board of directors made up of community--
    Chairman THOMAS. I didn't ask you if you set your own 
salary. Is the number incorrect, the $1.16 million?
    Mr. BERND. I believe it is accurate.
    Chairman THOMAS. Then my question was do you believe that 
is comparable across the board between for-profit and not-for-
profit with people in your commensurate responsibility 
    Mr. BERND. I don't know.
    Chairman THOMAS. You have never done comparative salary and 
compensation examinations?
    Mr. BERND. Personally, no. We hire an independent 
organization that does that for the board of directors, under 
their control.
    Chairman THOMAS. Last question, for all of you. We are 
looking at the question of whether or not we should maintain a 
tax preference for a particular type of hospital structure. 
Everyone believes we should take care of the uninsured. What, 
to you, is a higher use of taxpayer money: should we deny tax 
preference and use that to take care of the uninsured, or would 
you prefer to retain your tax preference and we set up a set of 
structures which guarantee that the uninsured are taken care of 
under the charity or the community label for which you receive 
the tax preference? We can just start with you, Mr. Bernd. We 
will go down the panel.
    Mr. BERND. That is a very long question. Can you repeat it 
for me, please? I am sorry.
    Chairman THOMAS. It is very simple. Everyone has argued 
that because they received a nonprofit benefit, we are doing 
charitable things, although once you examine it there are some 
folks, especially Dr. Cohen, about the fact that they get 
charged, we don't get collected. We have had bad debt. We've 
got a very elaborate superstructure to try to deal with this. 
Everyone says if we could get the uninsured insured, that would 
really solve a lot of problems.
    We are looking at an enormous amount of money that is 
currently going, 41 percent of the tax expenditures under 
501(c), to hospitals which originally was for charity and now 
community. My assumption was that maybe some of the uninsured 
got picked up that way and what we have heard were very 
minuscule examples of that effort which should pass muster.
    Very simple choice: in trying to make policy, would you 
prefer we repeal the tax-exempt status under 501(c) for any 
hospital and apply the money saved to perfect an insurance 
package for the uninsured? That would solve your problem, 
because now the people who are coming to your door are paying 
you and you can run more on a for-profit structure in which we 
might be able to adjust whether or not you make a profit. Or 
would you prefer, do you think it is a better societal service 
to keep the not-for-profit tax-preferred status, but you are 
going to say somebody else should worry about the uninsured, 
don't take it out of our money, when in fact the reason for 
creating the tax preference was for charity and community work. 
So, would you support eliminating the tax-preferred status and 
solving the uninsured problem with that money? Would that be a 
better use of the taxpayers' money than the way it is currently 
    Mr. BERND. No, I don't believe so. I think, as we talked 
about it, not-for-profit status and charitable has more to do 
than with indigent care and patients that don't have insurance, 
it has to do with community mission, community assets. Not-for-
profit status is wider than just that issue.
    Chairman THOMAS. The board that sets your salary may have 
some impact on the $1.16 million. Mr. Sucher, what is your 
    Mr. SUCHER. Obviously, being from the for-profit side, we 
would much prefer a level playingfield in all of our 
competitive aspects. We do provide much uncompensated care as 
well, for which we get nothing as far as benefit. So, we would 
really prefer to see something done regarding those who are 
uninsured in lieu of a tax break.
    Chairman THOMAS. You realize that your testimony just 
shocks me in terms of the position that you have assumed.
    Mr. SUCHER. Yes, sir.
    Chairman THOMAS. Mr. Morrison.
    Mr. MORRISON. My testimony will also shock you. It would be 
my consideration that we should maintain the tax-exempt status 
for long-term considerations. While there may be some short-
term issues that we are facing with the uninsured, I think the 
stability of the health care system long-term has been shown 
that it is served by the tax-exempt nature of hospitals. It 
will continue to be served by the tax-exempt nature of 
    Chairman THOMAS. Dr. Cohen.
    Mr. COHEN. Well, my priority is that extending coverage to 
the uninsured is the most important option out there for the 
limited resources that we have. However, tax breaks don't 
provide money. They allow hospitals to not pay money and if 
they suddenly have to pay that money, then Medicare, for 
example, would have to pay rates which paid their fair share of 
that burden that you then placed on the hospitals. So, if I had 
to answer your question, it would be first extend coverage. 
Then, if you eliminate the tax breaks, make sure that Medicare 
and Medicaid pay their fair share of the added costs that would 
be placed on hospitals by having to pay those taxes.
    Chairman THOMAS. Thank you very much, Dr. Cohen, because 
that underscores my point. I would say to my friend from North 
Dakota, prices are fundamental to dealing with the question of 
not-for-profit or profit, because nobody can tell you how they 
determine what their prices are other than dealing with the 
government on payments that are not realistic and don't deal 
with the cost of materials, overhead, labor, or profit. If in 
fact we are going to talk about trying to serve the uninsured, 
and in fact the price list is created for the purpose of 
getting more money out of taxpayers, i.e., the Medicare and the 
Medicaid payments, what it actually costs to do what they do is 
essential in looking at limited dollars, whether it is through 
tax-preferred structure or payments for real costs. If you 
don't know what they are, you cannot deal with the question 
responsibly as a legislator.
    When you are talking about tax-preferred status and what 
requirements need to be performed for that, you need to start 
with how much does it cost to do business. I would be more than 
willing to submit for the record the list of CEOs and the 
payment they receive between the not-for-profit and the for-
profit on comparable hospital responsibility sizes. There is a 
significant difference in that area alone. You wonder what 
other prices would be reflected if you had an accurate ability 
to determine what materials, overhead, cost, small margin of 
profit, notwithstanding the fact they are not for-profit, would 
produce between the two structures. Then you can determine the 
relative value of the tax-exempt. You can determine whether or 
not we ought to create a real system where you get the money 
out of the services that you deliver and that we make sure 
everybody gets a minimum compensation from that structure, and 
augmented if necessary to deliver the services.
    Psychic value of believing you are serving the community 
doesn't necessarily reflect the real value of the tax-deferred 
that does not get counted when we are dealing with the 
uninsured. Pricing is essential to completing the understanding 
of that model. Thank you, Mr. Chairman.
    [The information follows:]

                   Comparison of Not-For-Profit and For-Profit Hospital Executive Compensation
           Hospital System                    Hospitals                   Beds                 Compensation
Top 5
President and CEO
Catholic Healthcare West               38                       8,413                    $1,969,575
San Francisco, CA
President and CEO
Providence Health System               18                       3,306                    $1,421,000
Seattle, WA
CEO and Director
Sutter Health                          24                       5,383                    $1,203,005
Sacramento, CA
President and CEO
Adventist Health System West           19                       2,634                    $ 971,410
Roseville, CA
President and CEO
Sioux Valley Hospitals                 26                       1,902                    $ 398,303
Sioux Falls, SD
Source: 2002 990 IRS Forms for the 5 largest non-profit systems, excluding decentralized systems. It includes
  salaries, deferred compensation, expenses and other allowances.

           Hospital System                    Hospitals                   Beds                 Compensation
President and CEO
Health Management Associates           43                       5,520                    $1,404,203
Brentwood, TN
Chairman, President and CEO
Lifepoint Hospitals                    21                       1,968                    $1,124,615
Brentwood, TN
Chairman, President and CEO
Iasis Healthcare Corp.                 14                       2,028                    $1,086,449
Franklin, TN
Ardent Health Services                 23                       2,125                    $ 525,001
Nashville, TN
Senior Vice President*
Group Operations
Community Health Systems               20                       1,692                    $ 477,980
Brentwood, TN
* Senior Vice President is used for comparison purposes. With 72 hospitals, the Community system would be
  significantly larger than the not-for-profit systems.

Source: To compare systems of similar size, this includes the five smallest public for-profit systems. 2002
  data, SEC 14(A) and Annual Reports. It includes salaries, bonuses and deferred compensation.

    Chairman HOUGHTON. Thank you. Mr. Cardin?
    Mr. CARDIN. Thank you, Mr. Chairman. As I listened to 
Chairman Thomas' and Dr. Cohen's exchange, one very important 
point--and that is if we were to eliminate the tax-preferred 
status, then it would be incumbent upon the extra costs 
associated with that being shared fairly. In Maryland, we can 
do that because we have an all-payor structure. In the rest of 
Nation, I doubt that would occur, because of the way the prices 
are negotiated based upon market share, based upon the size of 
the entity that is negotiating with the hospital. If you are 
larger and you have a bigger share of that hospital's market, 
you can command a larger discount. That is just basic 
    I apologize for not being here during the presentations. I 
was actually, on behalf of the Democrats, managing two Ways and 
Means bills that were on the floor. I first want to acknowledge 
Dr. Cohen, because he is the person in our State responsible 
for the way that we were able to administer an all-payor system 
and still have one today. Many other States tried; Maryland is 
the only State that has been able to succeed. The reason is 
that Dr. Cohen established a regulatory system that was immune 
from traditional political involvement. As a legislator in 
Maryland, I never would have thought to interfere with the 
rate-setting discretion of our commission. That is a credit to 
Dr. Cohen and the confidence that we had in Maryland in the 
manner in which he administered the system.
    I think most people here don't understand what an all-payor 
system is. All-payor system is not a regulatory system that 
establishes a rate that hospitals can charge for a particular 
service. It establishes a rate that a hospital can charge for 
service, which is different among hospitals but the same for 
all the payors within that hospital. So, it makes no difference 
whether you are Medicaid or Medicare or private insurer or 
uninsured when you walk in the door. Basically, you are going 
to be charged the same amount for the services that the 
hospital performs. Under that theory--and maybe this is theory; 
I hope it is not--that you want to provide identical services 
to everyone who walks through your door for the same type of 
condition, that there is no difference in quality if you walk 
in with a Medicare card or you walk in with a BlueCross 
BlueShield card, into a hospital, that you are still going to 
get the same quality attention. Therefore, why should there be 
a difference in fee?
    Of course, the second major advantage in the Maryland all-
payor system is that we can get Medicaid and Medicare to pay 
its fair share, whereas in the other States in the Nation that 
is a little more difficult and complicated process. There is 
one more advantage, I might say, to the hospital community 
here. I have been told there is either one or two people in CMS 
that deal with the Maryland waiver. So, we don't have to deal 
with CMS, even though it is located in the State of Maryland, a 
great organization--at least the employees are great people. It 
does give you that advantage.
    So, I am just--particularly when you look at the nonprofit, 
the tax-preferred community, where you have a role to play in a 
community itself, why aren't you proposing more of this all-
payor concept so that you can get a fair distribution of the 
costs? Why don't I hear more of my colleagues around the Nation 
talk about returning to some form of an all-payor system in 
order to deal with this dilemma of treating all the users of a 
hospital fairly?
    Mr. BERND. As you mention, the system in Maryland has been 
very successful. In fact, talking to Dick Davidson about this, 
who was there when the system started, and how successful it 
has been, he said that there have been 15 other States that 
have tried it and have failed. The uniqueness of the Maryland 
system, as you know, is it is limited to 47 hospitals which get 
reviewed independently each year. There is an independent 
commission that is set up and I guess the biggest hurdle is 
Medicare and Medicaid paying full costs and the State being 
allowed by Medicare to set those rates.
    For instance, we looked at if you set an all-payor system 
in the State of California, for instance, just to duplicate 
what has happened with Medicare in the State of Maryland, you 
would have to increase the California medical reimbursement to 
hospitals in California by 40 percent. So, you have such 
disparities in reimbursement by Federal programs that it makes 
it very----
    Mr. CARDIN. I am not sure that is totally accurate. Why 
don't we start with North Dakota, a little bit more manageable 
State than California. I mean, there are a lot of other States 
we could pick other than California. California is a country 
unto itself. I understand the unique concerns. Dr. Cohen, is it 
possible that we could export, or are just so grateful that we 
have this waiver we are afraid if any other State looks at it, 
it could jeopardize what we are doing in Maryland?
    Mr. COHEN. I think--first of all, thank you very much for 
the kind words. I think one of the issues, when Maryland 
started, Medicaid was cost-based reimbursement. You were in the 
State legislature at the time when we negotiated the waiver, as 
I recall. We explained to the Maryland legislature that it was 
going to cost an additional 2 percent to pay their fair share. 
That is all it was going to be back then and the Maryland 
legislature said we are happy to pay our fair share and they 
adjusted the budget accordingly and went with the waiver. It is 
not clear to me that a lot of other States are willing to pay 
their fair share for Medicaid right now.
    There are tremendous equity advantages and huge access 
advantages. In my written testimony, I didn't have time to 
present it all, but I did indicate the fact that in Maryland 
everyone has access to all the hospitals. We had Legal Aid 
testify that they had no dumping cases. Hospitals were, you 
know, willing to treat people and uncompensated care is 
equitably financed and it is spread among all hospitals. There 
aren't any charity care hospitals as such. There are hospitals 
that provide a fair bit of charity care, but the range is only 
around 2 to 13, with the average of being around 7.5, I mean, 
which is--the average is high because there is good access, but 
no one hospital is all that high.
    Mr. CARDIN. I appreciate that. I would conclude by saying 
you are either going to pay now or pay later, and it is a lot 
less expensive if you pay up front and give access to quality 
hospital care to all your constituents. Thank you, Mr. 
    Chairman HOUGHTON. Thank you, Mr. Cardin. Mr. Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. I am wondering if 
patients who have high-deductible plans or maybe the new HSAs 
would be billed as those who are insured or those who are 
uninsured, since they are paying out of the pocket.
    Mr. COHEN. I can tell you that in Maryland they are all 
billed the same. So, the answer is they are all billed the 
    Mr. JOHNSON. For Maryland. I doubt that is the same with 
the rest of them.
    Mr. SUCHER. It is one of our concerns that those type 
plans, and you are starting to see them proliferate in a less 
organized manner across the Internet offering insurance for $50 
a month, things like that. All those plans do is offer access 
to that payor's discounts, which gets them, you know, maybe 70 
percent of charges or 80 percent of charges. It gets them a 
discount, but that is all. So, they are billed the entire rate 
minus the discount that whatever plan they have signed up for 
entitles them to, and then they are expected to pay that 
discounted rate.
    Mr. JOHNSON. Based on the insurer?
    Mr. SUCHER. Based on the supposed insurer that is backing 
them, of course, who is not just giving them access to their 
    Mr. JOHNSON. Which is providing that type of insurance.
    Mr. SUCHER. Right, and of course our concern with that is 
that the payor can't afford to pay 70 percent any more than 
they could pay 100. So, we get very little from that patient as 
    Mr. JOHNSON. Let me ask you this question. Since physicians 
decide on what treatment is needed, do they know what the 
treatment costs every time and how do you think that affects 
total cost?
    Mr. MORRISON. Congressman, that is an excellent question. 
We have in our organization undertaken some efforts to try to 
educate our physicians on what particular tests cost, what 
particular drugs cost, and as we are able to increase their 
sensitivity, they do make different decisions as to the 
selection of the drug or whether that test is really, really 
necessary. I am not sure it is a practice across the board, but 
I think it is something that hospitals ought to consider 
because doctors are a little inoculated from the impact of 
their decisions upon the cost of care.
    Mr. JOHNSON. Is every hospital different? Go ahead.
    Mr. SUCHER. Well, we are the same way. We very much know 
what our costs are and provide the information to our 
physicians regularly and encourage them to understand that and 
know what they can do to change that as well. Contrary to one 
of Mr. Thomas's earlier comments, I think hospitals today 
generally do know their costs of procedures. We know very 
precisely what our average costs for most things we do are. The 
trick is getting that from what we know the cost to be to some 
sensible charge structure, when--you know, I can't get anybody 
to pay any more to deliver a baby; where I lose money, I am 
sure not going to go in and say, gosh, I am going to discount 
my prices over here to come closer to costs when I can't raise 
the other side of the equation.
    Mr. BERND. I would just add that I think one of the most 
effective tools to provide effective care is working with 
physicians to look at the best treatment models for patients' 
illnesses and try to streamline the care process, which takes 
into account efficiency and effectiveness of the care, and 
using disease-based information that is available on what the 
best treatments are for patients with certain illnesses. I 
think that is really a key to long-term success of trying to 
hold down costs.
    Mr. JOHNSON. Do you think the for-profits or not-for-
profits provide better physicians, facilities, and response 
than one or the other? You know, why do you think specialty 
hospitals popped up? According to the physicians I have talked 
to, they said the hospitals were not giving them the operating 
time when they needed it.
    Mr. BERND. I think that facilities between not-for-profits 
and for-profits are very similar. I think the specialty 
hospitals in some places have been brought forward due to lack 
of capacity. I think in others it has something to do with 
profit motive. It just depends upon the situation, and I think 
we have talked--we heard earlier the testimony about the fact 
that certain procedures in hospitals are more profitable than 
others, and if you do take those out of an institution you can 
do well financially. So, it is a complex issue.
    Mr. JOHNSON. Yes, sir?
    Mr. MORRISON. I think that the first place you really do 
have to look is that, the financial incentives that are there 
in the boutique hospitals and with the physician involvement, 
you do have the prospect of taking the more profitable or the 
easy cases to someplace where you have an investment, and 
taking the more difficult cases where you do not. There may be 
instances where there are capacity issues, but those are 
generally met by the not-for-profit institutions. The issue is 
one of business and financial motive.
    Mr. JOHNSON. Thank you very much. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you. I am going to turn to Mr. 
Weller in a moment, but before I do, Mr. Bernd, please repeat 
your answer to one of Mr. Johnson's questions regarding some of 
the key elements of keeping down long-term costs.
    Mr. BERND. Well, I think using evidence-based medicine and 
trying to work with physicians to put into place treatment 
protocols and care pathways are very effective. I know we have 
had a lot of success in Norfolk with those, where you try to 
use evidence that is there on how to best treat a patient and 
follow a particular pathway. It is very effective in not only 
reducing cost, but having more effective care.
    Other things that are happening is we put in remotely 
controlled intensive care unit monitoring, where patients are 
monitored in intensive care units around the clock. You have 
immediate intervention with patients in trouble and we have 
seen a dramatic decrease in mortality and a decrease in cost 
for the investment of this technology.
    So, I think you are beginning to see some very good 
breakthroughs. Another good example are software systems that 
are now in place that, for instance, will provide to the 
clinicians when they order a particular drug, will show them 
how it interacts with other drugs, what counter-indications 
there are, lab test results. So, I think we are on the cusp of 
having some tremendous breakthroughs in both quality and cost 
    Chairman HOUGHTON. Is this something which would lend 
itself, really, to sort of regional repricing and re-
estimation, or is it something which could be right across the 
    Mr. BERND. I think it is something that could be very 
beneficial across the country and I think, the other problem we 
have with prices and hospitals and health care obviously has to 
do with increased utilization and the fact that we are getting 
older as a society. I hope these interventions and changes in 
technology will help us decrease the increases, which have been 
very high lately.
    Chairman HOUGHTON. Thanks very much. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman, and thank you for the 
opportunity to ask some questions. You know, Mr. Bernd, 
representing the AHA, as you know in Illinois, as is in the 
case of my own district, the vast majority of hospitals are 
    Mr. BERND. All right.
    Mr. WELLER. The district that I represent in the south 
suburbs, every hospital is a not-for-profit. They usually are 
the largest employer in town, if not competing with the usual 
locally, the school district, and they also provide service to 
my communities. I would note, one thing I am particularly proud 
of is that all my hospitals have a record of serving the health 
care needs of people in our communities regardless of their 
ability to pay, their insurance status or even their 
citizenship status.
    There is almost 1.7 million Illinoisans, many of them 
immigrants and the working poor that have no health insurance. 
Yet all my hospitals, as I have seen in the records that I 
have, have been there when they have needed medical care. This 
past year, Illinois hospitals provided more than $2 billion 
annually in medical care for which they did not receive one 
dime in reimbursement.
    I would note one system which serves much of my district, 
Provena Hospital System in Illinois, provides $6.5 million in 
free care and last year lost $32.8 million on Medicaid services 
that they provided to my constituents. One particular hospital 
of Provena, St. Joseph's in Joliet, provides care at no cost to 
the Will-Grundy free clinic and donated a quarter of a million 
dollars to the local YMCA to build a health care facility.
    As I have seen, Illinois hospitals take their commitment to 
charity care pretty seriously. In fact, last year the 
Integrated Healthcare Association (IHA) and the Metropolitan 
Chicago Health Care Council developed guidelines in charity 
care and collection practices for the uninsured that are 
designed to be patient-friendly. Mr. Bernd, I would like to get 
your perspective on these guidelines.
    The guidelines include a number of basic principles. 
Uninsured patients receive free care if they are at or below 
100 percent of Federal poverty. Discounts provided to patients 
with incomes between 100 and 200 percent of Federal poverty. 
Hospitals work with patients receiving discounts to develop a 
reasonable payment plan. Hospitals do not take legal action 
against charity care patients who have demonstrated that they 
do not have sufficient income or assets to meet their financial 
    Obviously, in order for these hospitals to serve, they also 
have to survive financially. Illinois hospitals such as Provena 
have demonstrated that they can serve these communities, 
particularly those with limited access to care. They tend to be 
the poorer non-citizen patients.
    The question I have for you, Mr. Bernd, is, you know, you 
are coming before us today with a national perspective. I have 
shared with you the initiatives of the Illinois hospital 
community. I was wondering what are your thoughts on charity 
care guidelines such as those that we have in Illinois?
    Mr. BERND. Actually, those guidelines that you have 
presented, endorsed by the Illinois Hospital Association, have 
come from the collaboration with the AHA, and actually we are 
asking every hospital in the union to endorse those particular 
guidelines. In fact, over 2,500 hospitals have endorsed those 
specific guidelines. I think they are excellent. I personally 
see them as a minimum requirement for our members. In fact, I 
was the first--we were the first institution that signed those. 
I think that is very good and I think it is something that is 
really needed.
    Mr. WELLER. So, essentially these guidelines are in process 
of being adopted nationwide? How many States adopted?
    Mr. BERND. Well, again, 2,500 of our 5,500 members have 
adopted it and we have only been at this about a month. So, we 
are very encouraged by the results, and we expect to have 100 
percent of our members across all States endorse this.
    Mr. WELLER. You had mentioned that you see these guidelines 
as the bottom line. How would you improve them?
    Mr. BERND. Well, for instance, my own health care 
institution, we provide discounts up to 500 percent of the 
Federal poverty. So, that is our commitment to our community. I 
think it would differ in each community, depending upon the 
needs of the community, the types of population, the number of 
poor you have, wage index. I think you need to tailor them by 
each community.
    Mr. WELLER. You know, Congress always comes up with great 
ideas, as you know.
    Mr. BERND. Yes, sir.
    Mr. WELLER. I was just wondering, is there a role for 
Congress in developing these kinds of guidelines?
    Mr. BERND. I would hope what you have done, which is to 
really publicly advocate what your member hospitals have done 
from your district. That is really outstanding. I am sure we 
will report that in our National news and the fact that our 
congressmen are supporting us in this effort. I think the real 
thing we all need to work on and the thing that we have all 
talked about today is the fact that there are now 44 million 
Americans without health insurance and the strains it is 
putting on all the systems, our health care systems. It is a 
real problem. It is now beginning to hit the middle class, and 
it really is a problem.
    Mr. WELLER. Thank you, Mr. Bernd.
    Mr. BERND. Yes, sir.
    Mr. WELLER. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Mr. Pomeroy.
    Mr. POMEROY. Mr. Chairman, I just have a request relative 
to the issue of whether people with HSAs that carry health 
insurance over the top of their HSA first-tier exposure are 
able to access the discounted arrangements made by the 
underlying insurance company for their portion of the first-
tier costs. We inquired of the largest players in the health 
insurance industry. I have a response from BlueCross 
BlueShield. Others are sought from the United Health Group. We 
would ask that these be allowed as part of the record of this 
hearing, Mr. Chairman.
    Chairman HOUGHTON. Absolutely. Mr. Portman.
    [The information was not received at the time of printing]
    Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the 
panelists for giving us some good information today. I was here 
for the earlier panel and then had a meeting in between. In 
that meeting, it happened to have been with somebody who works 
for one of our hospitals back home. I talked earlier in the 
hearing about the fact that we have three major networks in 
greater Cincinnati, Ohio. They are all three nonprofit. They 
all provide charity care, of course, but also benefits to the 
community beyond that.
    This person in particular was talking about billing. This 
was a good opportunity coincidentally to hear something from 
somebody who in this case is a relatively junior member of the 
billing staff, and she was talking about some of the very 
issues that you struggle with every day, including the fact 
that many of the patients are not able to access insured 
coverage, so they come in either under Medicaid or with no 
health care and no compensation for their care. They don't tell 
the hospital that. So, the collection process begins, it 
becomes very complicated. Reminds me a little bit of the IRS 
collection process, where often the left hand has not known 
what the right hand has been doing--although that is better 
now--and in the end there is a lot of wasted cost and effort 
and very little benefit to the hospital in the end because the 
person doesn't have the resources.
    My first question would be is the current system of billing 
serving the hospitals well, and how could it be improved? 
Particularly, what recommendations would you have for this 
panel in terms of dealing with the billing side of things 
strictly as it relates to uninsured or under-insured patients? 
Mr. Bernd, maybe you want to start with that.
    Mr. BERND. I think the present billing system doesn't serve 
the patients and the hospitals very well. It is very complex. 
We deal with over 100, 200 different insurance companies. I 
think some of the things we could work on are standardization 
of requests from insurance companies, standardization of 
information that is needed. It is a very difficult system and 
it is very complex. I think you heard about that today with 
pricing in the other areas. So, we could use some help in that 
    Mr. PORTMAN. Well, with regard to standardization, we have 
talked about that for years. With regard to the Federal side, I 
know we do more electronic billing now, which I am told is more 
efficient. I hope you all believe that. With regard to the 
private sector side, how would you get to that uniform or 
standardization of billing? Should that be a Federal mandate, 
are you suggesting? How would you get to the point that I think 
everybody agrees would be helpful to reduce the administrative 
    Mr. BERND. Well, I would like to see the private industry 
do that, but maybe encouragement by Committees such as this to 
say that we need to do it on the private basis would spur us on 
to do that. We need the cooperation of all these various 
insurance companies.
    Mr. PORTMAN. Let me ask the second question, and gentlemen, 
jump in as to my first one, too. Do you believe that hospitals 
are well-served by a system that bills consumers amounts 
unrelated to what their insurer actually pays? Is that 
something that is good for hospitals? Mr. Morrison, you seem 
eager to answer that.
    Mr. MORRISON. I am eager to answer that. Thank you, 
Congressman. I am not sure that we are well-served by that, 
because I think, if we know up front if you are insured, that 
your insurance company is going to pay something substantially 
less than, essentially, our rack rate, it does create a 
significant amount of confusion to that enrollee if he were to 
get a bill for $20,000. He doesn't know is he going to owe a 
portion of this? What is this bill all about? His insurance 
company comes back and says, you know, we paid $10,000, you owe 
$500--is the hospital going to come back at me to get the 
balance? Which we are precluded from doing because there is not 
balance billing. I think if we are required to send out a 
detailed bill when there is no expectation that an individual 
is going to pay off that detailed bill, it does create a 
tremendous amount of confusion and it creates a lot of cost. It 
is unnecessary.
    Mr. PORTMAN. Mr. Sucher.
    Mr. SUCHER. I think one of the greatest injustices to 
hospitals from the current system is that the insurers don't 
really show the insured what they did in fact pay. For that 
same $20,000 bill he just cited, if we get $10,000, for all the 
patient knows, they paid $19,500, because all they then get is 
a statement that shows the bill is taken care of except there 
is $500 left. It is very hard, then, to collect that $500 from 
the patient when he thinks we have already gotten $19,500, when 
in fact we have only gotten $8,000 or $10,000. So, it is a very 
disserving system for all concerned.
    Mr. PORTMAN. So, more transparency, we talked about 
earlier, even in billing--simplifying it and doing as much at 
the front end as possible to determine what the insurer can 
pay, will pay, and what the costs are would be helpful, it 
seems to me.
    Mr. COHEN. Mr. Portman, I believe that the very high 
charges are a major problem for managed care and insurance 
companies. Many admissions are through the emergency room. If 
you don't have a contract with the hospital and, for those 
patients who go through the emergency room, if you are 
responsible for paying charges, it is an exceedingly high 
amount. The result is that it puts inappropriate pressure on 
payors to negotiate with virtually every hospital. I think that 
puts too much of the balance of power in the hospital arena in 
regard to the negotiations, and that is something to consider.
    Mr. PORTMAN. Thank you, Dr. Cohen. One final question. I 
would ask for this response in writing, since my time has 
expired. Mr. Morrison, Florida law, as you know, hospitals are 
required upon request to provide the estimated charges for a 
hospital stay or a treatment. If you could give us your written 
response as to what the positives and negatives are to that--
and for that matter, any other panelists who have thoughts on 
that as a system that could be used in other States. Again, 
gentlemen, thank you for your testimony. Thank you, Mr. 
    Chairman HOUGHTON. Thank you. I just have one final 
question. Mr. Sucher, I am interested in a simplification, 
reduction, making it understandable. This is not just in health 
care, but in a whole variety of other things. Are there some 
immediate changes we could use to simplify the hospital billing 
system, like right now?
    Mr. SUCHER. I wish there were. I would certainly be glad to 
offer something if there was. The simplest thing is, as he just 
said, doing some kind of a lump-sum billing that allows, like 
Medicare for DRGs, and avoid the whole detail-billing process. 
I don't think that is a quick solution because there is too 
much invested in that process from so many things, to make a 
quick change in that.
    Chairman HOUGHTON. Is that possible on a State-by-State 
basis or would it have to be a national?
    Mr. SUCHER. I think you would prefer it was national rather 
than State-by-State. I mean, demonstration projects oftentimes 
can get something done, so----
    Chairman HOUGHTON. All right. Okay, well, thank you very 
much. Appreciate your testimony. It has been a great day. 
Onward and upward to another session.
    [Whereupon, at 1:20 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Houghton to Ms. Davis, 
Mr. Bernd, and Mr. Cohen, and their responses follow:]

         Question from Chairman Amo Houghton to Ms. Karen Davis

    Question: You stated to the Committee that you have quantitative 
estimates of the community benefits for medical education, standby 
capacity and charity care. I ask that you provide those estimates to 
the Committee. In addition, you stated that on the whole it was enough 
to justify the tax difference. I ask that you provide that evidence to 
the Committee.
    Answer: Like other nonprofits, nonprofit hospitals are ordinarily 
exempt from Federal income taxes. As a rule, they receive their tax-
exempt status under section 501(c)(3) of the Internal Revenue Service 
Code which applies to organizations with religious, charitable, public 
safety testing, scientific, literary, and educational purposes. Because 
the Code has never explicitly included medical organizations, hospitals 
and other health care organizations have qualified under the term 
``charitable.''\1\ The status also means that hospitals will have 
access to tax-free bonds, can receive tax deductible donations from 
donors, and will have a greater likelihood of being exempt from various 
state and local taxes.\2\
    \1\ D.M. Fox and D.C. Schaffer, ``Tax Administration as Health 
Policy: Hospitals, the Internal Revenue Service, and the Courts,'' 
Journal of Health Politics, Policy and Law, 16 no.2 (1991)251-279.
    \2\ M. Schlesinger, B. Gray, E. Bradley, ``Charity and Community: 
The Role of Nonprofit Ownership in a Managed Care System,'' Journal of 
Health Politics, Policy and Law, 21 no.4 (1996)697-751.
    An IRS ruling in 1969 explicitly defined the criteria for 
hospitals' tax exemption.\3\
    \3\ D.M. Fox and D.C. Schaffer, ``Tax Administration as Health 
Policy: Hospitals, the Internal Revenue Service, and the Courts,'' 
Journal of Health Politics, Policy and Law, 16 no.2 (1991)251-279.
    In particular, nonprofit hospitals were to operate a full-time 
emergency room and could not deny emergency care to patients. In the 
ruling, charitable activities, in the context of health care, were 
those that generally promoted health and thus benefited the community 
as a whole.
    A broad range of activities undertaken by nonprofit and public 
health care institutions have been identified as community benefits. 
Schlesinger and colleagues, for example, identified over 30 different 
community benefit activities that health care institutions engage 
in.\4\ Such activities include those with public good attributes such 
as teaching and research which benefit entire communities, those that 
have positive spillover effects such as programs designed to prevent 
disease, and those activities, like outreach to high risk patient 
groups, which have little likelihood of being undertaken by profit 
making institutions. Other types of community benefit are community 
involvement in governance and a refusal to exploit information 
asymmetries endemic to the health services market such as imperfect 
information on the part of patients.
    \4\ M. Schlesinger, B. Gray, E. Bradley, ``Charity and Community: 
The Role of Nonprofit Ownership in a Managed Health Care System,'' 
Journal of Health Politics, Policy and Law, 21 no.4 (1996) 697-751.
    Academic medical centers and teaching hospitals, the vast majority 
of which are public and private non-profit institutions, pursue several 
unique missions that benefit the broader community. Those missions 
include graduate medical education, biomedical research, and the 
maintenance of standby capacity for highly specialized care to 
medically complex patients. Research conducted by Lane Koenig, Al 
Dobson and others for the Commonwealth Fund's Task Force on Academic 
Health Centers and published in a late 2003 article in Health Affairs 
estimated that the costs of these three missions alone amounted to 
$27.2 billion in 2002.\5\ Of that total, $16.4 billion went to graduate 
medical education, $9.6 billion financed stand-by capacity, and $1.2 
billion funded research. Also see Appendix A for a summary of work on 
this issue in the final report of the Commonwealth Fund Task Force on 
Academic Health Centers.
    \5\ L. Koenig, A. Dobson, S. Ho, J.M. Siegel, D.Blumenthal, J.S. 
Weissman, ``Estimating the Mission-Related Costs of Teaching 
Hospitals,'' Health Affairs (November/December 2003):112-122.
    It should be noted that these estimates are based on standby 
capacity for highly specialized care such as burn units and trauma 
care. They do not include future threats including the value to 
communities of having a hospital equipped to deal with terrorist 
attacks or natural threats such as a SARS-like epidemic. Most 
communities would willingly forego property taxes on local nonprofit 
hospitals in exchange for assurance that this capacity was available--
even if an occasion to use it never materialized.
    With respect to charity care, as I indicated in my testimony,\6\ a 
significant amount of research has shown that nonprofit hospitals are 
more likely to care for uninsured patients than are for-profit 
hospitals.\7\ Further, academic health centers are more likely to care 
for such patients than are community hospitals.\8\ In recent years, 
care for the uninsured has been increasingly concentrated in fewer 
institutions willing to provide that care. Public academic health 
center hospitals provide the highest levels of charity care among all 
hospitals, while private nonprofit academic health centers provide 
twice as much free care as other private hospitals.
    \6\ Karen Davis, Hospital Pricing Behavior and Patient Financial 
Risk, Invited Testimony, Subcommittee on Oversight, Committee on Ways 
and Means, Hearing on ``Pricing Practices of Hospitals,'' June 22, 
    \7\ L.S. Lewin, T.J. Eckels, and L.B. Miller, ``Setting the Record 
Straight: The Provision of Uncompensated Care by Not-for-Profit 
Hospitals,'' The New England Journal of Medicine, 1212-1215,May 5, 
1988; Bradford H. Gray, ``Conversion of HMOs and Hospitals: What's at 
Stake,'' Health Affairs, 29-47, March/April, 1997; Gary Claxton, Judith 
Feder, David Shactman, and Stuart Altman, ``Public Policy Issues in 
Nonprofit Conversions: An Overview,'' Health Affairs 9-28, March/April 
1997; David Shactman and Stuart H. Altman, ``The Impact of Hospital 
Conversions on the Healthcare Safety Net,'' in Stuart H. Altman, Uwe E. 
Reinhardt, and Alexandra E. Shields (eds.), The Future U.S. Healthcare 
System: Who Will Care for the Poor and Uninsured? Health Administration 
Press; Institute of Medicine Committee on Implications of For-Profit 
Enterprise in Health Care, Bradford H. Gray (ed.), For-Profit 
Enterprise in Health Care, National Academy Press, 1986.
    \8\ Commonwealth Fund Task Force on Academic Health Centers, A 
Shared Responsibility: AcademicHealthCenters and the Provision of Care 
to the Poor and Uninsured, Commonwealth Fund, April 2001.
    Recent work by Jack Hadley and John Holahan found that in 2001, 
private and public health care providers spent an estimated $35 billion 
a year on care for uninsured patients that went uncompensated (i.e, 
that was not paid for by patients or private or public insurers).\9\ 
Hospitals delivered about two-thirds of total uncompensated care or a 
total of about $23.6 billion.
    \9\ J. Hadley and J. Holahan, ``How Much Medical Care Do the 
Uninsured Use, and Who Pays for It?'' Health Affairs Web Exclusive (12 
February 2003): W3-66--W3-81.
    I have only identified some of the quantifiable benefits that flow 
to communities and the nation as a whole from nonprofit and public 
hospitals. Clearly such community benefit activities yield considerable 
value to the U.S. health care system. Nonprofit hospitals' tax exempt 
status should be considered in the context of the overall framework of 
our health care system and its unique needs. Highly fragmented, it 
relies heavily on local health care institutions to provide a wide 
range of health care services, not all of them profitable, to an 
increasingly diverse population, as well as the education and training 
of health care professionals. Reliance on nonprofit health care 
institutions has likely helped the system maintain its high degree of 
decentralization and privatization while still managing to provide at 
least some of the services that traditionally for-profit entities might 
have failed to provide. Serious debate about the tax-exempt status of 
hospitals really has to engage the larger, more fundamental question of 
the how the United States wants to finance the health care of its 
Appendix A
    Excerpt from Envisioning the Future of Academic Health Centers: 
Final Report of The Commonwealth Fund Task Force on Academic Health 
Centers, New York: The Commonwealth Fund, February 2003; 7-9. (Fund 
Publication #600) Available at www.cmwf.org.
Clinical Costs of Mission-Related Activities in Academic Health Center 
    The conduct of mission-related activities in AHCs and other health 
care institutions is often associated with extra expenses that are not 
compensated in competitive health care markets. These extra expenses 
are manifested in part as higher clinical costs at AHCs. The 
performance of some missions, such as educating medical students and 
residents and conducting clinical research, makes the provision of care 
less efficient or requires extra work and the hiring of extra staff.
    According to a recent analysis by The Lewin Group, the cost per 
case for AHC hospitals ($8,548) was higher than the cost per case for 
other teaching hospitals ($6,047) and for other urban, community 
hospitals ($5,238) in fiscal year 1998 (Figure 3).\10\ The Lewin Group 
analysis decomposed these total cost per case estimates to provide 
separate cost estimates for each of the mission-related categories for 
fiscal year 1998. After accounting for differences in wages, case mix, 
and other factors that influence cost per case, mission-related costs 
averaged $2,360, or 28 percent of total costs, for AHC hospitals. By 
comparison, mission-related costs for other teaching hospitals 
accounted for only 11 percent ($674) of total costs. For AHC hospitals, 
stand-by capacity (defined as the capacity to provide high-technology 
or intensive services whose availability is essential to a modern 
health care system, but that are not always in use) accounted for the 
largest component of mission-related costs (45 percent), with indirect 
medical education and research representing 42 percent and 13 percent 
of total mission-related costs, respectively (Figure 4). After updating 
these cost estimates to 2002 values using the Centers for Medicare and 
Medicaid Services Prospective Payment System Hospital Input Price 
Index, total mission-related costs, including medical education, are 
estimated to be $11.4 billion for AHC hospitals and $27.2 billion for 
all teaching hospitals (Table 1).
    \10\ Lane Koenig et al., ``Mission-Related Costs of Teaching 
Hospitals: Estimates of Graduate Medical Education, Clinical Research, 
and Stand-by Capacity'' (Unpublished manuscript, November 2002).


                              Table 1. Total Clinical Costs of Mission-Related Activities by AHC Status, 2002* ($ billions)
                                   Direct Ed. Costs   Indirect Ed. Costs                       Standby Capacity
                                         (DME)               (IME)          Research Costs           Costs            Total Costs             N**
AHCs                               4.2                3.0                 0.9                 3.2                 11.4                 124
Other teaching hospitals           6.0                3.3                 0.2                 6.4                 15.8                1015
All teaching hospitals            10.2                6.2                 1.2                 9.6                 27.2                1139
* Costs have been estimated using the Centers for Medicare and Medicaid Services (CMS) Prospective Payment System Hospital Input Price Index.

** N is the number of hospitals in the CMS Prospective Payment System Hospital Input Price Index.

Note: Numbers may not add up due to rounding.

Source: Lane Koenig et al., ``Mission-Related Costs of Teaching Hospitals: Estimates of Graduate Medical Education, Clinical Research, and Stand-by
  Capacity'' (Unpublished manuscript, November 2002).

         Question from Chairman Amo Houghton to Mr. David Bernd

    Question: In your written testimony, you stated that hospitals had 
been concerned about violating Federal regulations governing billing 
and collections if they discount charges to the uninsured. Can you 
provide to the Committee descriptions of Sentara's charity care policy 
before and after the February 19, 2004 letter by Secretary Thompson to 
Richard Davidson, the president of the American Hospital Association?
    Answer: Sentara works diligently to qualify low income uninsured 
patients for public assistance through the Medicaid program or the 
Virginia State and Local Hospitalization program. For those patients 
that don't qualify for either of those programs, the Sentra charity 
program provides assistance for those uninsured patients whose family 
income falls below 200% of the Federal Poverty Level (FPL). The Sentara 
charity program has been in place for many years.
    In my capacity as incoming chairman of the board for the American 
Hospital Association, I was involved in the development and approval, 
by the Board, of the Statement of Principles and Guidelines on Billing 
and Collections Practices (Guidelines) as well as AHA's efforts, in 
connection with successful implementation of the Guidelines, to secure 
needed regulatory clarifications from the Department of Health and 
Human Services (HHS).
    In response to the Guidelines and in anticipation that HHS would, 
in fact, provide the necessary regulatory clarifications, in December 
2003, Sentara implemented an additional program for uninsured patients 
whose family income exceeds 200% of the FPL. The uninsured discount 
program provides discounts to uninsured patients, on a sliding scale, 
based on family income level and the amount of hospital charges 
incurred. This program provides assistance to uninsured patients whose 
family income is between 200% and 500% of the FPL.

       Question from Chairman Amo Houghton to Mr. Harold A. Cohen

    Question: In your written testimony, you state that as of 1986 
there had been no cases in Maryland of ``patient dumping'' because of 
the equitable funding of uncompensated care at Maryland hospitals. Is 
that still the case in Maryland?
    Answer: As Dr. Cohen testified during his presentation, this 
original assertion was made in the mid-eighties by the Maryland Legal 
Aid Bureau during a legislative hearing in Annapolis, Maryland. To be 
consistent with the original testimony, we contacted Maryland Legal Aid 
to obtain a response to your question. According to Hannah Lieberman, 
Director of Advocacy, no cases of patient dumping in Maryland have been 
recorded. I am enclosing her written response with this letter for your 
    Thank you for the opportunity to provide you with further insight 
into Maryland's unique rate setting system.
    [Submissions for the record follow:]
Statement of Reverend Michael D. Place, Catholic Health Association of 
                           the United States
    As the U.S. House of Representatives Committee on Ways and Means 
Subcommittee on Oversight conducts the first in a series of hearings on 
tax exemption with a particular focus on hospital pricing practices, 
the Catholic Health Association of the United States (CHA) is pleased 
to provide this statement for the record. CHA is the national 
leadership organization representing the Catholic health care ministry. 
With more than 2,000 members, CHA is the nation's largest group of not-
for-profit health care sponsors, systems, facilities, health plans, and 
related organizations from across the care continuum. CHA's members 
provide care to one in every six patients, either in an acute care or 
long-term care setting, in communities across the country. We have been 
caring for the nation's poor and disenfranchised for more than 275 
years and remain committed to health care that works for everyone. 
Perhaps even more than the immediate issue of hospital pricing, the 
specific subject of this hearing, is the need to find a real and 
practical solution to providing health care coverage to nearly 44 
million uninsured individuals. Finding a solution is critical to 
stabilizing our health care delivery system and remains CHA's number 
one priority.
    The Catholic health care ministry has a long-standing commitment to 
ensuring that every patient has access to quality care, regardless of 
his or her ability to pay. The recent focus on the issues related to 
services provided to uninsured patients of limited means has been a 
solid reminder that as health care providers we must be ever-vigilant 
to the unintended consequences of the complex financial and regulatory 
environment in which we operate. Hospital pricing is a difficult and 
complex issue that has its roots in the prior cost-based reimbursement 
system. Hospital pricing is an intricate and detail-driven process that 
affects all aspects of the health care sector, not-for-profit as well 
as for-profit.
    We fully support transparency in making financial assistance 
available and accessible for the uninsured and underinsured and in 
assuring quality care for the millions served by our ministry. As a 
ministry, we believe that all patients and their families deserve to be 
treated with dignity, respect, and compassion, not only when services 
are provided but also throughout the entire billing and collection 
process. To that end, members of the ministry have taken a thoughtful 
re-examination of their pertinent policies and procedures to ensure a 
greater degree of transparency. Many members of the Catholic health 
care ministry have publicized their efforts to review and amend their 
policies and remain committed to ensuring that uninsured individuals of 
limited means are not inadvertently disadvantaged by a fragmented and 
complex system. Additionally, the Catholic health ministry has long 
supported quality reporting initiatives, beginning with those related 
to our nation's long-term care facilities and now moving into our 
nation's hospitals. Patients have a right to the information necessary 
to make a reasoned and informed decision about where and from whom they 
receive their health care.
    As tax-exempt organizations, the members of the Catholic health 
ministry are committed to fulfilling their obligations to their local 
communities. Catholic health care has its origins in a faith-based 
response to the health needs of vulnerable populations. Over a decade 
ago, the tax exempt status of our nation's not for profit hospitals was 
called into question and resulted in a robust dialogue about various 
issues related to exempt status. Partly as a result of those 
discussions, along with concerns of our sponsors and boards, the 
Catholic health ministry developed a process for planning and reporting 
community benefits, the Social Accountability Budget. Subsequently, 
with VHA, Inc, (a leader in community health improvement) and others, 
we developed a software accounting system for tracking community 
benefits and revised our document to what is now the nationally 
recognized ``Community Benefit Planning: A Resource for Nonprofit 
Social Accountability.'' This is a community benefit planning resource 
to assist members of the ministry in examining their policies and 
ensuring that those policies encourage charitable behavior and 
responsiveness to communities.
    Community benefit is a planned, managed, organized, and measured 
approach to a health care organization's participation in meeting 
defined, identified community health needs. It implies collaboration 
with a ``community'' to ``benefit'' its residents, particularly the 
poor, minorities, and other underserved groups. We encourage each of 
our facilities to develop a community benefit plan that includes a 
community needs assessment, services designed to respond to identified 
community needs (such as the needs of uninsured persons and activities 
to improve health in the community), and continual evaluation of the 
effectiveness and outcome of community benefit activities. The 
community benefit services provided include charity care, responding to 
Medicaid and public program shortfalls, education and research, and 
subsidized services (providing services where there is a community need 
but no business case for doing so), and outreach programs related to 
health improvement and prevention.
    Throughout this process, members are encouraged to assess the 
particular needs of their communities, including addressing any 
disparities that may be evident. Outreach programs and community 
collaborations are encouraged to help meet the identified needs of the 
community and, in many cases, to step in where government programs and 
assistance may not be adequate to meet the needs of the community, 
particularly those of the uninsured, the underinsured, and the poor 
elderly. As providers of health care services, major employers in our 
communities, and critical partners in community collaboration, we are 
proud of our long-standing commitment and continuing contributions to 
the communities we serve.
    Notwithstanding the ministry's efforts at providing broad-reaching 
community benefits, there is a much larger issue that overshadows all 
of these issues and calls for immediate attention and real solution. 
Our nation faces an epidemic of uninsured individuals. Unlike many 
epidemics of the past, where every means necessary has been employed to 
find a cure or a solution, we, as a nation, seem paralyzed by partisan 
interests and bickering and continue to let this epidemic languish and 
worsen with time. The most recently available statistics note that 
nearly 44 million individuals go without any type of health care 
coverage. A recent study noted that one in three people in the United 
States under the age of 65 went without health insurance for all or 
part of the two year period 2002-2003. The issue of the uninsured is 
not an issue for government alone to solve, nor is it an issue that can 
be solved single-handedly by our nation's not-for-profit hospitals. But 
it remains an issue that cries out for action from all concerned 
    As members of the Catholic health ministry, we have our foundations 
in social justice teachings that acknowledge the human dignity of each 
person, have a special commitment to care for the poor and vulnerable, 
and call for responsible stewardship of resources. Furthermore, as a 
ministry we recognize health care as an essential social good rather 
than a commodity. Now is the time for a robust dialogue around a 
lasting solution for providing health care services for all. While 
there are tough moral, ethical, and policy questions to be debated, we 
must all--individuals at all levels of government, the private sector, 
the business community, the health care sector, the public policy 
thinkers, and the number crunchers--demonstrate ``a willingness to take 
a step toward the middle,'' to leave our special interests behind and, 
once and for all, demonstrate a sense of collaboration and resolve that 
will allow us to surmount our differences and find a lasting and 
workable solution to providing affordable and accessible health care 
for all.
    We are pleased to provide this statement to the Committee and to 
affirm the commitment of Catholic health care to providing quality care 
for all individuals, particularly the most vulnerable among us, and to 
strengthening local communities through a variety of services. It 
remains our most sincere hope that the issues raised by examining the 
problems of uninsured individuals will ultimately lead to a permanent 
and lasting solution for this national disgrace. On behalf of the 
Catholic health ministry, we thank the Committee for its interest in 
this matter.


         Statement of Community Catalyst, Boston, Massachusetts
    Community Catalyst appreciates the opportunity to submit comments 
to the members of the U.S. House of Representatives' Committee on Ways 
and Means' Subcommittee on Oversight in connection with its hearing on 
hospital pricing practices that was held on June 22, 2004. We applaud 
the Subcommittee for focusing attention on this very important issue.
    Community Catalyst is a national advocacy organization that builds 
consumer and community participation in the shaping of our health 
system to ensure quality affordable health care for all. It works with 
consumer health advocacy groups across the country that are fighting 
for health policy and system change at the local and state levels. It 
provides these groups with a range of support including policy and 
legal analysis, organizational development consultation, and community 
organizing assistance. In addition to our work with these groups on 
community-based health access issues, we work to build a national 
network of consumer organizations dedicated to securing universal 
access and health care justice.
    We are submitting the attached Patient Financial Assistance 
Principles for inclusion in the hearing record. Since 1999 we have been 
working with consumer health advocacy groups that are concerned with 
access to hospital care for the uninsured. The centerpiece of this work 
was a report issued in October 2003 entitled Not There When You Need 
It, the Search for Hospital Free Care.\1\ The report included findings 
from consumer surveys of more than 60 hospitals, conducted in 9 
localities across the country. The principal conclusion of the report 
was that information about financial assistance with hospital bills is 
not readily available to consumers. Front-line hospital staff at the 
surveyed hospitals appeared to be almost universally unaware of 
financial assistance policies, and they were also unable to redirect 
consumers/patients to hospital staff who might have that information. 
This was the case even where hospital leadership claimed such policies 
existed. Other findings were as follows:
    \1\ A copy of the report can be obtained at 
    That for low-income uninsured patients, a reduction in a hospital 
bill from ``list charges'' to an average discounted amount or ``cost'' 
is not sufficient to alleviate the health and financial consequences of 
being sick and lacking health insurance. The majority of the uninsured 
have incomes below 200% of the Federal Poverty Level, so a $15,000 
hospital bill reduced by 50% to $7,500 is just as daunting a challenge 
to the uninsured person.
    That hospital administrators are often unaware of the critical 
difference between notifying a patient at the outset of a 
hospitalization that they are eligible for free or discounted care and 
simply writing the account off at a subsequent time. Whereas the former 
means that the patient is never billed for the services, the latter 
simply means that the hospital does not expect to collect on a debt, 
even though collection action will continue and interest will continue 
to accrue.
    That there are serious health and financial consequences for 
uninsured patients who are unable to obtain free or reduced cost 
hospital care. Many uninsured simply avoid seeking necessary care 
because they don't have the money to pay for it. And those who do seek 
it often find themselves saddled with debt and subject to aggressive 
collection actions that further undermine low-income family financial 
    It was these findings, along with the extensive research that went 
into our report that led us to identify a set of imperatives that must 
be addressed in any hospital financial assistance policy. These 
imperatives are the basis for the enclosed principles.
    Requiring hospitals to make free and reduced-cost hospital care 
more readily available is not a permanent solution to the problem of 
the rising number of uninsured in our country. Nor, for that matter, 
will the ``health savings account'' model of coverage with its high 
deductible alleviate the problem of impaired access and medical debt 
for either low-to-moderate income patients or the providers that treat 
them. The true solution lies in creating a program of comprehensive 
universal coverage. Until such a program exists, the burden of being 
uninsured will continue to fall primarily on the uninsured themselves. 
We can and should take action to distribute this burden more fairly. 
One step in this direction is to require hospitals to live up to their 
community responsibilities.
    That said, we firmly believe that revoking the tax-exempt status of 
hospitals will not help them meet these crucial community 
responsibilities. Regardless of current concerns about some non-profit 
hospitals' operations and marketplace behavior, non-profit hospitals as 
a class provide the lion's share of free and reduced-price care. As 
such, they represent the ultimate safety net, not only for the 44 
million uninsured but also for countless other financially strapped 
individuals and families who are facing escalating out-of-pocket costs 
for essential health services. The challenge for the Subcommittee and 
the rest of us is to ensure that tax-exempt status means something 

                Patient Financial Assistance Principles

    Since 1999 Community Catalyst has been working with state and local 
consumer health advocates across the country who are concerned about 
access to hospital care for people with little or no insurance. Through 
this work, it has become abundantly clear that many hospital financial 
assistance policies are inadequate. The flaws include: a lack of clear 
and consistent eligibility standards, a failure to publicize the 
availability of financial help, and the use of harsh and inappropriate 
collection tactics. While a number of hospitals have been very 
responsive to consumer advocates' concerns, others have been slow to 
take action. In order to ensure people get the hospital care they need 
without incurring crushing debt, every hospital should adopt a 
financial assistance policy--whether voluntarily or through a statute 
or regulation--that includes, at a minimum, these 9 principles:

      Eligibility. Uninsured and underinsured individuals with 
incomes up to 200% of the Federal Poverty Level (FPL) should not be 
charged for hospital care. Individuals with incomes between 200-400% 
FPL should be eligible for financial assistance with their hospital 
bills. Financial assistance should also be available to individuals 
whose income exceeds 400% FPL but whose medical expenses have--or 
will--deplete individual or family income and resources to the point 
where the individual cannot pay for medically necessary services.
      Amount of financial assistance. Generally, the out-of-
pocket contribution of a patient who is eligible for financial 
assistance should be limited so that it does not exceed a reasonable 
percentage of family income. A financial assistance policy that merely 
applies a discount to a hospital bill may not provide sufficient 
financial protection to an eligible individual. For example, it clearly 
is preferable--and more humane--to base the financial liability of an 
individual with an income of 300% FPL (i.e. $27,930 for a family of 
one) and a hospital bill of $50,000 on a reasonable percentage of his 
or her of income (e.g. 10%, or $2,793) rather than to have it set at a 
discount of 50%--or even 75%--of that bill.
      Basis of financial liability. Any amount owed by an 
individual who is eligible for financial assistance should be 
calculated using the hospital's cost of providing the care--or by using 
the lowest rate negotiated by any private third-party payer--rather 
than the hospital's substantially higher ``list price.'' People who 
don't have insurance typically are charged the highest prices for 
hospital care because they do not have the benefit of an insurer or 
health plan negotiating on their behalf. As a result, they end up with 
the largest medical debt and are subject to the harshest collection 
actions, like wage garnishment, liens on personal property, and 
foreclosures on the family home.
      Covered services. Financial assistance should be 
available for any medically necessary hospital service and not just 
those services obtained on an emergency basis. This would include 
services delivered on an inpatient as well as an outpatient basis, and 
it would also include any medically necessary prescription drugs.
      Notification of the availability of financial assistance. 
Hospitals should broadcast the availability of financial assistance 
both inside their own institutions and to their broader communities. 
They should make sure that all staff who interact with patients and 
their families are trained to provide information on the hospital's 
financial assistance policies. Finally, hospitals should also ensure 
that the information is readily accessible to people who speak 
languages other than English.
      Application process. The financial assistance application 
form and process should be simple and ``patient-friendly,'' and any 
income documentation requirements should not function as a barrier to 
receipt of financial assistance.
      Payment plans. Any payment plan shall be reasonable, 
taking into account the patient's--or his or her family's--income and 
other financial obligations, and limiting any interest charged on an 
outstanding balance to no more than 3% per year.
      Role of hospital governing board. Hospital governing 
boards should be required to review and approve all collection 
policies, including the policies of any collection agent or attorney, 
and any purchaser of a hospital account. Certain collection actions 
such as foreclosures, placement of liens, and wage garnishments should 
require specific board authorization before they are initiated, 
regardless of whether it is the hospital or any agent, attorney or 
purchaser of an overdue account that is initiating the action.
      Reporting. Hospitals should be required to report to a 
state agency--or otherwise publicize--the amount of patient financial 
assistance they provide on an annual basis, along with any other 
information that enables the public and policymakers to assess the 
hospital's application of its financial assistance policies. Financial 
assistance should be reported using hospital costs rather than standard 
hospital charges, and it should not include any costs associated with 
bad debt, so-called shortfalls from government programs such as 
Medicaid and Medicare, or contractual allowances provided to private 
third party payers.


           Statement of Geoffrey C. Mitchell, Columbus, Ohio
    Thank you for your willingness to investigate tax-exempt health 
care. As you know, we've reached a point where uninsured working people 
are actually being forced to subsidize billion dollar insurance 
companies. I think this is only the tip of the iceberg. The cost of 
health care continues to escalate while the quality may actually be 
decreasing. I believe this ``value gap'' is due to widespread looting 
of American health care.
    Unfortunately the looting is not confined to for-profit 
enterprises. The leaders of non-profit enterprises too often emulate 
what they see in the for-profit world. ProvenaHospital is the obvious 
case in point but I'm sure there are others. Here is the story of the 
``non-profit'' care provided by OhioHealth, the largest health system 
in Ohio. This is a tale of behind-the-scenes antics of hospital 
administrators who have forgotten the charitable mission of their 
    There are four intertwining stories to be told, 1) administrator's 
secret drive to partner with and emulate for-profit corporate/criminal 
entities, 2) the securing of $200,000,000 in tax-subsidized bonds under 
false pretenses, 3) apparent private inurement at the highest levels of 
the organization, and 4) a full-fledged assault on indigent care by 
purchasing, then closing a hospital. Together, these stories bear 
directly upon the justification for granting tax-exempt status and the 
level of indigent and uninsured care provided by such ``non-profit'' 
    Riverside Methodist Hospital (RMH), the flagship of OhioHealth, is 
reportedly the 5th busiest hospital in America. Over the 
past decade, OhioHealth has capitalized upon the imbalance in Medicare 
reimbursement, focusing its attention on relatively lucrative 
cardiology services. This culminated in a recently completed $76 
million ``heart hospital.'' OhioHealth administrators call RMH the 
``Heart Institute of Ohio.''
    Not all patients benefited from OhioHealth's obsession with 
cardiology. Emergency department patients (ED) suffered greatly. For 
more than a decade, Riverside's express policy was to treat emergency 
patients in public hallways. This was a way to cut costs and increase 
profits. This policy negatively impacted patient care in many ways. One 
was that hallway medicine systematically discriminated against women. 
Men got EKGs done in the hallway, women did not.
    In the late 1990's OhioHealth saw itself threatened by the 
expansion of for-profit hospitals, particularly Columbia/HCA. 
OhioHealth administrators undertook a three-pronged strategy. They 
instituted a vocal campaign to publicly denounce the ``for-profit'' 
hospitals. This continues today. At the same time OhioHealth was 
publicly denouncing the evils of corporate medicine, these same 
administrators cultivated a behind the scenes partnership with 
MedPartners, one of the most corrupt and/or inept companies ever known 
in U.S. health care. Finally, OhioHealth actually usurped Columbia/HCA 
and acquired the hospitals Columbia had pursued.
The Acquisition of the Two Doctors' Hospitals
    Doctor's hospital was a two hospital system consisting of Doctors' 
West, a reasonably successful general hospital, and Doctor's North, 
which was losing money providing indigent care. Doctors West had 
enormous undeveloped potential as a referral hospital or portal of 
entry for cardiology patients on the west side of Columbus. Doctors' 
West is the closest hospital to the growing and affluent suburb known 
as Hilliard. OhioHealth and Columbia both yearned to possess Doctors' 
    OhioHealth succeeded in acquiring the two Doctor's Hospitals in 
1998 but the $142 million price tag took a toll. At one point 
OhioHealth's bond rating was cut. By the fall, OhioHealth announced 
layoffs of 90 people. It was a difficult time.
Secret Contracting with For-Profit Corporate/Criminal Entities
    The penny pinching required for the purchase of Doctors' meant RMH 
had to squeeze the emergency department (ED) even tighter. To 
accomplish this, OhioHealth contracted with MedPartners to run the RMH 
ED. At the time, MedPartners was the worst performing publicly traded 
company in America. Armed with this knowledge, RMH CEO David Blom was 
determined to contract with MedPartners anyway. Publicly, Blom was 
denouncing the evils of for-profit, Wall-Street groups but behind 
closed doors, he cut a secret deal with MedPartners.
    When the RMH contract was negotiated, MedPartners' chairman was 
alleged criminal mastermind, Richard Scrushy. Scrushy has now been 
indicted on 85 criminal counts for massive fraud at his other company, 
HealthSouth. In order to make the deal work, Blom hired Clifford 
Findeiss to work as ``hospital representative.'' At the time, Findeiss 
was being paid by MedPartners to negotiate and acquire hospital 
contracts on its behalf. Blom hired Findeiss to work for OhioHealth in 
its supposed ``negotiations'' with MedPartners. Findeiss had a direct 
reporting relationship to Richard Scrushy.
    Thus, OhioHealth official Clifford Findeiss was actually being paid 
by MedPartners while he was ``negotiating'' with them. This arrangement 
had the appearance of a felony kickback. In addition to the alleged 
kickback there were other massive conflicts of interest. E.g., while 
negotiating with MedPartners on behalf of OhioHealth, Findeiss owned a 
million shares of MedPartners stock. This whole arrangement was the 
subject of a three-year investigation by multiple government agencies. 
Apparently, there was ``not enough evidence to file criminal charges . 
. . at this time.''
    The RMH contract, negotiated by Findeiss, represented a trophy 
contract for MedPartners. The RMH contract was secured at a time when 
MedPartners was on the verge of bankruptcy. Scrushy had come from 
HealthSouth to assume the reins at MedPartners and rescue the company. 
As a result of his efforts, MedPartners was rescued. MedPartners was 
able to sell its emergency medicine business, Team Health, to venture 
capitalists for $335,000,000. The venture capitalists boast that they 
make 40-50% annual returns on their health care investments.
    Under the MedPartners contract, OhioHealth continued to squeeze the 
RMH ED and treat patients in the hallways. OhioHealth and MedPartners 
fired and defamed doctors who opposed their methods or spoke out about 
the declining quality of care. Quality was declining because fraud 
undermines the quality of care. There were many examples of poor 
quality care under the umbrella of MedPartners. At RMH, a fifteen year-
old girl was paralyzed at the hands of the local MedPartners quality 
expert. Findeiss' jail staffing company, EMSA, left a trail of wrongful 
death suits across the country. In New York, EMSA hired a convicted 
killer to treat patients.
    OhioHealth continued to mandate the practice of hallway medicine in 
the RMH ED. Then, in 1999, the overcrowded RMH ED was featured on CBS's 
60 Minutes (No Vacancy). 60 Minutes had over 4,000 hospitals to choose 
from. They chose RMH as the lead for this story. A five year-old boy 
had been turned away from the RMH ED because ``every bed was filled.'' 
He died en route to another hospital. As a result of a lawsuit and the 
feature story on 60 Minute s, OhioHealth eventually reversed course. In 
December of 1999, OhioHealth announced plans to expand the RMH ED. The 
new ED was incorporated into the ongoing plans for the new cardiology 
False Pretenses in $200,000,000 Bond Finance Deal
    In the fall of 2000, OhioHealth sought FranklinCounty's approval of 
$200,000,000 in tax-subsidized bonds. They wanted this money to build 
cardiology towers at RMH and Doctor's West. The County held the 
requisite TEFRA hearing and invited me to attend. I understand that the 
federal government mandates TEFRA hearings in an attempt to guarantee 
fairness and fiscal responsibility in the funding of non-profit 
organizations. Believing I had just the sort of inside information that 
a TEFRA hearing is designed to uncover, I offered testimony to the 
Hospital Commission.
    I testified with regard to what I believed to be fraudulent 
contracting between OhioHealth and MedPartners. Three years later, more 
than a dozen HealthSouth executives and officers were indicted/
convicted and/or fired for their role in fraud with Richard Scrushy. At 
least five of those individuals including Scrushy himself, were at 
MedPartners when the RMH contract was negotiated.
    OhioHealth attorney Penny Proctor attempted to contradict my 
testimony. I testified that OhioHealth had contracted with MedPartners 
and maintained a contract with MedPartners successor, Team Health. Ms. 
Proctor stated categorically, ``[t]here is no contract with Team 
Health.'' Her testimony may be found in the public record. Seen in the 
most favorable light, Ms. Proctor is like child making a promise with 
her fingers crossed behind her back. However, as an attorney and with 
$200,000,000 at stake, this is no trivial act.
    It is an undisputed fact that OhioHealth contracted with Mid-Ohio 
Emergency Services (MOES). MOES is a MedPartners/Team Health subsidiary 
completely controlled by MedPartners/Team Health. Secondly, is Ms. 
Proctor really claiming that this 501(c)3 charity sent $60,000,000 to 
Team Health without a contract? This is a gross breach of fiduciary 
duty. Thirdly, the continued absence of a contract with Team Health 
would now be prohibited under HIPPA law. OhioHealth has sent about a 
half a million confidential patient records to Team Health.
    Despite whatever convoluted technical sense in which her testimony 
might contain some grain of truth, Ms. Proctor had one goal, to deceive 
the Hospital Commission. Ms. Proctor sought to distance OhioHealth from 
MedPartners, to publicly deny OhioHealth's affiliation with 
MedPartners. Ms. Proctor's role was, like the old Mission Impossible 
cliche, to ``disavow any knowledge'' of MedPartners.
    There are two more ethical, and perhaps legal, problems with her 
claim. One, her public claim appears diametrically opposed to the 
testimony OhioHealth officials offered to federal investigators behind 
closed doors. There, it appears they claimed that they fully intended 
to contract with MedPartners, that they knew that Findeiss worked for 
both MedPartners and OhioHealth at the same time. Which version is 
true, the one offered to federal investigators or the one offered to 
the Hospital Commission? Which version is false?
    The most sinister aspect of Ms. Proctor's false testimony is that 
it was made with the goal of obtaining $200,000,000. Ms. Proctor knew 
or should have known OhioHealth had a contract(s) with MedPartners/Team 
Health and/or its subsidiaries. Ms. Proctor misrepresented these facts 
to the Hospital Commission. Does this amount to false pretenses in non-
profit hospital financing?
The Subsequent Closure of Doctors' Hospital North
    At one point Columbia/HCA sought to purchase Doctors' Hospital. 
They signed a letter of intent in March of 1997. Like OhioHealth, 
Columbia saw the lucrative cardiology potential of Doctors' West as the 
prize. The indigent care at Doctors' North was a burden. The deal 
required the approval of the Ohio Attorney General. OhioHealth CEO, 
William Wilkins, vigorously opposed Columbia's efforts and filed a 
written response. The accusation was always that if the deal was 
allowed to proceed, Columbia would close Doctors' North. Another 
hospital system, Mt.Carmel had lost the deal for exactly that reason.
    In late 1996, the Ohio AG began to expand the AG's oversight role 
under the Charitable Trust Act. Wilkins may have had some role in this. 
He appeared as a panelist at a symposium organized by the AG in April, 
1997. The Doctors'/Columbia deal soon fell through. OhioHealth then 
reached an agreement to purchase Doctors' Hospitals in August. The deal 
was approved by the AG in October. OhioHealth was awarded the contract 
because they promised Doctors' CEO that they would not close Doctor's 
North. It appears that the Ohio AG understood this promise as well. 
This appears to have been a condition of the Attorney General's 
approval. The Ohio AG's office said that their approval of the sale to 
OhioHealth, ``reduces our concerns over potential hospital closings.'' 
OhioHealth repeated this promise to the community. They promised not to 
close Doctor's North.
    OhioHealth's supposed plan to rescue Doctors' North relied upon 
cardiology services, specifically a heart surgery program. This was 
rather silly because it meant competing with the 
OhioStateUniversityMedicalCenter which was just a few blocks away. 
Predictably, the heart surgery program failed and Doctors' North died a 
slow death. It closed inpatient services in 2001.
    The non-profit ``charity'' known as OhioHealth made a ``profit'' of 
$86 million after it closed the door to the indigent patients at 
Doctors' North.
Private Inurement to OhioHealth CEO & CFO
    Investigation of the OhioHealth/MedPartners connection uncovered 
evidence suggesting private inurement to top OhioHealth executives. In 
1996 CEO William Wilkins and CFO Dennis Freudeman filed to incorporate 
the Upper ArlingtonSurgeryCenter aka the 
RiversideOutpatientSurgeryCenter. There are several indications that 
the ownership of this surgery center was structured differently than 
all other OhioHealth surgery centers. Evidence indicates that the 
RiversideSurgeryCenter is a privately held, for-profit entity.
    The RiversideSurgeryCenter holds itself out to be part of the non-
profit, RiversideHospital. The Center uses Riverside's name and logo. 
In newspaper articles and its annual reports OhioHealth indicates that 
the RiversideSurgeryCenter is part of (non-profit) OhioHealth.
    Publicly available state records indicate that Wilkins and 
Freudeman still own the SurgeryCenter long after they left OhioHealth. 
The problem is that this is not a separate, arm's length business 
entity owned by Wilkins and Freudeman. This is not Bill & Denny's 
SurgeryCenter. Wilkins and Freudeman were able to acquire their 
ownership stake by virtue of the fact that they were officers of the 
non-profit charity, OhioHealth. Wilkins' and Freudeman's ownership 
stake is almost certain to be profitable. The RiversideSurgeryCenter is 
strategically located in one of the most affluent sections of town.
    When I sought information about this possible private inurement 
under the FOIA, I was told that the SurgeryCenter is a for profit 
venture thus no disclosure is required. Charitable 501(c)3 
organizations are required by law to accurately and publicly disclose 
the income of their executives. Private inurement is a basis for 
revoking an organizations 501(c)3 status. OhioHealth did not report any 
income from the surgery center to William Wilkins and Dennis Freudeman. 
Wilkins and Freudeman were respectively the CEO and CFO of OhioHealth. 
If they had additional undisclosed income as a result of their 
positions, I understand this would be a violation of law. Since they 
refuse to disclose the income from the SurgeryCenter, it appears this 
may be the case. It appears that Wilkins, Freudeman and OhioHealth are 
concealing private inurement.
    Were there other examples of private inurement at OhioHealth? We 
now know that Richard Scrushy's other company, HealthSouth, paid bribes 
to acquire hospital contracts. Also, in a recent California court case, 
several doctors alleged that MedPartners' successor, Team Health 
offered kickbacks for assistance in acquiring the hospital's ED 
contract. This suggests the possibility of other kickbacks or private 
inurement at OhioHealth.
    Certain hospital administrators and corporate executives abuse and 
exploit the 501(c)3, non-profit hospital system. It's not known how 
much private inurement may have passed to Wilkins and Freudeman nor is 
it known exactly how Blom and/or Wilkins and others may have profited 
from their relationship with Scrushy's MedPartners.
    It is known that OhioHealth CEO Dave Blom seemed infatuated with 
MedPartners and welcomed them with open arms. It is also known that 
Richard Scrushy and Clifford Findeiss made or recouped tens of millions 
of dollars in their rescue of MedPartners. That rescue coincided with 
the secretive and I believe, fraudulent contract with OhioHealth. 
Scrushy's successors, Team Health, its executives and the venture 
capitalists make about $150 million per year from our nation's 
emergency care system. I think the evidence shows little if any value 
added by these expenditures. In fact, I believe it can be shown that 
the quality of care actually declines as a result.
    The solution is not to abandon the non-profit system. The solution 
is to enforce laws already on the books, laws designed to prevent 
kickbacks and private inurement. Where federal laws are unclear and 
unenforceable, Congress should work with prosecutors to clarify 
statutory language so the law may fulfil its intend purpose.
    We must not abandon the non-profit hospital system. To do so would 
be to relinquish health care to the Richard Scrushys of the world. We 
can't depend upon them to provide compassionate, high-quality health 
    If this is the kind of information you seek, please advise and I 
will gather my evidence in support of my allegations. Thank you.


   Statement of Pat Palmer and Nora Johnson, Caldwell, West Virginia
    Hospitals assert that they bill all payers, including CMS, 
uniformly. What is not often said, particularly to the under-insured or 
the uninsured, is that all payers are not expected to reimburse 
uniformly for the billed charges. Typically, CMS reimburses the lowest 
amount, major insurers the next lowest amount, and the working poor and 
uninsured pay the highest rate. It is our understanding that, when 
referring to a facility's Cost-to-Charge ratio, many hospitals bill 
uninsured patients 3 to 4 times the amount accepted as payment-in-full 
from insurance companies. A careful review of individual items and 
services contained in itemized statements will demonstrate mark-ups in 
excess of 4000%, and a major facility routinely charges for a solution 
that is marked up 367 times cost.
    The area of unconscionable mark ups, is merely part of the problem 
confronting our nation, the easiest to attack, but not the easiest to 
rectify. An effort to remedy overcharges by exacting an agreement from 
hospitals to apply a discount to uninsured, whether it is 40% or 80%, 
is hopelessly naive, totally ineffectual, and contraindicated by the 
billing examples we can provide for the Committee. Major healthcare 
systems are offering such discounts for the purposes of simultaneously 
appeasing lawmakers, generating good public relations, and emphatically 
protecting profits.
    In fact, a proffered discount is meaningless when counter-balanced 
by rampant billing violations. The federal government has mandated that 
facilities bill according to accepted guidelines. The government 
considers violations of these billing guidelines fraudulent and/or 
abusive. If CMS defines a billing pattern as fraudulent and abusive 
when submitted to the federal government for reimbursement, then why is 
it legal to foist the same billing pattern upon the public? Why are 
courts forcing private payers and the uninsured to pay facilities for 
hospital bills defined as fraudulent and abusive by CMS and the OIG? 
Are these guidelines applicable to payers other than the government?

  The Health Insurance Portability and Accountability Act of 1996 (HR 
                       3103) or HIPAA Section 241

    ``With the passage of HR 3103 on August 21, 1996, Congress declared 
war on all health care fraud and abuse and applied this provision to 
all payers. Health care fraud is now a ``federal health care offense'' 
with the full arsenal of federal law enforcement agencies available to 
find and punish violators. Fines are stiffer than in the past and 
transgressors face possible prison sentences. For purposes of this law, 
a health care benefit program is defined as:
``any public or private plan or contract, affecting commerce, under 
which any medical benefit, item, or service is provided to any 
individual and includes any individual or entity who is providing a 
medical benefit, item or service for which payment is made under the 
plan or contract.''
Source: Complete Guide to Part B billing and Compliance, February 
2002Page Compliance-5 Published by Ingenix.
    If, this is true, then why hasn't the government acted upon the 
providers and facilities that flagrantly violate billing guidelines?

    1.  The OIG has, to some extent, but its results rarely redress 
private payers.
    2.  CMS reimburses electronically via HCFA forms and UB-9X's. The 
charges are grouped, and reimbursement is made according to the 
applicable reimbursement system, (DRG's, APC's, etc.) An itemized 
statement is usually not germane to the DRG/APC reimbursement system.
    3.  Billing violations are more easily identifiable when a line-by-
line examination of the itemized bill is performed. This is rarely done 
by payers, and few have the expertise.
    4.  Most auditors are not educated in the area of billing 
compliance guidelines as established by the federal government. A 
hospital or insurance company audit examines items/services ordered and 
documented in the medical record, and merely verify the quantities of 
such as reported on the bill.
    5.  Facilities excel in creating cryptic, non-informational 
masterpieces, euphemistically referred to as `itemized bills'. The less 
sense a payer can make of the bill, the more cents the provider can 
make with it.

    The fact is that the overwhelming majority of hospital bills 
generate charges from line items that are fraudulent and abusive 
according to Federal Billing Guidelines, and coding guidelines as set 
forth in the Current Procedural Terminology copyrighted by the American 
Medical Association. Excessively billed items and services include:

      Routine supply charges that have been calculated into the 
cost of the room or service, and are duplicated on most bills with 
individual charges attached;
      Equipment charges for non-billable equipment;
      Unbundled procedure coded charges that emanate from 
hospital chargemasters' in direct violation of the Correct Coding 
Initiative established by the National Correct Coding Council developed 
for CMS Bureau of Program Operations.

    Another trend and very troubling area is the emergence and charges 
for disposable operating equipment. Equipment used multiple times and 
for multiple patients is considered as part of the accommodation or 
facility charge. One of the criteria defining ancillary supplies is 
that they are either not re-useable (hence disposable) or represent a 
cost for each preparation. This definition has given life to an entire 
mega billion dollar industry of ``disposable surgical equipment''. The 
result is that hospitals have discovered a new revenue center and now 
bill for and use disposable equipment with abandon and capitalize on 
enormous mark-ups as well. The red flags wave when the cost of 
`disposable equipment' exceeds the cost of permanent reusable 
    Hospital drug billing: many providers make a majority of profit on 
drug billing. Aside from the obvious mark-ups, it is common to see 
line-item charges for a vile of medication containing 5 mg billed for 
each use, when in fact the patient was prescribed 1mg per dose, 2 times 
daily. A phone call to the hospital pharmacy usually substantiates that 
1 mg vials are in stock. If 1mg vials are available in the hospital 
pharmacy, or available for order from a wholesaler, hospitals have no 
justification for daily charges of the 5mg vial repeatedly for weeks. 
Billing for items or services not rendered is #1 on the OIG's risk 
areas for fraud and abuse. This issue is separate from situations 
requiring use of a drug that cannot be used again, or drugs that have a 
limited shelf-life once opened.
    Hospitals bill whatever they want. They refuse to be accountable 
for, items fraudulently and abusively billed, errors billed, and 
grossly flagrant and unconscionable mark-ups.
    There is NOT ONE entity in the United States of America that will 
enforce federal compliance billing guidelines as they relate to private 
sector patients.
    One quandary faced by most patients is: do I take my finite dollars 
and fight the hospital bill by hiring an attorney? Or do I take my 
finite dollars, save my credit rating and good name, and just pay the 
hospital or collection agency? The answer is as obvious as the choice 
is narrow.
    The concept of making hospital prices more transparent via 
publication of charges designed to assist informed consumer choices 
will meet with abject failure. That hospital will not tell consumers 
that they will be charged an extra:

      $57 for a FRED. (Fog Reduction Elimination Device--a 2X2 
gauze used to wipe moisture from lenses in the operating room----not a 
billable item);
      $200 for a bag of IV solution that costs the hospital 
about 25 cents;
      $985 pair of scissors which is not a billable item;
      $1,028 for a contrast solution that CMS deems not 
chargeable as it is included in the cost of the procedure;
      $11 for a mucous recovery system--a box of tissues
      $350 for an IV start kit that is un-billable in the O/R 
and costs less than $2.
      Thousands of dollars per day for Nursing Services that 
CMS mandates as incorporated into the daily room charge and is not 
separately billable.

    Are the hospitals going to inform patients of these charges before 
they appear on the bill? Look at the dollars in their off-shore 
accounts, the CEO & CFO salaries, then answer.
Report Summation:
    The purpose of this report is to expose a few of the unscrupulous 
billing methods and price gouging, regularly used by hospitals 
nationwide. These examples represent a majority of hospital bills that 
we have reviewed, ranging from the most prestigious institutions in the 
country to religious affiliated hospitals, and corporately owned 
    The examples provided represent a few of an infinite number of 
methodologies that hospitals can employ to feed the bottom line. There 
are hidden charges in most hospital bills, and these hidden items can 
appear simultaneously, in several different places on the bill, with 
different charges and descriptions that illegally inflate the billed 
    1.  The enforcement of HR 3103, Section 241 of HIPAA, is 
imperative. If billing is truly uniform, then the standards and 
definitions for fraudulent and abusive billing should be enforced and 
extended to all payers from all sectors.
    2.  Patients should have access to an itemized hospital bill--for 
free and without encountering hostility from hospitals staffs. There 
are facilities in Nashville that charge $13.00 for an itemized bill 
that CMS has mandated as a right to their beneficiaries without charge.
    3.  Patients should also have the right to a UB-92, whether or not 
they are insured. The information on the UB-92 is supplemental and 
helpful when analyzing the itemized statement, and the provision of 
such would not pose a significant additional burden on the hospital.
    4.  Regarding hospital cost reports submitted annually to CMS: are 
the inflated or CMS non-reportable charges that are billed to other 
payers, calculated into the cost report? Do these charges impact CMS or 
the facility cost-to charge ratio for the following year?
    5.  How much is too much? What constitutes a `fair and reasonable' 
price? Can we afford to suspend businesses rights to profit? Hospitals 
are big business. A new `profit makes right' morality has emerged in 
the last three decades, and its heroes are being consecrated. They are 
the captains of industry who have amassed great wealth for themselves 
and their businesses. We hail them and then jail them. This bottom-line 
morality/mentality has pervaded the once held sacrosanct hospital, and 
the nation is footing the bill.

    A great man, a `captain' with a conscience, told us that DRG plus 
26% would be a fair and equitable reimbursement for hospitals, juries 
are in agreement, and so are we.


                         Statement of VHA, Inc.
    Not-for-profit health care organizations are the backbone of the 
nation's health care system, representing most of the nation's largest 
and smallest hospitals, and providing the large majority of care to the 
uninsured and underinsured patient population. Many of these 
institutions are delivering on their promise of community service every 
day, while also establishing clinical standards that make America's 
health care system the most advanced and sophisticated in the world. 
These hospitals are also investing in specialized programs and 
technologies that improve their business operations while actually 
reducing costs.
    However, a number of socioeconomic, political and cultural issues 
have converged in recent years to create a significant threat to our 
health care system. Not-for-profit hospitals are struggling to balance 
competing priorities and pressures. Hospitals are faced with limited 
reimbursement from both private insurers and the government, the 
imperative to acquire breakthrough clinical and operational 
technologies, as well as the need to expend resources to attract and 
maintain a strong workforce. Furthermore, the number of uninsured and 
underinsured individuals in the United States is increasing, placing an 
additional strain on the nation's not-for-profit health care providers. 
Caught between these realities, not-for-profit hospitals and affiliated 
physicians endeavor to remain true to their historic missions to 
provide charity care and other community benefits, while remaining 
financially viable.
    Public attention has turned to examples of instances when hospitals 
have acted aggressively to collect money from uninsured or underinsured 
persons, yet little attention is paid to the community benefits that 
not-for-profit hospitals consistently provide.
    As the nation's largest alliance of not-for-profit health care 
organizations, VHA Inc. believes hospitals and policy makers should 
work together to better address the issue of caring for the uninsured 
and underinsured. Hospitals must offer transparency regarding the 
charges associated with providing care as well as assure high-quality 
care for the uninsured and underinsured. We urge Congress to work 
toward bipartisan, achievable solutions to address the health care 
coverage needs of this population.