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99–670 2005

PRICING PRACTICES OF HOSPITALS 

HEARING 

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 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

AMO HOUGHTON, New York, Chairman 

ROB PORTMAN, Ohio 

JERRY WELLER, Illinois 

SCOTT MCINNIS, Colorado 

MARK FOLEY, Florida 

SAM JOHNSON, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

EARL POMEROY, North Dakota 

GERALD D. KLECZKA, Wisconsin 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

MAX SANDLIN, Texas 

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. 

iii 

C O N T E N T S 

Page 

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

WITNESSES 

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 

(1) 

PRICING PRACTICES OF HOSPITALS 

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:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

June 15, 2004 

OV–14 

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. 

BACKGROUND: 

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.’’ 

FOCUS OF THE HEARING: 

The hearing will examine the current hospital pricing system and focus on the 

lack of transparency in hospital charges, which hinders consumers from making inVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
3 

formed choices about where they get care and the options for increasing information 

about hospital pricing. 

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f 

4 

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. 

[Laughter.] 

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:] 

5 

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 up. 

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. 

f 

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, 

6 

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 back. 

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 AdminisVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
7 

tration. 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 forprofit. 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. 

8 

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 notfor-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 Code? 

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, 

9 

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. 

10 

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 circumstances. 

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. 

11 

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 reimbursements. 

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 taxexempt 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 uninsured. 

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 

heat? 

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 beVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
12 

fore Congress passed the tax break. He promptly founded Medical Savings Insurance Co. to sell more HSAs. 

PR HARDBALL 

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 

Hispanics. 

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 healthcare costs, especially hospital fees, is about more than money: It’s a moral crusade. 

As such, he makes no apologies for unorthodox methods. 

ARM-TWISTING? 

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 bareknuckle 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 

13 

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 

f 

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? 

STATEMENT OF NANCY KANE, PROFESSOR OF MANAGEMENT, 

DEPARTMENT OF HEALTH POLICY AND MANAGEMENT, HARVARD SCHOOL OF PUBLIC HEALTH, 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 

14 

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 

cost. 

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) 

15 

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. 2Daly 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 

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, 

Massachusetts 

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 lifethreatening diseases like breast cancer, and do not see a physician when suffering 

acute illnesses.3

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 

16 

4 1982 from Cleverley, WO, Hospital Industry Analysis Report, 1979–1983; 2002 data from the 

Almanac of Hospital Financial Performance, Ingenix, 2004. 5See 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. 6See footnote 1, above 

7See 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. 

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 2002.4

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. 

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 insurance.6

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 mid1990s 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

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 YaleNew Haven Hospital and Provena Health in Illinois, among others. 

17 

8See 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. 

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. 

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 nonurgent 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. 

Summary 

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. 

f 

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

STATEMENT OF PAUL B. GINSBURG, PRESIDENT, CENTER FOR 

STUDYING 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 

18 

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 conVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
19 

1Strunk, Bradley C., and Paul B. Ginsburg, ‘‘Tracking Health Care Costs: Trends Turn Downward In 2003,’’ Health Affairs, Web exclusive (June 9, 2004). 

sumers 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. 

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 hospitals. 

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 unVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
20 

derstands 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 feefor-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 issues. 

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 

21 

2Trude, 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). 3Mays, 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 2003). 

alternatives.2 For a number of reasons, these tiered-network products have developed slowly,3 but they eventually may become significant. 

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 discounts. 

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 incentives. 

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. 

De ́ja` 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 decisions. 

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 difVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
22 

fusion 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. 

f 

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

Lee? 

STATEMENT OF PETER V. LEE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PACIFIC BUSINESS GROUP ON HEALTH, SAN 

FRANCISCO, CALIFORNIA 

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 effectively. 

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 hospitals. 

23 

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. 

24 

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. 

3 Rapaport, Lisa. Region feels pain of high hospital bills. Sacramento Bee. November 10, 2002. 4Sacramento Hospital Comparison: Full Year 2000 Inpatient Data. HealthShare Technology, 

Inc. November 14, 2002. 

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 issues. 

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. 

• 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 efficiency. 

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

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

• 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: 

25 

5Kane, 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 

• 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; 

• 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-competiVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670

Insert offset folio 99670a.001
26 

tive’’ initiatives: the Consumer and Purchaser Disclosure Project (‘‘the Disclosure 

Project’’); and the Leapfrog Group. 

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) multistakeholder 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; 

27 

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 treatments. 

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 more. 

4. Allow the Market to Function 

Finally, we need to be sure that comparative performance information can indeed 

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pitals. 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 efficiency; • 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 them. 

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 demonstrations. 

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. 

f 

Chairman HOUGHTON. Thank you, Mr. Lee. 

Ms. Davis? 

STATEMENT OF KAREN DAVIS, PRESIDENT, THE 

COMMONWEALTH FUND, NEW 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 

29 

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 accountability. 

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 techVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
30 

nology 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 discounts). 

• 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 

profitable. 

• 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 services. 

• 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. 

31 

• 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 mid1990s, 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 purchasers. 

• 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 access. 

• 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. 

32 

1K. Levit et al., ‘‘Health Spending Rebound Continues in 2002,’’ Health Affairs (January/February 2004): 147–159. 2Kaiser Family Foundation/Health Research and Educational Trust, Employer Health Benefits 

2003 Annual Survey, September 2003. 3The Commonwealth Fund Biennial Health Insurance Survey (2003). 

4Sara 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. 5Karen Davis, A Theory of Economic Behavior in Non-profit, Private Hospitals, doctoral dissertation in economics, Rice University, May 1969. 

HOSPITAL PRICING BEHAVIOR AND PATIENT FINANCIAL RISK 

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

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 efficiency; 

• 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. 

HOSPITAL PRICING BEHAVIOR 

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 profitmaximizing 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 

33 

6P.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. 8P.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. 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. 10L.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 ForProfit 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. 12 Commonwealth Fund Task Force on AcademicHealth Centers, Health Care at the Cutting 

Edge, Commonwealth Fund, July 2000. 

money in order to advance a broader mission of excellence in patient care, medical 

education, and cutting-edge research. 

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

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. 

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. 

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. 

34 

13 Jon R. Gabel and Jeremy D. Pickreign, Risky Business: When Mom and Pop Buy Health 

Insurance for Their Employees, Commonwealth Fund, April 2004. 14 Robert J. Blendon et al., ‘‘Confronting Competing Demands to Improve Quality: A FiveCountry Hospital Survey,’’ Health Affairs 23(3):119–135, May/June 2004. 15 A.C. Monheit, ‘‘Persistence in Health Expenditures in the Short Run: Prevalence and Consequences,’’ Medical Care 41, supplement 7 (2003): III53–III64. 

This is one factor in the higher premiums charged for small businesses than for 

large businesses for the same benefits.13

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 bestquality 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. 

THE MARKET FOR HOSPITAL SERCICES IS DIFFERENT 

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 include: 

• 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. 

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 inVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00038 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
35 

16S. Trude, Patient Cost Sharing: How Much is Too Much? Center for Studying Health System Change, December 2003. 17Sara 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. 18 E.A. McGlynn et al., ‘‘The Quality of Health Care Delivered to Adults in the United States,’’ 

New England Journal of Medicine, 348(26):2635–45. 19K.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. 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. 21Sara 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. 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): W4–210–W4–21 

come out-of-pocket.16 This is a financially burdensome exposure; it effectively leaves 

people underinsured. 

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. 

CONSUMER-DRIVEN HEALTH CARE 

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 providers. 

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 costsharing, moreover, is not an effective mechanism for differentiating appropriate and 

inappropriate care but tends to lower use of both kinds of care.19

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

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. 

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 

36 

23Karen Davis, ‘‘Consumer-Directed Health Care: Will it Improve Health System Performance,’’ Health Services Research, forthcoming, August 2004. 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. 25 Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, ‘‘U.S. Health Spending in an 

International Context,’’ Health Affairs, May/June 2004. 26Gerard 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. 27 Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, ‘‘U.S. Health Spending in an 

International Context,’’ Health Affairs, May/June 2004. 28See for example, Reinhard Busse, ‘‘Disease Management Programs in Germany’s Statutory 

Health Insurance System,’’ Health Affairs, May/June 2004. Steven Morgan et al., ‘‘OutcomesBased Drug Coverage in British Columbia,’’ Health Affairs, May/June 2004. 

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

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 patient. 

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, provider. 

INTERNATIONAL EXPERIENCE 

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). 

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. 

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 patients.27

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. 

37 

29Karen 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. 30Peter 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. 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. 32Karen 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 33Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost 

Containment, Johns Hopkins Press, 1990. 

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. 

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: 

• 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 hospitals • 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. 

HISTORICAL PERSPECTIVE ON HOW WE GOT WHERE WE ARE 

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 shortlived 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. 

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 1977. 

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 hosVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
38 

34Karen 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. 35Karen Davis, Gerard F. Anderson, Diane Rowland, and Earl P. Steinberg, Health Care Cost 

Containment, Johns Hopkins Press, 1990. 36Drew E. Altman and Larry Levitt, ‘‘The Sad History of Health Care Cost Containment as 

Told in One Chart,’’ Health Affairs, January 23, 2002 37Karen Davis and Barbara S. Cooper, American Health Care: Why So Costly? Testimony for 

the Senate Appropriations Subcommittee, June 2003. 38Karen Davis and Barbara S. Cooper, American Health Care: Why So Costly? Testimony for 

the Senate Appropriations Subcommittee, June 2003 39Karen 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. 

pitals 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

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

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 2000s.38

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 Maryland. 

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 

39 

41Karen 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. 42Len 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. 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. 

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. 

PUBLIC POLICY OPTIONS 

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. 

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 patient. 

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 lifethreatening 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. 

But efficiency is not the only important dimension. Quality is equally important. 

Steven Grossbart at Premier, Inc., recently demonstrated wide variation in both cost 

40 

44S. 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. 45Thomas 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. 46Leapfrog Group, draft report to The Commonwealth Fund, 2004. 47Peter Smith and Nick York, ‘‘Quality Incentives: The Case of U.K. General Practitioners,’’ 

Health Affairs May/June 2004. 

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 complexity. 

One of the difficulties with generating this information is the absence of a multipayer 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 considered; • 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

Pay for Performance 

The natural desire of physicians and other health care leaders to provide highquality 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. 

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. 

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 

41 

48Pamela 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. 

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 care. 

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. 

42 


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f 

Chairman HOUGHTON. Thanks very much. Dr. Herzlinger. 


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STATEMENT OF REGINA E. HERZLINGER, NANCY R. MCPHERSON PROFESSOR, HARVARD BUSINESS SCHOOL, BOSTON, 

MASSACHUSETTS 

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 enrollees. 

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 UnitedHealthcare. 

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. 

54 

* 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). 1 ‘‘Twenty Years of Consumer Reports Surveys Show Astounding Gains,’’ Consumer Reports, 

April 2000, p. 12. 2 Auto Affordability Index, accessed August 21, 2003. 

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. 

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

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 declined. 

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 others? 

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 payers. 

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 

55 

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 available. 

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 av- erage 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 ig- norance. 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 safety. 

56 

3Ward’s Automotive Yearbook (Detroit, MI: Ward’s Reports, 2002), p. 202. 4Kathleen 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. 6Kevin P. Coyne and Jonathan W. Witter, ‘‘What Makes Your Stock Prices Go Up and Down,’’ 

The McKinsey Quarterly, No. 2, 2002, pp. 29–39. 7Slide 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. 8Mark 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. 9Dana Mukamel and Alvin I. Mushlin, ‘‘Quality of Care Information Makes a Difference,’’ 

Medical Care, vol. 36, no. 7 (July 1998), pp. 945–954. 10 New York Business Group on Health Care (NYBGH), Conference Proceedings, ‘‘The Nation’s 

Health Insurance System’’ (New York: NYBGH, 1992), p. 61. 

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

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 prices? 

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

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

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

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 

57 

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. 13Forrester Research, ‘‘The Millionaire Online’’ (Cambridge, MA: Forrester Research, May 

2000), p. 11. 14 ‘‘Just Another Day at the Office,’’ USA Today, April 16, 2001, pp. 1–2b. 15PricewaterhouseCoopers, 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. 16Susannah Fox and Lee Rainie, How Internet Users Decide What Information to Trust, May 

2002. 17Scott Reents, Impact of the Internet on the Doctor-Patient Relationship, op. cit., p. 4. 18 Ibid., p. 2. 19Thomas E. Miller and Scott Reents, The Health Care Industry in Transition: The Online 

Mandate to Change (New York: Cyber Dialogue, 1998). 20David 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. 

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

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. 

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-wantwhen-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

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. 

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

Health Policy Perennial Favorite: The Stupidity of Health Care Consumers 

We live in an information age, surrounded by ubiquitous newspapers, televisions, 

telephones, computers, radios, magazines, and books, available worldwide, roundthe-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. 

58 

21 (EDGAR stands for ‘‘Electronic Data Gathering, Analysis, and Retrieval’’ system.) 22See, for example, safety data for cars at and for planes at. 23Felicity Barringer and Geraldine Fabrikant, ‘‘Coming of Age at Bloomberg L.P.,’’ The New 

York Times, March 21, 1999, p. 1. 24Dale 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). 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, 1999. 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. 

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. 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

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

Further, the technocrats’ critique implies that professionally trained people are 

more capable of interpreting complex information. But the technocrats who poohpooh 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? 

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 subVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
59 

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. 29Peter 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. 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). 31See, 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. 32See, 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. 34David 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, 2001). 35 Bates, ibid. 

ject. 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 attributes.’’29

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

To my mind, these judgments ignore the fundamental tenet of information-seeking behavior: 

Consumers seek only the information that is directly pertinent to their 

needs. 

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 plans.33

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. 

60 

36 Joseph P. Newhouse, ‘‘Risk Adjustment: Where Are We Now?’’ Inquiry, Vol. 35, No. 2 (Summer 1998), pp. 122–129. 37Susan J. Landers, ‘‘Physician Data Bank Records Found Inaccurate, Incomplete,’’ American 

Medical News, Vol. 43, No. 47, December 18, 2000, pp. 1–2. 38David 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. 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. 298–308. 40Landers, op. cit. 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. 

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 lessseverely 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

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. 

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 

stocks. 

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

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 reVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00064 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
61 

43 ‘‘Operation that Rated Hospitals Was a Success, but the Patient Died,’’ The Wall Street 

Journal, August 23, 1999, p. A1. 44 Ibid. 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. 47 ‘‘Operation that Rated Hospitals Was A Success, but the Patient Died,’’ The Wall Street 

Journal, August 23, 1999, p. A1. 48Watson Wyatt, ‘‘Purchasing Value in Health Care’’ (Bethesda, Maryland: Watson Wyatt, 

1997). 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. 1A. 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 

Continued 

ceived. 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

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 studied.46

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

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

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

62 

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. 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. 55Michael Chatfield, A History of Accounting Thought (Huntington, NY: Robert E. Krieger 

Publishing, 1997), p. 32. 56 Joel Seligman, The Transformation of Wall Street (Boston: Houghton-Mifflin, 1982), p. 41. 57Fred Skousen, op. cit., p. 2. 58 Joel Seligman, op. cit., pp. 54–55. 59 Joel Seligman, op. cit., pp. 43–48. 

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

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 mid1930s. The delay is surprising because accounting, the measurement tool of business 

performance, has existed since the middle of the fifteenth century when doubleentry 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. 

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

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

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

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 setVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
63 

60Walter 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). 61 Bethany Mclean, ‘‘Why Enron Went Bust,’’ Fortune, Vol. 144, No. 13 (December 24, 2001), 

pp. 58–68. 62See, for example, Joel Seligman, The Transformation of Wall Street (Boston: Northeastern 

University Press, 1995), pp. 561–568. 63 Bertram Schwarzschild, ‘‘The Tau Neutrino Has Finally Been Seen,’’ Physics Today, Vol. 53, 

No. 10 (October 2000), pp. 17–19. 64Leslie Robert, ‘‘A History of the Human Genome Project 2001,’’ Science, Vol. 291, No. 5507 

(February 16, 2001), pp. 1195–1200. 65 Richard E. Baker, ‘‘Accounting Rule-Making—Still at the Crossroads,’’ Business Horizons, 

vol. 19, no. 5, October 1976, p. 66. 66Steve Pearlstein, ‘‘The Whole Story?’’ The Washington Post, May 12, 2002, p. H01. 67 ‘‘SEC Chief to Impose ‘Stringent’ Rules on Accountants,’’ The Buffalo News, May 24, 2002, 

p. A9. 

ting standards in health, safety, environment, and consumer protection follows a 

similar public-private structure.60

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

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

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 contract. 

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. 

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 

64 

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. 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. 71Mark 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. 73David 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. 74 ‘‘Health Plan Report Cards May Influence Insurers More than Consumers,’’ Findings Brief, 

Health Care Financing & Organization, Vol. 3, No. 3, April 2000. 

to create a new entity to oversee the accounting professionals.68 Similarly, the rulemaking Financial Accounting Standards Board hoped to simplify and streamline its 

occasionally complex rules.69

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-themoney 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

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 

65 

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. 

of the patient care procedures.75 And all these results were obtained in the absence 

of consumer control. 

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 model: 

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 fully. 

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. 

66 

76Michael Sherman and Regina E. Herzlinger, ‘‘Health Allies,’’ Harvard Business School Case 

No. 302–019, Rev. September 2002 (Boston, Mass.: Harvard Business School Publishing, 2001). 77 Ingenix, communication to author, June 18, 2004. 78 ‘‘The Good Hospital Guide,’’ Sunday Times, April 6, 2003 and ‘‘Private, I?’’, accessed June 

20, 2004. 79 Audit Bureau of Circulation (ABC), published on AdAge.com, January 17, 2003. 80David E. Larson, Mayo Clinic Family Health Book (New York: William Morrow, 1996). 81 ‘‘A New Direction for Employer-Based Health Benefits,’’ KPMG, LLP, publication 99–12–05, 

November 1999. 

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 employer.76

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. 

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 

HealthAllies.78

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 blankeyed, 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 Book.80

The web is a major source of health information. It not only enables masscustomization 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

Nevertheless, substantial market needs remain largely unserved. A 2000 survey 

revealed that the information that consumers sought most was largely unavailable. 

67 

82Scott Reents, Impact of the Internet on the Doctor-Patient Relationship: The Rise of the 

Internet Health Consumer (New York: Cyber Dialogue, 1999), p. 5. 83The Commonwealth Fund, ‘‘Accessing Physician Information on the Internet’’ (New York: 

Author, January 2002). 84Michelle 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. 86Dagmara Scalise, ‘‘Who’s Rating You?’’ Hospitals & Health Networks, December 2001, 

pp. 36–40. 87See, for example, ‘‘Bush Is Said to Be Set to Back Patient’s Bill,’’ New York Times, June 

7, 2002, p. A16. 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. 

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

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

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. 

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. 

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

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 consumerdriven health care system. 

f 

68 

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 Code. 

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 notfor-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-forprofits 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 notfor-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 beVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
69 

tween 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-profits? 

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 information. 

Chairman THOMAS. Dr. Ginsburg. 

Mr. GINSBURG. I don’t have anything to add to what Dr. Kane 

said. 

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. 

[Laughter.] 

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 like—— 

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 care. 

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 strucVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
70 

ture, 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 made. 

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 forprofit as well as the structure that you outlined? 

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 quality. 

Chairman THOMAS. Mr. Chairman, as we examine the question, 

we shouldn’t just focus on community or charitable care as it may 

71 

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. 

[Laughter.] 

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-forprofit, 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 today. 

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 direction? 

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. 

72 

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 us. 

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 thirdparty 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 

73 

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 

inquire? 

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 reVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
74 

spective 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. 

[Laughter.] 

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 forVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
75 

give 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. 

Herzlinger? 

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. 

Kleczka? 

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 

76 

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? 

[Laughter.] 

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 margin. 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 system. 

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 

77 

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 

to—— 

[Laughter.] 

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 

78 

it in Milwaukee. I did not want to give a speech. I wanted to ask 

a question. 

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. 

79 

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 lowercost 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 right? 

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 

80 

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 question. 

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 not? 

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 listed? 

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 challenged. 

Mr. SANDLIN. Okay. 

81 

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—— 

82 

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 

the—— 

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-forprofit. 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. 

83 

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 

time. 

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 have. 

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 

84 

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 you. 

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 speVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
85 

cific 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 Herzlinger. 

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:] 

DRAFT UNTIL PUBLIC COMMENT PERIOD ENDS 7/1/04 

Billing & Collections Principles and Guidelines for Low-Income, Uninsured 

Patients 

Principles 

All patients should be treated fairly, with dignity, compassion and respect. 

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 viability. 

Hospitals should assist patients with enrolling in Medicaid and other government—sponsored programs. 

86 

Debt collection policies of the hospital and its debt collection agencies and attorneys must reflect the mission and values of the hospital. 

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 residents. 

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 lowincome 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 

assistance. 

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 incur. 

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. 

87 

(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 obligation. 

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. 

f 

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 

88 

a charitable intent when they are providing care. I think that is 

an improvement over what it was historically. 

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 institutions. 

Yet at the same time, there is another element in the not-forprofit, 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 

89 

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 

money. 

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 wellmanaged, 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 forprofit companies have been skilled and effective at identifying failing not-for-profit hospitals that are failing because they are not 

90 

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 

91 

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 estimation. 

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 

92 

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 taxexempt 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 first. 

Mr. POMEROY. Dr. Ginsburg. 

93 

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 

ahead. 

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 

94 

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, actually. 

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 

95 

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 notfor-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 TenVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00099 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
96 

ant, 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 discounts. 

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 

97 

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 communities? 

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 taxexempt status or a 5-percent margin? 

Mr. GINSBURG. No, I do not know and they have both now. 

98 

Mr. SANDLIN. Well, I think that answers the question. Thank 

you. 

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? 

STATEMENT OF DAVID BERND, CHAIR, AMERICAN HOSPITAL 

ASSOCIATION 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 rising. 

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 

99 

in the initiative are doing so. A consumer-oriented website will be 

up early next year. 

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 statement. 

Regardless of how prices are displayed, hospitals have always 

helped patients who cannot pay. At Sentara, for instance, 63-yearold 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:] 

100 

Statement of David Bernd, Chair, American Hospital Association Board of 

Trustees 

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 Hospitals.’’ 

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 communities. 

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 onethird 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 receive. 

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: 

101 

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 confusion. 

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 reVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00105 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
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cently 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 services.’’ 

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 nonmedical 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 

103 

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 

104 

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. 

Conclusion 

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 

105 

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. 

f 

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

Sucher? 

STATEMENT OF RANDY SUCHER, EXECUTIVE VICE PRESIDENT 

AND CHIEF OPERATING OFFICER, SOUTHERN MEDICAL 

HEALTH SYSTEMS, INC., 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 

106 

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 

107 

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 lowend 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 today. 

f 

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

STATEMENT OF RICHARD MORRISON, REGIONAL VICE PRESIDENT FOR GOVERNMENTAL AND REGULATORY AFFAIRS, 

ADVENTIST HEALTH SYSTEM, 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 curVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00111 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
108 

rent charge structure? Do charges serve a purpose? Can the current system be changed? Can transparency be improved? 

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 

109 

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 physician. 

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 today. 

[The prepared statement of Mr. Morrison follows:] 

Statement of Richard Morrison, Regional Vice President, Florida Hospital 

for Government, Regulatory and Public Affairs, Orlando, Florida 

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 structure? 

4. Do charges serve a purpose? 

5. Can the current system be changed and what are the barriers to change? 

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 

110 

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 

111 

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. 

f 

Chairman HOUGHTON. Thanks, Mr. Morrison. Dr. Cohen—and 

again, I am sorry that Ben Cardin isn’t here to introduce you. 

STATEMENT OF HAROLD A. COHEN, PRESIDENT, HAL COHEN, 

INC., 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 $10,000. 

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 

112 

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 policy. 

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, selfinsured 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 

113 

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 availability. 

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% markup 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 average. 

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 ConVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00117 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
114 

gressional 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. 

Equity 

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. 

Access 

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 lengthof-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. 

Data 

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. 

Conclusion 

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 

115 

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. 

f 

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 circumstances. 

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 

116 

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-forprofit 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 that? 

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 notfor-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. 

117 

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 Thomas. 

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 notfor-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 notfor-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 status. 

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 

118 

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 

119 

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 position? 

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 

120 

and solving the uninsured problem with that money? Would that 

be a better use of the taxpayers’ money than the way it is currently 

spent? 

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 position? 

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 hospitals. 

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 notfor-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. 

121 

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 

Not-For-Profit 

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 

For-Profit 

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 

122 

Hospital System Hospitals Beds Compensation 

Iasis Healthcare Corp. 14 2,028 $1,086,449 

Franklin, TN 

CEO 

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 economics. 

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 

123 

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 

124 

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. 

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 same. 

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 rates. 

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 well. 

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. ThomVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00128 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
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as’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 inVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00129 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
126 

tensive 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 reductions. 

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 country? 

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 not-for-profits. 

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. 

127 

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 obligations. 

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 sysVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00131 Fmt 6633 Sfmt 6602 E:\HR\OC\99670.XXX 99670
128 

tems. 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 area. 

129 

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 costs? 

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 

130 

1D.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. 2M. 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. 3D.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. 

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. 

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

An IRS ruling in 1969 explicitly defined the criteria for hospitals’ tax exemption.3

131 

4M. 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. 5L. 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. 6Karen 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, 2004. 7L.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 ForProfit 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. 

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. 

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. 

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. 

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 

132 

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. 10Lane Koenig et al., ‘‘Mission-Related Costs of Teaching Hospitals: Estimates of Graduate 

Medical Education, Clinical Research, and Stand-by Capacity’’ (Unpublished manuscript, November 2002). 

private or public insurers).9 Hospitals delivered about two-thirds of total uncompensated care or a total of about $23.6 billion. 

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 population. 

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 Hospitals 

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). 

133 


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134 

Table 1. Total Clinical Costs of Mission-Related Activities by AHC Status, 2002* ($ billions) 

Direct Ed. 

Costs 

(DME) 

Indirect 

Ed. Costs 

(IME) 

Research 

Costs 

Standby 

Capacity 

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 review. 

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 minVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00138 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
135 

istry. With more than 2,000 members, CHA is the nation’s largest group of not-forprofit 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, 

136 

1 A copy of the report can be obtained at www.communitycatalyst.org. 

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 Americans. 

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. 

f 

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 

137 

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: 

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 stability. 

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, nonprofit 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 tangible. 

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 polVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00141 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
138 

icy 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 thirdparty 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. 

f 

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 organization. 

139 

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’’ hospitals. 

Background 

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’ West. 

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, WallStreet 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 

140 

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 tower. 

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 

141 

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. 

Conclusion 

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. 

142 

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 care. 

If this is the kind of information you seek, please advise and I will gather my 

evidence in support of my allegations. Thank you. 

f 

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 naı ̈ve, 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. 

143 

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 equipment. 

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; 

144 

• $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 facilities. 

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 total. 

Recommendations: 

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. 

f 

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. FurVerDate Aug 04 2004 15:23 Aug 30, 2005 Jkt 099670 PO 00000 Frm 00148 Fmt 6633 Sfmt 6621 E:\HR\OC\99670.XXX 99670
145 

thermore, 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. 

Æ