Some Facts about the Incredible Cost of Health-Care

English: Spending on U.S. healthcare as a perc...
English: Spending on U.S. healthcare as a percentage of gross domestic product (GDP). (Photo credit: Wikipedia)

This week Time Magazine published a massive cover story on the cost of health-care in America.  Says the author, Steven Brill, When we debate health care policy, we seem to jump right to the issue of who should pay the bills, blowing past what should be the first question: Why exactly are the bills so high?  This article attempts to answer that first question by looking line-by-line at the charges on seven medical bills and following the money back.

The whole article is incredibly long (36 pages in print), but that only speaks to the thoroughness of its reporting.  What it uncovers is many incredible, alarming, and even infuriating facts about how health-care cost, pricing, and billing practices work in America.  If you can’t read the whole article, here are some of (to my mind) the most striking points made:

  • The US will spend $2.8 trillion on health care this year ($800 billion from Medicare/Medicaid and $2 trillion from the private sector).
  • Healthcare accounts for 20% of America’s GDP every year, making it by far our largest “consumer good.”
  • The United States spends more on health care than the next 10 biggest spenders combined: Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain and Australia. [Brill doesn’t make this point, but its worth noting that those 10 countries have a combined population approximately 6.5 times that of the United States.]
  • If we spent the same amount per-capita on health care as other developed nations, we would save $750 billion this year.  That means that Americans are paying 27% more for health care than other developed countries (and the costs are rising faster than inflation).
  • The Health-Care-Industrial-Complex spends more than 3x as much on lobbying every year as the Military-Industrial-Complex.
  • Mark-up of medical costs from the Medicare Fee Schedule (which is calculated to cover all the related costs of service) to the chargemaster schedule (a fee schedule unique to each hospital which serves as the basis for its “uninsured” charges), is routinely a 250% or more increase in price.  It is not uncommon for such a mark-up to be as high as 1,000%.
  • Insurers and “billing advocates” usually negotiate a discount on these chargemaster claims, resulting in a national average of hospitals collecting only about 35% of what they bill.
  • Charitable giving to hospitals (including not-for-profit hospitals) usually accounts for less than 5% of a hospitals annual revenues.
  • Even still, hospitals (especially not-for-profit ones) usually run a profit.  The national average profit margin (calculated after executive bonuses and including hospitals that ran a loss) of not-for-profit hospitals in the United States is about 12% per year.  More not-for-profit hospitals make a profit every year (in both actual numbers and percentages) than for-profit hospitals.
  • Outpatient emergency services run a profit margin of 15% (national average).
  • Outpatient non-emergency services run a profit margin of 35% (national average).
  • 60% of personal bankruptcy filings are over medical bills.
  • The ambulance industry makes more money than Hollywood.
  • Prescription drug costs in the United States are 50% higher than the costs of comparable products in other developed countries.
  • Despite the claim that high profits in the American market are needed to fund research and development at pharmaceutical companies, on average major pharmaceuticals spend between 15 and 20% of their gross revenue on R&D compared to frequent 30% or higher profit margins (calculated after executive bonuses and research and development costs).
  • Despite complaints about bureaucracy, Medicare’s administrative costs amount to about .6% of the total paid in claims each year.  In comparison, private insurers routinely have administrative costs equal to 25% or more of claims paid.

Find out more about what drives the cost of health-care by reading the full article.

Brill concludes with this assessment of the economics of the health-care industry:

Unless you are protected by Medicare, the health care market is not a market at all. It’s a crapshoot. People fare differently according to circumstances they can neither control nor predict. They may have no insurance. They may have insurance, but their employer chooses their insurance plan and it may have a payout limit or not cover a drug or treatment they need. They may or may not be old enough to be on Medicare or, given the different standards of the 50 states, be poor enough to be on Medicaid. If they’re not protected by Medicare or they’re protected only partly by private insurance with high co-pays, they have little visibility into pricing, let alone control of it. They have little choice of hospitals or the services they are billed for, even if they somehow know the prices before they get billed for the services. They have no idea what their bills mean, and those who maintain the chargemasters couldn’t explain them if they wanted to. How much of the bills they end up paying may depend on the generosity of the hospital or on whether they happen to get the help of a billing advocate. They have no choice of the drugs that they have to buy or the lab tests or CT scans that they have to get, and they would not know what to do if they did have a choice. They are powerless buyers in a seller’s market where the only sure thing is the profit of the sellers.

The real issue isn’t whether we have a single payer or multiple payers. It’s whether whoever pays has a fair chance in a fair market. Congress has given Medicare that power when it comes to dealing with hospitals and doctors, and we have seen how that works to drive down the prices Medicare pays, just as we’ve seen what happens when Congress handcuffs Medicare when it comes to evaluating and buying drugs, medical devices and equipment. Stripping away what is now the sellers’ overwhelming leverage in dealing with Medicare in those areas and with private payers in all aspects of the market would inject fairness into the market. We don’t have to scrap our system and aren’t likely to. But we can reduce the $750 billion that we overspend on health care in the U.S. in part by acknowledging what other countries have: because the health care market deals in a life-or-death product, it cannot be left to its own devices.

Put simply, the bills tell us that this is not about interfering in a free market. It’s about facing the reality that our largest consumer product by far — one-fifth of our economy — does not operate in a free market.

Brill has several suggestions about how to tackle the cost of health-care in America, and I have some ideas of my own, but I would love to hear from others first.  What should we do about this problem?  What solutions should we consider?


What do you think? I would love to hear from you, please share your thoughts. Just remember to be respectful of others.

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