Where are the profits in health care?

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Melanie Evans of thw WSJ writes,

For nearly a decade, Gundersen Health System’s hospital in La Crosse, Wis., boosted the price of knee-replacement surgery an average of 3% a year. By 2016, the average list price was more than $50,000, including the surgeon and anesthesiologist.

Yet even as administrators raised the price, they had no real idea what it cost to perform the surgery—the most common for hospitals in the U.S. outside of those related to childbirth. They set a price using a combination of educated guesswork and a canny assessment of market opportunity.

The actual cost? $10,550 at most, including the physicians. The list price was five times that amount.

This fits in with the theme of Overcharged, by Charles Silver and David A. Hyman. They argue that the problem is third-party payments. They say that if American consumers had to pay more out of pocket, health care prices would have to come down.

I am all in favor of increasing the share of out-of-pocket spending and reserving insurance for the most costly illnesses. But I am skeptical of the view that there is a lot to be squeezed out of health care prices. Some thoughts.

1. I was surprised that knee surgery is so prevalent. Is it that prevalent in other countries? Contrary to the claim that Americans get the same amount of health care as people in other countries, I bet that knee surgery per capita is much higher in the U.S. than elsewhere. I think that Americans spend more on health care because we undergo more medical procedures, particularly high-end procedures, than people in other countries. On the whole, these additional procedures are not all that effective, so undergoing more of them does little or nothing to help overall health outcomes.

2. If you charge five times what something costs, you should show fantastic profits. I don’t believe we find that in the health care sector. Profits in many cases, yes. But nothing so spectacular. A lot of hospitals are non-profits, after all.

3. If hospitals only charged for variable cost, they would lose money. Hospitals have a lot of overhead. Lots of administrative paperwork. Lots of janitors, orderlies, laundry workers, cafeteria workers, and so on. That overhead has to be allocated somewhere. You can only allocate so much of it to the patient who visits the emergency room for strep throat or food poisoning. So more of it gets allocated to surgical patients.

4. If you want to convince me that America’s health care mess is primarily a price problem, then don’t just tell me anecdotes.
If you think that America overpays for health care by $1 trillion a year (a figure that Silver and Hyman toss around), then show me where that money goes in the aggregate. Add up all the excess returns on capital at hospitals, pharmaceutical companies, medical supply companies, etc. I bet you won’t find anything close to $1 trillion.

43 thoughts on “Where are the profits in health care?”

  1. The concept of profit in health care is misleading. What needs to be looked at is where is the spending.

  2. I suspect a lot of the surplus that would otherwise be profit is captured by the salaries of medical professionals, especially doctors. Even at non-profits, salaries of specialist doctors are in the hundreds of thousands of dollars per year, and occasionally over one million dollars.

    This chart from this paper on health force remuneration across countries supports that supposition. Although I am surprised the wages of US nurses are not so much higher than those in other high-income countries.

    • Correlation does not necessarily mean causation, but one other thing that is way above OECD average in the US is obesity, and the knee is a load-bearing joint.

  4. “A lof of hospitals are non-profits, after all.”

    Not sure if irony was intended. “Non-profit” status has never restrained costs at hospitals. http://www.washingtonpost.com/wp-dyn/articles/A26388-2005Apr4.html Profits that would otherwise go to shareholders just goes to staff instead. It has been a big enough of a scandal over the years that the new tax bill included a 21% excise tax on pay above $1 million a year for the 5 highest paid employees of a hospital. This of course has led to hospital reorganization strategies to avoid the tax: https://www.wsj.com/articles/new-tax-will-hit-some-nonprofit-hospitals-more-than-others-1517918401

  5. The 3rd party payment argument has been tossed around for quite a few years now. Often proponents of a single payer system argue that costs are higher with multiple 3rd party payers because each payer has their own form and it is costly for staffers to search for the correct places to put the information. If that’s the case, why hasn’t the industry adopted common forms?

  6. Similar to what Robert Sterbal says, I suspect rents are going to doctors, administrators, and the various service employees who earn above-market pay. If your comparative advantage is janitorial services, would you rather work for a hospital or for a company that cleans office buildings? Non-profit hospitals have less incentive to bid down wages and services. I’ve done some contract work with hopsitals, and like universities, they will typically just hire whoever makes their jobs easier. If you could measure effort-corrected wages among non-medical staff in hospitals, you would probably find a lot of the missing profits.

    • To a point. When my brother went into med school I ran an ROI on his track vs. mine (MBA). For fairly typical time and salary considerations it was a wash over a lifetime. You have to have a baseline salary level to offset the 4-8 years of opportunity cost for someone with high academic potential.

      Now you could argue for shifting away from high-cost clinical staff to lower cost. Or changing the structure of medical education to reduce the opportunity cost…

      • I wasn’t even thinking about the medical staff so much as the administrative layers. Their nominal pay is probably close to similar jobs in other industries, but because they don’t have as much pressure to save costs, they do the easy (for them) thing rather than the most cost-effective thing.

        • Yes and no. In my experience, there’s actually a bit of a non-profit discount on admin jobs. But there’s a limit to how far you can go. You have to pay at least a reasonable amount to compete. A marketer is a marketer, a sysadmin is a sysadmin. Doesn’t matter if they work at IBM or Local General Hospital.

  7. Let’s say I put out a book called Overcharged II: Higher Education by Silver, Hyman, and Bryan Caplan.

    Lots of your same observations would still hold. 1. Plenty of it is not useful, 2. Dominated by non-profits, 3. Rich countries consume lots more per capita, 4. Lots of “overhead”, and 5. Prices for mostly equivalent services – say an undergraduate education in mathematics at a top 50 institution – have completely exploded in real terms over the past two generations.

    If you “follow the money” and look closely at where the extra funds go, you will see that it is going to individual rents (i.e. higher salaries derived from quotas and special institutional market power), and also a lot of frivolities and waste, and that many of these things are frankly obscene and without justification or explanation without resorting to some kind of deviation from Econ-101 assumptions.

    Four years ago on this blog in “Textbooks, Venture Capital, and Pharmaceuticals” I pointed out that an ordinary calculus textbook full of concepts at least a century (or three) old and for which there were ample free substitutes of arguably superior quality was going for $224.65 (!) in the GMU bookstore. Yes, there are ways to save money with renting used books and so forth, but why should “buy new” be so expensive that mere books (with next to no genuinely valuable new intellectual content, and certainly no track record of proven pedagogical superiorty) are treated like cars? I’m browsing around again today and I see the same thing over $200 for a linear algebra book, and the same for elementary number theory (!) a subject I was taught adequately using dover books totaling less than ten bucks!

    There’s a good example of “excess profits” in a system analogous to health care but which might not even show up as “profits” per se. With tuition, this shows the origin of the problem is a “prices crisis”, not a matter of utilization intensity.

    So Overcharged II would be spot on with its diagnosis. Why shouldn’t one have a similar presumption about Overcharged I?

    • Let’s go further and imagine the government imposed price controls on education, freezing tuition and book prices in real terms to what they were in the 1990s (or whenever). By how far would the quality of the output decline? I doubt it would even be noticeable. In those circumstances, one would be totally justified in saying that our basic observations of the sector indicate a very severe and wasteful social failure mode which justifies even obnoxious levels of government intervention in the market in terms of price ceilings.

      Education is special because of the social failure factor, and so is medicine. Both make for somewhat strange cases in which libertarians (especially GMU ones) are on the lead of both sides of the debate, as if against themselves. That is, they been doing the best work clearly demonstrating the special, problematic nature of these sectors and dysfunction of whatever market exists for those services, but at the same time, the most opposed to state interventions in those markets to address collective action, rat race, and other issues.

    • This comment it spot on for its analysis, but I also appreciate the pointer to Dover Books. I was unaware of the niche they filled, and they do indeed have a nice selection of low priced text books. Thanks!

  8. I would guess that the estimated costs that the physicians provided doesn’t include overhead. Buildings, administrators, benefits, insurance, etc, etc, etc.

  9. 4. If you want to convince me that America’s health care mess is primarily a price problem, then don’t just tell me anecdotes.

    Doesn’t this contradict your point #1 on Americas getting more unhelpful surgeries? You assume a lot in #1 on what is necessary/unnecessary on surgeries on limited data on knee surgeries.

    Basically I tend to think the strength of the US system is does the hardest things best. (Thinking of football offense the US is best at performing 30 yard passes.) As a nation we tend have the highest cancer survival rates and the doctors are the best of the best. However we miss more basic healthcare, say maternity health care, the US tends to perform a lower level. (I do believe some of this is diminishing clinic coverage in rural US and there are other US issues, such as obesity.)

    European systems tend to the basics better in healthcare and control cost better which does diminish the hardest surgeries, such as cancer. (So they can do a 4 yard run better.) Therefore they control price and manage the healthcare consumption better.

  10. I don’t think paying more out of pocket is enough. I need to be able to comparison shop and choose my health insurance provider, choose what I’m covered for, and comparison shop for various medical procedures.

    Right now my employer chooses my health insurance plan. It and the government choose what I’m covered for. About all I can choose is between a few different deductible levels: gold, silver, bronze.

    Until we can shop for healthcare like we can shop for a new computer, I don’t think we’ll get the outcomes we desire.

  11. I didn’t see it mentioned in the post or in the other comments, but I do think that it bears mentioning that hospitals almost never get paid what their list prices. How exactly it came to be that the list prices are not reflective of the actual prices paid is something I don’t know, but I do know that the list prices don’t reflect the actual payments to providers, which are often much lower. Raising the list price is definitely an attempt to get reimbursed more per procedure, but without knowing what the providers are actually getting paid, and how exactly that list price relates to how much the providers get paid under the various reimbursement methodologies applicable, the picture is woefully incomplete.

    • Excellent point. And the negotiated rates that are actually paid by insurers are generally considered trade secrets and rarely, if ever, revealed to outsiders. My impression is that there tends to be an immense amount of cross-subsidization in hospital pricing.

      • While it is difficult to get prices for specific procedures, there is actually a decent amount of information that is publicly available if you want to try to do some analysis of costs for hospitals. All hospitals that are enrolled as Medicare Part A providers have to file what is called a Medicare Cost Report annually, and I believe that you can access them with a freedom of information request (and I think CMS posts the data files for those reports on its website, called HCRIS files, although it would take some work for someone unfamiliar with them to start to understand the data itself). Anyway, the Medicare Cost Report will give you both the hospital’s costs and charges, and cost to charge ratios. It will even break down those costs into cost centers like “Administrative and General Costs” or “Routine Costs”, “Capital Costs”, “Radiology Costs”, etc. A number of hospitals make their audited financial statements public, so you can see (or make a pretty good estimate) of what they are overall getting paid. Also, the Medicare Cost Reports now contain data on “Uncompensated Care” as well. The point being that there is actually a fair amount of data to look at for those with the time, inclination, and patience (admittedly not too many people).

        • Bear in mind that per CMS rules there are real business costs that are excluded from the Cost Reports. Marketing is an example. CMS doesn’t care where a Medicare patient goes for treatment, but if a hospital markets its cardiac program it’s spending some of its marketing money on CMS patients.

          So the Cost Reports don’t fully reimburse fully loaded costs. It’s not a huge %, but it’s not a high-margin business.

          Also, it’d check as to whether uncompensated costs are charges or actual estimated costs. I’d assume the former. Some safety net hospitals have a problem with uncompensated care, but the bigger issue is the structural under-reimbursement of the government payers that represent half or more of the volume…

          • My recollection is that those excluded costs are actually supposed to be on the cost report (so that it doesn’t mess up the allocation of overhead costs), but then get taken out before Medicare’s costs are calculated. Of course, not every hospital does it that way.

    • More and more health insurers want nothing to do with Gundersen, Mayo, Marshfield, the Cleveland Clinic, and other renowned centers of excellence.
      ACA insurers especially have been unable to negotiate lower rates with these entities.

      When I visited Mayo recently, and of course this is utterly scientific, most patients appeared to be on Medicare, or local residents, or CEO’s or foreigners.

  12. It needs to be kept in mind that hospitals provide a lot of services that they lose money on. Hospitals in states that declined to expand their Medicaid programs still treat a large number of uninsured patients which they receive little compensation for, typically, and even in states that have, Medicaid often pays the hospitals less than cost, so you lose money on each Medicaid patient you treat. You can’t really make up that loss on your Medicare patients, since you have to just take whatever Medicare wants to pay you, so you have to pass that all along to your commercially insured patients, because those are the ones you have some flexibility with in the prices you charge.

  13. https://surgerycenterok.com/?procedure_category=knee#jump

    https://surgerycenterok.com/blog/episode-143-surgery-pricing-vs-premiums/

    “The pricing outlined on this website is not a teaser, nor is it a bait-and-switch ploy. It is the actual price you will pay. We can offer these prices because we are completely physician-owned and managed. We control every aspect of the facility from real estate costs, to the most efficient use of staff, to the elimination of wasteful operating room practices that non-profit hospitals have no incentive to curb. We are truly committed to providing the best quality care at the lowest possible price.”

  14. In response to the OP:

    1. I was surprised that knee surgery is so prevalent. Is it that prevalent in other countries? Contrary to the claim that Americans get the same amount of health care as people in other countries, I bet that knee surgery per capita is much higher in the U.S. than elsewhere…

    ACL repair is more prevalent in the US than in (extreme example) Venezuela. As my orthopedic surgeon told me when I had it done, “no one needs an ACL.” You only do it if you are twisting your knee. Since I wanted to continue in martial arts, I had it done. My out of pocket cost was much lower than than the actual surgery cost. It was a luxury procedure. The US is a rich country, so there’s more luxury care. The line between luxury and necessary can be made very fuzzy, even without the arguer having an interest in the outcome. There are a lot of healthcare stakeholders in the US with an interest in arguing that their care is necessary (this touches on Handle’s point on what constitutes ‘profit’).

    2. If you charge five times what something costs, you should show fantastic profits…

    The article was behind a paywall, but the reference to ‘list price’ triggered my automatic ‘not again’ filter. Healthcare charges in the US average something like 3.5x actual cost. That’s based on the national ratio of cost to charges that CMS publishes. Most major payers in a given market either negotiate prices mostly unrelated to charges or as a (reasonable) percent of charges. Self-pay patients normally get the bill with full charges (which (1) freaks them out and (2) is required by CMS rules for any provider that accepts Medicare patients) and then negotiate down to…a reasonable percent of charges. Since the average ‘profit’ margin for US providers is in the low single digits, there’s not much room for 5x pricing. Where the pricing is materially above cost, that margin is generally being shifted to cover Medicare/Medicaid patients who are reimbursed below cost, on average.

    3. If hospitals only charged for variable cost, they would lose money. Hospitals have a lot of overhead. Lots of administrative paperwork. Lots of janitors, orderlies, laundry workers, cafeteria workers, and so on. That overhead has to be allocated somewhere. You can only allocate so much of it to the patient who visits the emergency room for strep throat or food poisoning. So more of it gets allocated to surgical patients.

    Yes. Even the salary cost for the nurses on the inpatient unit are fixed in the context of an incremental patient. Healthcare is labor intensive and labor isn’t always easy to flex. Especially if it is unionized.
    And a hospital that doesn’t understand what a procedure costs doesn’t have a cost accounting team. Which, sadly, happens. But it also isn’t typical.

    4. If you want to convince me that America’s health care mess is primarily a price problem, then don’t just tell me anecdotes….Add up all the excess returns on capital at hospitals, pharmaceutical companies, medical supply companies, etc. I bet you won’t find anything close to $1 trillion.

    Don’t forget Epic. There’s a few billion in spending…

    • Hehe, yes, it seems to be almost negligent to run a hospital these days without using Epic.

  15. Knee and/or joint replacement is getting a bad rep here.

    Yes, it is not a matter of life or death. But it is a major issue of quality of life, especially for the elderly. With joint replacement my wife is able to live a normal life and that includes continuing to work. But without it, she wold suffer almost constant pain and be virtually housebound.

    With an older population these quality of life medical procedures have to take on an increased role. It is just one of the changing standards or norms we need to adjust to.

  16. Responding to your numbered comments:

    2. I think there is some confusion over the word “non-profit”. Contrary to popular belief, non-profit does not mean that these entities can’t make money. Rather, the defining characteristic is that non-profits have no owners, and thus cannot pay distributions or dividends. I have seen the books of many non-profits that are plenty profitable. That said, non-profits do have to figure out what to do with their “earnings.”

    3. Absolutely, hospitals have lots of fixed costs. A good analogy is a hotel or an airline. On the subject of costs, I believe a hospital in my area recently added a new wing to its facility. The cost is approximately $1 billion. I believe the cost to construct a hospital or new hospital wing in the San Francisco Bay Area is about $1,000 per square foot, including hard costs (about $700) and soft costs such as studies, permits, mitigation payments, etc. (around $300). That is expensive.

    4. Unfortunately, it is difficult to explain the cost problem without resorting to anecdotes, because the high costs are not centered in any single place. Rather, they are spread everywhere. So to give you some anecdotes, and I know you said not to do this, but one is the cost of hospital construction that I describe in 3. above. Second example is pay. I know that the average pay of acute care hospital nurses in the San Francisco Bay Area is about $175,000 or $200,000 per year, although this varies tremendously based on specialty, shift (e.g., day shift, evening shift, etc.) and seniority. When adjusted for benefits, which tend to be pretty rich, I would say the private market equivalent is more like $225,000. I don’t know what other people think, but that strikes me as pretty good pay for a position with this type of educational requirements, job security and other attributes. Third anecdote is to compare it to other similarly regulated industries, such as the airlines pre 1980s. If you had sat around in 1980 and speculated what sort of cost reductions would occur under deregulation, it would have been hard because you would not have known the cost savings ex ante. Actually that is not completely true, because you would have been able to compare to intrastate airlines (PSA and AirCal in California come to mind, not to mention Southwest Airlines in Texas, which incidentally became very successful later as it spread its model nationwide) which would have given you a clue. My guess is that on an inflation adjusted basis, air travel today is about 40% less than it was in 1980. Final anecdote…..the father of one of my classmates in the early 1980s was a 747 captain for TWA. My buddy told me his dad made $300,000. Adjusted for inflation, that is probably $700,000 today. He was based in the San Francisco Bay Area. My guess is that the current pay for this same position is about $400,000. So the pay of the airline industry, one that went from regulations somewhat similar to how healthcare is regulated today, dropped by about 40% when it went to a more of a free market approach. My guess is that overall compensation in healthcare would drop by about 30% if the third-party payment system went away.

    • When I attend meetings on single payer, the strongest supporters often come from Nurse’s unions. They do not seem to realize that for at least some of them, their wages and benefits would be cut drastically under single payor.

  17. Defensive medicine.

    Doctors are afraid of getting sued so they eliminate the legal risk by ordering a lot of unnecessary tests and surgery.

    Some of these may end up killing you.

    • Pretty good numbers in this an defensive medicine probably adds just a few percent to costs.

      Steve

  18. 1) We do more knee replacements in the US, but we do fewer hip replacements that 11 other countries. Still above the OECD average. Not sure why this happens. My best guess is that knee replacements are done to improve lifestyle for people who are truly incapacitated, but they are also done sometimes just so people can have a better golf game. Or maybe it is just a practice style thing.

    2) Aaron Carroll has done some good work on why US Health costs more than the rest of the world. He has broken it down to many of its components so you can see where we have excess spending compared with everyone else.

    https://theincidentaleconomist.com/wordpress/what-makes-the-us-health-care-system-so-expensive-introduction/

    Steve

  19. There’s a huge problem with how statistics are cut, and a huge problem with pre vs post event knowlege.

    Two anecdotal illustrations (bare with me) illustrate the pre/post problem and the individual vs aggregate problem.

    1. In the few months before my mother died, she wanted very little treatment (and indeed wanted to die because she was so limited), but we DID NOT KNOW what the basic issues affecting her health were until well into the process. Certain disorganized aspects of the american medical system made it worse (she had to have heart scans repeated for an actual cardiologist to see the failing valve, etc.) Given perfect hindsite would she have chosen and I have supported less costly and invasive treatment? Surely yes. But since we did not have that, those costs were incurred and of course could not be unincurred after the fact. (And she went the mimimal route. Somebody who thought they might recover and carry on with decent quality of life could have spent much more to no real effect, but not know it at the time.)

    Any analysis of healthcare has to deal with these issues that arise from the limits of the field and before vs after event information.

    2. I happen to have an artificial knee. (Total Knee Arthroplasty.) In my case, I put it off probably too long, and could not walk without crutches nor fully straighten my leg before the surgery. No credible voice questioned the wisdom of it – and I did get mulitple opinons. After a longish rehab, I now compete in bicycle races, walk freely, etc. And my health is better because I am again able to get exercise.

    Yet some other people have TKA and end up with very poor results. Because they didn’t do the rehab, because their health was unsuitable for the surgery, and so forth.

    So while it was frankly a triumph of medical technology for me, it might statistically be less
    than ideal for the US as a whole.

    The point isn’t “knee replacement is great” or that “knee replacement is way too costly”, but rather that it really is totally great for some people (for example me), and probably a painful waste for other people. And while medical staff incentives and behavoir may shift those a little bit, I suspect we’ll find that simple limits to knowlege and the incentives of patients will drive a lot of that.

    And also recall the “Hansonian” argument – rich countries spend a lot on health care in part to be seen spending a lot on health care. If that psycho-social force is the root driving issue, we can expect that the percentage of GDP spent on it will never decline, we’ll just move around who collects the rents.

    And in any case, it may be that the revealed preference for distilled american society is NOT to FIX the issues. Having it be costly on the whole serves the ‘elephant in the room’ purposes. Having it be much more available to some segments of society than to others helps cement the status of those segments, and maybe that’s a “feature” for the revealed behavoir of society. (Just like inequality of education is some sense a feature for those on the winning side of the boundary.)

    • The more one delves into the molecular basis of macro-physiology, the more one appreciates the truly astounding and incomprehensible complexity of the systems we are trying to assess and restore to “health”, compounded by the especially high degree of biochemical diversity across the human species.

      So one is really grasping in the dark for whatever few reliable correlations and relationships one can discover, and even then, most techniques are inescapably reliant upon underlying processes of spontaneous restoration or repair (e.g., homeostasis mechanisms in general, or setting broken bones which is really dependent on the patient’s little osteo-blasts, clasts, and cytes doing their amazing reconstructive dance). With regard to anesthetics and many antibiotics – examples often used to illustrate the triumph of modern medicine – it’s not really exaggerating to say that we were much more simply lucky than clever in finding substances with these effects.

      The analogy to macroeconomics should be clear, and as with macro, it’s extremely hard to discover interventions which reliably do more good than harm on average.

      So, it may simply be the case the the very idea of medicine is a subject that is inherently too complicated to do much better than have Hansonian outcomes, a problem which is of course compounded by the very special social and psychological role that ‘healing’ and ‘caring’ play in the human cognition and affairs.

      But, if most medicine is too complicated even for doctors, then making sensible consumption and care decisions is even more hopelessly out of reach for ordinary patients. As such, it’s reasonable to conclude that (most) medicine is special and as a field in general it will probably never be able to function like other healthy markets for ordinary goods and services.

  20. Arnold:

    “I am all in favor of increasing the share of out-of-pocket spending and reserving insurance for the most costly illnesses. But I am skeptical of the view that there is a lot to be squeezed out of health care prices. … I bet you won’t find anything close to $1 trillion.”

    It is quite apparent – and enshrined in current law, not just anecdote – where the additional $1 Trillion is. Within PPACA, there is another “mandate” that compliant health care insurers pay out 80% of their actual premium revenues to actual “health care” charges for their covered patients. The other 20 cents of each paid premium $1 can be retained by the insurer to cover the insurers “administrative costs, including ‘profit'”. Insurance companies have inescapable “administrative costs”, just as do all businesses (including “non-profits”, and health care providers/hospitals).

    A bit of quick arithmetic is all that is required to show that the “third party payer” construct adds a multiplicative layer of “administrative costs” to actual “health care” costs – mandated in PPACA at 25%, for example. For example, if I receive $10,000 in “health care” from a provider (which includes the providers “administrative costs”), and that is paid for through my PPACA compliant health care insurer, the insurer is “entitled” to receive $12,500 in premiums to offset their $10,000 outlay (on my behalf), PLUS an additional $2,500 to offset their “administrative costs, including ‘profit'”.

    Given the approximate $4 Trillion diverted to “health care” (actually, Health “Insurance”) in the U.S., at least $1 Trillion is attributable solely and exclusively to “administrative costs” associated with the “third party payer”, and have nothing whatsoever to do with actual health care costs – except to also increase the “administrative costs” of providers at the very least by requiring them to provide “compliance” reporting/negotiating/etc..

    Any and every “third party payer” construct – private insurance, Medicare, Medicaid, VA, IHS, CHIPS, and full “National Health Care” systems – ALL have this multiplicative “administrative costs” burden. And it’s expensive.

    THAT is the point Silver and Hyman were attempting to illustrate. The “conventional wisdom” regarding health care costs/spending in the U.S. system relies almost exclusively on the “third party payer” construct, in one form or another. Almost inevitably, Health Insurance is conflated with Health Care, as if they are the same thing. They are not. And PPACA is a classic example of that conflation – it is almost exclusively about Health Insurance, and actual Health Care is rarely mentioned, if mentioned at all, in the PPACA statute.

    There will always be a prudent, legitimate role for “third party” health care payers in the U.S. But to whatever extent that role can be relegated to Payer-of-LAST-Resort, rather than Payer-of-FIRST (or ONLY)-Resort, a non-trivial cost savings will be from minimizing that “administrative costs” burden, even if actual Health Care costs remain unchanged, or even increase.

    How to accomplish that??

    How about incentivizing direct payment to health care providers within the tax code, instead of penalizing taxpayers for NOT paying for increasingly multiplicative layers of “administrative costs” – in addition to actual health care – within the tax code? Do you suppose that might that work? (I do.)

    P.S. There are several other rather insidious and grossly distortionary effects associated with ALL “third party payer” constructs. If you’re interested, just ask.

  21. As it happens, I’m an orthopaedic surgeon who does joint replacements. Medicare reimburses me about $1300 for preop evaluation, the actual surgery, and 90 days of post op care. From that, I pay myself, my insurer, and my staff.
    It pays the hospital about $15,000. Of that, the direct costs (meaning implants, nursing, a bed, meals, therapy, etc) account for $10,000. The rest represents indirect costs; these are typically calculated as 50% of the direct cost, whatever that happens to be.
    You want to find your missing trillion dollars? Look in the indirect costs: the 30% that goes to administrators who provide no actual patient care, but push papers and electrons around. The cost of an electronic medical record that erodes efficiency and wastes time. The unfunded mandates for compliance, billing, and documentation.

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