Medical Costs – Exactly How Out of Control? Part 1

This article is making the rounds. In it, the writer details the horrors of the cost of the American medical system.

Disclaimer: I’m in favor of universal health care. I’m in no way disputing the suffering of the people involved in this story, nor am I suggesting that our medical system is the best way or even a good way to care for people’s health. But – if you don’t start out respecting the truth, you can end up anywhere. So let’s attempt to bleed off the hyperbole by applying the leaches of math to the hydroptic prose:

According to one of a series of exhaustive studies done by the McKinsey & Co. consulting firm, we spend more on health care than the next 10 biggest spenders combined: Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain and Australia.

Notice anything about that list? First off, it combines 2 very different types of countries: those that spend vast amounts on healthcare because they have vast numbers of people – China, Brazil – and those that spend vast amounts on healthcare because they are very rich – all the others. Implicit in this list is the idea that healthcare is healthcare is healthcare – that the man leading off the story, who contracted non-Hodgkin Lymphoma, would be just as happy getting his care anywhere in the world as in America. I don’t think your average American would be very happy with the healthcare received by the average Chinese or Brazilian if it’s anything other than routine care. Even in the richer countries, is it reasonable to assume that a disease that affects something like 0.007% of the population would warrant the same level of attention – and the same level of care – in all countries? The title to the first section calls this ‘routine care’ – like a broken arm or the mumps? Is it telling that we consider treatment for a disease that afflicts a few thousand people out of a population of 330 million ‘routine’?

Compare this:

The total cost, in advance, for Sean to get his treatment plan and initial doses of chemotherapy was $83,900.

With this:

Although it is officially a nonprofit unit of the University of Texas, MD Anderson has revenue that exceeds the cost of the world-class care it provides by so much that its operating profit for the fiscal year 2010, the most recent annual report it filed with the U.S. Department of Health and Human Services, was $531 million. That’s a profit margin of 26% on revenue of $2.05 billion, an astounding result for such a service-intensive enterprise.

And factor in this:

The president of MD Anderson is paid like someone running a prosperous business. Ronald DePinho’s total compensation last year was $1,845,000.

So, 26% of Sean’s bill goes to profit, and another 0.09% – $75 – went to pay the president.

So, assuming that this treatment is about as profitable as anything else the hospital does, and taking all the profit out of Sean’s treatment and the $75 that went to the president, his costs are now $62,011. Even if this treatment was twice as profitable, Sean – or whoever is paying the bill – would still be out 40 grand for the profit-free version. On the surface, it would appear that treatment for non-Hodgkin Lymphoma is very expensive, even if the health care provider – MD Anderson – doesn’t pay their president or make any profit at all.

But what about other rich countries? They have nationalized health care, so there shouldn’t be any of those obscene profits.

When you crunch data compiled by McKinsey and other researchers, the big picture looks like this: We’re likely to spend $2.8 trillion this year on health care. That $2.8 trillion is likely to be $750 billion, or 27%, more than we would spend if we spent the same per capita as other developed countries, even after adjusting for the relatively high per capita income in the U.S. vs. those other countries.

Soooo – assuming MD Anderson is representative – and nothing we’ve been shown so far would lead us to expect otherwise – it looks like other rich countries have found about 1 percentage point more savings than what’s left over after we strip all the profits out of the delivery system end of things, even though other rich countries have had decades to work on it. Sean – or whoever pays the bills – is still out a ton of cash.

What this suggests is that the miracle of socialized medicine doesn’t really save an earth-shaking amount of money – 27% is nothing to sneeze at, but it’s not going to make healthcare affordable for Sean. What makes it affordable for Sean is simply having other people pay for it.

But, it turns out, the *average* profitability of a hospital is 11.7%. MD Anderson is extraordinarily profitable – the reduction in cost achieved by eliminating all profit from the healthcare delivery end of things overall would only provide less than 12% savings. This information is available on page 4, long after the 26% profit margin is well-established in our minds. So, on the plus side, socialized medicine achieves a 15 percentage point average savings over an *average* hospital’s pre-profit costs.

Now follows a long piece of investigative journalism laying out a number of ridiculous, quasi-criminal behaviors by health care providers. It seems hospitals routinely charge – or at least, try to charge – 10 times or more what routine tests and medications cost, and 250% of what more fancy implants and gadgets cost.  So, insofar as Sean’s bill is based on such ridiculous charges, it could be reduced up to 90% and still leave room for some profit. But unless full pay customers make up a fairly large percentage of their clientele,  the overall profitability of the hospital suggests this may not be the case. In fact, it sounds like most of the business hospitals get is via insurance companies who routinely negotiate 50% or more off of ‘list’.

The really important comparison, it seems to me, is with other rich countries. But what isn’t clear is why, once profit is removed, European health care isn’t, say, 30% the cost of American health care, instead of 63% of the cost. And this assumes that there’s no qualitative difference between healthcare anywhere in the developed world, which, it would seem, requires something more than a bald assertion that it is true.

It seems  to be assumed – and, is in fact claimed all the time – that other countries do it right. Therefore, it would be reasonable to assume that the most that could be reasonably cut from our healthcare costs would be an amount that gets us into line with the cost of socialized health care in other rich countries. That means that, despite all the abuse and lobbying and high prices described in the article, we’re only seeing about 27% that can be cut. Unfortunately, that’ll only cover 4 or 5 years* of healthcare cost increases at current rates – meaning we’re back where we started as far as cost baseline in only a few years. That’s a reprieve, not a solution.

More later – it’s a long article. Here’s part 2.

* Corrected: I earlier said 2-3 years, misremembering the inflation rate of health care costs as being something like 8-9%. The real long-term average has been 5.5%.


Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

2 thoughts on “Medical Costs – Exactly How Out of Control? Part 1”

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