Two years ago, Phil’s daughter Mary spent a month at a major San Diego nonprofit hospital, recovering from a near-fatal disease. Like one in four Californians, Mary was uninsured. The stay was billed at over a quarter-million dollars.

“I was overwhelmed,” says Mary (not her real name), a San Carlos resident who was in her late 20s at the time. She was still recovering when the bills began coming in. “At one point, I said, ‘It would have been easier to die.’ That’s the best way to put it. It’s inhumane.”

She and her father wish to remain anonymous and to keep the hospital unnamed in case she requires medical assistance in the future.

“I called the number given on the bill, gave them the account number, and said we didn’t have that kind of money,” Phil says. “The operator who received my call just said, ‘That’s okay, sir, I am authorized to offer a 50 percent discount.’ That was the very first time I called the billing department.”

A patient-advocacy group got them an additional 5 percent off the bill, but making the payment remained near impossible for Phil and his recovering daughter. Surprised by the elasticity of the charges, Phil began researching hospital-billing practices on the internet and stumbled upon hospitalbillreview.com, a medical-bill evaluation service run by Chapman Consulting. Marc Chapman, president of the Austin, Texas–based company, advised Phil to request a detailed bill with current procedural terminology codes, known as CPT codes, which hospitals use in lieu of a line-by-line description of services.

“The first bill I received was just like a credit card bill,” Phil says. It listed only the amount due. When he requested a detailed bill, they sent an itemized bill without the codes. He asked for a bill with the CPT codes, and as he recalls, “They seemed reluctant to provide it.”

For $200 (some review services charge as much as 50 percent of the amount of the bill), Chapman provided Phil with a line-by-line analysis of charges complete with CPT codes, the price charged by the hospital, the price Medicare pays, and a “reasonable and acceptable” charge of 150 to 180 percent of the Medicare price. All the charges were inflated, some as much as five times the Medicare rate. The actual hospital costs were around $60,000. Chapman said a reasonable and acceptable bill would be about $84,000.

Little wonder, then, that the billing department offered a half-price discount so readily; they were still making over 100 percent in profit.

“[Overbilling] is common practice,” says Brian Heller, Ph.D., a health-insurance consultant in Ohio. “Hospitals have to jack up their charges to offset the nonreimbursed or underreimbursed care they provide.”

However, the hospital in question states in its annual financial disclosure report that it lost $872,022 in 2008 to unpaid outpatient bills, an insignificant sum compared to the year’s $413,075,407 net patient revenue. Note that hospitals quote their unpaid bills and charity work at their billing rates, not their actual cost, which is typically about 25 percent of their billing. The hospital’s actual cost of unpaid bills was only about $220,000, or less than 0.05 percent of net patient revenue.

“Most hospitals bill an amount much greater than what Medicare pays them for the services,” says Talina Smith, a health-provider billing agent with experience in seven states and several companies, including a private ambulance service in San Diego. “This in and of itself isn’t very surprising. Medicare pays some of the lowest rates of any type of insurance coverage with the exception of Medicaid programs. Most commercial insurance companies pay more than Medicare. For people with good health insurance coverage, this is hardly ever noticed, as the hospital will typically be contracted with their insurance, and therefore, the insured patient would not see any extra charges. However, for uninsured folks like [Mary], these bills are horribly scary.”

One example of overcharging on Mary’s bill involved the daily blood tests for which the hospital billed her more than $40,000. Using Chapman’s calculation, the tests should have cost around $3500. According to Medical Billing Advocates of America, most hospitals would bill approximately $30,000 to $35,000 for a routine appendectomy. Medicare would reimburse $4200 to $5000 as payment in full. An HMO may contract to pay $7000 for the same bill. Commercial insurance companies may reimburse $9000. Uninsured patients will be forced to pay the full $35,000.

It’s difficult to believe that hospitals would charge such grossly inflated fees to the very people who can least afford them, the uninsured and underinsured. Smith is familiar with several explanations for this practice, and from a business standpoint, they all make sense. Hospitals need money to cover costs of such things as expensive medical equipment, lawsuits and malpractice insurance, and the unpaid bills of patients who cannot or refuse to pay. Meanwhile, 70 percent of bankruptcy claims in the United States are due to medical debt among insured and uninsured patients alike, according to the research of Elizabeth Warren, a professor at Harvard University’s law school.

“Ten Ways to Avoid Outrageous Hospital Overcharges,” an article on msn.com, a news website, cites a case where a patient was charged $129 for a “mucous recovery system,” or a box of tissues. Medical Billing Advocates of America cites cases of patients being charged $57.50 for a teddy bear (called a “cough support device” on the bill), $57 for a two-by-two-inch piece of gauze used to wipe down surgical equipment (called a “fog elimination device” on the bill), and $1004 for a “courtesy” toothbrush. Mary was billed for a medication, propranolol, at a price 102 times higher than Costco pharmacy charged (no one bothered to tell her that it would cause her hair to fall out) and a laxative at a 5200 percent markup. She was charged $67.83 for a bacterial culture for which Medicare pays $13.22, $29.75 for a blood test for which Medicare pays $8.38, and $536.25 for a consultation for which Medicare pays $194.45.

Virtually all hospitals charge uninsured patients more than they charge those with health insurance, said Gerard Anderson, a health policy professor at Johns Hopkins Bloomberg School of Public Health, on 60 Minutes in March 2006. Senator Chuck Grassley, then chair of the Senate Finance Committee, said that billing practices for uninsured patients are “an institutional bias against uninsured people” and “something to be outraged about.”

In addition to the bloated prices that appeared on Mary’s bill, Phil uncovered multiple charges for services that never took place. Among them were physical therapy sessions started during a period when Mary was barely conscious and incapable of leaving her bed, a $180 psychiatric evaluation that Mary does not recall and that the hospital has no records of, three $607 ultrasounds that don’t exist, and an $81.30 flu shot that Mary declined upon her discharge from the hospital. Phil also observed a 7.2 percent increase in charges at the beginning of the fiscal year, bearing no correlation to annual inflation rate, which was 2.8 in 2007 and 3.8 in 2008.

In 1998, a study on hospital billing procedures led by Dr. Kimberly Elsbach of UC Davis found that hospitals intentionally make their bills difficult to analyze in order to discourage patients from contesting the charges. Many contain wording meant to “scare patients into paying quickly.”

“Citizens are becoming more educated about hospital billing and taking responsibility for ensuring that their charges are correct,” Elsbach said. “Hospitals are countering that with their own efforts to discourage people from becoming involved with challenges or audits because it costs them a great deal of time and money.”

The CPT codes are available to the public on the American Medical Association website, along with the Medicare fee schedule. The website notes, “This fee schedule applies to Medicare payments only and may not reflect the true cost of the services provided.”

A chargemaster is a hospital’s list of procedures and the prices it charges for them. It is available upon request. The prices are generally several times higher than what Medicare pays. For example, the Sharp chargemaster lists cardiopulmonary resuscitation at $767, while Medicare prices range from $190.20 to $375.68 (prices vary by region). Chargemaster prices are billed to everybody. However, Medicare rates are set by the government. Insurance companies usually pay a little more than Medicare, as per their contract with the hospital. Only uninsured and underinsured patients end up paying the full chargemaster price.

“Chargemasters are not related to cost,” says Dr. Geni Bennetts of Healthcare Billing Advocacy in Napa. “They are what the market will bear.”

Sharp’s website notes that “the charges contained in the [chargemaster] may not reflect Sharp HealthCare’s actual reimbursement from all patients or insurance companies.” And later, “The [chargemaster] is not necessarily a useful document for consumers who are ‘comparison shopping’ between competing hospitals because the descriptions for a particular service could vary from hospital to hospital. Procedure charges may be comprised of several separate line items that are not necessarily in the same department. It is very difficult to try to independently compare the charges for a procedure at one facility vs. another.”

In a California HealthCare Foundation study conducted in 2005, shoppers from Devon Hill Associates, a San Diego–based mystery shopping company, posed as uninsured patients and requested pricing information for various procedures at 64 California hospitals. The mystery shoppers contacted hospitals both in person and by telephone over the course of three months and asked the price of 1 of 25 procedures or tests. They also asked about financial assistance.

The study found that “obtaining a price depended primarily upon luck and persistence.” Experiences varied, even at the same hospital. While 76 percent of the mystery shoppers’ inquiries were ultimately answered with a firm or estimated price, more than a third had to make three or more calls to arrive at a price. One mystery shopper went through 17 points of contact to obtain a price. Only 32 percent of callers and 25 percent of those who visited the hospitals in person were able to get a price in one attempt.

When I called Alvarado Hospital to inquire about their chargemaster, I was transferred six times. Many of the six people I talked to had never heard of a chargemaster. I eventually left a message that has yet to be returned.

The report notes that “the hospitals did not appear to have a designated person or department to provide pricing information, resulting in referrals to multiple sources. At hospitals that did have someone designated to provide pricing information, most staffers were apparently unaware of who that person was, as they frequently referred shoppers to other departments instead.… While most hospitals posted information on financial assistance programs, the information was often hard to find and usually not comprehensive.”

The mystery shoppers could have gone online to consult the chargemasters, but at least one hospital — Sharp — discourages this, disclaiming on its website, “This document should not be used to accurately estimate or determine the final patient cost of a given hospital stay at Sharp HealthCare.” And, perhaps ironically, “Our primary concern is ensuring the accuracy of your bill.”

To complicate matters, hospital billing is often outsourced to work-at-home processors who may easily introduce errors. In fact, Mary recently ran into an old neighbor who said she was working from home, processing medical bills. She said she found the job on the internet, and the bills are emailed to her. Mary notes that the woman, from her experience, is “not the brightest bulb.”

Legalities

A series of class-action lawsuits was filed against four of California’s largest hospital chains and one physicians’ group on behalf of nearly a million uninsured patients who alleged that the organizations engaged in price gouging. Scripps Health, John Muir Health, Sutter Health, Catholic Healthcare West, and California Emergency Physicians Medical Group (which provides emergency-room care at over 55 hospitals statewide) returned over $1 billion to patients in the 2006–2008 settlements.

“At a time when there is a national crisis of uninsured people vulnerable to financial devastation due to their lack of health insurance, it is unconscionable for any hospital or medical group to price gouge,” said Kelly Dermody of Lieff Cabraser Heimann & Bernstein, the San Francisco law firm that filed the class-action suits. The suits generated enough media coverage to revive Assembly Bill 774, which Governor Schwarzenegger had vetoed in 2004.

Effective January 1, 2007, AB774 allows uninsured patients and patients with high medical costs who have a family income that’s less than 350 percent below the federal poverty level to apply for charity (free) or discounted care. The bill requires hospitals to maintain a written policy regarding discounts for financially qualified patients and allows patients to seek review from the business manager, chief financial officer, or other manager. Financially qualified patients are to be charged no more than the amount the hospital would receive from Medicare, Medi-Cal, Healthy Families, or any other government-sponsored health program in which it participates, whichever is greatest. Furthermore, hospitals must give financially qualified patients 150 days to negotiate bills before they are sent to a collection agency.

Despite the legislation, hospitals still overcharge regularly, says Dr. Geni Bennetts of Healthcare Billing Advocacy in Napa. The policies outlined in AB774 are rarely enforced “unless somebody like me challenges it.” Bennetts, former chief of the division of hematology/oncology and bone marrow transplantation at Children’s Hospital of Orange County, became aware of routine overbilling when she was paying emergency-room bills of her own. Since then, she has “hardly seen anything that wasn’t upcoded on something.”

“Upcoding” means using a code for a higher-paying item or procedure instead of the appropriate code. “It’s considered illegal,” says Bennetts, “but it’s done all the time.” The practice is particularly harmful to uninsured and underinsured patients. “People don’t choose to get $5000 to $10,000 deductibles,” Bennetts says of underinsured patients. “They get them because they are all they can afford. They go to the ER for a small operation and end up paying it all in cash. Those people are really stung.”

Common upcodings include medications charged at up to 6000 times their cost, billing for a 30-minute visit when the doctor leaves after 10, and billing for a higher level of treatment than was given. As an example of the latter, Bennetts once worked with a woman who had her throat and ears examined before being prescribed cough syrup. She was billed $1390 because it was coded as an emergency-room visit.

“Some people think it’s their dumb luck,” Bennetts says, “but they’re coming to realize it’s everyone’s dumb luck.”

Meanwhile, the nation’s five largest health insurance companies made combined profits of $12.2 billion in 2009, up 56 percent over 2008. The companies — WellPoint, UnitedHealth Group, Cigna, Aetna, and Humana — covered 2.7 million fewer people than they did in 2008. Premiums have simply become unaffordable.

Phil notes that if patients were charged what he ultimately paid (about 150 percent of the Medicare payment), insurance would be largely unnecessary.

In a revealing letter dated February 19, 2004, Tommy Thompson, then secretary of the U.S. Department of Health and Human Services, discussed with the president of the American Hospital Association, Richard Davidson, the association’s rationale for charging the uninsured higher prices. “Hospitals charging the uninsured the highest rates is a serious issue that demands all of our attention,” Thompson said. He continued, “Your letter suggests that HHS regulations require hospitals to bill all patients using the same schedule of charges [chargemaster] and suggests that as a result, the uninsured are forced to pay ‘full price’ for their care.”

Thompson went on to write that hospitals are encouraged to give charity care and discounts to poor and uninsured patients. In fact, Medicare was already subsidizing hospitals $22 billion a year to help offset the costs of charity care and another $1 billion for bad debt associated with serving Medicare clients.

The letter concluded, “I strongly encourage you to work with AHA member hospitals to take action to assist the uninsured and underinsured and therefore, end the situation where, as you said in your own words, ‘uninsured Americans and others of limited means are often billed and required to pay higher charges.’”

The American Hospital Association declined comment on this story but referenced the Healthcare Financial Management Association, which is “spearheading a patient-friendly billing project and can talk about the factors that go into a hospital bill.”

California Department of Public Health spokesperson Ralph Montano says his department is responsible for enforcing AB774 and encourages anyone who suspects that a facility is not following this law to contact the department and file a complaint. If you are uninsured, you are entitled to negotiate your bill down to the price paid by Medicare, Medi-Cal, Healthy Families, or any other government-sponsored health program in which it participates, whichever is greatest. A complaint can be filed on the department’s website.

Charity Care

Of the 4518 Medicare-certified hospitals in the nation in 2003, 58 percent were nonprofit, 18 percent were for-profit, and 24 percent were government owned, according to a 2006 Congressional Budget Office report.

Nonprofits, in theory, invest their proceeds back into providing health care rather than distributing earnings to private investors. They are exempt from paying federal taxes. In 2002, the report found, nonprofit hospitals received an estimated $12.6 billion in federal, state, and local tax exemptions. In exchange for exemptions, nonprofit hospitals are required to provide charity care and community benefits, though the Congressional Budget Office report admits there is “little consensus on what constitutes a community benefit or how to measure community benefits.”

“Hospitals are not required to provide a certain amount of charity care annually to maintain tax-exempt status,” says John Cihomsky, Sharp’s vice president of public relations and communications. “In California, private not-for-profit hospitals are required to comply with Senate Bill 697 by annually reporting the economic value of community benefits, including charity care. SB697 requires hospitals to conduct collaborative community planning and develop benefit plans that address identified community needs. The community-needs assessment is conducted by the Community Health Improvement Partners. The fiscal year 2009 community benefit report submitted by Sharp HealthCare identifies $342.5 million relating to unreimbursed community benefits.”

“In Nevada, the hospitals I heard about usually offered charity upon finding out the patient had no other form of payment,” says Talina Smith, the health-provider billing agent. “Other states typically waited until the patient requested some kind of help. The hospital chain I worked with in Colorado would run any unpaid accounts over a certain amount — I believe $10,000 — through a soft credit check at the end of the fiscal year and automatically apply charity to those accounts so they could obtain the maximum tax reduction.”

In 2003, the American Hospital Association reported that its hospitals provided $25 billion in “uncompensated care costs,” which represents charity care and bad debt, adjusted according to a formula to approximate the actual cost of providing the care. However, some hospitals include employee payroll, unpaid patient bills, and the difference between chargemaster prices and Medicare’s price in their “community benefit,” according to a fact sheet released by the California Association of Health Plans. Excluding these expenses, many hospitals spend much less on charity care than they receive in tax breaks.

This is one reason why nonprofits are faring better financially than their for-profit counterparts. Seventy-seven percent of nonprofit hospitals are profitable, compared to 61 percent of for-profit, taxpaying hospitals. The combined income of the 50 largest nonprofit hospitals jumped eightfold from $544 million in 2001 to $4.27 billion in 2006, according to a Wall Street Journal analysis of data from the American Hospital Directory.

In 2005, nonprofit hospitals marked up their prices by an average of 175 percent of cost. Taken in tandem with questionable practices such as opting for the most expensive procedures, selling patients’ bills to collection, and demanding up-front payment, some nonprofit hospitals have accrued nontaxable cash piles on par with publicly traded companies, the health-plan association’s fact sheet says.

An article in the May 28, 2007 issue of the San Diego Business Journal reports on a complaint filed by the United Nurses Associations of California/Union of Health Care Professionals in which they allege that Sharp devoted on average 0.48 percent of operating expenses to charity care, while nonprofit peers of a comparable size gave an average of 4.6 percent. Kyle Serrette, who was then organizing director for United Nurses, wrote in the complaint that Scripps Mercy devoted the most to charity care at 5.7 percent, followed by UCSD at 3.55 percent, then Sharp Memorial at 0.57 percent, and Sharp Grossmont at 0.4 percent. Serrette used 2005 figures, which he got from the Office of Statewide Health Planning and Development and the U.S. Government Accountability Office.

In fiscal year 2009, Cihomsky says, “Sharp HealthCare incurred $65.5 million in costs for charity/bad debt cases. This represents 3.3 percent of Sharp’s total operating costs.” In defense of nonprofits, a 2004 study in the Canadian Medical Association Journal found that for-profit hospitals charge an average of 19 percent more than nonprofit hospitals. For-profit hospitals have 2 percent higher death rates. The study found that administration accounted for 24.5 percent of total costs at nonprofit hospitals versus 34 percent at for-profits, while payroll costs for clinical personnel were 7 percent higher at nonprofits. Additionally, for-profit hospitals tend to raise prices when taxes increase, a problem that bypasses nonprofits altogether.

Settling the Bill

Mary applied for charity care but forgot to provide the bank statements the hospital required. Along with the request for assistance, Phil sent a long letter to the hospital’s billing department. The letter challenged some inflated blood-work charges performed by a pathology lab near the hospital, which Phil had just noticed. On top of being charged $6900 by the lab that did the work, the hospital charged over $42,000 for the exact same work. Phil called the lab on two occasions and was told both times that the lab used its own technicians and equipment. The lab didn’t know why the hospital was charging for the work.

It’s no coincidence, perhaps, that a board member of the pathology lab is also the director of pathology at the hospital (and several others) where Mary was cared for. “It is hardly accidental that the pathology lab bill is incorporated into the hospital bill on a daily basis and multiplied by the same factor [over 650 percent] every day,” Phil says. The doctor in question was not available for comment.

The billing director’s assistant called Phil back and told him that the charity-care application had been turned down because of the missing bank statements. Phil told her that he had the statements. She said she would send the application back and they could reapply. Three days later, with no response to his letter complaining about the double-charged blood work, Phil called the billing director, who said he hadn’t read the letter but had passed it on to his assistant and he’d have her call.

“She called less than an hour later,” Phil relates, “and after the usual pleasantries asked what did I think of their offer? I asked, ‘What offer?’ because I knew they had never made one. She said, ‘The offer I made last time we spoke.’ I said, ‘I just turned 74 less than a week ago, and my memory is faulty. What was your offer?’ That was when she said, ‘Seventeen thousand dollars.’ I was whupperjawed and gobsmacked. I asked, ‘Did you say 17 or 70?’ She said, ‘No, seventeen, one-seven.’ I said that sounded very fair. She then said, ‘If you want to reapply for charity, send the forms back in, and we may be able to reduce that some more.’ I asked her to send me a letter describing the offer, and we received it the next morning. It said nothing about charity, as I remember.”

When the hospital settled for $17,000 (6.8 percent of the original bill), they effectively racked up nearly a quarter million dollars toward charity care, which allows them to justify their nonprofit, tax-free status. The blood-work facility settled for $4000, which under AB774 was a reasonable fee. Phil suspects that the hospital decided to settle once he pointed out the double billing taking place for the blood work.

The doctors’ fees, a separate bill altogether, totaled almost $19,000. Mary wrote a letter to the medical group from which the doctors were contracted, detailing a multitude of questionable charges. Most of them involved upcoding for longer visits and multiple doctors performing the same examinations, according to CPT codes, in which doctors “poked me briefly in the belly, admonished me to eat more and exercise more, then walked out, spending no more than five minutes with me.” Such visits were charged at $176 with four or five different doctors in and out on a daily basis. In her letter, Mary offered to settle for $8000. The offer was accepted immediately, without further negotiation or comment.

After being discharged from the hospital with an infection that the hospital couldn’t cure, Mary spent several months at another local nonprofit. Her infection was diagnosed and cured, and she was discharged. Upon receiving another inflated bill, Phil contacted the hospital and was told by a “very irate” billing lady that AB774 was so complex and changeable that it wasn’t worth the paper it was written on. She also told him that medical bills were nonnegotiable.

“This was the same woman who charged us for two CAT scans when the doctor ordered one,” Phil says. “They quoted the CAT scan as being $1950, and we had to pay half in advance. When the bill came in, each CAT scan was about $2400, but the technician’s fee was over $400 for one scan and over $600 for the other, which they don’t tell you. Bear in mind that both scans were done at the same time on the same machine, one for the abdomen and one for the chest.”

In response, he hand-delivered to her office 19 pages of articles from the state and federal government encouraging people to question and negotiate their medical bills. He hasn’t heard from the hospital since.

Phil and Mary are currently disputing a $4000 bill with a local for-profit hospital in which Mary recently stayed for half an hour. An example of charges include $1172 for an emergency-room evaluation, for which Medicare pays $115; $575 for an IV infusion, for which Medicare pays $69.69; and $39 for an IV loop that sells for $2.

Evidently, flagrant overcharging is standard operating procedure for nonprofit and for-profit hospitals alike.

How to Avoid Hospital Overcharging

When choosing a hospital, ask questions about your stay and procedures. Contact the hospital’s billing department and get a quote on your visit. Research fair prices ahead of time. Ask what the room price includes. Make sure none of the included items appear on the bill. If possible, bring your own tissues, towels, toothbrush, and prescriptions. Consult your insurance and be clear on exactly what is and isn’t going to be covered.

While you’re in the hospital, keep a detailed log of every test, treatment, and medication you are given or ask a family member or friend to do it. Never pay a bill before leaving the hospital.

When you get the bill, confirm admission and discharge dates. Request a bill with CPT codes (hospitals are required to provide this), and look up Medicare prices on the American Medical Association website. To search procedures by name, try the comprehensive healthcarebluebook.com. Newchoicehealth.com allows you to compare chargemaster prices for hospitals in your area. If you find overcharges, file a complaint on the California Department of Public Health website.

Be aware of phantom or double charges on your hospital bill. Physicians and equipment are often billed separately, so you will get identical CPT codes with different prices. If you’re not sure, ask. Don’t be afraid to contact the billing director and hospital administrator. Get all settlements in writing. Know that under AB774, you have the right to negotiate bills.

While it’s outrageous to think that hospitals are taking advantage of people when they are most in need, it’s the patient’s responsibility to enforce fair billing. This practice is allowed to continue because most people simply don’t know that they are being taken advantage of. The neighborhood hospital, after all, is a business. Or, as Phil puts it, “They’re gangsters.”