The musings of a Philadelphia Physician who has served the community for six decades

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Philadelphia Reflections is a history of the area around Philadelphia, PA ... William Penn's Quaker Colonies
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Diagnosis Related Groups (DRG), in Relation to Medical Electronic Records.

The American Medical Association

For a system which has worked well, the use of Diagnosis Related Groups (DRG) for inpatient reimbursement has a bizarre history. It led to some disastrous results, nevertheless, and should be thoroughly reworked. In a sense, the story begins eighty years ago. The American Medical Association had decided all of disease, ultimately all of medical care, would be better understood if it were first reduced to a systematized code. Originally, the code was visualized as a six digit complex, with the first three digits defining anatomical location, and the second set of three digits specifying the cause of the disease. That meant a code for a thousand diseases in a thousand locations, or a million disorders just for a beginning. IBM was called as a consultant, who advised them just to get a numerical code for everything, and mathematicians could easily make it usable for calculating machines, the forerunners of computers. Apparently, some of these consultants had worked with a system which had produced great success for the U.S. Census. A third group of three digits was soon added, to make a nine-digit Standard Nomenclature of Diseases and Operations , familiarly known as SNODO, which could identify a hunded million different operations. The pathology profession subsequently added a fourth set of digits, for microscopic features, so we are now up to a hundred million microscopic conditions. The team of physicians who worked on coding the medical universe contains many names which are now famous, including Robert F. Loeb and Dana Atchley of The College of Physicians and Surgeons of Columbia University. For at least thirty years, the Joint Commission on the Accreditation of Hospitals (an AMA and AHA joint affiliate) enforced the rule that every discharge summary from every accredited hospital in America must code and index every discharge diagnosis in SNODO code. It was tedious work, kept alive by the future prospect of developing an Electronic Medical Record in 1940.

Robert F. Loeb

After twenty years or so of this enormous task, the Medical Records Librarians rebelled. The labor effort was burdensome, and the librarians were in an occupational position to observe how little use was being made of it. On their demand, an alternative simpler coding system was adopted, called the International Classification of Diseases (ICDA). At first it was limited to the one thousand commonest discharge diagnoses , therefore limited to the charts which the librarians could confidently observe would be used. In time, it was expanded to ten thousand commonest diagnoses. Limiting medical codes by 99% also limited the cost and effort of coding, and was considered an important retreat from over-enthusiasm. Meanwhile, expansion of the SNODO code by a handful of true believers continued to fill up the coding gaps, soon using and exceeding the capacity of the 12-column IBM punch card (originally, ten digits plus metadata). Unfortunately, the code was in danger of collapsing from this unanticipated expansion, and computers had not yet advanced to the point where they could rescue SNODO from the limitations apparent to its users. It was a classic case of a hypothetical system appearing to be better than the one in actual use. The ICDA coding scheme did suffice for immediate purposes, and the punched-card calculator system was at least a decade away from evolving the computer into a practical substitute which skipped around the limitations of an 80-column punch card input system.

The professional difference was this: the doctors understood the coding system, and could code most charts by the logic of an abbreviated language. The record librarians were not trained to encipher (or even dither, as photographers say) the code by logic; a thousand codes was about the limit of what anyone could memorize. All the medical record world promptly abandoned SNODO; except the pathologists who immediately recognized that ICDA could never approach their greatly expanded needs. Eventually pathologists took SDODO over, expanded and redesigned the basic framework, and produced what they are rightly proud of, an elegant code book called SNOmed which obeyed meaningful internal coding rules. It still came however, in a large and expensive book.

Dana Atchley

Meanwhile, a group at Yale lurched in the opposite direction of reducing the ICDA code (expanded to 10,000 entries, which proved too large for many purposes, while still lacking specificity in many others) back down to only 200 of the commonest "diagnosis clusters". They termed their product Diagnosis-Related Groups (DRG) , which made no pretense of being complete, but was small enough to be easily memorized by those who used it. To summarize what happened next when Medicare adopted DRG for payment purposes: both DRG and ICDA started to expand, and SNOMED was relegated to the role of code book for neanderthal pathologists. But ICDA was fast losing its praise for being compact, and a growing feeling developed that DRG derived from it was far too small and crude for what physicians could now realize was going to play a very large and important role in everybody's finances. There really was no quick fix, because both DRG and the underlying ICDA designs were based on frequency of occurance rather than precision and logic. Furthermore, the copyright was owned by professional societies who had little interest in finances, and considerable interest in reducing the burdensome coding workload. By now, however, computers had made the task of code translation a trivial one. Like the three bears of Goldilocks, some codes were too large and some were too small, but at least there were three of them, each crippled in a different way. Comparatively few doctors understood what was going on, and in spite of their vital interest at stake, had trouble getting over their hatred of the boring coding task. Since this whole issue of data coding and summarization has taken on major importance to the success of the Affordable Care Act, in some circles the uproar has become a political war dance. Let Obama do it, if he likes coding so much. Basically, the librarians were saying they resented being criticized for making important mistakes in a task they didn't understand very well.

One faction of the small field, of those who are interested in such matters, has decided to expand both the specificity and the reach of ICDA, which is now up to its tenth edition of revision. That does not seem to some of the rest to be a sensible approach. We have an elegant code in SNOMED, which is arguably too big to use; expanding ICDA seems destined to reach the same destination, on the rebound from being too small. We now have ample data on what is common. The most efficient approach would at first seem to be condensing the highly specific SNOMED to a useful size, based on frequency of use. That approach would stand in contrast to making a list of diseases by frequency, and subdividing their specificities. While such a condensed volume could be printed as a book, we are now at a point where every record room within the hospitals of the nation is equipped with several computers, so elasticity of the code should no longer be anyone's problem. This whole process could now rather easily be automated for more than its original purpose of classifying disease populations, and it could even substitue 26-digit letters for 10-digit numerals, imparting some clues in the process. A further condensation of a condensed version could be used for payment purposes, adding still greater amounts of practical nuance. You would suppose that everyone could see that paying the same amount of money for a disease of the toe, as for a disease of the eye, merely because they were both too uncommon to have specific codes -- was either going to bankrupt someone, or enrich someone else. And that's only money. Any scientific or diagnostic decision based on a code of "All other" will make computerized medical records march toward worthlessness. At the rate it's going, lumps of "all other" will have no relation to each other, except they cost the same.


In automated form, SNOMED is quite ready to be revised still further in other directions for other purposes. It could, for once, integrate the accounting and demographic functions with the rest of medical care. But a great many other useful functions can be imagined, once computers have a stable platform on which to build, and the task of coding without much physician input burden can be safely undertaken. Safe, that is, from the danger that the whole coding framework will get changed, again and again. In a certain sense, this is similar to the brilliant choice by Apple of the Unix skeleton, when Microsoft Windows seized on quicker expedients. A great many sub-professions seem to wish to have their own codes for their own purposes, and resist the idea that a physician code should be imposed on them. However, medical care and hospital care are medical functions, and their accounting and demographics will always eventually return to its medical professional core. Meanwhile, notice what happened to DRG, so crude it relegates most refinements to the category of "All Other". The fact of the matter is, it is a crude approximation, some cases paying on the high side, some on the low side of true costs.

The surprising usefulness of such expedience has almost nothing to do with medical content, and almost everything to do with having sufficient case volume to remain in balance. The highly prized profit margin of 2% or 3% can easily be gamed by admitting slightly more cases of a kind that are profitable (ie hire a surgeon of certain profitable operations), or by the government adjusting just a few DRGs to profitable status (like reducing tariffs for favored industries in Congress). Meanwhile, the rest of the enterprise becomes progressively more expensive, because it once lost a meaningful connection to revenue with service benefits, and now has even less direct relation to costs. It is a precarious thing for institutional solvency, to depend on internal balancing of the case load within one set of four walls, and then complain that hospitals are too small to be profitable. Through their accountants and their record librarians, this outcome drives the institution into a futile chase after high patient volume with inevitably higher administrative costs to bridge the increased complexity. Of course we need to change with the times. But some basic truths never change, and one of them is that every ship should sail on its own bottom.

Let's get specific. In the first place, allowing only a 2% profit margin during a 3% national inflation is nothing but blind man's buff. But if some fair profit margin could be agreed to, it is only an average among hospitals. You might as well reduce the DRG to four payments, and reimburse hospitals on the basis of which wall the patient faces. With enough tinkering, you could arrive at the desired total hospital reimbursement to match any profit margin you establish, totally disregarding the diagnoses of any patients. Quite obviously, you must code the diagnosis to whatever number of digits it requires to identify the unique condition. You could match up all of the hundred dollar cases and all of the fifty thousand dollar cases, call that a code number and pay. But such an effort is just a waste of time. Somebody has to go to the trouble of coding every single diagnosis down to the point where the code is meaningful, and assign a relative value among them. Only at that point would it be legitimate to assign a dollar amount to each relative value. And you have to maintain the code as treatments change, which will be quite frequently. You can do it, and you can computerize it. But there is no guarantee that charging itemized bills wouldn't turn out to be cheaper. DRG in its present form is nothing but a crude rationing system; get rid of it, or spend the money to make it work.

So that's how DRG got to be be what it is. It's perfectly astounding that such a rough approximation, devised for other purposes, could be so "successfully" employed to pay for billions of dollars of Medicare inpatient care, and that payment by diagnosis lumps could very likely spread to all medical care. Unfortunately, there is another way to describe it: inpatient hospital care has been lumped into a rationing system which constrains national inpatient care to a 2% overall average profit margin. Payment by diagnosis ignores both cost and content. It does not matter how long the patient stays or how many tests he gets, or how many expensive hospitals swallow up inexpensive little ones. Meanwhile, emergency rooms and satellite clinics do not suit themselves to a supposed linkage between the diagnosis and the cost, and their much more generous profit margins support what has become a hospital conglomerate. Any corporate executive could tell you what happens when one department is subsidized, and another is treated as a cash cow. And the fun part is this: squeezing physician income against a "Sustainable" Growth Rate creates the "doc fix", which annually blackmails physicians into acquiescence past the next November elections.

DRG Cartoon

A sustainable growth rate is a term borrowed from financial economics, implying the rate within which a company may grow without borrowing more money. It is essentially calculated by subtracting dividends from return on investment. A sustainable growth rate in Medicare is calculated by a formula ten pages long, modified every year in special ways which closely resemble "earmarks", but containing special adjustments for changing work hour components, malpractice cost components, etc. It is an enormous task for the Physician Payment Commission to determine yearly changes in thousands of medical services, and it must be a frustrating one for them to see their painstaking calculations tossed aside every year by Congress in response to howls from the various professions. The debate every year has long since shifted from expert calculations to a simple threat that physician reimbursement will be cut. Each year it is cut, and each year Congress relents on the cut at the last moment. This keeps the AMA in a constant state of agitation, and it keeps physicians in a constant posture of supplication. At the end of 2013, the proposed cut in reimbursement had grown to 26%. When almost every physician has an overhead of 50%, a cut of 26% from a 50% net is beyond meaningful. And every year the financial attractiveness of joining a hospital clinic for a dependable salary grows, with consequent improvement in the overall economics of the hospital conglomerate.

The DRG system threatens the patients, too. After discharge from a hospital, the patient is sent a multi-page itemized bill, usually without mention that actual reimbursement is the DRG rate, far lower than the "list price" on the bill. The "patient responsibility" is often zero because of contract provisions, but the bill is for thousands or even hundreds of thousands of dollars. The DRG payment to the hospital is not zero, but it is far less than the total on the itemized bill, and is seldom revealed. Well, one message it sends is pretty clear: "This is what you would be charged, if you didn't have Insurance X." The shortfall in revenue is made up by shifting the cost formula to charge the emergency room and the outpatients, who are not suitable for anything resembling the present DRG. If the hospital does not have enough outpatient work to sustain the inpatient losses, its only recourse is to call the architects and build a bigger outpatient department. To fill it, just buy up a neighboring group practice or two of neighborhood doctors.

Increasingly, as the old surgeon remarked, the main value of health insurance is to keep the hospital from fleecing you. Some day, hospitals will be very sorry they were complicit in this.

Which Obamacare Plan Fits Best With Health Savings Accounts?

Health Savings Plans were designed over thirty years ago, well before the Affordable Care Act was passed. The ACA provides catastrophic coverage, but only to persons under the age of 30, and only in hardship cases over that age. Generally speaking, the Obamacare catastrophic options are not entirely suitable as required linkages to HSA. The regulations could be changed to remedy that awkwardness, and should be. However, all of the Obamacare options do contain a fairly large deductible, so it is of interest to see if any of them would serve the purpose of a required high-deductible policy, to be linked to Health Savings Accounts. No matter what happens to the legislation and its regulations, it is still of interest to make a cost comparison which uses the most nearly suitable ACA option.

Furthermore, the ACA introduces the interesting concept of an annual upper limit to patient out-of-pocket costs, which really means there is a hidden re-insurance at work. That seems like a useful innovation, which would eliminate the need to design a special re-insurance program for Health Savings Accounts, providing we can find a way to fit the two together. The unknown person who devised this idea is to be congratulated.

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None of the Obamacare "metal" options is entirely suitable for a Health Savings Account. {bottom quote}
A high deductible is itself a desirable feature, while co-pay or coinsurance, is undesirable. The typical 20% co-pay feature is too small to have any restraining effect, and would have been dropped as useless, except for one thing. A 20% co-pay will reduce the premium by 20%, a 34% co-pay would reduce premiums by 34%. Therefore, in the heat of a salesman making a pitch, it is useful to be able to make the premium just about anything requested, so the marketing departments usually press for inclusion of a "flexible" co-pay feature. But it is really just a smoke-screen. The effect of a deductible on premiums, on the other hand, is rather difficult to calculate, whereas its potential effect on patient behavior is striking. Just think for a moment of the effect: the higher you raise the deductible, the lower you make the premium. I very well remember the time when the AMA offered a $25,000 deductible for $100 yearly premium. If we had stuck with that idea during the intervening fifty years, we might not be in a pickle about rising health care costs.

So the bottom line is this: even the Obamacare metal plans demonstrate that the higher the deductible, the lower the premium. Since the bronze plan has the highest deductible and the lowest premium, it is definitely the one to choose for linking to a Health Savings Account. It's nowhere close to a $100-dollar premium, however, and is not at all what I would have designed for the purpose. But if you must have an ACA high-deductible, take this one. And indeed, you probably must. The U.S. Supreme Court decision that it isn't a penalty, it is a tax, has been worked around by saying you have to pay a penalty of 1% of your income, unless the small tax penalty is larger, which it seldom will be. A young person might be able to pay the small tax penalty with his first job, but it will soon creep up on him that he really has to pay 1% of his income, when he is so unlucky as to get a raise in salary.

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But, the bronze plan has the highest deductible and the lowest premium. {bottom quote}
So the way we would advise using the HSA has three components: 1. Choose the cheapest plan with the highest deductible. 2. Try to build up the HSA to $6000 as quickly as you can, by contributing the full $3300 limit even when you don't need to. 3. Try not to spend the funds in the tax-sheltered account, unless you don't have any fully-taxed funds at your disposal when you get sick. If your Health Savings Account contains a $6000 special-purpose fund for unexpected medical costs, compound investment income will make it grow considerably faster when you are young, at a time when mathematics will make it grow fastest in the long run. Remember, you aren't required to do this, but take my word for it; it will make for much better lifetime health financing, if you have the funds.

Barnes Arboretum

If you want to live on City Line Avenue, safely in Montgomery County, you put your entrance on Latches Lane, which is parallel to City Line. It used to be said that the Barnes Foundation was next to Episcopal Academy, but that has moved further West, and St. Joseph's University now owns the property. When St. Joseph's decides what to do with the land, we can possibly describe a better landmark. The Barnes Foundation has always faced away from Philadelphia and is a little hard to find, all of which may have something to do with Dr. Barnes' strong dislike of the City.

When you go there now, the old Museum is still there, but already showing signs of neglect. The house the Barnes family lived in is still, right next door. But it's harder to move an Arboretum than a group of paintings, so the Arboretum School, which was Mrs. Barnes' hobby, is still at the same place, likely to stay awhile. It's still a very nice place to visit, especially right at Labor Day when the very large Franklinia Trees are in full bloom. Like all Franklinia trees, these are direct descendants of the only example John Bartram was able to find, in Georgia or anywhere else.

We're going to have to leave the decision to former Governor Rendell, about what you do with an empty museum, since he is said to have had a lot to do with making it that way. We came to see the Arboretum.

The first thing which strikes you is that many of the big old trees are much older than the Barnes Foundation would have been. The brochure helpfully explains that a 19th Century tree fancier started it in 1880, and the Barnes acquired it in 1922. That still wouldn't account for a massive tree which is lying on the ground all cut up, opposite the Medicinal Garden. The base of the tree must be three or more hundred years old, so perhaps there was a grove of old oaks, just over the line of William Penn's city, which every owner tended carefully, until the bugs got it. There are a considerable number of Chinese trees that look about right for 1880, but without a guide it's pretty conjectural.

Ever since someone imported the Japanese beetle along with some plants, to Moorestown, New Jersey, there have been laws prohibiting the importation of plants from abroad, but there must be some regulatory rigamarole which allows museums to do it. Korea and Japan are at the same latitude as Philadelphia, and the glaciers spared some ancient dinosaur food in those regions, so quite a few strange plants have come here from that source. Since the Barnes is a school, and since it only has a few acres, many if not most of the specimens in the gardens are one or two of a kind. That either means they have a feeder garden somewhere to store backups, or a good relationship with government officials. Like all Arboretums, it attracts insects, so be prepared to do some swatting if you go. The school is said to be outstanding and quite conveniently located, but even just a stroll around is quite a nice way to spend a Sunday afternoon.

Bring Your Own Hammer

Stonehenge in England is a ring of big stones standing on edge, but only recently has it been discovered that they chime when you hit them with a hammer. The British didn't discover the phenomenon, however. Long ago the Quakers of Pennsylvania knew they had ringing rocks in a moraine dumped at the edge of a receded glacier in Bucks County. The County has made it a recreation park which is mostly deserted, except when a drove of cars appears, bearing dozens of Cub Scouts or other excursionists.

Just what makes these boulders chime when you hit them with a hammer, isn't entirely clear. It's certainly a good topic for a geologist to use for a thesis, but right now none of the visitors to the park cares very much. It can easily be seen that the moraine marks the edge of the fertile plain surrounding Philadelphia, to the north of which the ground breaks up and has mining as its main industry. The farms suddenly become smaller and less prosperous on the moraine plateau, and fancy exurban restaurants yield place to auto dumps and parks of pickup trucks. In certain seasons, it is possible to imagine the gun racks above the front seats. Some of the area suits itself for summer cottages in the hot weather, usually close to a stream or lake. This is the area where the Shenandoah Valley extended, narrowing down to the Delaware Water Gap. George Washington didn't just cross the Delaware once near here, it was a sort of a Ho Chi Minh Trail out of reach of the British Fleet during the Revolutionary War. The main arsenal of the Revolution was in Reading. The valley meets what used to be an industrial area along the Delaware, coming up from Philadelphia. Before that, the Seneca Indians had made it their headquarters, and after that, people like Stephen Girard discovered and exploited the minerals once exposed by the glaciers to the north. There's a "wind gap" (cleft in the mountain without water at the relatively high base), and the water gap. William Penn terminated his line separating East from West Jersey at Dingman's Ferry within this region, and later his sons' agents cheated the Indians with the Walking Purchase nearby. The politics of Bucks County are easily imagined by looking at prosperous Doylestown, and comparing it with nearby rundown Easton. This is really just the center of Bucks County, half of which extends to the North, and all of which must have an interesting political history.

Abruptly, turning a corner amidst the summer cottages, is a neat little park, the Ringing Rocks County Park. At times it is deserted, at other times you can hardly find a place to park your car. Fields of boulders, three to ten feet in diameter, extend down the hill to the river. It's easy to go down, not so easy to get back up to your car. People pile out of their cars, carrying brand-new hammers, and you can see dozens of (probably disappointed) pock marks on the rocks near the parking area. If you thought it was going to be easy, you are quickly disappointed.

But the legions of cub scouts, happily swinging their hammers, swarm down on the rock piles, hitting every rock as they go. If there are enough of them, you hear plenty of clunks, but also an occasional ringing chime is heard, and the other cubs soon swarm around. At a rather daunting distance from the edge of the rock field, one cub scout after another discovers a rock that chimes like a cowbell. He attracts his friends, who have a whack at it. The chimes never quite outnumber the clunks, but the music rises as the scouts swarm over the property on agile little feet that soon defeat their elders' lumbering climb. A sudden thundershower made the rocks too slippery even for kids, and the place quickly emptied out. When we got back to he top of the hill, soaking wet, there were only a few cars still there.

Healthcare Reform for Lobbyists

In the construction of a major legislative package, the White House and significant Congressional committees maintain strong control over the major concepts and compromises. To get this into legislative language, lawyers and officials of involved executive departments supply the meat to put on the bones, so to speak. But in the obscure technicalities of the industry under consideration, particularly those with no particular political weight, experts and lobbyists from the industry itself have considerable ability to shape things. They may even go so far as to provide "suggested" language. Here are a few significant areas where the lobbyists have considerable influence:

Is Preventive Medicine always and everywhere less expensive? As heads nod vigorously in support of prevention, notice that in general usage it suggests several different things. The almost invariable implication is that small interventions for everyone are less expensive to society, less expensive, that is, than large expenses for a few who get the disease. That is clearly not invariably true, and unfortunately in a compulsory insurance world, it may seldom be true.

Take for example a tetanus toxoid booster, which ten years ago cost less than a dollar for the material. Recently, I was charged by my corner drugstore $85 dollars for the material in preparation for a vacation trip. If you do the math, I feel it is rather likely that $85.00 times millions of Americans is a far greater number than the present aggregate cost of Americans actually contracting tetanus, especially after multiplying by ten for the conventional advice to have a booster shot every ten years. This becomes more certain if one adds in the cost of administration. The vaccine is quite effective, we had almost no cases in the Far Eastern Theater in World War II whereas the British who did not vaccinate routinely had large numbers of often fatal cases. Furthermore, even if the tetanus patient survives, the disease is hideously painful. Is it better to immunize routinely? Yes, it is. Is it cheaper? I'm not entirely sure, because I have no access to production costs of tetanus toxoid. But it certainly seems possible that it isn't cheaper. Malpractice costs, which are a different issue entirely, may complicate this opinion.

Something unsatisfactory has transformed an undeniably effective preventive procedure from clearly cost effective to -- probably not cheaper for a nation which no longer has horses on the streets, but still has many horses on farms and ranches. This is presently mostly a malpractice liability problem for the vaccine maker, not a preventive care issue. To take another well-known example, In the case of smallpox vaccination, it is now clearly more expensive to vaccinate everyone in the world than to treat the few actual cases. The waffle currently being employed is to limit vaccination to countries where there are still a few cases, hoping thereby to eradicate the disease from the planet. Over and over, examination of individual vaccinations shows the answer to be: better, yes, cheaper, no; with the ultimate answer depending on accounting tricks in the calculation of cost, cost inflation because of third-party payment, and related perplexities. To be measured about it, the profitability of preventive measures may act as a deterrent for finally calling off prevention, by taking on a briefly more expensive campaign to achieve final eradication. Somewhere in this issue is the whisper that "natural" gene diversity of any sort must not be totally eliminated, a viewpoint which even the philosopher William James never openly extended to include virulent diseases.

Routine cervical pap tests, routine annual physical examinations, routine colonoscopies and a host of other routines are in general. open to question as to cost effectiveness. The issue is likely to increase rather than go away. Much of the current denunciation of "Cadillac" health insurance plans focuses on the elaborate prevention programs enjoyed by Wall Street executives, college professors, industrial unions, and other privileged health insurance classes. A more useful approach to a borderline issue might focus on removing such items from health insurance benefit packages, particularly those whose cost is subsidized, either directly or by Henry Kaiser income tax deductions. Those preventive measures which demonstrate cost effectiveness can have their subsidy restored. The inference is rather strong that unrestrained substitution of community prevention for patient treatment can escalate costs rather considerably, and certainly needs to demonstrate cost effectiveness before subsidy is considered. While self-interest is a possibility if only physicians are consulted, total reliance on bean-counters could be far worse. Community cost effectiveness is a ratio, and both sides must be fairly argued.

In the final analysis, without some form of patient participation in the cost, this issue may possibly be unsolvable. To launch a host of double-blind clinical trials to find out the truth will lead to answers of some sort, which will quickly be undermined by price/cost confusion, leading to increasingly futile regulation. Including preventive costs in the deductible could at least allow public participation in the decisions and true balance to begin; which is to say, even universal preventive care admiration cannot be adequately assessed except in the presence of a substantial open market for the product. The fact is that much "preventive" care is really "early detection" or "early management". When the goal changes so subtly, it is often not possible to judge what is worthwhile, except by placing some price on pain and suffering. The abuse of the monetization of pain and suffering in the malpractice field by the trial bar, ought to be a gentle reminder of that. Preventive colonoscopy has clearly caused a decline in deaths from colon cancer; that's a medical judgment. Whether the cost of catching those cancers early was cost effective is largely a matter of colonoscopy cost, and on digging into it, will be found to be as much an anesthesia issue as a colonoscopist one. In any event, it is not one where the opinion of insurance reviewers should be decisive. If the litigation industry moves to make omission of prevention a new source of action, it will surely be past time to caution the public about the direction of things.

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Average Hospital Profit Margins: Inpatient 2%, Accident Room 15%, Satellite Clinics 30% {bottom quote}
Payment By Diagnosis

Outpatient Care is Not Necessarily Always Cheaper Than Inpatient Care. Because hospital inpatient care is reimbursed at roughly 106% of cost, while hospital outpatient care is reimbursed at roughly 150% of cost, hospitals favor outpatient care, while reimbursement third-parties favor inpatient care. So, go figure. Hospital management is resistant to wage increases in the inpatient area, less resistant in the outpatient and home care programs, so true costs are steadily rising in the outpatient area. Personnel shortages follow, as does friction between hospitals and office-based physicians. Wherever the balance currently happens to be, it is likely that in time outpatient care would inevitably be more expensive than inpatient, as it was in 1751 when Benjamin Franklin founded the Pennsylvania Hospital and raised funds on this plea. If to this is added the cost-shifting of administrative costs, it is now uncertain just where we stand, but a good place to set a baseline would be to find the highest-cost hotel room in the vicinity, adding nursing costs, and subtracting something for putting two patients in a semi-private room. The one thing which is very clear is that the present pushing of truths of the past will lead to distortions in the future. Even addressing these shifts on a continuing basis while destroying market mechanisms with third-party reimbursement will lead to continuously bizarre situations. Those who propose universal third-party reimbursement for every cost and for every person will some day be doomed to perpetual ridicule unless they find a way to display a reasonable relationship between hospital costs and charges. The monstrosity of the present charging system will be discussed later in more detail, but we can at least establish one truism: hospital charges have become totally useless as guides for physician case management.

The Return of a Discharged Hospital patient Within 30 Days is not Necessarily a Sign of Bad Care. Early re-admission can of course be an indication of premature discharge or careless coordination with the home physician. But it can also mean the convalescent center is convenient to the hospital, making it reasonable to move the patient without much loss of continuity of care, treating his return to the acute facility as a matter of small consequence. It is also a matter of cost accounting; when you are claiming a hundred dollar hotel cost to be worth thousands of dollars, many distortions are possible. If a hospital essentially shuts down on weekends, for example, there really can be better care available at home. Imposing a penalty for returns to the hospital post-discharge has certainly changed behavior, but it is far from clear which institutions are better for it. Without a detailed study of longitudinal effects and costs, this rule is no more than an untested experiment.

The legitimate reasons for re-admission to the hospital are many and varied, and collectively they may constitute a general attitude on the part of a particular hospital that it is reasonable to send many patients home a little early in order to achieve greater overall cost savings in spite of sustaining a few re-admissions. But all of this is somewhat beside the point. The insurance companies suspect the real motive for favoring readmission might be that it is the only way for a hospital to increase reimbursement under a DRG system. More or fewer tests, longer or shorter stay have no effect, but readmission can double reimbursement. Consequently, re-admission has been stigmatized as invariably signifying careless treatment, justifying a penalty reduction of reimbursement. This is high-handed, indeed. It would require a research project to determine which of the alleged motives is actually predominant.

The Donut Hole: Deductibles versus Copayments. To understand why the donut hole is a good idea, you have to understand why copayment is a flawed idea. In both cases, the purpose is to make the patient responsible for some of the cost in order to restrain abuse. The question is how to do it; the donut has not been widely tried, but the copayment approach is very familiar: charge the patient 20% of the cost, in cash. This idea finds great favor with management and labor in negotiations, because the savings are immediately known. If the copayment is 10%, then the employer cost will be decreased 10%; if it is 50%, the cost is reduced 50%. In midnight bargaining sessions, such simplicity is much appreciated. However, the donut hole was not devised to make negotiations simpler for group insurance, it was devised to inhibit reckless spending, once the initial deductible is achieved.

Health insurance companies like it, too. It affords the opportunity to sell two insurance policies for the two pieces, adding up to 100% coverage, thus doubling the marketing and administrative costs, an advantage only to the insurance intermediary, but totally undermining the idea of restraining patient overuse. In practice, having two insurances for every charge has led to mysterious delays in payment of the second one, even though they are often administered by the same company. Physicians and other providers hate the system, not only because it involves two insurance claims processes per claim, but because it often makes it impossible to calculate any residual after insurance until months after the service has been rendered. Patients often take this long silence to imply payment in full, and disputes are common.

So, the idea of a donut hole was born, after observation about what was owed on two levels, one for small common claims, and another for big ones. The patient either paid cash in full or was insured in full, and arriving at the Paradise of full coverage must be purchased in cash within the first deductible. Unfortunately, once that threshold was crossed, the sky was the limit. Some way had to be found to distinguish between extravagant over-use, and the use of highly expensive drugs, particularly those still under patent protection. The idea was generated that if the two levels of the donut hole were calculated from actual claims data, there often might be a clear separation of minor illnesses from major ones. Since the patient would ordinarily be uncertain how far he was from triggering the donut hole, the restraint of abuse might carry over even into areas where the facts were not as feared. It is too early to judge the relative effectiveness of the two patient-responsibility approaches, but it is not too early to watch politicians pander to confusion caused by an innovative but unfamiliar approach.

Plan Design. The insurance industry, particularly the actuaries working in that area, have long and sophisticated experience with the considerations leading to upper and lower limits, exclusions and exceptions. Legislative committees would be wise to solicit advice on these matters, which ordinarily have very little political content. However, the advisers from the insurance world have an eye to bidding on later contracts to advise and administer these plans. They are not immune to the temptation to advise inclusion of provisions which invisibly slant the contract toward a particular bidder, and failing that, they look for ways to make things easier for whichever insurance company does get the contract. The donut hole is a recent example of these incentives in action; no member of any congressional committee was able to explain the donut for a television audience, so it was ridiculed. The outcome has been a race between politicians to see who could most quickly figure out a way to reduce the size of the hole. The idea that the size of the hole was intended to be an automatic adjustment to experience, seems not to have occurred to any of them. Asking industry experts for advice is fine, but it would be well to ask for such advice from several other sources, too.

I want to thank you for this wonderful resource. I find it fascinating. May I offer one correction? In the section "Rittenhouse Square Area" there is reference to the Van Rensselaer home at 18th and Walnut Streets and its having a brief fling as a club. I believe in 1942 to about 1974/5 the Penn Athletic Club was located in the mansion. The Penn AC was a good club, a good neighbor and a very good steward of the building - especially the interior. It's my understanding that very unfortunately later occupants gutted much of the very well-preserved original, or close to original, interiors. I suppose by today's standards the Van Rensselaer-Penn Athletic Club relationship could be described as a fairly long marriage. The City of Philadelphia played a large role in my life and that of my family, and your splendid website brings back many happy memories. For me and many others, however, there is also deep sadness concerning the decline of so much of the once great city and the loss of most of its once innumerable commercial institutions. Please keep-up your fine work. Your's is a first-class work.
Posted by: John D. Mealmaker   |   Aug 14, 2014 2:24 AM
Dr. Fisher, The name Philadelphia University was adopted in 1999, as you write, but the institution dates to 1884 and has been on School House Lane since the 1940s. It acquired the former properties of the Lankenau School and Ravenhill Academy, but it did not "merge" with either of them. I hope this helps when you update your site.
Posted by: David Breiner   |   Jun 11, 2014 10:05 PM
Hello Dr. Fisher, I was looking for an e-mail address and this is what I could find. I must tell you my Mother who you treated for years passed away last May. She was so ill with so many problems. I am sure you remember Peggy Marchesani. We often spoke of you and how much we missed you as our Dr. You also treated my daughter Michele who will be 40. I am living in the Doylestown area and have been seeing the Dr's there.. I just had my thyroid removed do to cancer. I have my fingers crossed they get the medicine right. I am not happy with my Endochronologist she refuses to give me Amour. I spoke with my Family Dr who said he will take care of it. I also discovered I have Hemachromatosisand two genetic components. I have a good Hematologist who is monitoring me closely. I must say you would find all of this challenging. Take care and I just wanted to convey this to you . You were way ahead of your time. Thank you, Joyce Gross
Posted by: Joyce Gross   |   Apr 4, 2014 2:06 AM
I come upon these articles from time to time and I always love them. Is the author still alive and available to talk with high school students? Larry Lawrence F. Filippone History Dept. The Lawrenceville School
Posted by: Lawrence Filippone   |   Mar 18, 2014 6:33 PM
Thank you for your articles, with a utilitarian interest, honestly, in your writing on the Wagner Free Institute of Science [partly at "" - with being happy to post that url but the software here not allowing for the full address:)!] I am researching the Institute, partly for an upcoming (and non-paid) presentation and wanted to ask if I might use your article's reproduction for the Thomas Sully portrait of William Wagner, with full credit. Thanks very much for any assistance you can offer here. Josh Silver Philadelphia
Posted by: Josh Silver   |   Jun 2, 2013 1:39 PM
Thank you for your articles, with a utilitarian interest, honestly, in your writing on the Wagner Free Institute of Science [partly at "" - with being happy to post that url but the software here not allowing for the full address:)!] I am researching the Institute, partly for an upcoming (and non-paid) presentation and wanted to ask if I might use your article's reproduction for the Thomas Sully portrait of William Wagner, with full credit. Thanks very much for any assistance you can offer here. Josh Silver Philadelphia
Posted by: Josh Silver   |   Jun 2, 2013 1:39 PM
George, Mary Laney passed away last November. I was one of her pall bearers. She had a bad last year. However, I am glad that you remembered her and her great work. I will post your report at St Christopher's and pass this along to her husband Earl. Best wishes Peter Hunt
Posted by: Peter Hunt   |   Mar 28, 2013 7:12 PM
Hello, my name is Martin. I came across [] and noticed a ton of great resources. I recently had the honor of becoming a part of a new non promotional project on We decided to put together a brief guide about cirrhosis, and the dangers of drinking. We have received a lot of positive feedback and I wanted to suggest that we get listed on the above mentioned page under The National Institutes of Health. Let me know what you think and if you have any further requirements or suggestions.
Posted by: Martin   |   Jan 1, 2013 8:51 AM
Posted by: SUSAN WILSON   |   Aug 12, 2012 12:49 AM

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