Monday, October 14, 2013

$546 for Six Liters of Saltwater

A recent NYT article, How to Charge $546 for Six Liters of Saltwater, discussed the high cost of the humble bag of normal saline (0.9% sodium chloride solution). However, while claiming to attempt to shed light on how a patient could be charged hundreds of dollars for a bag of "saltwater" that costs under a dollar, it managed to recast this rather simple transaction into a complex scenario worthy of Gordian knot status!

The situation: a hospital buys a bag of saline for around $1.00, but charges a patient several hundred dollars when it is used to rehydrate the person. OK, rather simple you would think... But no, according to the NYT:

"... But as the tale of the humble IV bag shows all too clearly, it is secrecy that helps keep prices high: hidden in the underbrush of transactions among multiple buyers and sellers, and in the hieroglyphics of hospital bills.  At every step from manufacturer to patient, there are confidential deals among the major players, including drug companies, purchasing organizations and distributors, and insurers. These deals so obscure prices and profits that even participants cannot say what the simplest component of care actually costs, let alone what it should cost..."
But wait, there's more: "...  But even before the finished product is sold by the case or the truckload, the real cost of a bag of normal saline, like the true cost of medical supplies from gauze to heart implants, disappears into an opaque realm of byzantine contracts, confidential rebates and fees that would be considered illegal kickbacks in many other industries...  IV bags can function like cheap milk and eggs in a high-priced grocery store, or like the one-cent cellphone locked into an expensive service contract. They serve as loss leaders in exclusive contracts with “preferred manufacturers” that bundle together expensive drugs and basics, or throw in “free” medical equipment with costly consequences..."
And: "... Few hospitals negotiate these deals themselves. Instead, they rely on two formidable sets of middlemen: a few giant group-purchasing organizations that negotiate high-volume contracts, and a few giant distributors that buy and store medical supplies and deliver them to hospitals...  the IVs... are taken by truck to regional warehouses by big distributors. These contracts proved to be another black box.."
OK, so we have secret Machiavellian group purchasing organizations (GPOs) jacking up prices, then the distributors secretly taking their cut.... No wonder the poor patient (or his/her insurance) gets stuck with a big bill! Unfortunately this is nonsense!

Why is almost every article about hospital pricing always full of the same errors? Let us consider: 

First, they never seem to be able to distinguish between hospital cost and patient charge! They often seem to use these two interchangeably, even though it makes no sense whatsoever! Thus, in this article it is clear that the hospital cost for a bag of saline is under (or perhaps very slightly above) $1, while the patient charge is in the hundreds of dollars. In other words, AFTER all the secrecy, the "bundling", and the various (implied) nefarious acts of the GPOs, the hospital cost is $1 for the liter of saline. The distributor adds  a few percent (5%? 10%?) onto the cost to cover their costs of distribution and to make their margin. The bottom line? The "byzantine contracts", the "confidential rebates", the "black boxes", etc. have nothing to do with the high patient charge for a bag of saline. 

Another example of conflating hospital cost and patient charge is "... The limit for one liter of normal saline (a little more than a quart) went to $1.07 this year from 46 cents in 2010...  That would seem to make it the rare medical item that is cheaper in the United States than in France, where the price at a typical hospital in Paris last year was 3.62 euros, or $4.73." Oh, come on! In this example the U.S. hospital cost of $1.07 is being compared to the French patient charge of $4.73 (i.e. the $1.07 acquisition cost BEFORE markup is being compared to the French AFTER markup charge of $4.73!)

OK, once we are past that,  let us look at the markup structure for the hospital, referencing the simplified flow chart above. Given that normal saline is a "plain IV" it may be distributed internally by the Supply Chain department or by the Pharmacy department. If the former then the question is if the item is separately chargeable. Most hospitals have a cost threshold, and only individually charge for items that exceed that cost. The threshold might be set fairly low ($1, $5, $10) or perhaps fairly high (e.g. $50 or $100), and the hospital will individually charge 'cost plus a markup' for an item that exceeds the threshold. It does not individually charge for items that fall below its chosen threshold, and usually the costs of these items are rolled into the room charge (if inpatient) or possibly procedure cost (if outpatient). The markups are usually on a sliding scale, with lower cost items marked up more (usually several hundred percent), while higher cost items are marked up less... Alternatively, the IV could have been dispensed by the Pharmacy department... In that case the charge usually is structured as either 'cost plus a mark-up plus a fee' or 'AWP plus a markup plus a fee.' (AWP being average wholesale price of the item). Generally the Pharmacy fee is fairly high, making the item more expensive if distributed by the Pharmacy (since the labor in Pharmacy is much more expensive than in Supply Chain!).

Second, these articles always act as if the patient charge is uniquely for the item itself... It is not, the patient charge is to generate revenue to pay not just for the item, but also for everything that goes into getting it to the patient (the organization has staff  that buy the product and do the receiving, inventory control and internal distribution; a physician has to write a medical order for the saline, the order has to be verified by a Pharmacist, a Pharmacy Technician pulls the item and labels it, then the  Pharmacist double-checks the item before it leaves the Pharmacy; and so on). Not to forget the  costs associated with expensive hospital infrastructure - construction running at $1 million per bed; huge capital investments such as MRIs, CT scanners, etc. PET scanners, MEGs, Da Vinci surgical robots... the list is endless.

The bottom line? Yes,  hospital patient charges are byzantine - even given the simplified flowchart above it is practically impossible to compare hospital prices at the item level (since even in this example the patient charge for the identical item could vary from "zero" to hundreds of dollar depending on the hospital and the circumstances). But, please, let's not obfuscate this with the GPO bogeyman, the distributor, and so on... And any hospital supply chain personnel that let their IV solution prices be tied to "expensive drugs' or anything else are not doing their job... 

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