Gekkonomics

You won't be surprised to learn that the University of Pittsburgh Medical Center's (UPMC) out-of-network fees are way above the national average. According to data compiled by the Center for Medicare and Medicaid Services, UPMC charges more than many of the nation's most highly regarded hospitals, such as the Cleveland Clinic, and twice as much as its only real competitor, Allegheny General Hospital (AGH). In 2010, UPMC's average charge for inpatient care was $121,765, compared to $74,406 at the Cleveland Clinic and $55,205 at AGH.

Out-of-network fees originated in the 1980s, when Medicare and Medicaid began reimbursing hospitals prospectively rather than after-the-fact for some procedures. Insurance companies then began to negotiate discounts for their subscribers, in exchange for channeling those subscribers to “approved” doctors and hospitals. By 1990, only people without health insurance and international visitors were charged the “full cost” of medical services—the out-of-network rate. For people with health insurance, the “full cost” is really just funny money—an unrealistically high charge that appears on their statement. Health insurance pays only a fraction of that cost, and the remainder is waived.

However, in June 2013, out-of-network fees may become real money for many Western Pennsylvanians if UPMC, the region's largest hospital chain, carries out its threat not to negotiate an agreement with Highmark, the region's largest health insurance company.

If we accept the Medicare reimbursement rate as the real cost of hospitalization plus a modest profit for the provider, then UPMC has an average markup of 850%. Dr. Gerald Anderson, a health policy expert at Johns Hopkins University, is quoted as saying, “I think they have an ethical problem in trying to say they should be paid eight times more than what it costs to provide the service.”

This brings us to the presumed motive for UPMC's and Highmark's behavior—monopoly control and the ability to fix prices. Large corporations move toward monopolies through two types of integration, horizontal and vertical.

Horizontal integration occurs when companies buy out competitors that provide the same product or service, thereby increasing their market share. For the last decade, UPMC has been aggressively buying other hospitals in the region. AGH is its only major remaining competitor. If it provides an essential service and has no competitors, it can charge whatever it wants.

Vertical integration occurs when a company controls several stages in the supply chain that produces a product or service. For example, a company that sells natural gas to consumers may also own gas wells and control prices by speeding up or slowing down production. Or a movie studio may own a theatre chain which preferentially books its films and refuses to book films by competitors. In 1998, UPMC started its own health insurance division, the UPMC Health Plan. Highmark retaliated by agreeing to purchase AGH. Of course, both hospitals and insurance companies can use the threat of out-of-network fees to pressure clients to purchase the complementary service from its own affiliate.

It appears that both UPMC and Highmark are trying to obtain monopoly control of the health care system in Western Pennsylvania. Since our very lives are at stake, if either of these “nonprofits” achieves their goal, they will be in a position to make us what organized crime calls “an offer we can't refuse.”

Of course, this kind of outrageous profit-taking would disappear under a single payer health care system.