The Challenge of Paying for PICU Care: A Health Care Financing Primer

Modern medical technology can perform miracles. These miracles, however, are enormously expensive. Health care costs in America already consume a far larger portion of our gross domestic product than they do for any other developed nation in the world, and this alarming trend shows no sign of moderating anytime soon. Intensive care services account for a good share of this enormous cost. Bills of half a million dollars for one child’s care are not unusual. Why are these costs so high, and who can pay these enormous sums?

Health care costs, after declining somewhat during the middle of the nineteen-nineties, are once again increasing faster than the overall rate of inflation. This is an immensely complicated and controversial subject, although most observers agree on a few general points. One reason for the increasing costs is that expensive new technologies and treatments are constantly being introduced into medicine, often without much analysis regarding whether or not they are truly better for the patient than existing, and usually cheaper modalities. American physicians, like most Americans, tend to think that newer is better, so we rush to give our patients the benefit of the latest great thing without much considering the cost.

Many observers believe that one engine driving medical inflation is the skyrocketing cost of medications. There is heated debate about whether or not excessive profits by pharmaceutical companies is the main reason, or at least a contributing reason, for the high cost of drugs. However this may be, a fundamental reason for the steady increase in the proportion of our medical bills that goes to drugs is that we have experienced a steady increase over the years in conditions that we can treat with medications. We are in fact victims of our own success. Drug therapy was cheap when we hardly had any.

The health insurance coverage among the children admitted to America’s PICUs is divided into several large categories: private insurance, which includes many versions of managed care plans; various government programs, the largest of which is Medicaid; and children from families with no health insurance at all. Most observers believe that the last of these three groups is constantly growing, although there is debate about the truth of that assertion as well. What all of these insurance plans are and how they work is a complicated story. Some would term it an incomprehensible muddle.

Traditional health insurance, as that term is generally understood, is rapidly disappearing from the health care scene. It is important to point out, however, that “traditional” in this sense is a relative term. Until the nineteen-thirties, most Americans either paid cash for their health care or they went without. Physicians and hospitals provided some charity care for patients who did not have money to pay for services, but they were under no obligation to do so. Insurance companies established health insurance plans as they did their other insurance ventures; participants paid regular premiums to an insurance company in return for having their medical bills paid by the company when they needed health care. The health insurance plans made money for the insurance companies in the same way that life or auto insurance plans made money: the companies invested the premium dollars and pocketed the accrued interest, meanwhile anticipating how much money to keep on hand to pay claims made for care rendered to subscribers. Virtually all of these plans covered only hospital care, expecting subscribers to pay for physician office visits themselves. This made sense when most things that were done to patients took place in the hospital. Now, of course, a wide variety of expensive medical encounters take place outside the hospital.

The first health insurance plans generally paid out to physicians and hospitals whatever fees were generally felt to be “reasonable and customary” for the care rendered and did not question too much the details of the bills. In that “fee for service” environment, physicians and hospitals in a particular geographic region usually charged more or less the same price for the same service and neither the insurance plans nor the individual patients could do much in the way of cost comparisons when choosing where to get their care, particularly because, until fairly recently, advertising of medical services was considered to be unethical.

It is easy to see how, under this system, there was little constraint on costs other than physician judgment regarding what services were needed. In fact, overuse was encouraged because the more services that physicians and hospitals provided, the more they got paid. Further, since the patient with such an insurance plan paid little or nothing out of pocket for hospital bills beyond a monthly premium (large co-payments were a thing of the future), there was essentially no measure of financial restraint built into the system at the subscriber level. When physicians had relatively few medicines and treatments to offer, this system worked. However, as increasingly expensive treatments and procedures appeared, costs skyrocketed. This is why less than five percent of the children admitted to America’s PICUs have insurance coverage of this sort; the risks to the insurance companies are huge, and they have little control over the total cost of the care provided.

Virtually all private insurance now takes the form of some variant of what is termed managed care. In a typical PICU, some sort of managed care plan covers twenty-five percent of the children. The rationale behind managed care is that a significant portion of the exploding costs of medical care is caused by the lack of any constraints under traditional insurance plans regarding what insurance would cover. The concept of managed care is that, before various kinds of expensive procedures or treatments could be given to a patient, the need for these treatments must be justified. Some managed care policies decide that specific treatments or procedures are simply not covered in the plan, in effect asserting that they are never justified or that there are always cheaper alternatives that are just as effective. There are many, many variants of how managed care works, and this variability can be extremely frustrating to physicians and hospitals because every insurance carrier has its own set of administrative rules.

Although the managed care plans vary considerably in the details of how they operate, they share one overriding characteristic: they never pay retail. At very frequent intervals, the plans negotiate with physicians and hospitals how much money that they are willing to pay for the care provided to their subscribers, and because of their clout they usually obtain deep discounts below “sticker price.” These reduced prices benefit the plan members, but they can be extremely unfair to others because children in the PICU receiving similar care may have very dissimilar bills for that care. This is particularly unfair to those families without any insurance at all because, although managed care plans virtually never pay the standard, quoted price for PICU care, individuals with no such influence are billed at the going rate for the care. So those unfortunate families with no health insurance get hit for the full price, sums which almost no one can possibly pay, especially if the family was already unable to afford basic health insurance in the first place.

For most PICUs the eight-hundred-pound gorilla of health care funding is Medicaid. This is because Medicaid is the largest single insurer of children in America. Last year, for example, over half of the children in the PICUs where I work were Medicaid patients. It is ironic that, in spite of all of the heated debates in the media about government involvement in health care financing, few seem aware of the fact that the government already pays for the care of at least half of the children in most PICUs. Many large urban PICUs have a much higher proportion of Medicaid patients – often three-quarters or more. On average, just over twenty percent of the children in America are enrolled in Medicaid. Yet there are many more children on Medicaid in the PICU than are present in the general population. Why is this? Are children on Medicaid more likely to be critically ill?

Children on Medicaid are indeed not just more likely to land in a PICU than are children with private insurance, but Medicaid children are twice as likely simply to need admission to a hospital. The National Association of Children’s Hospitals reports that nearly fifty percent of all of the children admitted to its member institutions are on Medicaid. There are several possible explanations for this observation, but chief among them is that children on Medicaid find it very difficult to get regular medical care. This is because it is difficult in many areas to find a physician who will take Medicaid patients. The reason is money.

The costs in time and overhead for a typical pediatrician or family physician to see a child on Medicaid for a typical office visit is more than the physician is paid by Medicaid for the visit. In other words, the doctor loses money on every Medicaid patient. Although most pediatric practices have some Medicaid patients, one can see that, if the practice has too many children on Medicaid, the doctor will go broke. The result is that pediatric practices across the country are less and less likely to see Medicaid patients. Therefore many children have difficulty obtaining routine medical care. What care they can get us usually only at subsidized community health centers and clinics, and these facilities cannot carry the entire load.

This is a huge issue if a child has a chronic medical problem such as asthma or diabetes. For such children, visits to the doctor to manage their problem are the ounces of prevention which, regularly applied, can prevent the expensive pounds of cure that are hospital admissions. Yet these children often cannot get the regular care that they need. The result is that they show up in emergency rooms very ill, and often then need the PICU.

Medicaid puts enormous fiscal pressure on the states because, unlike the federal government, most states are required to operate with a balanced budget from year to year. So when the state portion of the Medicaid bills come due, they need to be paid in full from a fairly fixed pot of money. And, since Medicaid is an entitlement, the states have only minimal control over the number of Medicaid participants who need to be cared for with this fixed sum. The states can reduce their pool of eligible persons by enrolling only those who meet the federally-mandated minimums, but they must enroll at least those. Unlike private insurance plans, Medicaid cannot reject a person because he or she has a preexisting condition that is expensive to care for; Medicaid must enroll all who qualify financially. And it is just this subset of patients – poor children, disabled adults who are unable to work – for whom Medicaid assumes a disproportionate share of the medical care costs.

The system is crazy. As a society, we willingly pay for very expensive things, such as PICU stays, that could have been cheaply prevented. Worse, our present system needlessly subjects children to pain and discomfort. We must find a solution that is fair and humane, but that recognizes that our resources are finite.

I urge everyone to learn more about this health care crisis for America’s children. These links can help you do that.

http://www.cms.hhs.gov
This is the official United States Government site for Medicaid and Medicare. It is huge. It also has a large amount of information, and is a good place to start if you are interested in understanding how these programs actually work.

http://www.childrenshospitals.net
This site is maintained by the National Association of Children’s Hospitals. It is most useful for its links to other informational sites about children’s health issues. This organization is an advocacy group for children’s hospitals, and virtually all of them in the country belong to it.

http://www.healthpolicy.ucla.edu
The Center for Health Policy Research at the University of California at Los Angeles (UCLA) does a great deal of important research about health care issues and publishes it on this site (or links to other sites). It is slanted toward California, but what happens there often precedes developments elsewhere in the country.

http://www.kff.org
The Kaiser organization has long been a ground-breaker in health care delivery. It was the first large health maintenance organization (HMO) in the United States, began by Henry Kaiser to provide care for his shipyard workers during World War II. The Kaiser Family Foundation, the sponsor of this site, is an offshoot of the Kaiser HMO. It is an excellent site, with good discussions of a wide variety of health care policy issues.

http://www.urban.org
This is the site for the Urban League, which is a self-described nonpartisan research organization of economic and social policies. It is mostly about cities, but has excellent information about health care matters as they affect cities. This is especially important for Medicaid.

http://www.rwjf.org
The Robert Wood Johnson Foundation has existed for many years. It is totally focused on health care, and gives out many research grants on the problems of health care policy. It is particularly interested in access to care by the poor and those without insurance, as well as quality of care. It describes many of its programs and research conclusions on this site.