Fine print: June 2012

When health care is wealth care
By G.D. Gearino

There are times, and they are many, when I think of the American health-care system in the same way England’s Henry II thought of “this turbulent priest” Thomas Becket — which is to say, I wonder why no one will rid us of fee-gouging hospitals and price-fixing insurers. But when I give voice to that frustration, nothing happens. When Henry II expressed his frustration, his henchmen immediately set off to slay the cause of his majesty’s annoyance. It’s good to be the king.

It’s beginning to feel that health care is the American domestic equivalent to the Israeli-Palestinian conflict: an intractable problem that was long in the making, spreads suffering mostly among the innocent, exposes differing world views that cannot be reconciled and thus makes zealots out of virtually anyone who joins the discussion. Worse yet (and to change metaphors in mid- rant), any attempt to change the way health care is paid for is akin to trying to reduce the size of a balloon by squeezing it. The cost of health care is never reduced. It just moves around to the place where there’s less squeeze-back. That place is us, the consumer.

That reality was made clear recently by reporting from three newspapers. Two of them, the Raleigh News & Observer and The Charlotte Observer, are one-time rivals now owned by the same company that team up occasionally. A series of stories by their staffs showed that North Carolina’s major hospitals, most of which are structured as nonprofit institutions, make a mockery of the phrase “nonprofit.” To cite just one example: Duke University Health System, which comprises three hospitals, posted an operating profit of $190 million in 2011. It also has a $1.5 billion investment portfolio, which helped the company invest in lavish, patient-attracting touches such as “waiting rooms that rival lobbies at four-star hotels,” as the newspapers described them. (And, yes, those stories you hear about huge markups for things such as an aspirin are true.)

Health-care systems have that kind of money, in part, because their urge to grow and dominate their markets was given almost free rein by the Affordable Care Act, which encourages consolidation and doctor-hospital networks. The idea, I suppose, was that economies of scale could be passed along to patients. In practice, it works the other way around. As the newspapers reported, revenue of North Carolina hospitals “has risen faster than the cost of treating patients — and much faster than inflation.”

In a rational marketplace, such cost spirals are held in check by a countervailing force. That should be insurers, who ultimately pay those bills. But costs seem to be a secondary concern to insurers, and in fact one health-insurance giant — the national Blue Cross and Blue Shield Association and affiliates in 38 states — seeks to keep medical costs propped up, according to a lawsuit recently filed in federal court in Statesville. My newspaper, North Carolina Lawyers Weekly, recently reported on the class-action suit, which accuses the Blues of price-fixing and restraint of trade. Anybody can allege anything in a lawsuit, of course, but the New York-based law firm that filed the claim is headed by David Boies, the guy the federal government hired in 1998 to make its antitrust case against Microsoft Corp. The suit focuses in part on the same allegation of price-fixing the U.S. Justice Department has been investigating. In short, it isn’t a frivolous bit of litigation but a serious claim brought by serious people.

The lawsuit makes two central allegations. The first is that the various Blues, supposedly independent opera- tions, have agreed not to intrude on each other’s territory. The second is that in states where the local Blue dominates the market, as is the case in North Carolina, medical providers who do business with the company — just about everybody, in other words — are required to agree that they won’t accept a lower level of compensation from a competing health insurer that might wish to grab market share by offering employers a better deal on their health-coverage packages (cover story, November 2010). The medical providers are happy to do so, of course, but the effect is to fix prices and stifle competition.

Surely government can do something about this, right? (I’ll pause here for a moment of derision, scorn and laughter.) In reality, the state of North Carolina has a vested interest in keeping “nonprofit” hospitals flush with cash. Most hospital construction and expansion in our patch of heaven is financed through tax-exempt state bonds. North Carolina has long enjoyed a good bond rating, with the benefit being that the state’s borrowing costs are low. So to make sure that hospital companies don’t default on the bonds that finance their expansion, and thus damage that fine bond rating, the state carefully regulates the market. No hospital is built or expanded until the state first determines that this won’t have the inadvertent effect of increasing competition to the point where a hospital operator might be forced to choose between making a bond payment or — gasp! — skipping the new marble floor for its waiting room.

The only people who absorb the consequences of this medical-cost spiral are the patients. Where are henchmen when you need them?

G.D. Gearino is editor of North Carolina Lawyers Weekly. Email him at dan.gearino@nclawyersweekly.com.