Ronin of the Spirit

Because reality is beautiful.

The Health Care Debate II

Ok, so last blog, I looked at the insurance companies.  Basically, there is large room for improvement, but I didn’t find the huge smoking gun of “THE WHOLE THING SUCKS BECAUSE OF THE INSURANCE COMPANIES” I thought I would.  In fact, ultimately, premiums are high because hospital care (which premiums insure) are high.

A hospital is a business, even when it is a non-profit.  If cash out exceeds cash in, like all other businesses, it fails.   Right now, hospital costs are higher then they have ever been, so we would think that hospitals are making money hand over fist.  Actually, not at all.

Over the last 10 years the average profit margin (the amount of economic surplus) has increased. It’s gone from (ready for this)… 4.9 to 5.2%.  An oft quoted stat is that many of the most profitable hospitals are making a 20.1% profit margin.  It’s true.  Some of the most profitable hospitals are putting a 20% mark up on certain procedures.  It’s to cover the 15% loss they take on the other ones, leaving an end of the year balance of…5%.

Why are they taking a 15% loss?  Well, because Medicare, Medicaid, SCHPs, (all the gov-care) doesn’t pay the full cost.  Note, this isn’t saying gov-care doesn’t pay the full charge.  Think of it this way. A procedure costs the hospital $100.  They bill $120 for a twenty percent markup.  Private insurance pays $120.  Gov-care pays whatever it can afford, usually around $85.  A 15% loss means 15% below cost, but about 43% below the price.

The reason for this is the program is never given enough money to pay all the expenses it incurs.  If the program was supposed to pay for 100 procedures at $1 each, and there are 140 procedures, then all the hospitals get $0.71 instead of a dollar.

Further, remember that gov-care is only about 1/3 of the number of patients, 2/3rds are private insurance, so how does the hospital not make a killing, taking 15% loss on 1/3 and getting 20% gain on 2/3rds?  Because the 1/3 of people on gov-care are the most expensive patients.  Despite the fact they make up only 33% of the hospital population, they make up 50% of the expenses.

Hospitals can refuse gov-care patients so why don’t they? If taking a patient on medicare meant you were going to loss 15% of the cost of care, why would hospitals take them in?  Because of the Emergency Medical Treatment Act of 1986, which means, “regardless of citizenship, legal status or ability to pay” any patient who needs emergency care must receive it.

Hospitals loss on average, about $84 per emergency room patient.  Emergency rooms account for about 20% of the total cost of running a hospital.  So, why have one? Because 1/7 patients who visits the ER will have a highly profitable inpatient transfer.  The best way hospitals can get the profitable 2/3rds of insurance payers into inpatient surgery is through the ER doors.

What about people who don’t have insurance, and don’t qualify for gov-care and simply refuse to pay? They are very small part of hospital losses, about 3% on average.

So if, 97% of the hospital customers are paying, and half the cost is at a 15% loss, and half is at 20% profit, that doesn’t really explain why health care is so expensive.  I mean, yes all the responsible people are effectively paying a 20% sales tax to the hospital to cover the portion of socialized medicine that the their income tax didn’t pay.  But, 20% sales tax does not 200% overcharging make. (The cost US health care exceeds the cost of better health in many other industrialized democracies.) So what gives?

The most expensive thing in the hospital is labor.  If we are serious about reducing the cost of health care, we have two very basic options. One is make labor cheaper, the other is use less of it.

What about cheaper labor? The most expensive section of hospital is ICU and 80% of the cost of ICU is labor.  ICU nurses make about 46k a year.   I’ve often mentioned France in this study.  Nurses in France make half of what American ones do, and health care is cheaper.

As to reducing the number of hours nurses have to spend with patients, let me rip this long section from this article.

For example, if you are a Medicare recipient and you have a heart attack in a region where doctors practice less aggressive care, like Salt Lake City, your care will cost Medicare about $23,500 over the course of a year. But if you have your heart attack in a place like Los Angeles, the bill will be closer to $30,000.

The wide gulf in spending between the two cities is not because of different prices. Sure, everything costs a bit more in Los Angeles, including nurses’ salaries and the laundering of hospital linens, but not enough to account for the extra amount Medicare pays for a heart attack. The reason the same patient’s care costs more there than in Salt Lake City is that doctors and hospitals in Los Angeles tend to give their patients more tests, procedures, and surgeries, and their patients tend to spend more days in the hospital.

But here’s the important part. All that extra care in L.A. doesn’t lead to better outcomes. As it turns out, heart attack patients who receive the most care actually die at slightly higher rates than those who receive less care.

So, um, why are we doing this to our selves? Again, same article:

Why? Because doctors believe patients will be less likely to go to a lawyer if they think the doctor did everything possible—even when doing so doesn’t help the patient or causes harm…

The article puts forward the idea 50% of medical procedures are basically done to make people feel better rather than be better.  That is to say, nearly half of all procedures done have no backing in reality which suggest they are necessary.  At least one large portion of the problem is that lack of skepticism and respect for the scientific method exhibited by American medical consumers.

Tune in next time, when I tie the this blog and the last one together to create a cohesive solution.


August 24, 2009 - Posted by | Pharmacology, Politics, Science, skepticism, Uncategorized | , , , , , , , ,


  1. Glad to see that you are back posting…I missed your writing. I have effectively buried my head in the sand on all things politics these days, so I am appreciating reading your thoughts on the healthcare stuff. I feel I am getting a little informed by someone who seems to be doing the research without being biased. (Is that an accurate assessment?)

    Comment by lesleehorner | August 27, 2009 | Reply

  2. Yeah, I try to be really unbiased, but good grief, this one is really pushing my unbiasedness. I mean it is just such pure crap at every level, the real facts are hard to find and everyone has suuuuuuch an opinion about it. Thanks for reading and commenting though, sorry it takes me so long to reply.

    Comment by truthwalker | August 29, 2009 | Reply

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