Health Care Spending: The Basics; How Much Do We Spend on Hospitals? Part I

As regular readers know, over the past few months, I’ve been investigating how much we spend on various sectors of health care, and where we might be able to save.

As the chart below shows, 4.5 percent of the $2.1 trillion that we, as a nation, spend on health care goes to private insurers to cover their administrative costs—which include advertising, marketing, underwriting, lobbying, profits for shareholders and  executive salaries that look like telephone numbers. As I discussed in December, that $94.5 billion (4.5 percent of $2.1 trillion) equals the difference between what we pay insurers in premiums, and what they pay out in reimbursements.


The government then takes a sliver of the pie to cover the paperwork involved in funding programs like Medicare, Medicaid and SCHIP. Note that while the government picks up nearly half of our $2.1 trillion  health care tab, and private insurers pay just one-third, the government needs only $52.5 billion (2.5 percent of $2.1 trillion) to cover its administrative costs—significantly less than the $94.5 billion that  private insurers require to cover their profits and overhead.

In January I took a close look at spending on physicians’ services. Not surprisingly, doctors fees account for a large chunk of the pie—22 percent.  Healthcare, after all, is a labor-intensive business; it is not at all clear how much we can save in this sector.

Without doubt, some specialists’ fees should be pared. As I explained in January a
Medicare advisory committee which is dominated by specialists sets the
prices for Medicare’s fee-for-service payment schedule, a price-list
that has become the basis for most private insurers’ payments as well.
As a result, many specialists are overpaid for certain services, which
in turn,  encourages some to over-treat.

Indeed, as a whole, our fee-for-service payment system creates incentives for doctors to focus on volume. As I discussed in a second post
on how much doctors are paid, we might much better reward doctors for
the “quality” rather then “quantity” of the care they provide.  And
doctors themselves would be much happier if they didn’t feel they had
to rush from patient to patient.

But paying for quality also would mean paying family doctors and other
primary care providers significantly more to co-ordinate care, provide
preventive care, create medical homes for patients and oversee chronic
disease management.  Today, internists, pediatricians and other doctors
who practice “thinking medicine”—talking to and listening to
patients—are by and large, underpaid. That is why there is such a
shortage of family doctors, and an abundance—indeed an embarrassment—of
specialists in many parts of the country. I’m not convinced that we can
trim the nation’s total doctors’ bill by much , but we could greatly
improve the quality of care, and in the long run, cap healthcare
inflation,  by redistributing some of the dollars.

This week, I would like to turn to spending on hospitals. In 2006,
hospital bills accounted for nearly one-third of the $2.1 trillion pie,
or $648.2 billion dollars—up 7 percent from 2005. Use of hospital
services didn’t grow much in 2006, but hospital prices did, rising by
4.1 percent.  The uptick in total hospital spending was part of a
trend:  since 2000, spending on hospitals has risen anywhere from 5.2
percent (2000) to 8 percent (2003) each and every year.

What is driving hospital prices higher?  Begin with the cost of new
construction; then consider how much hospitals pay for medical devices,
drugs and medical equipment—much of it duplicating equipment already
available at a hospital down the road.

In the past two years the U.S. hospital industry has embarked on a
building boom, the likes of which we haven’t seen since 1969. Back
then, with the passage of the Medicare/Medicaid bill, millions of
elderly and low-income Americans were lining up for hospital care.
Clearly more beds were needed.

But what has fueled today’s surge in construction? As the chart below
reveals, spending has been climbing since 1999—and in just the past two
years it has jumped by more than a third to $30.6 billion.


One might guess that the aging of the boomers has created a surge
in demand for hospital services. But, as readers of HealthBeat know,
the impact that graying boomers are having—or will have—on our health
care system has been greatly exaggerated.

For one, the Pepsi Generation won’t grow old all at once.  Princeton
economist Uwe Reinhardt made the point at a recent health care
conference, using the chart below to show that boomers will grow old
just as they were born—over a period of many years. Moreover, the folks
who introduced us to good bread, yogurt and granola will age much more
gradually than previous generations.


Indeed, projections of U.S. spending on health care in the years ahead
show the aging of the population as only a minor factor driving health
care inflation:


What, then, will be the biggest factor pushing our national health
care bill higher? “Innovation,” says Reinhardt. “The health care
industry will continue developing new stuff for every age group,” he
explains. Will that “new stuff”—in the form of new drugs, devices,
tests and procedures—be worth it? In some cases, yes; in some cases, no.

Returning to the hospital building boom, it turns out that it’s the
desire to “innovate”—not the need for more beds—that has been inspiring
hospital expansion. As Paul Ginsburg, President of the Center for
Studying Health Systems Change, explained in the January/February issue
of Health Affairs: “hospitals have been increasing capacity, not
predominantly by adding new beds but by expanding specialized
facilities (such as operating rooms and imaging facilities) needed to
serve patients with the latest technology.”

Consider, for example, what may be the world’s most expensive medical
device: a particle accelerator with a total price tag well over $100
million. The machine, which employs protons to bombard cancerous
tumors, can deliver higher and more precise doses of radiation, and we
have evidence that it is effective in treating certain rare cancers.

But we don’t know whether it offers any benefits when it comes to
treating common cancers.”That’s far from established, and there’s a
good deal of controversy about it,” said J. Frank Wilson, a professor
of radiation oncology at the Medical College of Wisconsin recently told
the Milwaukee Journal Sentinel.

Nevertheless, roughly a dozen proton therapy centers have been proposed
throughout the country, including northern Illinois,” the paper
reported. “Central DuPage Hospital in Winfield, Ill., about 100 miles
from Milwaukee, is seeking state approval to build a center at a
projected cost of $140 million. And more centers are likely to be
announced in the coming year.”

ProCure Treatment Centers, a privately held company founded in 2005 by
a particle therapy physicist, plans to partner with hospitals and
doctors throughout the country to build proton therapy centers. Tommy
Thompson, the former governor of Wisconsin and former secretary of the
U.S. Department of Health and Human Services, is a director of the

The pending boom was set off in part when Medicare and commercial
health plans began paying for the treatment. Reimbursement for proton
therapy is 30 percent to 50 percent higher than for current treatments.

ProCURE believes that the big market will be in treating prostate
cancer. But so far, no clinical studies have been done that prove
proton therapy is more effective than existing and less costly
treatments. Yet hospitals are installing the equipiment as if this were
a done deal.

“There isn’t any question that it is technology that should be
explored,” David Vanness, a health care economist and professor at the
University of Wisconsin-Madison told the Milwaukee Sentinel. “But there
isn’t any evidence yet it performs better for common cases.”

What is clear is the cost of the equipment—and the treatment. The
particle accelerator, which fills a building as big as two football
fields, requires major construction just to be installed. At
Massachusetts General Hospital, 110-ton, three-story-high cranes reach
up from the contraption and aim the radiation at patients lying on
robotic beds. Each treatment then costs $50,0000. According to  a
recent report in Congressional Quarterly Weekly,
Medicare reimbursements to hospitals for this service have soared by a
factor of 50 in the past four years, from $208,000 in 2004 to $10.5
million in 2007.

“If the technology is not much better than what you have, is that a
wise use of resources?” asks Vanness, whose research includes assessing
new technologies.

In the meantime, CQ Weekly reports: “many members of Congress have
pressed to build more centers.  . . Barack Obama, the Illinois senator
and leading Democratic presidential candidate, has backed the
construction of a proton therapy facility at Northern Illinois
University in DeKalb, even though a second facility is also being
planned nearby, on Chicago’s west side. The Illinois Health Facilities
Planning Board is weighing whether both are necessary.”

These are not decisions for politicians. Public health experts and
medical researchers should make the judgment, based on community needs
and medical evidence as to the benefits of the new technology.

But hospitals are eager to invest in big-ticket items that promise
lucrative returns. Indeed,  as Paul Ginsburg observed recently in
Health Affairs: “Interviews with hospital executives suggest that the
profitability of the services is the key to developing a service line,
with cardiac procedures often topping the list.  As one hospital chief
executive officer (CEO) told me in response to a question about capital
spending priorities: ‘We just list the specialty lines by profitability
and go down the list.’

“We found no hospitals developing a mental health service line,”
Ginsburg added, “such admissions generally are considered money losers.”

In other words, decisions about what to build, and where to build, are
driven not by a community’s needs, but by a hospital’s desire to
compete for the most affluent patients seeking the most profitable
services (whether or not those patients actually need those services.)

In February, CQ Weekly confirmed what both  Reinhardt and Ginsburg are
saying: “Experts are increasingly adopting the view that the biggest
cause of rising costs is not the aging population, which has so often
been blamed in the past, but the insatiable appetite doctors and their
patients have developed for the latest devices and medicines: high-tech
equipment such as particle accelerators, magnetic resonance imaging
(MRI) and positron emission tomography (PET) machines, artificial
joints, specialized stents, and the ever-expanding array of
pharmaceuticals for treating hypertension, heart failure, HIV,
depression and other chronic illnesses.

“The director of the Congressional Budget Office, Peter R. Orszag, is
among the most influential people in Washington holding this opinion,”
the report continued. “There’s been an overemphasis on aging and
demographics,” says Orzag. “In his estimate, overuse of health care and
technologyis the main driver of medical inflation.”

Next week, in Part II of this post, I’ll take a look at the places
where hospitals are adding more beds—in the suburbs—and consider some
of the special services that these hospitals provide.  I’ll also ask
this question: what will hospitals do if Medicare refuses to pay for
improvements that don’t increase a hospital’s efficiency — by
improving outcomes and lowering cost? The answer, I’m afraid, is that
hospitals will charge private insurers more, which means that we can
all look forward to insurance premiums soaring even higher.

27 thoughts on “Health Care Spending: The Basics; How Much Do We Spend on Hospitals? Part I

  1. “Doctors fees account for a large chunk of the pie—22 percent. Healthcare, after all, is a labor-intensive business; it is not at all clear how much we can save in this sector. ”
    Say What?
    It’s very clear how to save money. In the Netherlands for example, physicians often have the same pay as other professionals, not 5-10 times.
    Physicians have to loose their sacred cow status. Their incomes have to come down and they have to stop fighting the growth of mini-clinics run by NPs.
    Of course, it’s a free market. So that won’t happen. White will always follow Green.

  2. Frustrated Consumer–
    Thanks for the comment. But if you go back and look at the pieces I did on doctors salaries, you will find that these days, many doctors in the U.S. don’t make more than other professionals.
    Pediatricians, Primary Care Docs, Family Physicians, Hopsitalists and others begin at $110,000 to $115,000 a year. And they emerge from medical school with debt averaging $250,000.
    Even when they reach peak earnings, many will never earn more than around $200,000 to $250,000.
    This is handsome pay. But after spending around so many years in med school, and then however many years paying off the debt, it is not more than many other professinonals make.
    In many parts of teh country, starting lawyers make more than $110,000– and will go on to make much,much more than $250,000. They also have much less debt and spend only 3 years in school.
    Money managers often make much more. Orthodontists make more.
    Corporate v.p.s with only an MBA make more.
    And if they move up the executive ladder, they can earn millions.
    There are of course docs who earn far more than primary care physicians. Cardiologists, Orthopods, Neurologists can average $800,000–and far more at the peak of their career. That’s where we can cut fees.
    Nurse practioners also can do some of the work family doctors do –and they can certainly team up and work together. But really good nurse practioners in states like California earn as much as many pediatricians.

  3. Kindly clarify your statement that “4.5 percent of the $2.1 trillion that we, as a nation, spend on health care goes to private insurers to cover their administrative costs.” I am accustomed to hearing that private insurers spend over 20 percent on administration/overhead, while Medicare runs at approx 3 percent. I have such respect for your work that undoubtedly I’m misreading the private insurer statistic. What am I missing? Thanks.

  4. PCB & Hariette–
    First, PCB here’s the link to the piece I wrote about whether not-for-profits deserve their tax breaks:
    Thanks for your comment.
    This can be confusing–let me explain.
    When people talk about private insurers taking as much as 20 percent to cover their overhead, they are talking about the fact that insurers keep 15-20 percent of the premiums they receive in order to cover overhead: advertising, marketing, exec salaries, profits, the cost of underwriting (trying to avoid sick people), etc.
    Meanwhile, they pay out 80% to 85% of the premiums they receive, reimbursing doctors, hospitals and patients.
    When you add up all of the 15 to 20 percent chunks of all of the premiums paid to all insurers, the total comes to roughly $950 billion–or 4.5% of the total $2.1 trillion that we as a nation spend on health care.
    $950 billion is a nice chunck of change. But it’s not the major factor that makes U.S. healthcare so expensive. It’s just 4.5% of the total that we spend each year.
    As I often say, if I were elected czarina tomorrow and decided to wave my wand and abolish the private insurance industry, the money I saved would be offset by less than 9 months of health care inflation.
    (The entire $2.1 trillion pie is growing by an average of around 6 percent a year.)
    The biggest factor driving spiraling health care costs is over-treatment and over-use of technology that hasn’t been proven to be effective, plus over-priced drugs and devices.
    Hope that explains it–

  5. Maggie:
    I think one of the problems with the calculation of the overhead of the insurance sector is how their balance sheet is used.
    Many insurance companies in other sectors (auto and life, for example) claim that they lose money on the insurance. That is they pay out more in settlements than they get in premiums. Obviously they would go bust if this were their own source of income. The real way insurance companies are run is to take the premiums and invest them in ways that generate a high yield. So they can simultaneously claim that they are losing money while making their stockholders very happy.
    Ignoring this income distorts the picture, although I’m not sure how it should be accounted for. Obviously a government-administered program doesn’t seek a high return on the float, but how does this get reflected?
    It is possible that a for-profit insurance company has the ability to shift profits and expenses around so that it can make its overhead look bigger or smaller. I think this needs some investigation.
    Your using the gross premium vs payout figures seems to be too simplistic, although I’m not sure what the correct approach is. Perhaps there are some insurance economists who can clarify.
    As I’ve said before, there is nothing wrong with having an expensive health system, if that is what society wishes to spend on. We have the world’s most expensive military system, yet the same discussions about inefficiency or unneeded programs never seems to get much notice.
    The attention to the two sectors is not proportional to their economic importance. I don’t know if this is because the military trough is bigger or because of the high degree of dislike for social programs administered by the government. Whatever it is, the various sectors need to be examined using similar standards.

  6. Maggie,
    First, you left out the decimal point from your administrative cost numbers. It should be$94.5 billion for private insurers and $52.5 billion for government, not $945 billion and $525 billion, respectively. Second, from one of your previous posts, I assume your figure of 50% of healthcare costs paid by government includes the money spent by federal, state and local government to purchase private health insurance for their employees as well as the value of the tax preference afforded to employer provided health insurance. Neither of these chunks of money has any administrative costs associated with it. However, if that money were used to buy Medicare like insurance for public employees and the uninsured, there would be administrative costs that would be incurred by government and would be materially higher than Medicare’s because the average healthcare utilization per person in the under 65 population is well under half of Medicare’s per beneficiary cost. Ken Thorpe and others have shown that administrative costs incurred by large self-funded employers typically account for only 5%-6% of their medical spending because they don’t have to pay for medical underwriting or broker commissions or premium taxes. They only pay for claims processing, network access, and, if they want to buy it, disease management and wellness programs. In the individual and small group markets, administrative costs are indeed far higher.

  7. Maggie,
    I wonder if you or any of your readers can quantify how much of the 22% of healthcare spending attributable to physician fees is for procedures (including surgeries) that are performed in a hospital inpatient or outpatient setting. I bring this up for several reasons. One is that it highlights the potential value of interoperable electronic medical records to reduce duplicate testing and adverse drug interactions, especially when there are multiple doctors involved in the care of patients with multiple and/or complex medical issues. A second issue is the potential for doctors and hospitals to work more closely together to bring about episode or package pricing, especially for surgical procedures. I understand that CMS is very interested in moving in this direction. I think they call it bundled reimbursement. If the hospital were the actual recipient of the bundled fee, there would have to be some agreement among doctors, hospitals, physical therapists and others as to exactly how to carve up the revenue from the reimbursement. The third issue relates to the tremendous market power some hospitals have amassed. Partners in Boston is a great example. Such hospitals use that power to drive up reimbursements from private payers, often claiming that Medicare and especially Medicaid reimbursement rates are inadequate. Finally, the way that Medicare computes how much it will reimburse for complex, very expensive outlier cases gives hospitals an incentive to aggressively raise their chargemaster (list price) rates well in excess of general inflation each and every year.
    Separately, I also think it would be useful if doctors who do most or all of their work in a hospital setting such as radiologists, anesthesiologists, pathologists, and emergency medicine doctors worked on salary with their fees built into the hospital’s overall insurance case rate or per diem reimbursement. Patients generally have no role in choosing these doctors even for procedures scheduled well in advance which gives the docs an incentive to avoid joining provider networks so they can command higher reimbursement rates than in network doctors receive from insurers and balance bill the patient for any difference between the reimbursement and their (usually very high) list price.

  8. Barry has a good point. Electronic medical records, actually tied into a national database, would go a long way toward reducing costs, especially duplicate testing resulting from lost records. But as well, it should ultimately serve as a quality control tool that provides the effectiveness of physicians on certain tests.
    You may have seen this list of 10 things we could do to reduce costs ( ), but our fee-for-service system of compensating physicians motivates them to order more tests and do more surgeries. The capitated HMO plan has just the opposite incentive, to forego procedures even when needed.
    The best approach is salaried, as they are in academic or veteran’s and military hospitals.

  9. Barry and Jack
    First, Barry– You are never going to convince anyone that the administrative costs of public sector insurance would not be significantly lower than the admnistrative costs of private-sector insurance, even when employers self-insure.
    You have tried to make this argument repeatedly on this blog.
    I realize that, for ideological reasons, you just don’t like the idea of single payer.
    I also understand that, some other people feel very strongly that single payer is the best solution.
    I do not want this blog to become a platform for people to simply express their ideological preferences, over and over again. This does not lead to productive discussion.
    For my part I’ve studied the economics of healthcare and know that private insurers add little or no value.
    As for companies that self-insure, they are simply trying to segregate their typically healthier population from the rest of the nation. (People who work for large corporations are generally healthier and more affluent than the population as a whole, and as we all know, wealtlh is the single biggest factor determining health.)
    Corporations that self-insure are violating the most basic ethic of insurance– getting everyone in the boat together so that we can share the risk, with the most fortunate helping those who are less lucky.
    But while I might prefer a single-payor solution, I realize that most people who have employer-based private insurance want to keep it, and so we are far from having the votes in Congress for single payer. Eventually, I think we’ll end up with something close to single-payer simply because it is more efficient and can deliver higher-quality less expensive care (as we have seen in countries like Germany, where public-sector and private sector compete.)
    But I refrain from repeating my personal preference for single payer because a) this would only bore people and b)it’s not happening in the near future.
    Jack– I definitely agree that ultimately, we would like to see all doctors working on salary rather than fee-for-service. And the good news is that most young doctors emerging from medical school are interested in working on salary for a larger organization. They don’t want to try to run their own business.
    On Electronic Medical Records–Unfortunately, the idea that Health IT will save a Huge amount of money has become an urban myth perpetuated by people who hope to make a fortune selling Health IT.
    Over time, Health IT will save some money, but not as much as one might think. Over the first 10 years, it won’t save money, it will cost money (this is what Kaiser and others have discovered) and
    long term, the big benefit comes not in saving money, but it saving lives. Health IT will reduce errors
    On the economics of it, take a look at the MIT symposium on health IT here
    If you read it you will see that implementing Health It is not easy; the buyers are often not the users; the potential users (doctors) tend to be poor consultatnts in the process.
    The cost is enormous–not just in terms of developing and installing the technology, but in terms of training doctors to use it. This works best in situations where the doctors all work for the health care organization–i.e. Kaiser or the VA.
    But when doctors who have their own practices are asked to learn the IT system at a hosptial where they have privileges, many refuse. They say it takes too much time.
    Or that the technology is cumbersome and not well- suited to what they and patients
    need (this is often true–since the people who design it usually are not doctors and do not understand that a hospital is very, very different –and much more complicated–than any business.)
    If the hospital insists doctors learn to use EHRs,, doctors say they will take their patients elsewhere.
    When this happened, Cedar-Sinai in L.A. junked an enormous, very expensive system.
    Finally, the MIT syposium reveals that the net amount of Nntional savings we could expect from inpatient EHRs (electronic health records) is only around $1 billion. Outpatient EHRs might save $44 billion.
    The big savings would come with Community Health Information Exchange –$77 billion.
    (The problem with community health exchange is that somebody needs to start it and no one wants to put up the money.)
    With Community Information Exchange, the total national savings would $131 billion– this is about 8 percent of the $2.1 trillion we are now spending on health care.
    That’s certainly a nice amount of money to save–but only slightly more than one year’s inflation in health care spending. And once you’ve done it, it’s a one-time savings.
    We need to find savings that will put a cap on health care inflation. The most direct way to do that is to reduce the volume of health care–the number of oprocedures and tests done,the number of medications prescribed–as well as the price of products..
    This is not to suggest that we don’t need health IT. We do. It could greatly reduce errors and save lives. That’s the reason to do it.
    But as healthcare eocnomist Uwe Reinhardt and many others have pointed out there is no “business case” for heatlh IT either for hosptials or for doctors. Any savings would go, not to the docs or hospitals, but to the payors –insurers and the govt.
    Private insurers are not, by and large, stepping up to offer to pay for it.
    The government must. As Reinhardt explains, this is a “public good”–not something you expect to make a profit on, but something that will improve the health of the society.
    In every other developed country in the world, the govt has funded Health IT and eventually, the govt will have to come up with most of the funding here. This is not a case where competition in the market will work to provide a solution.
    We need top-down design with the govt decicing on a platform that will allow systems to talk to each other–and open access–without anyone trying to make a profit on it
    And no Barry, I don’t mind people making an enormous profit on many things that one doesn’t have to buy. (Consumer goods.)
    But I do object to profiteering on the necessities of life–including health care.
    For example, today many investors are salivating at the prospect of making a profit on water. As you know, we face a world water shortage, and these investors hope to profit from the shortage.
    I believe that we need international laws to make this illegal. (If we develop a for-profit market in water, the wars we have had in the Middle East over oil will seem minor by comparison.)
    Health IT is already very, very expepnsive–and sorely needed to save lives. Let’s not let anyone add another layer to the costs in the form of steep profits, multli-million-dollar exec salaries, multi-million dollary marketing budgets . . .

  10. Robert–
    There’s general agreement surrounding the numbers I’ve given on insurers, but maybe you could find more information by talking to an insurance analyst on Wall Street.
    My sense, however, is that if there really was balance sheet sleight of hand going on, one of the many, many people who have written about the high cost of private sector insurance would have analyzed it in detail.
    Also, if health insurance were such a high-profit industry, Warren Buffet would own health insuerers. (Most of his holdings are in insurance, but he doesn’t touch health insurance.)

  11. maggie,
    It is unfortunate that cardiac centers are popping up all over while it’s always such a struggle to find a bed for someone with acute mental health needs.
    But as you’ve pointed out elsewhere, determining what medical services are worth is done by the government, namely CMS through the RUC recommendations. (private payors simply follow) The hospital adminstrators are simply responding to incentives.
    If RUC/CMS were more responsive to societal medical needs, they could fix this immediately. Just increase the RVUs for mental health services (or whatever service you want more of) and decrease payment for cardiac catheterizations.
    This hasn’t happened for a host of reasons. (RUC makeup, lobbying, etc). But it doesn’t give me a lot of confidence in increasingly looking to the government to get us out of the mess that it largely created itself.

  12. Sylvia and Pcb–
    Sylvia– Hospital CEO salaries are all over the map from many, many millions to perhaps $1 million or $800,00.
    Overall, CEO hospital salaries are too high becase they have been trying to keep up with CEO salaries in corporate American–salaries which are greatly inflated.
    We now know that CEOs who earn $30 million don’t do a better job than CEOs who earn $1.4 million.
    At a certain point, a higher salary stops eing an incentive.

  13. Maggie,
    What do you mean when you say: For my part I’ve studied the economics of healthcare and know that private insurers add little or no value. I’ve heard statements like this many times, but I’ve never seen a justification that wasn’t wrong or beside the point.
    There is a straightforward way in which health insurance “adds value.” It reduces financial risk for the individual who holds it. This is why people want it in the first place. If insurance didn’t add any value, we wouldn’t talk about a lack of insurance as a “crisis.”
    Now, if what you and others mean by not adding value is that insurers don’t provide health care, then that is true but beside the point. Medicare and single-payer schemes don’t provide health care either. You can’t criticize the financing portion of the system for not being the care delivery portion of the system. That’s true even if what you want is integrated delivery systems…there will always be a financing arm and care delivery arm of those organizations.
    Another criticism might be that health insurers don’t improve the quality of care, because they either lack the mechanisms to incentivize quality improvement, or those mechanisms are too weak to make much difference. Insurers can certainly be criticized for not doing enough, as can providers and government, but that is a different point than is expressed by the general claim that insurance doesn’t “add value.”

  14. This will not sit well with the right-wingers, but health IT should be developed by one and only one entity, not the hundred or so current efforts. We should start with and expand the VA’s VistA system. Perhaps outcource it so we can add profits for private industry. Give it to Halliburton if you will. They need the cash and Cheney will love it. And the taxpayers are used to their giveaways by now.
    But we have to get rid of the multitude of efforts that are simply delaying the project and making it one hell of a mess.

  15. Maggie,
    Several comments.
    First, on administrative costs, even you have argued that under a single payer system, administrative cost savings alone will be nowhere near sufficient to get us to a slower growing, more sustainable healthcare system. I like people to have choices and I would have absolutely no problem with Medicare competing with private insurers to sell health insurance to the under 65 population as long as the competition were on a true level playing field, ideally, including risk adjustment payments. I would prefer to call it something other than Medicare and specifically allow doctors to refuse to accept it if they think the reimbursement rates are too low while continuing to accept current Medicare patients (age 65 and older or disabled).
    Second, with respect to private employers that self-insure, they do it to save money, not to segregate their employers from the rest of the insurance pool. Perhaps jd could speak to this more definitively, but some large employers buy traditional risk products from insurers, but they do so based on the experience of their own pool. I believe both the federal government and the AARP’s Medicare supplement contract with UnitedHealth Group operate this way. That is, if medical costs are lower than expected, the difference goes into a reserve fund that will lower future premium growth rather than to increase the insurer’s profits. Conversely, if claims are higher than expected, premiums rise more than they would have otherwise the following year.
    Regarding electronic medical records, I appreciate and understand the doctors’ perspective. It takes too much time to learn a hospital’s system, and it’s the payers that benefit from any savings anyway. It doesn’t make a lot of sense to me to expect a doctor whose time is probably worth hundreds of dollars an hour to spend time entering data into a computer when a data technician could probably do it just as effectively or even more so for $30 or $35 an hour.
    With respect to regulating drug and device profits like public utilities are regulated, the difference is that public utilities are natural monopolies. The business is so capital intensive (as measured by how many dollars in assets are needed to support $1.00 of revenue) that it would make no sense to have more than one company serving a particular area or region. On the flip side, at least before the deregulation of the late 1990’s, utilities were basically guaranteed a fair return on their “rate base” which meant the value of their existing plant plus facilities that were under construction. The downside was that, within reason, they had no real incentive to be efficient because successful cost reduction efforts would largely benefit ratepayers and not shareholders. There wasn’t a lot of incentive to innovate either. I question whether a similar model applied to the drug and device industries would serve us well over the long term though it probably would cut costs in the short term.
    Finally, on very highly compensated CEO’s whether they work for hospitals (for profit or not for profit), insurers or drug and device manufacturers, I think their pay is excessive too primarily because of overly generous stock option and restricted stock awards. Some of this trend was a fallout from legislation passed by Congress in the early 1990’s limiting the tax deductibility of straight salary to $1 million per year unless it was performance based. At any rate, even if we could find talented, independently wealthy people to work as CEO’s for a dollar a year, it would probably not reduce prices one iota at hospitals, insurance companies or drug and device companies.

  16. I also think HR executives in the steel and auto manufacturing companies would disagree with your assertion that employees of (their) self-insured companies are healthier than average, at least with respect to the plant workers whose jobs are physically demanding and often dangerous.

  17. j.d., Barry and Jack
    Jack– I entirely agree. We
    need one entity in charge of devleoping health IT.
    Trying to leave it to the market–and competing entities–is exactly what we did with cell phones.
    Do you remember when you had to pay roaming fees if you traveled out of state?
    In the meanwhile, most of Europe settled on one platform, and you could make calls across borders with no problem while we were still paying roaming fees to call Pennsylvania.
    j.d.– You misunderstood when I said ‘private insurers add no value.” I meant to put the emphasis on “private.” In other words, I was trying to say that private insurers add no value over public insurers. Yet private insurance is inevitably more expensive because private insurers must spend money on advertising, marketing, lobbying, profits for shareholders and very expensive executive salaries. Government-
    sponsored insurance (like Medicare) doesn’t have these costs.
    But of course insurance itself does add value–great value. Without it, we would all be vulnerable to catastrophe.
    You write “employers who self-insure do it to save money.”
    Exactly. And they save money by segregating their workers from the less healthy general population which includes many blue collar workers who, by defnition, are, on average, less healthy.
    They also segregeate their mainly white workers from the general population where there are many, many more black workers. (The small percent of black and
    Latino workers at the largest, wealhiest corprorations in the service sector–which is where wealthy corporations are these days–has been well documented.)
    When I was at Barron’s–which is part of Dow Jones–my editor, Alan Abelson, who was on Dow Jones financial steering committee ,explained to me why Dow Jones was interested in self-insuring–so that it wouldn’t have to get in the same boat with, and share risk with, companies that hired poorer people and had many blue-collar workers. (He, too, thought this was very wrong, but typical of corporate America.)
    Dr. Jack Mahoney, formerly Gerry Ford’s White House Doctor, is now head of human resources at Pitney Bowes–a company that has many blue collar workers (as you no dobut know, they make postage meters.)
    He also talked to me about how Pitney Bowes has tried to get other corporations to join together with them in a single pool–he would like to have seen all the companies in America join in one risk pool. Size would give them much more leverage with insurerss.
    But he explained other comapnies didn’t want to do this because they had more white collar, more affluent and thus healthier workers than Pitney Bowes.
    And even the largely white collar companies didn’t want to join with each other because each felt they they were better than the others at avoiding hiring sick people (or people likely to become sick. See the Wal-Mart memo. It applies to many other companies.
    Barry–it’s clear that you are comfortable living in a nation with two tiers of health care. One for “haves,” another for the “havennot’s”. This is why you think it woudl be fine if, under national health reform, doctors didn’t have to take people with public-sector (Medicare-like) insurance if they didn’t think it paid enough.
    That would guarantee two tiers of doctors and two tiers of patients. This is the sort of thing that has created medical apartheid–and very, very poor care for blacks and Latinos.
    Finally, as to the notion that steel-workers and auto-workers are less healthy than the rest of us because they have dangerous jobs . . .When were you last in a steel factory? 1920?
    Look at incomes, and the color of someone’s skin, and as Dr. Donald Berwick teaches his students, that will be the best predictor of how healthy he or she is.
    P.S.– The notion that “clerks” earning $30 to $35 an hour should “type the data” into computers in hospitals so that doctors who earn hundreds of dollars an hour don’t have to waste their precious time shows a complete lack of understanding of health IT and how it reduces errors.
    Each time a technician retypes a doctor’s prescription into a computer there is a possibility of error–either because he can’t quite read the handwriting, or because of a typo. This is how medication errors happen.
    The whole point of health IT is to have one person (the doctor) send the prescription directly to teh hospital pharmacy.
    In addition, the whole idea is for hte doctor to be looking at the the patient’s medical record and history on the screen when he writes the prescription so that he will realize if the patient is taking another medication (prescribed by another doctor) that should not be mixed with what he is prescsribing.

  18. “Barry–it’s clear that you are comfortable living in a nation with two tiers of health care. One for “haves,” another for the “havenot’s”. This is why you think it would be fine if, under national health reform, doctors didn’t have to take people with public-sector (Medicare-like) insurance if they didn’t think it paid enough.”
    This is a completely unfair inference, and I’m disappointed that you would suggest it. I am of the opinion that nobody owes anyone else a job, and if government, competing on a level playing field (with risk adjustment payments) can provide health insurance cheaper than the private sector, so be it. The public system would eventually evolve into a single payer system, and if that’s the market’s verdict, fine. Doctors and hospitals are free to refuse to accept private insurer’s contracts now if they think reimbursement rates are too low or if payment is too slow or if the insurers are just more trouble to deal with than they’re worth. I don’t see how suggesting that they be able to deal with a public system for the under 65 population on the same terms while still being able to take regular Medicare for the over 65 and disabled population suggests favoring a two tier system.
    “Yet private insurance is inevitably more expensive because private insurers must spend money on advertising, marketing, lobbying, profits for shareholders and very expensive executive salaries. Government – sponsored insurance (like Medicare) doesn’t have these costs.”
    If this is the case, a public system can win even if it offers reimbursement rates that are on par with what the private insurers pay. If there are risk adjustment payments to compensate all insurers who wind up with a riskier than average population, as there are now under the Medicare Advantage program, the public system would win an increasing share of the available business over time. If, on the other hand, there is more fraud in the public system (I don’t know for a fact whether there is or not), that would be reflected in its costs as well.
    Bottom line: competition is fine with me as long as the playing field is truly level which means the public system (for the under 65 population) must cover its costs from premiums alone (just as private insurers do) with no additional help from general federal revenue.

  19. The reason hospitals are such a major part of annually escalating health care costs is because they are each (whether “for-profit” or “not-for-profit”) operated as independent business fiefdoms with the bottom line being the dollar bill. Whether they do construction to expand their bed number, to provide more space for advancing technology, or for other reasons, they only undertake these efforts if the CEO and the Board see a way for the hospital to increase its profits. As noted in Ms. Mahar’s entry, “the profitability of the services is the key to developing a service line.” Also as noted by Ms. Mahar, the drive to build and expand is not driven by the community’s needs but by the competion for the most affluent patients seeking the most profitable services.
    What enables this mode of operation to take place? The system of payment that we use is one of the basic factors:
    1. The health insurance industry enables this by allowing for the occurrence of the business mechanism known as cost-shifting. The journal HEALTH AFFAIRS Jan/Feb 2006 contains a wonderful article by Allen Dobson et al, “The Cost-Shift Payment Hydraulic. Foundation and Implications,” which describes how hospitals ameliorate their losses when less affluent patients from the public payer sector utilize the hospital’s services.
    2. The fact that until recently CMS based DRG weights on charges as opposed to costs. In the fiscal year 2007, CMS began a three year transition from basing DRG weights on charges to basing them on costs. For 2008, the blend is one-third charge-based and two-thirds cost-based. Hospital cost’s are standardized to improve comparability. This involves adjusting costs to remove differences associated with variations in local market prices for inputs and those related to the size and intensity of hospital’s resident training activities, as well as the low-income patients hospitals treat. ( “Hospital Acute Inpatient Services Payment System” revised October 2007) These changes by Medicare I see as a step in the right direction. However, I believe the cost data submitted by hospitals will still reflect much unnecessary business overhead, such as exorbitant CEO salaries, perks for hospital boards, and other business activity which is not really concerned with health care.
    I have suggested, as part of a single payer system within a Department of Homeland Medicine, an Hospital Budget Approval Commission, which would:
    1) analyze each hospital’s budget every year to every few years depending on the hospital,
    2)make a determination with the hospital business people and doctors about which of their activities really supports health care in their local community as opposed to supporting profit making, 3) then set payments designed to pay for those costs plus a small capped controlled profit to be used for reinvestment in the physical plant and for new investment as deemed necessary.
    In the same issue of Health Affairs, Jan/Feb 2006, professor Reinhardt authored the article, “Hospital Services: Chaos Behind A Veil Of Secrecy,” another wonderfully informative article. He indicates that the contracting and billing departments of U.S. hospitals have become huge enterprises, often requiring large cadres of highly skilled workers backed up by sophisticated computer systems that can simulate the revenue implications of individual contract negotiations. Of course, in our current system, their goal is to enhance net income to each individual hospital.
    I have tried to take this info from these authors and use it to inform how a single payer could operate to completely control the price paid for hospital services and product on an individual hospital basis. First, with a single payer, the cost-shift business mechanism would no longer exist because there would be no other entity to shift the cost to. Second, the large cadre of professional business people in the hospital’s contracting and billing department could have their focus changed from enhancing net income to determining the lowest possible cost for providing services and product in that individual hospital, while strictly adhering to nationally accepted very high standards, such as 4:1 patient to nurse ratios outside of critical care units. Interaction between these individual business departments and the hospital budget approval commission then would function to set appropriate pricing for that individual hospital. The annual contribution by hospitals to the escalation of health care costs would cease. With no more bad debt, i.e., a single payer administering payment of the bill for everyone, hospitals would thrive just fine. There might be a whole lot of unhappy hospital CEOs and Board members. So What!
    (– click on my article, “Hospital Cost Shifting And The $Business$ Of Medicine: What Happened To The Medicine Of Medicine?”
    I am looking forward to Ms. Mahar’s next post on suburban hospitals, i.e., niche market development by the health care construction industry. I have also discussed this in my book, Equal Health Care For All, which delivers an overhaul for our entire health care system. For meaningful, beneficial change to occur for everyone, the dollar bill will have to be removed from its core position in our health care system and be replaced by actual health care assuming that core position, i.e., sound, ongoing doctor—patient relationships, and clear and equal access to same.
    R. Garth Kirkwood MD

  20. You will recall my earler question re the 4.5 percent pie chart figure indicating private insurer administrative costs. A friend (another singlepayer advocate)questions your explanation and my quick acceptance of it.
    Unless we’ve misplaced a zero, 950 billion is 45 percent of 2.1 trillion, not 4.5 percent.
    Believe me, I have never worked with so many zeros, but I’d appreciate your checking that out.
    Thanks, H.

  21. Hariette-
    You’re entirely right– there was a typo with the decimal point. (I think it’s now corrected)
    It should have been 94.5 billion dollars which is, in fact 4.5 percent of our the total $2.1 trillion in our national health care bill.
    I made the mistake, caught it a couple of hours later, but our proof-reader just did’t fix it.
    I’m very sorry this caused confusion. But if you insert the decimal point in the right place, and go back to my original response to your comment, I think you’ll find it all makes sense.
    (If it doesn’t, please feel free to come back.)

  22. Regarding the discussion between Barry and Maggie on self-insuring:
    Generally, companies above 500 employees self-insure and those below that number don’t. The threshold has been creeping down, but roughly this is the point at which it doesn’t pay to self-insure. Below it, admin costs per member approach those of health plans, and the volatility of claims becomes high enough to create stability issues for the company’s finances.
    The main reason companies self-insure is because when they do they are governed under ERISA, which cuts through all state-level insurance regulation and substitutes regulations which are uniform and in many cases weaker than that of the various states. Thus, self-insuring companies can have the same benefits and risk pool across many state lines. These companies also have more freedom to cut out certain benefits, so long as there isn’t a federal mandate, if they want to cut costs.
    Another reason companies self-insure is that there is less administrative overhead. Self-insuring companies don’t need to support sales and marketing staff, underwriters, etc.(though they do indirectly support the sales and marketing staff of their TPA or ASO vendor).
    A third reason to self-insure is that it creates better cash flow. The “reserves” of a self-funded plan are owned by the company and it gets to earn interest on the money, rather than the health plan.
    In addition to all this, I think there is only a limited sense in which self-insurance is driven by the desire to avoid the sick employees of other companies. Unlike Lake Wobegon, not everyone can be above average, and yet something like 99% of employers above 1,000 employees self-insure. So at least half of them can’t be trying to avoid a worse risk pool.
    Moreover, large companies would be experience-rated in almost every state, which means the claims history of their own population would determine their premium. They are not pooled with the general population. There are a few states where HMO products are community rated no matter how many lives are in the group, and New York State is one of them. So, I’m guessing that the person from Forbes that Maggie mentions was referring to New York’s universal HMO community rating. This is the exception rather than the rule.
    Maggie’s reference to large employers across the country refusing to pool their risk sounds quite plausible to me. Take any two companies, and one will have a worse risk pool than the other. As long as a pool is large enough that a company can reliably self-insure, no company will want to combine its pool with one that has sicker members. So, the company with less healthy employees will want to combine, and the one with healthier employees will not. But avoiding risk was generally not the reason they went to self-insurance in the first place, since experience-rated fully-insured plans in the long run result in exactly the same risk for large companies in most states.

  23. j.d.–
    You write:
    “Maggie’s reference to large employers across the country refusing to pool their risk sounds quite plausible to me. Take any two companies, and one will have a worse risk pool than the other. As long as a pool is large enough that a company can reliably self-insure, no company will want to combine its pool with one that has sicker members. So, the company with less healthy employees will want to combine, and the one with healthier employees will not.”
    Exactly. And this is what bothers me. Insurance is supposed to be about the less healthy and the healthier pooling their resources to share the risk.
    That said, I believe you on the many reasons why larger employers self-insure.
    But I am also quite certain (from pesonal experience and reporting)
    that very large wealthy corporations self-insure in order to avoid the costs of insuring low-income, often minority employees.
    I was at Dow Jones for 12 years. I can’t remmeber ever seeing a black or Latino person in the elevator, and this was a huge orgsanization– (the Wall St Journal, Dow Jones News Service, Barrons, etc.)
    There may well have been one or two minority reporters at the WSJ during that time that I just didn’t happen to run into..
    But the fact is, there were not any minority secretaries, adminsitrative assistants, people in marketing or PR,
    Investor Relations, Human Resources, etc. etc.
    There were some disabled people in the very small mailroom–but no minorities.
    These corporations really do avoid hiring people coming from poorer backgrounds, and a lot of that has to do with keeping their health profile high.

  24. Maggie,
    I don’t think your experience at Dow Jones can be extrapolated to corporate America generally with respect to the reasons they self-insure. You might try asking the same question of the CEO’s of U. S. Steel, General Motors, Boeing, Goodyear or any number of other heavily unionized companies in the manufacturing sector. They will tell you that they self-insure for all the reasons jd outlined – avoid paying for medical underwriting and broker commissions, capture the investment income from insurance reserves, offer a uniform, nationwide set of benefits under ERISA rules and avoid state mandates, etc. Their populations are generally less healthy than the average because they tend to be older, live less healthy lifestyles and work in physically demanding and often dangerous jobs. The federal government’s insurance contracts are generally cost plus and experience rated. The last time I checked, the federal workforce includes a large number of minority employees. I don’t think the feds are trying to avoid insuring poor people either.

  25. Very informative article. I am very passionate about hospitals using refurbished medical equipment. Using refurbished equipment is a great way for hospitals to save money.

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