What Explains It: The Cost of Medical Supplies

Published in Vermont Business Magazine (print edition)

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If you’ve heard that Tylenol in a hospital may cost 100 times more than it would if you bought the pills yourself, you heard right.

If you’ve read that hip replacements or cardiac surgery cost more at some hospitals than the procedures would at others, you read that right, too.

And if you know that private insurers pay more for services than Medicare or Medicaid, and that uninsured patients (except those on charity care) pay even higher rates for the same treatments, this may aid your understanding of the Tylenol phenomenon, which plays out in different ways on virtually every facet of health care costs.

Alternately referred to as cost-shifts or cross-subsidizations, the transactions leave charges for health care, including medical supplies, all but untethered from their line-item costs. Like a prism spinning in a window on a sunny day, what shows after financial models are applied to medical services looks like anything but the surface costs they’re comprised of. What’s refracted, instead, is a menagerie of ever-shifting, oddly shaped rainbows — but much, much less pretty.

Cost shifts and cross-subsidization

1chart_salnonsalThe so-called “cost shift” at the heart of much debate over health care reform typically refers to disparities among different kinds of payers. The theory is that private payers (mostly insurance companies, on behalf of their subscribers) reimburse hospitals at higher rates than Medicaid and Medicare, to make up for the government payers’ lower rates.

Not all economists buy the cost-shift theory of price variation among payers. Some studies in recent years indicate that wildly divergent reimbursement rates are more a function of marketplace competition and negotiating prowess, and less about private burdens amplified by government underfunding. Reimbursement rates, after all, vary not just between public and private payers, but also among different insurance companies servicing the same market.

But whatever the reason, one thing is clear: Different payers pay different rates for the same service.

A related transaction that’s undisputed, if not widely understood, is when hospitals up-charge for basic procedures to recover their losses from more complicated care. Such “cross-subsidization,” as it’s known, extends beyond services to the gamut of medical supplies, from pills to gauze pads to knee braces.

Amy Vaughan is Director of Revenue, Finance and Reimbursement at the University of Vermont Medical Center. When asked to explain the relationship between a hospital’s costs and the charges passed along to patients, she laughed.

“Well, it’s —,” she stopped and tried again. “That’s complicated,” Vaughan said.

Vaughan explained that medical supplies get marked up not just to cover the regulatory overhead associated with each one, but also to help make up for what the other cost shifts and cross-subsidizations don’t.

In the case of the Tylenol phenomenon, made notorious in the 2013 TIME Magazine article “Bitter Pill” by Steven Brill, the drug costs patients outrageously more than it costs hospitals not only because there’s a lot of work and red tape associated with administering it. The hospital also up-charges one patient’s Tylenol, for example, because it’s losing money on another patient’s psychiatric services. 

Specific profit-drivers and loss-leaders vary from hospital to hospital, and their algorithms are far more complicated than to imply a one-to-one ratio anywhere within the mix. But the concept is simple: Hospitals mark up medical supplies to help make up for losses elsewhere in their business models. This rings true in profit- and non-profit facilities, alike.

Cory Gustafson, Director of Government and Public Relations for Blue Cross and Blue Shield of Vermont, said it takes a paradigm shift to understand the proposition.

“It doesn’t make sense when it’s lined up against our own common sense of supply and demand,” Gustafson said. But pricing in a highly regulated environment like Vermont isn’t determined by classical free market principles, he said. This is, in part, because hospitals are obliged to provide complex services on-demand, even when the demand for those services is not sufficient to sustain the business. 

A small hospital’s emergency room is a good example, Gustafson said. “The community needs that ER, so (the hospital) ends up needing to make revenue in other places to subsidize it,” he said.

This is why BCBSVT, in its rate negotiations with hospitals, doesn’t fixate on how much it’s asked to pay for a knee brace, for example. The insurer agrees to pay the price it does because it knows the knee brace is carrying part of the facility’s overall financial weight, he said. Making sure the hospital is adequately funded is the insurer’s way of making sure the whole health care system is there when members need it.

Cross-subsidization: seen, not touched

2chart_nonsalcats-revised2The fact that you can’t hold a rainbow doesn’t make it any less real. Likewise, cross-subsidization is a very definite part of the health care cost equation, though its exact size and shape are all but impossible to quantify.

Vaughan said she doubts the UVM Medical Center could even figure out how much of its hospitals’ revenues are comprised of reimbursements for medical supplies, because reimbursement for services is so divorced from any system of line-item charges. 

The UVM Medical Center and Central Vermont Medical Center, the health network’s two hospitals in Vermont, are both designated by the Centers for Medicare & Medicaid Services as “prospective payment system” hospitals. This means billing — at its most basic level for inpatient care — is based not on the cost of specific services provided to any particular patient, but on that patient’s diagnostic code. (Reimbursement works somewhat differently for some of Vermont’s smaller, more rural hospitals.) 

For example: Imagine if two patients, we’ll call them Ginger and Fred, both had the same health care plan with the same insurer, and were admitted to UVM Medical Center for an appendectomy the same day. Ginger stays only three days, while Fred stays six (but with no complicating factors that result in a second diagnostic code). Ginger and Fred’s insurance company would pay the hospital the same amount for both patients, even though clearly more medical supplies (and labor) would have been used in the process of caring for the patient who stayed twice as long. 

Vaughan cautions that such an example is an oversimplification, but it gets the point across: The hospital may clear a profit from Ginger’s payment, but lose money on Fred’s treatment. Either way, its budgetary goal is not for each service to pay for itself, but for all payments to cover the cost of all services, with some left over to reinvest in the organization’s people, programs and facilities. 

“We look at it in totality,” Vaughan said. “We’re looking at covering (our costs) at the global level, not from a line-item level. We’re not saying whenever we do X procedure, we need to cover X cost.”

The Green Mountain Care Board, with regulatory authority over hospital budgets, likewise focuses on the forest, not the trees. Mike Davis, GMCB Director of Health System Finances, said the board’s priority in hospital budgeting is to curb overall cost growth, not to micromanage spending.

“Whether medical supplies are going up 15 percent or down 15 percent, we don’t try to manage at that level,” Davis said. However hospitals piece together their budgets to stay within certain targets for overall growth is up to them, as long as quality of care is maintained, Davis said. 

The Green Mountain Care Board collects categorized spending projections from all of Vermont’s hospitals, so the rough outline of each facility’s equation is visible. Medical supplies, including pharmaceuticals, account for almost 10 percent of Vermont hospitals’ overall budgets. At individual hospitals, that proportion ranges from less than one percent at Mt. Ascutney Hospital and Health Center, a rural Critical Access Hospital, to 13 percent at the UVM Medical Center, a Level 1 Trauma Center. Davis cautioned that these numbers are a good place to start, but reporting nuances among hospitals complicate direct comparison.

Among the complications: Different hospitals have different overhead and different payer mixes to compensate for. Plus, the Board’s reporting instructions include general definitions for medical or surgical supplies sold, drugs sold, and other related expenses — as granular as it gets, he said. But each hospital may apply these definitions somewhat differently, and the Board has never conducted a reporting audit, he said.

Teasing apart the dollar value of cross-subsidized medical supplies also is complicated by a proprietary veil: Each hospital and insurance company negotiates reimbursement rates separately, and privately. Insurance companies get a discount off the full-price charges, but neither hospitals nor insurers want their competition to know how much (or how little) it’s worth.

The art of the bargain

3chart_medsuppercenttotalIt’s up to the Green Mountain Care Board to make sure hospitals and insurance companies set fair rates that keep health care reliable, hospitals solvent and health insurance affordable. Inside the hospitals, it’s up to supply chain managers to find good deals. 

Charlie Miceli, C.P.M., Vice-President and Network Chief Supply Chain Officer at the UVM Health Network, said medical supplies procurement has evolved from a back-office function to an integral part of the network’s financial strategy. 

“It’s not just three bids and a cloud of dust anymore,” Miceli said. “In the old days, you just went for the lowest bid. You were on a hamster wheel of repetitive, non-critical processes.” 

Today, Miceli said, physicians and nurses are pulled into the procurement process and even into bargaining sessions, both to get them invested in savings and for their expertise. He said in some cases, “procurement stiffs” can only get negotiations so far, but practitioners who work with the supplies in question can push a good deal across the finish line.

The UVM Health Network also has signed on with several “third-party decision support providers.” Miceli said the cost of these contracts is more than offset by the savings they facilitate through specialized consulting, analytical tools and group purchasing power. 

The UVM Medical Center buys about 30 percent of its medical-surgical supplies through a consortium of 116 academic medical centers that comprise about $52 billion of annual buying power. The University HealthSystem Consortium’s benchmarking data show that UVM Medical Center just makes it into the top one-third of all academic medical centers for price competitiveness on med-surge supplies. Miceli said the benchmarking data help his team identify where they could be getting better deals by giving them a sense of the prices being paid by others in the hospital’s peer group. 

And with four hospitals under its umbrella, the UVM Health Network claims a group purchasing power of its own. 

“We’ve taken over $6 million out of the system,” Miceli said, just by contracting together for a few high-ticket items, including cardiology, orthopedic implants, imaging services and pharmaceutical distribution. 

Miceli said the network is about two years away from having all its supply chain management aligned on one computer system, and that it’s already taken over supplies ordering and delivery for almost all its primary care clinics, as well. 

“Maybe you can get two more appointments in per week, because you don’t have to count sutures or supplies to order,” he said. Their strategy with supply chain management is not just to save money, but time. “It’s the time that’s even more scarce,” he said. 

The health network’s growing heft also helps when it gets into procurement negotiations with medical supply companies, many of which are undergoing their own rounds of consolidation that let them throw new weight around the bargaining table. But it can only get them so far. Case in point: One of the only major national suppliers of IV solution, Hospira, was recently bought out by Pfizer. Not interested in leveraging the product as a loss leader, as Hospira had done, the new owner — with a mandate for shareholder return, not affordable community health — is making up for lost profits. 

“I understand what they’re doing,” Miceli said. But he said the hit to UHC members alone is about $600 million from the Hospira acquisition and a change in another company’s distribution of key cancer-fighting drugs. “(A)t the end of the day, we’ve got to figure out something else. That’s why supply chain management has risen from a back-office function like it was when I started in the ’80s,” he said.

Mike Del Trecco, Vice-President of Finance at the Vermont Association of Hospitals and Health Systems, said the health care system is complex partly because of such shifting market forces as any business faces, but also because hospitals negotiate those market forces while delivering extremely specialized care to individuals with unique situations. The best way to manage that complexity, he said, lies in current efforts to reform health care delivery away from a fee-for-service system.

“You come up with an aggregate approach for paying for that population,” Del Trecco said. “The status quo is gone from our mind. It’s not even an option.”

Again, it’s a paradigm shift. One that’s already underway, where the concept of services comprised of line-item charges may mean even less than it does today.

DATA: Jobs in Vermont

Amid election-season rhetoric and political spin about jobs, this series of data visualizations documented labor statistics over time and across sectors, with both county-level detail and nationwide context.

I conceived and designed the series, wrangled and analyzed the data, and wrote accompanying explanatory stories.

Published on VTDigger.org in September 2014

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STATEWIDE ALTERNATIVE UNEMPLOYMENT RATES, 2003-PRESENT

screen-shot-2016-12-14-at-6-36-52-pmThe unemployment rate changes depending on how “unemployment” is defined. Does it include long-term joblessness? Discouraged workers? Underemployed? A firm grasp of the different ways employment is measured is essential to understanding the meaning behind labor statistics.

This series of four visualizations explains and illustrates those differences. It starts by tracing the size of Vermont’s labor force alongside unemployment rates from 1976 to 2014, then delves into alternative unemployment measurements. Interactive graphs compare the state’s alternative unemployment rates over a decade, examine every state’s alternative unemployment rates over time, and contrast Vermont’s alternative unemployment rates against national averages.

// Read the full story here.

 

CENSUS OF VERMONT JOBS AND WAGES, 2003-PRESENT

stacked graph comparing the size of "SuperSectors" over timeFocusing on Vermont for the publication’s primary audience, this interactive tool compares both the number of people employed in various sectors over time, and the average annual pay those workers received.

This set of three visualizations automatically changes two detailed views as the reader hovers over or clicks on each sector in the main graph.

// Read the full story here.

Jay Peak loses trust of first EB-5 investors

2651 words / by Anne Galloway and Hilary Niles / VTDigger.org

A group of immigrant EB-5 investors are incensed that Bill Stenger, president and CEO of Jay Peak Resort, seized ownership of the Tram Haus Lodge and turned their half-million dollar equity stakes in the property into IOUs.

Investors had no knowledge of Stenger’s actions until five months after they were executed.

Bill Stenger (foreground, right), president and CEO of Jay Peak Resort, presides over the ribbon-cutting ceremony at the immigrant-funded Stateside Hotel and Baselodge. Photo by Hilary Niles / VTDigger

Stenger and his partner at Jay Peak, Miami-based Ariel Quiros, dissolved the company on Aug. 31, 2013, turned the investments into unsecured loans and “waived” investors’ legal rights, according to documents obtained by VTDigger. Stenger says he sent an email to investors with the promissory note on Jan. 24 of this year, but he did not mail official, paper copies until May.

After the investors sent letters of complaint to Stenger and the state, Jay Peak agreed to change certain terms of the IOU in a take-it-or-leave-it offer earlier this month.

In an interview, Stenger said he did not need to consult with the 35 limited partners in Jay Peak Hotel Suites, LP, before he dissolved the company, because Jay Peak had the legal right to do so under the limited partnership agreement with the investors.

Stenger said he regrets not communicating better with both investors and state officials, and he takes full responsibility for the “big mistake.”

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Data viz: Part-time work casts shadow over low unemployment rating

VTDigger.org

201406_AltURatesVermont’s official unemployment rate may be approaching pre-recessionary lows, but when part-time and other marginally attached workers are factored in, the rate has been slower to budge.

At 3.3 percent, the state’s official jobless rate remained second lowest in the nation in May, the most recent month for which estimates are available. The official rates from the Vermont Department of Labor only include jobseekers who have been looking for work for a four-week period. Averaged annually, the official rate in Vermont was 4.3 percent in 2013.

But discouraged and underemployed workers don’t show up in official rates. A more inclusive measure of “labor underutilization” averaged 9.3 percent last year.

Economist Tom Kavet of Kavet, Rockler & Associates, who consults for the Vermont Legislature, said in a normal economic recovery, he would expect the number to have come down more by now.

“Things are getting better, but we’re not back to anything near full employment,” Kavet said. “A lot of people would like to work more but are not able to.”

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6 Ways to slice unemployment

The federal government estimates unemployment six different ways to account for different segments of the workforce. Here’s a rundown, with more detail at the U.S. Bureau of Labor Statistics.

    U-1: unemployed 15 weeks or longer
    U-2: job losers + temporary workers
    U-3: official rate — jobless available to work who have looked in most recent four weeks
    U-4: unemployed + discouraged (potential workers who have dropped out of the labor force but looked for jobs in the last year)
    U-5: unemployed + discouraged + other marginally attached (available for work, but hadn’t looked in last four weeks)
    U-6: unemployed + discouraged + marginally attached + part-time workers who’d prefer full-time work

Analyst, economist weigh potential of IBM sale to Globalfoundries

1348 words / VTDigger.org

If IBM were to sell its computer chip-making unit to California-based Globalfoundries — patents and all, as the company is widely rumored to be considering — would the new owner of Vermont’s largest manufacturing plant even want to keep it?

Probably not, according to Len Jelinek, a semiconductor manufacturing industry analyst for the global information firm IHS.

IBM is Vermont’s largest private employer, with about 4,000 workers, and anxiety about the impact of the plant’s sale and potential closure is palpable.

Despite these feverish efforts to keep IBM in the Green Mountain State, there is little the state can do to prevent a potential closure of the plant. Global trends are driving behind-the-scenes negotiations between powerful industry players.

Job losses of IBM’s magnitude are easier to absorb over time, economist Art Woof acknowledged. Still, he said, the area’s financial engine is diversified and resilient enough that even such a “worst case scenario” would not kill the economy.

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Study shows 40 percent of Vermont children are not ready for Kindergarten

769 words / VTDigger.org

A new report on the health of Vermont’s children shows that 40 percent of the state’s children were deemed “not ready” for kindergarten in 2012-13. Almost one-third of third-graders read below grade level — a figure that jumps to 45 percent for children living in poverty.
The report, “How are Vermont’s Young Children?” published annually by Building Bright Futures, the state’s early childhood education advisory council, analyzes key factors that affect children’s health and academic success.

Children sang and played at the launch event for Let’s Grow Kids, a statewide public education campaign about the importance of early childhood experiences. Photo by Hilary Niles/ VTDigger

Vermont’s infant mortality and premature birth rates are very low, while the proportion of children with medical insurance is high, according to the report.

But two out of five Vermont kids under age 6 live in low-income households. And the number of children placed in protective state custody has increased 17 percent since 2002.

“Any business leader that does not think this is a huge business issue, candidly, they just haven’t done their homework,” Green Mountain Power president and CEO Mary Powell said Friday morning. She was speaking at Burlington’s Main Street Landing Performing Arts Center for the launch of a three-year, statewide public awareness campaign about early childhood development.

Unemployment rate drops, but labor force declines

366 words / VTDigger.org

December brought good news and bad news for Vermont’s jobs picture: The unemployment rate dropped again, but so did the labor force.

Among the people who consider themselves ready and willing to work, more of them were employed in December than in recent months. The state’s seasonally adjusted unemployment rate remains among the lowest in the nation, at just 4.2 percent compared to a national average of 6.7 percent.

But fewer people consider themselves ready and willing to work. Vermont’s labor force lost about 950 people in December, dropping to 349,900 — the lowest in 35 years.

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Q Empire: The man behind the Northeast Kingdom’s biggest plan

3332 words / VTDigger.org

Ariel Quiros is the entrepreneurial force behind Jay Peak ski resort and the $600 million Northeast Kingdom Economic Development Initiative – one of the largest development projects ever attempted in Vermont.

Though the project is high profile, Quiros is not. The international tycoon, though sometimes seen, is seldom heard.

Ariel Quiros whispers to Gov. Peter Shumlin during a press conference at Jay Peak’s Stateside Hotel and Baselodge. Photo by Hilary Niles/ VTDigger

The first generation American stands out at press conferences for his mystique: When he’s not got the ear of the governor, Quiros is most often seen standing uncomfortably before a crowd with pursed lips, staring silently and expressionless, at nothing in particular, through ice blue eyes.

Quiros quietly presides over an integrated set of projects that together constitute the largest private investment Vermont has ever seen: expansions at Jay Peak, development of the newly renamed Q Burke Mountain ski area, the mixed use Renaissance Block planned for downtown Newport, the future site of a biotech firm in the same town, and the promise of a new and improved Newport State Airport in Coventry.

“I make the vision,” he says quietly, a touch of gravel in his voice after 20-plus years of smoking.

His accent, clearly from New York, is also infused with the Puerto Rican and Venezuelan accents of his mother and father, respectively. He speaks three languages and his English borrows sometimes a tense from Spanish or a cadence from Korean, his wife’s native tongue.

He just sees things, Quiros says. He gets a vision for what can be, ignores all obstacles, and surrounds himself with people who can make it happen.

And they do, which is why Quiros likes to keep to himself. Business risk is thrilling, but trust is a precious commodity for a millionaire. Quiros is generous with friends, but says he hasn’t fought for all he’s built to give it away, much less have it taken.

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Community fears history will repeat itself at Q Burke Mountain

3310 words / VTDigger.org

It’s the day before Q Burke Mountain opens for the winter, and Ary Quiros could just as well be preparing for battle as for business.

The new CEO is opening the ski resort for the first time since he started at the mountain the previous winter, and he’s amped. If Quiros, 36, can turn this chronically failing but beloved ski area into a stable business, he will succeed where prior, much wealthier, owners have failed.

The arc of history and local expectations give him long odds. But Quiros — and his staff — are determined.

Wearing a weathered, Army green jacket and frequently checking a watch face practically the size of his wrist, Quiros shuttles from one outpost of operations to another to check on his troops: snowmaking, ticket sales, kitchen, pub and cafeteria. Finances. Marketing. Housecleaning.

“It’s like being in the Army again,” Quiros says. The 12-year veteran of the wars in Iraq and Afghanistan is now a captain with the Vermont National Guard. He relishes intensity in the field, clarity of mission, camaraderie, and he applies his military leadership experience to Q Burke Mountain operations.

Ary Quiros served in the Army’s 101st Airborne Division in Iraq and held other posts in Afghanistan and South Korea before taking over as CEO of Q Burke Mountain ski area in Vermont. Photo by Hilary Niles/ VTDigger

“You take care of them,” Quiros says about both his military units and staff. “They watch your back, and you move forward.”

The responsibility to provide for and protect his staff weighs heavily on Quiros, perhaps even propels him.

And his military analogy for mountain operations is echoed by his father, Ariel Quiros, who purchased Burke Mountain in 2012.

Ariel Quiros says half a dozen buyers before him couldn’t close the deal because of the mountain’s high-profile history and reputation with banks and investors: Bankruptcies dating back to the 1980s. A bounced tax check to the town for $97,374.30. More bankruptcies. A public auction. Ginn Companies’ $675 million default with Credit Suisse bank.

“Boom boom boom, bombs away,” Quiros says. “Everybody’s shelling the mountain, all the banks, doesn’t wanna fund it. All the businessmen failed.”

Some of them, Quiros notes, possessed or managed wealth that far exceeds his own, built from international trade since the 1980s. Bernd Schaefers was a German movie producer who made “The NeverEnding Story” and “In the Name of the Rose.” Donald Graham founded investment firms that collectively manage upwards of $7 billion. Developer Bobby Ginn presided over real estate transactions across the country that also measure in the billions.

None of their business plans at Burke held. Some went down in flames.

And plans now are as grand as ever: to brand the mountain as year-round training grounds for elite athletes. Buildout is expected to cost about $108 million and will include four hotels, an aquatic center, tennis facility and indoor mountain biking park.

But this time, even more is at stake.

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Shumlin celebrates broadband progress, though target is missed

930 words / VTDigger.org Despite conceding that Vermont will miss his target of statewide broadband and cellular coverage before year’s end, Gov. Shumlin Wednesday gathered top telecommunications executives to celebrate how far they’ve come.

20131120_Guite-VTel-610x428
VTel president Michel Guité addresses a roundtable of telecommunications executives and press assembled by Gov. Peter Shumlin in Montpelier Wednesday afternoon. Photo by Hilary Niles/VTDigger

About 3,000 homes still lack high-speed Internet service — representing less than 1 percent of residences in the state. Of those homes without service, solutions have been identified for the vast majority, though connection dates remain elusive. Five or fewer locations still remain without any solutions figured out. Administration Secretary Jeb Spaulding said the effort has been largely successful. “I think (the governor) is excited and thankful and gratified for the progress we have made, and I think for all intents and purposes, we have hit his target.”

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