The Best American Magazine Writing 2014

by The American Society of Magazine Editors

  With those fourteen words, the work of Bach and his colleagues was undone. And costs remain unchecked.

  “Medicare could see the research and say, Ah, this drug works better and costs the same or is even cheaper,” says Gunn, Sloan-Kettering’s chief operating officer. “But they are not allowed to do anything about it.”

  Along with another doomed provision that would have allowed Medicare to pay a fee for doctors’ time spent counseling terminal patients on end-of-life care (but not on euthanasia), the Obama administration’s push for comparative effectiveness is what brought opponents’ cries that the bill was creating “death panels.” Washington bureaucrats would now be dictating which drugs were worth giving to which patients and even which patients deserved to live or die, the critics charged.

  The loudest voice sounding the death-panel alarm belonged to Betsy McCaughey, former New York State lieutenant governor and a conservative health-policy advocate. McCaughey, who now runs a foundation called the Committee to Reduce Infection Deaths, is still fiercely opposed to Medicare’s making comparative-effectiveness decisions. “There is comparative-effectiveness research being done in the medical journals all the time, which is fine,” she says. “But it should be used by doctors to make decisions—not by the Obama bureaucrats at Medicare to make decisions for doctors.”

  Bach, the Sloan-Kettering doctor and policy wonk, has become so frustrated with the rising cost of the drugs he uses that he and some colleagues recently took matters into their own hands. They reported in an October op-ed in the New York Times that they had decided on their own that they were no longer going to dispense a colorectal-cancer drug called Zaltrap, which cost an average of $11,063 per month for treatment. All the research shows, they wrote, that a drug called Avastin, which cost $5,000 a month, is just as effective. They were taking this stand, they added, because “the typical new cancer drug coming on the market a decade ago cost about $4,500 per month (in 2012 dollars); since 2010, the median price has been around $10,000. Two of the new cancer drugs cost more than $35,000 each per month of treatment. The burden of this cost is borne, increasingly, by patients themselves—and the effects can be devastating.”

  The CEO of Sanofi, the company that makes Zaltrap, initially dismissed the article by Bach and his Sloan-Kettering colleagues, saying they had taken the price of the drug out of context because of variations in the required dosage. But four weeks later, Sanoficut its price in half.

  Bureaucrats You Can Admire

  By the numbers, Medicare looks like a government program run amok. After President Lyndon B. Johnson signed Medicare into law in 1965, the House Ways and Means Committee predicted that the program would cost $12 billion in 1990. Its actual cost by then was $110 billion. It is likely to be nearly $600 billion this year. That’s due to the aging U.S. population and the popular program’s expansion to cover more services, as well as the sky-rocketing costs of medical services generally. It’s also because Medicare’s hands are tied when it comes to negotiating the prices for drugs or durable medical equipment. But Medicare’s growth is not a matter of those “bureaucrats” that Betsy McCaughey complains about having gone off the rails in how they operate it.

  In fact, seeing the way Alan A.’s bills from Sloan-Kettering were vetted and processed is one of the more eye-opening and least discouraging aspects of a look inside the world of medical economics.

  The process is fast, accurate, customer-friendly, and impressively high tech. And it’s all done quietly by a team of nonpolitical civil servants in close partnership with the private sector. In fact, despite calls to privatize Medicare by creating a voucher system under which the Medicare population would get money from the government to buy insurance from private companies, the current Medicare system is staffed with more people employed by private contractors (8,500) than government workers (700).

  $1.5 Billion a Day

  Sloan-Kettering sends Alan A.’s bills to Medicare electronically, all elaborately coded according to Medicare’s rules.

  There are two basic kinds of codes for the services billed. The first is a number identifying which of the 7,000 procedures were performed by a doctor, such as examining a chest X ray, performing a heart transplant, or conducting an office consultation for a new patient (which costs more than a consultation with a continuing patient—coded differently—because it typically takes more time). If a patient presents more complicated challenges, then these basic procedures will be coded differently; for example, there are two varieties of emergency-room consultations. Adjustments are also made for variations in the cost of living where the doctor works and for other factors, like whether doctors used their own office (they’ll get paid more for that) or the hospital. A panel of doctors set up by the American Medical Association reviews the codes annually and recommends updates to Medicare. The process can get messy as the doctors fight over which procedures in which specialties take more time and expertise or are worth relatively more. Medicare typically accepts most of the panel’s recommendations.

  The second kind of code is used to pay the hospital for its services. Again, there are thousands of codes based on whether the person checked in for brain surgery, an appendectomy, or a fainting spell. To come up with these numbers, Medicare takes the cost reports—including allocations for everything from overhead to nursing staff to operating-room equipment—that hospitals across the country are required to file for each type of service and pays an amount equal to the composite average costs.

  The hospital has little incentive to overstate its costs because it’s against the law and because each hospital gets paid not on the basis of its own claimed costs but on the basis of the average of every hospital’s costs, with adjustments made for regional cost differences and other local factors. Except for emergency services, no hospital has to accept Medicare patients and these prices, but they all do.

  Similar codes are calculated for laboratory and diagnostic tests like CT scans, ambulance services, and, as we saw with Alan A.’s bill, drugs dispensed.

  “When I tell my friends what I do here, it sounds boring, but it’s exciting,” says Diane Kovach, who works at Medicare’s Maryland campus and whose title is deputy director of the provider billing group. “We are implementing a program that helps millions and millions of people, and we’re doing it in a way that makes every one of us proud,” she adds.

  Kovach, who has been at Medicare for twenty-one years, operates some of the gears of a machine that reviews the more than 3 million bills that come into Medicare every day, figures out the right payments for each, and churns out more than $1.5 billion a day in wire transfers.

  The part of that process that Kovach and three colleagues, with whom I spent a morning recently, are responsible for involves overseeing the writing and vetting of thousands of instructions for coders, who are also private contractors, employed by HP, General Dynamics, and other major technology companies. The codes they write are supposed to ensure that Medicare pays what it is supposed to pay and catches anything in a bill that should not be paid.

  For example, hundreds of instructions for code changes were needed to address Obamacare’s requirement that certain preventive-care visits, such as those for colonoscopies or contraceptive services, no longer be subject to Medicare’s usual outpatient copay of 20 percent. Adding to the complexity, the benefit is limited to one visit per year for some services, meaning instructions had to be written to track patient timelines for the codes assigned to those services.

  When performing correctly, the codes produce “edits” whenever a bill is submitted with something awry on it—if a doctor submits two preventive-care colonoscopies for the same patient in the same year, for example. Depending on the code, an edit will result in the bill’s being sent back with questions or being rejected with an explanation. It all typically happens without a human being reading it. “Our goal at the first stage is that no one has to touch the bill,” says Leslie Trazzi, who focuses on instructions and edits for doctors’ claims.


  Alan A.’s bills from Sloan-Kettering are wired to a data center in Shelbyville, Ky., run by a private company (owned by Well-Point, the insurance company that operates under the Blue Cross and Blue Shield names in more than a dozen states) that has the contract to process claims originating from New York and Connecticut. Medicare is paying the company about $323 million over five years—which, as with the fees of other contractors serving other regions, works out to an average of $0.84 per claim.

  In Shelbyville, Alan A.’s status as a beneficiary is verified, and then the bill is sent electronically to a data center in Columbia, S.C., operated by another contractor, also a subsidiary of an insurance company. There, the codes are checked for edits, after which Alan A.’s Sloan-Kettering bill goes electronically to a data center in Denver, where the payment instructions are prepared and entered into what Karen Jackson, who supervises Medicare’s outside contractors, says is the largest accounting ledger in the world. The whole process takes three days—and that long only because the data is sent in batches.

  There are multiple backups to make sure this ruthlessly efficient system isn’t just ruthless. Medicare keeps track of and publicly reports the percentage of bills processed “clean”—i.e., with no rejected items—within thirty days. Even the speed with which the contractors answer the widely publicized consumer phone lines is monitored and reported. The average time to answer a call from a doctor or other provider is 57.6 seconds, according to Medicare’s records, and the average time to answer one of the millions of calls from patients is two minutes forty-one seconds, down from more than eight minutes in 2007. These times might come as a surprise to people who have tried to call a private insurer. That monitoring process is, in turn, backstopped by a separate ombudsman’s office, which has regional and national layers.

  Beyond that, the members of the House of Representatives and the Senate loom as an additional 535 ombudsmen. “We get calls every day from congressional offices about complaints that a beneficiary’s claim has been denied,” says Jonathan Blum, the deputy administrator of CMS. As a result, Blum’s agency has an unusually large congressional liaison staff of fifty-two, most of whom act as caseworkers trying to resolve these complaints.

  All the customer-friendliness adds up to only about 10 percent of initial Medicare claims’ being denied, according to Medicare’s latest published Composite Benchmark Metric Report. Of those initial Medicare denials, only about 20 percent (2 percent of total claims) result in complaints or appeals, and the decisions in only about half of those (or 1 percent of the total) end up being reversed, with the claim being paid.

  The astonishing efficiency, of course, raises the question of whether Medicare is simply funneling money out the door as fast as it can. Some fraud is inevitable—even a rate of 0.1 percent is enough to make headlines when $600 billion is being spent. It’s also possible that people can game the system without committing outright fraud. But Medicare has multiple layers of protection against fraud that the insurance companies don’t and perhaps can’t match because they lack Medicare’s scale.

  According to Medicare’s Jackson, the contractors are “vigorously monitored for all kinds of metrics” and required every quarter “to do a lot of data analysis and submit review plans and error-rate-reduction plans.”

  And then there are the RACs—a wholly separate group of private “recovery audit contractors.” Established by Congress during the George W. Bush administration, the RACs, says one hospital administrator, “drive the doctors and the hospitals and even the Medicare claims processors crazy.” The RACs’ only job is to review provider bills after they have been paid by Medicare claims processors and look for system errors, like faulty processing, or errors in the bills as reflected in doctor or hospital medical records that the RACs have the authority to audit.

  The RACs have an incentive that any champion of the private sector would love. They get no up-front fees but instead are paid a percentage of the money they retrieve. They eat what they kill. According to Medicare spokeswoman Emma Sandoe, the RAC bounty hunters retrieved $797 million in the 2011 fiscal year, for which they were paid 9 percent to 12.5 percent of what they brought in, depending on the region where they were operating.

  This process can “get quite anal,” says the doctor who recently treated me for an ear infection. Although my doctor is on Park Avenue, she, like 96 percent of all specialists, accepts Medicare patients despite the discounted rates it pays, because, she says, “they pay quickly.” However, she recalls getting bills from Medicare for $0.21 or $0.85 for supposed overpayments.

  The DHHS’s inspector general is also on the prowl to protect the Medicare checkbook. It reported recovering $1.2 billion last year through Medicare and Medicaid audits and investigations (though the recovered funds had probably been doled out over several fiscal years). The inspector general’s work is supplemented by a separate, multiagency federal health-care-fraud task force, which brings criminal charges against fraudsters and issues regular press releases claiming billions more in recoveries.

  This does not mean the system is airtight. If anything, all that recovery activity suggests fallibility, even as it suggests more buttoned-up operations than those run by private insurers, whose payment systems are notoriously erratic.

  Too Much Health Care?

  In a review of other bills of those enrolled in Medicare, a pattern of deep, deep discounting of chargemaster charges emerged that mirrored how Alan A.’s bills were shrunk down to reality. A $121,414 Stanford Hospital bill for a ninety-year-old California woman who fell and broke her wrist became $16,949. A $51,445 bill for the three days an ailing ninety-one-year-old spent getting tests and being sedated in the hospital before dying of old age became $19,242. Before Medicare went to work, the bill was chock-full of creative chargemaster charges from the California Pacific Medical Center—part of Sutter Health, a dominant nonprofit northern California chain whose CEO made $5,241,305 in 2011.

  Another pattern emerged from a look at these bills: some seniors apparently visit doctors almost weekly or even daily, for all varieties of ailments. Sure, as patients age they are increasingly in need of medical care. But at least some of the time, the fact that they pay almost nothing to spend their days in doctors’ offices must also be a factor, especially if they have the supplemental insurance that covers most of the 20 percent not covered by Medicare.

  Alan A. is now eighty-nine, and the mound of bills and Medicare statements he showed me for 2011—when he had his heart attack and continued his treatments at Sloan-Kettering—seemed to add up to about $350,000, although I could not tell for sure because a few of the smaller ones may have been duplicates. What is certain—because his insurance company tallied it for him in a year-end statement—was that his total out-of-pocket expense was $1,139, or less than 0.2 percent of his overall medical bills. Those bills included what seemed to be thirty-three visits in one year to eleven doctors who had nothing to do with his recovery from the heart attack or his cancer. In all cases, he was routinely asked to pay almost nothing: $2.20 for a check of a sinus problem, $1.70 for an eye exam, $0.33 to deal with a bunion. When he showed me those bills he chuckled.

  A comfortable member of the middle class, Alan A. could easily afford the burden of higher copays that would encourage him to use doctors less casually or would at least stick taxpayers with less of the bill if he wants to get that bunion treated. AARP (formerly the American Association of Retired Persons) and other liberal entitlement lobbies oppose these types of changes and consistently distort the arithmetic around them. But it seems clear that Medicare could save billions of dollars if it required that no Medicare supplemental-insurance plan for people with certain income or asset levels could result in their paying less than, say, 10 percent of a doctor’s bill until they had paid $2,000 or $3,000 out of their pockets in total bills in a year. (The AARP might oppose this idea for another reason: it gets royalties from UnitedHealthcare for endorsing United’s supplemental-insurance product.)
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  Medicare spent more than $6.5 billion last year to pay doctors (even at the discounted Medicare rates) for the service codes that denote the most basic categories of office visits. By asking people like Alan A. to pay more than a negligible share, Medicare could recoup $1 billion to $2 billion of those costs yearly.

  Too Much Doctoring?

  Another doctor’s bill, for which Alan A.’s share was $0.19, suggests a second apparent flaw in the system. This was one of fifty bills from twenty-six doctors who saw Alan A. at Virtua Marlton hospital or at the ManorCare convalescent center after his heart attack or read one of his diagnostic tests at the two facilities. “They paraded in once a day or once every other day, looked at me, and poked around a bit and left,” Alan A. recalls. Other than the doctor in charge of his heart-attack recovery, “I had no idea who they were until I got these bills. But for a dollar or two, so what?”

  The “so what,” of course, is that although Medicare deeply discounted the bills, it—meaning taxpayers—still paid from $7.48 (for a chest X-ray reading) to $164 for each encounter.

  “One of the benefits attending physicians get from many hospitals is the opportunity to cruise the halls and go into a Medicare patient’s room and rack up a few dollars,” says a doctor who has worked at several hospitals across the country. “In some places it’s a Monday-morning tradition. You go see the people who came in over the weekend. There’s always an ostensible reason, but there’s also a lot of abuse.”

  When health-care wonks focus on this kind of overdoctoring, they complain (and write endless essays) about what they call the fee-for-service mode, meaning that doctors mostly get paid for the time they spend treating patients or ordering and reading tests. Alan A. didn’t care how much time his cancer or heart doctor spent with him or how many tests he got. He cared only that he got better.