A front page story in many newspapers this week was about a government report showing outrageous hospital charges across the country. We are supposed to be shocked that getting medical care in a hospital is a lot like buying a used car. If you have insurance, you get a pretty good price. If you have Medicare, you get a better price. If you don’t have insurance, or if you have lousy health insurance, you get an outrageous bill.

To me this is old news, since I wrote about a Tucson man and his $126,000 hospital bill back in 2011. I thought I’d share the story again.

MEDICARE STORY: 24-HOUR HOSPITAL STAY, $126,241 BILL

When you spend the night in the hospital, you would assume you had been “admitted” to the hospital – but you could be wrong.  And this definition of your status could cost you thousands of dollars if your Medicare Advantage plan has a 20% co-pay for “outpatient surgery”.

I met last week with a man who went to Northwest Hospital to have stents put in his coronary arteries. Ralph spent about 24 hours in the hospital and he was  in a bed, in a room, overnight. So you would think he had been “admitted” to the hospital.

Ralph gave me copies of his bill from Northwest Hospital that showed his 24-hour stay cost $126,241.67!!!!

The biggest charge was $13,148 for “cardiology” services – and this charge was repeated 5 times on the bill.  I’m figuring he got five stents. The bill included a $3,049.01 charge for an “observation room”. And this “observation room” charge is why Ralph got burned.

Don’t have a heart attack,  Ralph didn’t have to pay that much.

The good news for Ralph, who is 86 years old, is that his Medicare Advantage plan had to pay only $14,093.04 of the $126,241.67 hospital bill. This is because Medicare sets the price for each service, and $14,093.04 was the total of “approved” charges associated with Ralph’s 24-hour hospital stay – or rather, his observation stay.

The $126,241 bill is a made up number – unless you don’t have insurance. Then this outrageous number is your starting point for negotiating how much you will pay for the medical care you received. This story is really about Ralph’s Medicare Advantage plan.

The bad news for Ralph is that his Medicare Advantage plan requires him to pay 20% for “outpatient surgery”, so he had to pay $2,814.48.

Medicare Advantage plans have a set co-pay for in-patient hospital care, which is $295 per day (days 1-5) in Ralph’s plan. So I would have thought his bill would be $590. But because the bill says he was in an “observation room”, Ralph had to pay a lot more.

Something to consider with Medicare Advantage:

What is the charge for “outpatient surgery” in your plan, or the plan you are considering joining? Most plans have a set fee of $150, $175, or $275 dollars for outpatient surgery or services. But Ralph’s plan says he must pay 20% for any outpatient surgery or diagnostic tests.  So he is stuck with a big bill because of how his Medicare Advantage plan is designed – and because Northwest Hospital never admitted him.

Hospitals are routinely “not admitting” patients so they can charge more money to Medicare and patients.

According to an email I recently received:

The Center for Medicare Advocacy has heard increasingly about beneficiaries throughout the country whose entire stays in a hospital, including stays as long as 14 days, are classified by the hospital as outpatient observation.  In some instances, the beneficiaries’ physicians order their admission, but the hospital retroactively reverses the decision.  As a consequence of the classification of a hospital stay as outpatient observation (or of the reclassification of a hospital stay from inpatient care, covered by Medicare Part A, to outpatient care, covered by Medicare Part B), beneficiaries are charged for various services they received in the acute care hospital, including their prescription medications.

The Affordable Care Act cuts payments to Medicare Advantage plans, which may cause some companies to get out of the business. Mitt Romney says 4 million seniors will lose their Advantage plans due to these cuts. I keep saying that insurance companies seem to know something the rest of us don’t – and so they keep investing in Medicare Advantage.

The latest example is Aetna offering to pay $7.3 billion for Coventry Health Care Inc. (NYSE:CVH).

LifeHealth Pro, an insurance industry publication reported today:

Aetna, Hartford, is starting with 18 million enrollees, 437,000 Medicare Advantage enrollees, 1.2 million Medicaid enrollees, and $36 billion in projected 2012 revenue.

Coventry, Bethesda, Md., has 4 million enrollees, 253,000 Medicare Advantage enrollees, 932,000 Medicaid enrollees, and $14 billion in projected 2012 revenue.

Aetna likes Coventry’s emphasis on efficient, low-cost plans with relatively narrow provider networks, Aetna says.

Earlier this year, Cigna completed its purchase of Healthspring for $3.8 billion.

In January 2012, the Philadelphia Business Journal reported:

Cigna has completed its previously announced $4 billion acquisition of HealthSpring, a move that expands its presence in the Medicare managed-care market.

The acquisition adds more than a million individuals to Cigna’s existing 70 million members.

HealthSpring of Nashville, Tenn., has 340,000 Medicare Advantage members in 11 states — including Pennsylvania and New Jersey — and Washington, D.C., as well as a large, national stand-alone Medicare prescription drug business with more than 800,000 customers.

In 2010, HealthSpring paid $545 million to buy Baltimore-based Bravo Health, the Philadelphia market leader in providing managed-care plans for residents dually eligible for Medicare and Medicaid.

So insurance companies keep investing billions of dollars to expand their Medicare Advantage business – while Mitt Romney says Obamacare is killing this option for seniors.   As I see it, smaller Advantage plan companies will find it difficult to find enough efficiencies to handle lower payments from Medicare. But the big players will get bigger, and they know they can still make profits with less money from Medicare.

Insurance companies like UnitedHealthcare, Cigna, Wellpoint, and Aetna seem to know that Medicare Advantage enrollment will continue to grow year by year (it’s almost 30% of all Medicare beneficiaries now). And they figure they can make profits from the billions of dollars in revenue they can get from Medicare.

FYI: In many urban areas like Phoenix and Tucson, AZ, almost 50% of Medicare beneficiaries are enrolled in Medicare Advantage. Other cities with high Medicare Advantage enrollment are: Philadelphia, Pittsburgh, Buffalo, Miami, Los Angeles.

Yesterday, Mitt Romney did his white board presentation comparing President Obama’s plans for Medicare to his own. Romney painted a bleak picture of Medicare under Obama, and offered his own vision for the program that provides health insurance to 48 million Americans. Romney said his plan for Medicare would be “very much like what we have today with Medicare Advantage”.

Currently, nearly 30% of Medicare beneficiaries are enrolled in Medicare Advantage plans across the country. Medicare Advantage enrollment is around 50%  in cities such as Phoenix, Tucson, Philadelphia, Buffalo, and Miami (and many more).

Medicare Advantage plans receive a base payment of around $800 per month from Medicare for each person enrolled with them. In Florida, plans get $1,100 per person per month. With this “premium” paid by Medicare, Advantage plans pay the medical bills for their members.

People enrolled in Medicare Advantage plans have co-pays for every medical service they receive, and this is very similar to the kind of health insurance they had through their employers (if they worked for a large employer and had good coverage).  If people are healthy, they will have very low out-of-pocket costs in a given year. If they get sick, their out-of-pocket costs are currently capped at $6,700 per year (or lower depending on their plan).

I think Medicare Advantage could be a good business model for Medicare except for a few things:

Capping Medicare costs: Payments to Advantage plans are risk adjusted, so Medicare pays more for people who are sicker and more costly for the plans. Medicare’s payout is not capped under the current system.  Ryan and Romney would cap what Medicare pays for each person’s coverage, so the risk would shift from Medicare to insurance companies.  Why would insurance companies take on this risk?  I suppose they would raise their premiums each year to make sure they make a profit. But if Medicare “vouchers” do not increase enough, will seniors have to pay the difference? What if they can’t pay the higher premium each year?

Competition is costly: Ryan and Romney say competition among Advantage plans will keep costs down, but competition requires advertising and big salaries for management. Today’s Advantage plans have administrative costs (including profit) of around 15% of their total revenue.  Original Medicare, which doesn’t do much advertising and doesn’t pay million dollar salaries, has administrative costs of around 4-5% of its budget.

Profits: Advantage plans get to make a profit from doing business with Medicare. If Advantage plans have a 5% profit margin, let’s do the math. Medicare spent $486 billion in 2011.  $486 billion x .05% =  over $24 billion. That’s profit going to insurance companies rather than staying in the Medicare Trust Fund.

Questions for Mitt:

I’d like to ask Mitt Romney how he can justify $24 billion every year going to insurance company profits under his version of Medicare.

Mitt also pointed out in his whiteboard presentation that Obamacare payment cuts to Medicare Advantage plans will cause insurance companies to cancel plans around the country. He said four million people will lose their Advantage plan under Obama.

I’d like to ask Mitt Romney if he thinks it’s okay for Medicare to spend more money on seniors in Medicare Advantage plans than those on Original Medicare. If Advantage plans are not saving Medicare money, is that a good deal for Medicare? And if it’s not a cost-saving model now, how will it be under his version of the program?