Why so high?

A look at the hidden costs behind what hospitals charge health-care consumers

“There are a lot of hidden costs in health care that people don’t realize,” says Kevin Erich, CEO of Paradise’s Feather River Hospital.

“There are a lot of hidden costs in health care that people don’t realize,” says Kevin Erich, CEO of Paradise’s Feather River Hospital.


Next week in Healthlines:
The second in a two-part series on hidden costs of operating a hospital.

Many people who go to a hospital for care experience the same side-effect: sticker shock. “Twenty-five dollars for one aspirin? How can that be?”

Some of the high prices correlate to the delicate dance between hospitals and insurance companies, in order to reach a “discounted” total that both can live with. But hospitals also incur a lot of expenses to keep running 24/7—some expenses that are obvious, but many that are inconspicuous.

“There are a lot of hidden costs in health care that people don’t realize,” said Kevin Erich, CEO of Feather River Hospital in Paradise. “They look at the aspirin and say, ‘Why does the aspirin cost so much?’ It’s not that the aspirin costs so much; you’re also paying for the support system around that aspirin in case you need more services than just that aspirin.”

The CN&R asked three local hospitals’ CEOs—Erich, Oroville Hospital’s Robert Wentz and Enloe Medical Center’s Mike Wiltermood—about these hidden costs. (They listed so many that we couldn’t fit them into a single story, so this is the first of a two-part series.)

“I think that the public is probably not as tuned in as we’d like them to be about the so-called hidden costs,” Wiltermood said. “Clearly, when we provide community benefits, that’s a decision we make to help enhance our service to the community, even if it’s not compensated for. Some of the more insidious costs have to do with rules and regulations. There’s almost too many of these things to count.”

Hospitals need to pay staff, naturally, but unlike most businesses, hospitals never close. Their emergency rooms and inpatient wards continuously operate. Hospitals need doctors on call—either physically in the facility or at home nearby, available by phone—as well as nurses.

Those physicians are, in essence, independent contractors. As Wentz explained, “California is one of the few states that doesn’t allow for doctors to be employed by hospitals, so that means hospitals have to go through costly organizations or contracts in order bring a doctor in and make sure they’re adequately compensated when they work in our community.”

Hospitals can employ nurses directly, but state regulations determine the staffing levels. The more intensive the care, the more nurses on duty to meet the nurse-to-patient ratio.

Wentz and Wiltermood explained that these ratios are determined by the ward a patient is in, rather than the condition of the patient. So, when rooms in “step-down” wards (for those patients requiring less care) are unavailable, patients who may no longer require intensive care remain in intensive-care, with the corresponding amount of nurses. Stays in intensive-care are more expensive, but insurance plans don’t always pay a variable rate based on the patient’s ward, but rather on his or her procedure.

“There are a lot of positives about mandatory nurse-patient staffing ratios,” Wiltermood said, “but sometimes, because it’s a black-and-white rule, it does create some additional cost to hospitals that I think could be avoided, and it does limit your creativity in terms of your staffing. We’ve gotten used to it in California, but it does fix our cost at higher rates per patients than states that don’t have those rules.”

State regulations also impact equipment. On top of the price for sophisticated technology comes the approval process, which Wiltermood said can take up to a year. A hospital can’t just replace an outdated CT scanner, for instance; state regulators must approve an application to do so. The process costs the hospital in terms of time and energy—work for which the hospital must pay.

Next come what Wiltermood calls “market forces”—how manufacturers set themselves up to compete with others. “We have so many vendors who market directly to physicians and patients,” he explained, “and they create markets that are very expensive … and the difference [between their products] is negligible.”

As an example, Wiltermood cited the various implants available for knee-replacement surgery. Not only does the hospital need to buy the implant, but also a “tool kit” specifically for that implant that won’t work on a competitor’s implant.

“We’re highly vendor-driven,” he noted. “Everybody is trying to get an edge or do something a little bit better, a little bit faster. Any vendor who can promise that usually has the ear of the clinicians, and it does at times make it very difficult for us to standardize processes, which is really where the savings is.”

A major technology expense stems from the federal Patient Protection and Affordable Care Act. The PPACA requires hospitals to adopt electronic health records—computer-based data storage—as opposed to paper charts. The federal government offered financial incentives to help defray the cost of buying new hardware and software, but hidden costs include maintenance, training and additional time required to input information into the system.

“Health-care information systems are way behind regular industry—they’re very costly and very time-consuming, difficult to operate,” Wiltermood said. “That to me is a huge cost we’ve seen escalate in health care over the past five years or so. Ironically, the more we use computers, the more [work] hours we have to pay for to make sure our patients get the bedside care they’re supposed to get.”

As with other equipment, there is no single system of electronic records. It’s another vendor-driven industry, albeit one where the federal government requires a degree of interconnectivity.

Hospitals have little choice but to pay these—and many other—hidden costs. Ask a CEO what percentage of the operating budget goes to behind-the-curtain infrastructure, and you may not be able to get an accurate answer.

“You can analyze it, but I think there’d be a large degree of error,” Wentz said. “One of the problems is it becomes integrated into the fabric of our organization and it is just part of the cost.”