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.
Health care as I see it.
I started this blog just writing down as many facts as I could about the health care system, trying to make sense of it all. The first assumption is that health insurance is the right way to pay for health care, and this leads to two problems. One, that insurance is too expensive, and two since it’s so expensive, to few people have it.
Well, I’ll begin by saying there could be serious improvement to health insurance. First off, insurance is a method of sharing risk. Everybody pays a foreseeable and affordable loss (premium) to the company, who in exchange pays unforeseeable and un-affordable loss affecting a small minority of policy holders.
I’m not sure insurance is a totally appropriate method of paying for health care in this day and age for three reasons. One, modern diagnostics, predictive methods, and techniques mean the unfordable loss is no longer unforeseeable. Two, the big three killers: hypertension, smoking, and high cholesterol, are all preventable and highly dependent upon lifestyle choices. Again, this does not meet the criterion “unforeseeable”. In fact, we could even say high treatment costs for chronic illness are so foreseeable as to be statistically unavoidable. Three, the rate of premium depends upon how expensive the policy holders un-affordable loss is to the company, and the number of policy holders who need it. In an age of 32% obesity rates (obesity exacerbates almost every chronic health condition.) that are likely to be approaching 40% in the next ten years, health care expenses don’t meet the final criterion of only a small minority experiencing an un-affordable loss.
Is insurance too expensive? Probably. Everything I mentioned above can only go one place: premium increases. Are insurance companies pushing the boundaries of ethical behavior? Probably. Is that failure of the insurance companies? Well, not exactly. People and groups have the ethics they can afford. The average health care insurance company runs a 5.5% profit margin. In a free market economy you get what you pay for. The higher the premium the better the service. The lower the premium the worse the service.
The answer to improving the insurance industry is pretty simple. Consumers need better info, with less dead weight losses to changing companies. The insurance companies need to write their contracts at a 6th grade level (Average US reading comprehension), and switching insurance providers needs to be a single sheet of paper or a phone call. However, other then codes requiring simplicity, transparency, and interchangeable standards, the industry needs to be heavily deregulated. This encourages the sort of cut-throat capitalism that makes America a land of opportunity. Also, medical saving accounts are an option. Between private capital in medical savings accounts, credit union style insurance companies, and D-regged private insurers, competition would make companies leaner.
But ultimately, we are talking about companies fighting for tenths of a percent. The cost of premiums is decided by the frequency and cost of care. Insurance companies can profitably only reduce unnecessary visits. Visits which prevent costly claims increase profitability, so a huge reduction is frequency of care is unlikely. The real cost of health care rests not on insurance companies, but upon care providers.
This case is further born out by the fact that about 1/3 of the cost of health care in the US is paid for by the Medicaid, Medicare, SCHP, and VA government plans. If the problem of cost was one of insurance alone, one would expect that there would be a significant saving to socialized health care, but analysis of the cost of gov-care versus private care show no significant reduction in price for identical procedures. The additional 5% private insurers make as profit disappears into the significantly more expert administration of the private insurers, so gov-care is not 5% cheaper.
So insurance is just a middleman, the real cost in the health care providers. Why is American medicine so expense? Supply and demand says, consumers demand will use up the supply, raising costs until producers can create more. The producers will make so much it will lower the price. The tension of supply and demand drives the price down to market equilibrium, where the consumer is paying as little as he can, and the producer is charging as much as he can. That’s the miracle of free market economy. It pushes the price to where it the lowest possible, ensuring the greatest number have access to the good. Yet in the US 100 million people are on some kind of gov-care. That’s a third of the population!
Every body needs health care, the demand is universal, so it should be decreasing supply, increasing the price, raising the incentive to enter the field which would result in increased competition. This competition would result in innovations which would increase the supply and lower the cost. For some reason, this isn’t happening. In fact, the American medical system is running so badly, that planned economies are achieving greater results with less spending, both in raw dollars and as portion of GDP. The US spends more on gov-care (Medicaid, Medicare, SCHP, VAB, etc.) than countries with fully socialized health care spend on it, to get lower rates of health for a 1/3 the per capital population. Then the 60% of Americans pay again! American private health care costs more then any other industrialized nation. France in particular stands out (!) with the average American paying over 200% more for private health care, and 75% more for gov-care, while having maintaining statistically worse health.
When planned economies are running better then capitalism, we know something is rotten in Denmark. I’ll address what later.