Hospitals in the Hot Seat

Published October 1, 2005

In the coming year there will be a convergence of forces descending on America’s hospital industry like the proverbial ton of bricks. And the industry isn’t remotely prepared for it.

Rise of Consumer-Driven Health Care

We are witnessing explosive growth in the numbers of Americans covered by Health Savings Account (HSA) and Health Reimbursement Account (HRA) programs.

Those consumers will demand price transparency, quality information, and customer convenience. In addition, hospitals will have a difficult time figuring out what to charge a patient who wants to pay at the time of services but whose claim is subject to being “repriced” by the patient’s Preferred Provider Organization (PPO).

Increasing Number of Uninsured People

The uninsured try to pay their bills directly, but they often have limited means. They will examine their billing statements carefully, much like the HSA/HRA patients will, and they will complain when charges seem excessive.

Hospitals typically charge non-indigent “self-pay” patients four to five times (that’s 400 to 500 percent) what they charge a PPO patient for the same service. This over-charging discourages many self-pay patients from even trying to pay the bill.

Flood of Lawsuits

Richard Scruggs, the Oxford, Mississippi attorney known for taking on asbestos manufacturers and the tobacco industry, and his allies have filed suit against 400 not-for-profit hospitals in at least 25 states, charging the facilities with violating their implied contract with the state to provide care to the indigent in exchange for their tax exemption.

The hospitals managed to prevent these suits from being joined as a single national class action, but that means there will be separate litigation in each of the states. At a minimum, defending these suits will be a major new expense for the facilities.

Consejo de Latinos Unidos Campaign

Headed by KB Forbes, this campaign has focused its attention more on for-profit hospitals such as Tenet and Hospital Corporation of America (HCA), but it recently brought suit against the not-for-profit Sutter hospital chain in California, charging them with price-gouging self-pay patients, both those who are indigent and those with means.

Ongoing Patient Safety Concerns

Employers such as the Leapfrog Group and policy advocates including former U.S. Speaker of the House Newt Gingrich of the Center for Health Transformation are alarmed that the concerns raised by the 2000 Institute of Medicine (IOM) study have barely been addressed, let alone corrected. The study estimated as many as 98,000 people die from medical errors every year in the United States.

The study was badly flawed and is almost certainly wrong in its conclusions. But whatever the true number, there is little dispute that the quality of care in some U.S. hospitals is questionable and needs to be addressed.

Increasing Federal Antitrust Scrutiny

The Federal Trade Commission and U.S. Department of Justice issued a report in July 2004 condemning anti-competitive behavior and promising to more closely scrutinize potential anti-trust activities and anti-competitive regulations such as Certificate of Need (CON).

End of Specialty Hospitals Moratorium

The moratorium on Medicare payments to specialty hospitals as part of the Medicare Modernization Act of 2003 has focused the attention of Congress on the lack of competition in the hospital industry and the extremely flawed system of payments in which maternity and cardiac patients are overcharged in order to subsidize trauma centers and other services that are underpaid. The moratorium should expire by the end of the year, bringing a surge of new competition.

Medicare Payment Reductions

Congress pulled back from cutting reimbursement rates for physicians, and it is just beginning a new drug benefit. Hospital costs are driving Medicare shortfalls, and it is much more palatable to cut back on payments to hospitals than to physicians.

Growing Competition from Offshore

“Medical tourism” is a key economic development strategy in India, Singapore, and Thailand, where patients can get quality service for a fraction of the U.S. price. Traveling to Brazil or the Caribbean for cosmetic surgery is already commonplace for Americans. It isn’t much of a stretch for those countries to expand their offerings to include other surgical procedures.

Restive Media

The media can focus on only one industry at a time, and its attention wanes after a few years. In the past decade it has shifted attention from greedy doctors to evil insurance companies, and most recently to profiteering drug companies.

Just about everything that can be said about those industries has been said. Now the media will turn its attention to a new villain: American hospitals.

Hospital administrators must do a sober assessment of the stakes here. The perception that hard-working consumers are being overcharged by dangerous and poorly run facilities that have conspired to retain a monopoly position in the health care system has set the stage for a devastating attack on the hospital system.

It doesn’t matter if administrators think they are doing good work. Executives in the drug and insurance industries thought the same, but good works do not inoculate an industry from attack. It doesn’t matter to the press that a hospital is not profiteering and is losing money. That is just further evidence of administrative incompetence.

The cruelest cut will come not from the media or the politicians but from members of hospital boards of directors who are suddenly embarrassed to be associated with the facility. They will be ashamed when their friends ask, “How can you let the Medical Center charge the uninsured four or five times what you charge a PPO patient?”

If hospital administrators don’t move decisively to manage these issues, they will find the issues will manage them.

Greg Scandlen ([email protected]) is founder of Consumers for Health Care Choices, a national nonprofit membership organization based in Hagerstown, Maryland ( He experienced the insurance wars as CEO of an insurance industry trade group in 1991-1996.

For more information …

More information on the trends and challenges reported here is available online.

“Analysts Predict Future Growth of HSAs,” July 20, 2005,

“Early Adoption of HSAs Indicates Strong Growth Potential,” by Carol M. Tellez, March 2005,

“Investigative Report: Overcharging the Uninsured,” Health Care News, September 2003,

“Not-for-Profit Hospitals Class Action Litigation,” news release, June 17, 2004,

Consejo de Latinos Unidos,

“Hospital Pricing Probe Launched,” Gilbert Chan, Sacramento Bee, August 23, 2005,

“To Err Is Human: Building a Safer Health System,” Institute of Medicine, November 1999,

“New Study Says Medical Errors Are Overstated,” Health Care News, September 2001,

“Improving Health Care: A Dose of Competition,”

Bricker & Eckler LLP, “Information and Resources on the Specialty Hospital Moratorium,”

“AHA Advocacy and Representation: Letters to Federal Agencies,”

“Interesting Articles on Medical Tourism,”