State’s Hospitals Overbill For Care

Last year, Jeff Kortan was involved in a bicycle accident and was taken by ambulance to Mercy San Juan Hospital in Sacramento. Fortunately, he wasn't seriously injured. He was treated in the emergency room, where he got a CT scan, a tetanus shot and five stitches for a cut on his scalp then was sent home. His emergency room visit lasted just under an hour.

The problems really began for the Kortans about two months later when they received a bill from Mercy San Juan's ER for $31,613. That was just the ER bill. The ambulance and the emergency room doctor billed them separately. The Kortans don't have insurance, so they were responsible for the full bill. After a year of haggling with Mercy San Juan, they managed to have that bill reduced to about $18,000 – about $3,600 a stitch.

Hospitals routinely overbill, upending people's worlds over the "cost" of treating a simple cut. An insurance company would almost never be held to such an outrageous charge. 

We frequently hear of these horror stories and think, "isn't there some way to stop this?" Well, as it turns out, there is. In one state -- Maryland -- it's already been stopped, and it's been stopped for nearly 40 years now. In 1971, the State of Maryland established the Health Services Cost Review Commission. This commission has put a cap on how much Maryland hospitals can bill for any of the services they provide since 1977.

How effective has this commission been?

Let's compare (for example) the billing practices of California hospitals and Maryland hospitals. In 2011, California hospitals billed a total of $289 billion for all of the services they provided. They collected $79 billion: a 366% markup.

That same year, hospitals in Maryland billed a total of $15.7 billion, and collected $12.7 billion: a 24% markup. In other words, California hospitals billed an average of nearly $4 for every dollar they received whereas Maryland hospitals billed an average of only $1.24 for every dollar they received that year. 

What does the difference mean? Could it be that most California patients are deadbeats and never cough up what they owe? Absolutely not. The fact is that California hospitals negotiate in advance with insurance companies and agree, before the bills are even mailed out, that hospitals will be getting only about 27 cents on each dollar billed.

We often hear that other U.S. hospitals bill so excessively to make up for the losses they endure from underpayments and uncollected bills, right? Well first, California hospitals report their bad debt losses each year, and it averages less than 2%. And Maryland hospitals aren't doing so badly. In 2011, they managed to clear a healthy $847 million in profit on the $12.7 billion they made that year. That's a comfortable 6.7% profit margin -- and they did it without having to bill anyone $31,000 for five stitches.

California hospitals, as a whole, did only slightly better. In a much bigger state with many more hospitals, they cleared $5.8 billion in profit on the $79 billion they collected: a 7.3% profit margin. 

For years now there's been a huge national debate, and little agreement, about how we can pay for all of our skyrocketing healthcare costs. I think there's one thing everyone should agree on though: No matter how we end up paying for our healthcare, we can afford a lot more of it once we stop being overcharged so much for what we're getting.

In the meantime, I'm sending a copy of the legislation that formed Maryland's commission, along with some financial statements, to every member of the California Assembly and Senate.

Editor's Note: An earlier version of this article gave Dr. Belk an incorrect first name. Payers & Providers regrets the error.