Plain People and Healthcare Economics

[Ken]

Maybe I'm a bit dense, but it seems to me that whether a million dollar write off is better all depends on the starting point. If they are charging a higher price to begin with, then the initial income is higher. So that it takes a larger write-off just to get down to the same place.

For instance, say hospital A charges $100,000 for a surgery, has direct costs of $40,000 and overhead of $35,000. That leaves them with a profit of $25,000 to pay taxes on.
If hospital B charges $500,000 for that same surgery, has the same direct costs of $40,000 and overhead of $35,000, but then writes off a $400,000 self-pay discount, they have the exact same $25,000 of profit to pay taxes on.

How is that a financial incentive?

I'm not saying there might not be other social reasons to do this, but I'm asking about the specific statement that was made - that this is probably better financially for tax reasons.

What you are missing is that most hospitals have a wide variety of prices for the same service.

Their paying customers (which are mostly Medicare/Medicaid and insurance companies) pay negotiated discounted prices for all hospital costs such as surgeries, labs, etc. So their profits are based on the large volume of paying customers. That is their income stream. They can't charge more because the government and insurance companies aren't going to pay more.

Their non-paying customers are mostly the uninsured. These are the people who get the enormous "retail-price" bills. Which the hospitals rarely ever collect on and mostly just write-off. I think that is why you hear stories like those upstream where Menno and Amish folks have sat down to negotiate payment and have gotten large discounts. I suspect the hospitals in question realize that "hey...this is actually a paying customer so we might as well get what we can get rather than writing off the bill like we were planning to do" and they negotiate discounts.

Why else would a hospital charge 10x more to say an indigent uninsured undocumented immigrant than they charge to Medicaid for a Medicaid patient? They know from experience they aren't likely to get paid either way. So might as well inflate the write-off as much as they can.

People do the same exact thing when they make charitable donations to Good Will. You drop off a box of old clothes at Good Will and they hand you a blank receipt that you can put down whatever value you chose to use for the tax deduction. So people will put down $500 for a box of clothes that isn't worth $50. I think hospitals are doing the same exact thing on a MUCH MUCH more massive scale with they play around with pricing on bills that they know aren't going to ever be paid. And it is all legal because there are really no price controls in health care.

No sir, I'm not missing that pricing variety at all.

So tell me again - if I record revenue of $100,000 and then a charitable donation of $90,000, how exactly is that better than if I just record revenue of $10,000? In order for a $100,000 medical bill to exist, the hospital has to book a revenue of $100,000. They can't book a revenue of $10,000, send the customer an invoice for $100,000, then forgive $90,000 of that bill and take a tax deduction for it. There are plenty of games that can be played legally with tax accounting, but that isn't one of them.

Claiming a $500 tax deduction for donating $50 worth of clothes to Goodwill is tax fraud, but people get away with it because (1) most people don't get audited, and (2) it's awfully hard to prove a value for a box of clothes that isn't around to inspect any more. And if by some stroke of luck you happened to have bought a particular limited edition brand of sneakers 20 years ago for $10 that has now appreciated to $1,000 - well, there are special rules that apply that allow you that windfall of a deduction for donating them. And there are special rules allowing extra deductions for charitable donation of inventory. But those rules don't apply for medical services.

Because a typical big hospital probably has tens of millions of dollars of actual revenue. They can't do much to mess around with their revenue because it is actual payments coming in from the government and private insurance companies. I don't think they book revenue from their billings. The book it from their receipts.

The only thing they can really do to reduce their tax bills is increase their costs. Some of those like labor, utilities, equipment, etc. are pretty fixed. The one place they can really get creative is in how they calculate the value of the charitable care that they do (and write off).

What I am saying is happening is that a hospital issues a $100,000 bill for services to an indigent patient who pays zero. The hospital books ZERO revenue from that bill because they did not get paid. But they credit themselves as having given $100,000 worth of indigent or charity care that they write-off.

Sure the hospital could have issued a $10,000 bill for the same service. Perhaps that is what Medicaid would have paid for that service. In this case the patient isn't going to pay either way no matter how big or little the bill is. But then when they write off the bill as charity care they only get a $10,000 write off.

There is no price regulation in medicine. Hospitals are free to charge whatever they want for for this sort of care. I'm saying that the tax code gives them a powerful incentive to inflate the value of the charity care that they do write-off if we are talking about a for-profit hospital.

[ken_sylvania]

What you are missing is that most hospitals have a wide variety of prices for the same service.

Their paying customers (which are mostly Medicare/Medicaid and insurance companies) pay negotiated discounted prices for all hospital costs such as surgeries, labs, etc. So their profits are based on the large volume of paying customers. That is their income stream. They can't charge more because the government and insurance companies aren't going to pay more.

Their non-paying customers are mostly the uninsured. These are the people who get the enormous "retail-price" bills. Which the hospitals rarely ever collect on and mostly just write-off. I think that is why you hear stories like those upstream where Menno and Amish folks have sat down to negotiate payment and have gotten large discounts. I suspect the hospitals in question realize that "hey...this is actually a paying customer so we might as well get what we can get rather than writing off the bill like we were planning to do" and they negotiate discounts.

Why else would a hospital charge 10x more to say an indigent uninsured undocumented immigrant than they charge to Medicaid for a Medicaid patient? They know from experience they aren't likely to get paid either way. So might as well inflate the write-off as much as they can.

People do the same exact thing when they make charitable donations to Good Will. You drop off a box of old clothes at Good Will and they hand you a blank receipt that you can put down whatever value you chose to use for the tax deduction. So people will put down $500 for a box of clothes that isn't worth $50. I think hospitals are doing the same exact thing on a MUCH MUCH more massive scale with they play around with pricing on bills that they know aren't going to ever be paid. And it is all legal because there are really no price controls in health care.

No sir, I'm not missing that pricing variety at all.

So tell me again - if I record revenue of $100,000 and then a charitable donation of $90,000, how exactly is that better than if I just record revenue of $10,000? In order for a $100,000 medical bill to exist, the hospital has to book a revenue of $100,000. They can't book a revenue of $10,000, send the customer an invoice for $100,000, then forgive $90,000 of that bill and take a tax deduction for it. There are plenty of games that can be played legally with tax accounting, but that isn't one of them.

Claiming a $500 tax deduction for donating $50 worth of clothes to Goodwill is tax fraud, but people get away with it because (1) most people don't get audited, and (2) it's awfully hard to prove a value for a box of clothes that isn't around to inspect any more. And if by some stroke of luck you happened to have bought a particular limited edition brand of sneakers 20 years ago for $10 that has now appreciated to $1,000 - well, there are special rules that apply that allow you that windfall of a deduction for donating them. And there are special rules allowing extra deductions for charitable donation of inventory. But those rules don't apply for medical services.

Because a typical big hospital probably has tens of millions of dollars of actual revenue. They can't do much to mess around with their revenue because it is actual payments coming in from the government and private insurance companies. I don't think they book revenue from their billings. The book it from their receipts.

The only thing they can really do to reduce their tax bills is increase their costs. Some of those like labor, utilities, equipment, etc. are pretty fixed. The one place they can really get creative is in how they calculate the value of the charitable care that they do (and write off).

What I am saying is happening is that a hospital issues a $100,000 bill for services to an indigent patient who pays zero. The hospital books ZERO revenue from that bill because they did not get paid. But they credit themselves as having given $100,000 worth of indigent or charity care that they write-off.

Sure the hospital could have issued a $10,000 bill for the same service. Perhaps that is what Medicaid would have paid for that service. In this case the patient isn't going to pay either way no matter how big or little the bill is. But then when they write off the bill as charity care they only get a $10,000 write off.

There is no price regulation in medicine. Hospitals are free to charge whatever they want for for this sort of care. I'm saying that the tax code gives them a powerful incentive to inflate the value of the charity care that they do write-off if we are talking about a for-profit hospital.

Do you have any data at all to back up this theory? Because it would be in direct violation of IRS regulation, as well as being in violation of GAAP.

[Ken]

No sir, I'm not missing that pricing variety at all.

So tell me again - if I record revenue of $100,000 and then a charitable donation of $90,000, how exactly is that better than if I just record revenue of $10,000? In order for a $100,000 medical bill to exist, the hospital has to book a revenue of $100,000. They can't book a revenue of $10,000, send the customer an invoice for $100,000, then forgive $90,000 of that bill and take a tax deduction for it. There are plenty of games that can be played legally with tax accounting, but that isn't one of them.

Claiming a $500 tax deduction for donating $50 worth of clothes to Goodwill is tax fraud, but people get away with it because (1) most people don't get audited, and (2) it's awfully hard to prove a value for a box of clothes that isn't around to inspect any more. And if by some stroke of luck you happened to have bought a particular limited edition brand of sneakers 20 years ago for $10 that has now appreciated to $1,000 - well, there are special rules that apply that allow you that windfall of a deduction for donating them. And there are special rules allowing extra deductions for charitable donation of inventory. But those rules don't apply for medical services.

Because a typical big hospital probably has tens of millions of dollars of actual revenue. They can't do much to mess around with their revenue because it is actual payments coming in from the government and private insurance companies. I don't think they book revenue from their billings. The book it from their receipts.

The only thing they can really do to reduce their tax bills is increase their costs. Some of those like labor, utilities, equipment, etc. are pretty fixed. The one place they can really get creative is in how they calculate the value of the charitable care that they do (and write off).

What I am saying is happening is that a hospital issues a $100,000 bill for services to an indigent patient who pays zero. The hospital books ZERO revenue from that bill because they did not get paid. But they credit themselves as having given $100,000 worth of indigent or charity care that they write-off.

Sure the hospital could have issued a $10,000 bill for the same service. Perhaps that is what Medicaid would have paid for that service. In this case the patient isn't going to pay either way no matter how big or little the bill is. But then when they write off the bill as charity care they only get a $10,000 write off.

There is no price regulation in medicine. Hospitals are free to charge whatever they want for for this sort of care. I'm saying that the tax code gives them a powerful incentive to inflate the value of the charity care that they do write-off if we are talking about a for-profit hospital.

Do you have any data at all to back up this theory? Because it would be in direct violation of IRS regulation, as well as being in violation of GAAP.

What is your theory for why hospitals charge the uninsured 2x or 3x more than the insured when they rarely collect?

[ohio jones]

I don't think they book revenue from their billings. The book it from their receipts.

That's cash basis accounting. Any business as large as a hospital is almost certainly going to have to use accrual basis, which means recognizing revenue when billed and eventually writing off uncollectibles.

[Ken]

I don't think they book revenue from their billings. The book it from their receipts.

That's cash basis accounting. Any business as large as a hospital is almost certainly going to have to use accrual basis, which means recognizing revenue when billed and eventually writing off uncollectibles.

I defer to your superior business knowledge.

What is your theory as to why hospitals bill the uninsured at rates up to 10x higher than they do for patients on Medicare or private insurance? Especially when they rarely collect but do bankrupt thousands with medical debt?

I don't have any particular inside knowledge. But I expect there are powerful economic incentives of some sort that causes them to do this.

[MaxPC]

I accept that there will always be people who behave in irrational manners. But at the macro level, surely the law of economic would have some impact. I believe it would. But I don’t know what else would be factors, possibly larger or countering factors.

RZehr, this is a great topic and it points up the fact that it is not just about the costs.

In my experiences, I have seen people bypass medical care for a variety of reasons unrelated to costs:
-concerns and fears of prolonged pain and agony seems to be the most frequent reason
-depression and loss of a sense of purpose is another frequent cause (e.g. I am going to die anyway, I might as well just give up)
-family and friends' horror stories of bodged treatments (e.g. Cousin Fred had that done and he lost the use of his right leg)
-some are alone and have no one to care for them after the procedures
-too much trouble for all of the appointments and follow-ups

[Josh]

If the hospital doesn't expect to get paid either way, which will their accountants prefer when it comes to tax time? A write-off off $100,000 or a write-off of $2 million. I'm guessing the latter. Which is why I suspect a lot of hospital pricing really has to do with inflating their write-offs rather than extracting blood from a turnip.

How does one benefit them more than the other?

I may be wrong, but I think what he’s saying is if someone can’t pay, regardless of price, then the hospital can write that off as a loss, reducing their tax liabilities. So if you write off a million, it’s much better for your taxes than a hundred grand.

Most hospitals are nonprofits these days; in order to continue to be non-profits they have to do some figure like 55% of "charity care". When they write something off, this can go against the 55%. Needless to say, they are incentivised to write off absurd amounts for this.

So when an appendectomy is performed on someone covered by Medicaid or insurance, it might cost $12,000 (typical cost if covered by insurance) or about $1,200 (typical cost that Medicaid will pay).

An uninsured patient, on the other hand, gets a bill in the $40,000 - $55,000 range. (See [urlhttps://www.cbsnews.com/news/cost-of-an-appende ... 5000-bill/[/url], for example. Note that the original bill was $55,000, and he ended up having to pay around $11,000 out of pocket, since he did have insurance.

So if a hospital does $100,000 in business in a year, they can claim they are dispensing 55% as charity care with 1 uninsured patient who can't pay. Meanwhile, with the remaining $45,000, they can do:

- 1 appendectomy for "free" for an uninsured patient
- 10 appendectomies for Medicaid at $1,200 a piece, $12,000
- 3 appendectomies for insured patients at $11,000 a piece, $33,000

How do I know this? I used to be a consultant that worked with insurance companies to analyse hospital billing data.

If you think the above is terrible, it is. The "nonprofit" U.S. hospital system is pretty much a giant scam. I'd do whatever you can do stay out of them and avoid dealing with them.

[ken_sylvania]

What is your theory for why hospitals charge the uninsured 2x or 3x more than the insured when they rarely collect?

Maybe the same reason some trucking companies like FedEx, YRC, etc have outrageous rates in their tariff, but will happily set just about anyone up with a discount of 70% to 80% even for small shipping volumes, with discounts of 90% or greater for large shippers?

Maybe because when an account goes to collections or if a customer goes bankrupt, it's far better to collect 5% of $100,000 than to collect 5% of $10,000?

I really don't know why they do it.

Ask Josh - he should know.

[Josh]

What is your theory for why hospitals charge the uninsured 2x or 3x more than the insured when they rarely collect?

Maybe the same reason some trucking companies like FedEx, YRC, etc have outrageous rates in their tariff, but will happily set just about anyone up with a discount of 70% to 80% even for small shipping volumes, with discounts of 90% or greater for large shippers?

Maybe because when an account goes to collections or if a customer goes bankrupt, it's far better to collect 5% of $100,000 than to collect 5% of $10,000?

I really don't know why they do it.

Ask Josh - he should know.

Very unrelated businesses. Bulk shipping makes sense. Bulk appendectomies do not. It's an emergency procedure that almost always starts in an E.R.

If hospitals were run ethically and for the good of patients, they would charge cost-plus for an appendectomy, charge uninsured patients the same amount they charge insured ones, and charge Medicaid a little less. Instead, they negotiate huge discounts with Medicaid (because they want contracts with Medicaid for other reasons), try to charge insurers as much as they can (but insurers have savvy negotiators), and then try to really soak uninsured patients for every last dollar. And they do the latter so they can play games with their accounting so they can retain their "nonprofit" status, and escape paying taxes like every other business does.

I don't really have a solution to this, but healthcare in America is getting worse and is going to continue to get worse. We have fewer hospital beds than we did a few decades ago. Hospitals are being closed, consolidated, and made "more efficient", which to you, the patient, means you're going to get worse care, a farther drive away, for longer waits, and with higher prices.

My recommendation is to figure out how to arrange your life so you're less in need of a hospital. There's nothing you can do to avoid an appendectomy, but a lot of other things like heart attacks can be reduced with lifestyle changes.

If you don't have insurance or a church health care sharing plan, you need to get one, or else develop a relationship with a bankruptcy attorney. A relatively simple thing like a hospital birth that ends up involving a C-section (hospitals tend to unnecessary C-sections, partly to reduce liability for lawsuits but mostly because they can make a lot more money for them) is in the $100k range out of pocket now. If you have $100k in assets, you need to have an insurance company, a health sharing plan, or else plan to sign your house over to the hospital.

[Wade]

I've had free health care my whole life. But I now avoid conventional doctors if I can help it because my personal record with them is that they didn't help with any ailment I've had - why would I go to someone that doesn't do anything to help? They know so little about things like digestion and food allergies/intolerances there advice cannot be trusted. Naturopath doctors have helped immensely every time.

Granted the conventional medical system does an exceptional job in emergencies - I would gladly go to them for a broken bone or other major bleeding, stitches, and etc. They just are not good at everything - and the cost of going to them for non- emergencies for me has been more years of pain. I gladly pay money for a Naturopath than going to free doctors that don't help. You did get what you pay for some times.