Why Medical Bills are Killing Us

From Time, by Steven Brill, and this set of clips from Josh Wooden … and we need to have a good conversation about the issues raised in this article:

Why are costs so high? We all have some crazy stories about some medical item or procedure. When I had shoulder surgery, about a decade ago, I asked the kind woman at the counter when I was paying the bill why the extreme prices — to which she said matter of factly in a kind of “Here’s why, honey!” set of statements: “This is how much your doctor got; this is how much we got; and this is how much is left over to pay for those who don’t have insurance and can’t afford the same procedure. Next question?”

“When you look behind the bills that Sean Recchi and other patients receive, you see nothing rational — no rhyme or reason — about the costs they faced in a marketplace they enter through no choice of their own. The only constant is the sticker shock for the patients who are asked to pay.

Yet those who work in the health care industry and those who argue over health care policy seem inured to the shock. 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?

What are the reasons, good or bad, that cancer means a half-million- or million-dollar tab? Why should a trip to the emergency room for chest pains that turn out to be indigestion bring a bill that can exceed the cost of a semester of college? What makes a single dose of even the most wonderful wonder drug cost thousands of dollars? Why does simple lab work done during a few days in a hospital cost more than a car? And what is so different about the medical ecosystem that causes technology advances to drive bills up instead of down?

Recchi’s bill and six others examined line by line for this article offer a closeup window into what happens when powerless buyers — whether they are people like Recchi or big health-insurance companies — meet sellers in what is the ultimate seller’s market.

The result is a uniquely American gold rush for those who provide everything from wonder drugs to canes to high-tech implants to CT scans to hospital bill-coding and collection services. In hundreds of small and midsize cities across the country — from Stamford, Conn., to Marlton, N.J., to Oklahoma City — the American health care market has transformed tax-exempt “nonprofit” hospitals into the towns’ most profitable businesses and largest employers, often presided over by the regions’ most richly compensated executives. And in our largest cities, the system offers lavish paychecks even to midlevel hospital managers, like the 14 administrators at New York City’s Memorial Sloan-Kettering Cancer Center who are paid over $500,000 a year, including six who make over $1 million.

Taken as a whole, these powerful institutions and the bills they churn out dominate the nation’s economy and put demands on taxpayers to a degree unequaled anywhere else on earth. In the U.S., people spend almost 20% of the gross domestic product on health care, compared with about half that in most developed countries. Yet in every measurable way, the results our health care system produces are no better and often worse than the outcomes in those countries.

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. We may be shocked at the $60 billion price tag for cleaning up after Hurricane Sandy. We spent almost that much last week on health care. We spend more every year on artificial knees and hips than what Hollywood collects at the box office. We spend two or three times that much on durable medical devices like canes and wheelchairs, in part because a heavily lobbied Congress forces Medicare to pay 25% to 75% more for this equipment than it would cost at Walmart.

The Bureau of Labor Statistics projects that 10 of the 20 occupations that will grow the fastest in the U.S. by 2020 are related to health care. America’s largest city may be commonly thought of as the world’s financial-services capital, but of New York’s 18 largest private employers, eight are hospitals and four are banks. Employing all those people in the cause of curing the sick is, of course, not anything to be ashamed of. But the drag on our overall economy that comes with taxpayers, employers and consumers spending so much more than is spent in any other country for the same product is unsustainable. Health care is eating away at our economy and our treasury.

The health care industry seems to have the will and the means to keep it that way. According to the Center for Responsive Politics, the pharmaceutical and health-care-product industries, combined with organizations representing doctors, hospitals, nursing homes, health services and HMOs, have spent $5.36 billion since 1998 on lobbying in Washington. That dwarfs the $1.53 billion spent by the defense and aerospace industries and the $1.3 billion spent by oil and gas interests over the same period. That’s right: the health-care-industrial complex spends more than three times what the military-industrial complex spends in Washington.

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. Of the total $2.8 trillion that will be spent on health care, about $800 billion will be paid by the federal government through the Medicare insurance program for the disabled and those 65 and older and the Medicaid program, which provides care for the poor. That $800 billion, which keeps rising far faster than inflation and the gross domestic product, is what’s driving the federal deficit. The other $2 trillion will be paid mostly by private health-insurance companies and individuals who have no insurance or who will pay some portion of the bills covered by their insurance. This is what’s increasingly burdening businesses that pay for their employees’ health insurance and forcing individuals to pay so much in out-of-pocket expenses.

Breaking these trillions down into real bills going to real patients cuts through the ideological debate over health care policy. By dissecting the bills that people like Sean Recchi face, we can see exactly how and why we are overspending, where the money is going and how to get it back. We just have to follow the money.”

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  • Joe Canner

    Although I would probably lose my job if the health care industry were reformed in accordance with this article (my position is funded by surgical fees at a large, well-known teaching hospital), I’m sure there is a lot of merit to what is being said here.

    In addition to the coercive power of the industry, a related problem that relates to high costs is that most people don’t have any idea what things costs and who is paying for them. When I had traditional indemity health insurance, I didn’t give much thought to what I needed or what it cost, because I knew insurance was covering it. The small co-pays made me only marginally more concerned. But, when I switched to a high deductible plan, suddenly every health care encounter resulted in a significant bill as well as careful scrutiny of the bill, including angry letters to providers regarding overcharging.

    HMOs get a bad rap, but both they’re one of the few ways to make both patients and providers accountable for costs. Someone needs to mind the store and make sure that people aren’t getting unecessary care, and doctors need incentives to keep people healthy, not order more procedures.

  • Pardon me for being obtuse, what exactly was the answer? I somehow don’t suspect that drug companies are securing their wealth from the uninsured, so can you give me a breakdown? Out of $100 spent on medical care, what portion goes to build those shiny new hospitals, what portion goes to tests, pills, overworked nurses, underpaid janitors, etc.? Maybe I read this too fast, but I don’t recall seeing this information.

  • I live on the Wisconsin side of the Wisconsin-Minnesota border. Minnesota has a law which prevents medical providers from charging the uninsured more than they would charge an insurance company for the same care. So when we were without health insurance a few years back, we crossed the border into MN to see the doctor. It was such a huge difference. I don’t understand why all states don’t require this. It is absolutely criminal to charge the uninsured many times more than what insurance companies are charged for the same care.

  • Joshua

    Rick, the drug companies are securing their wealth from the uninsured and the insured, alike. The article mainly investigated people who already had insurance. What the money is spent on wasn’t broken down (unless it was included in the bills, like doctor fees).

  • Dianne P

    Rant alert. I’m a retired RN. After years of varied clinical practice, I worked in big pharma, managing clinical research trials round the world. When I was first required to travel to the UK, I was horrified. My area was dialysis and renal transplantation, and I had believed the mantras that we had the best health care in the world and that those “socialized” European countries were rationing care. Certainly I’d be seeing the elderly and unworthy denied dialysis and kidney transplants.

    Cue… ROFLOL. Years of managing clinical studies in Japan, England, Scotland, Wales, France, Italy, Germany, Spain, and Mexico (yes… Mexico) showed clearly and painfully that ALL of those countries have a better health care SYSTEM than the US. In the area of dialysis, all of the European countries look down us and pity us for the horrid care standards for dialysis patients here. As in just about everything else, we have poorer outcomes and spend more money than anyone.

    We have NO health care SYSTEM. We are ensnared in a nightmare tangle of random and inefficient insurance snares. Talk about govt bureaucracy… there is nothing in medicare that even approaches the nonsense of the insurance industry. Read carefully the Time article. The only insurer that is doing anything sensible is Medicare. Yes, lower the age of medicare… to birth.

    When my husband was being treated for lung cancer, an office of 3 oncologists had a long office full of paper pushers. That was in addition to 2 front office people, lab tech, a nurse for each doc, and a chemo nurse. In other words, an entire office for insurance and billing. Too many people to count. Each and every CT scan… standard protocol after every so many rounds of chemo… had to be phoned and faxed in for approval to the insurance company. And this was done by the nurse. The oncologist told horror stories of receiving phone calls from insurance company docs (now there’s an oxymoron), challenging him on the care of his patient. He had to spend/waste almost half an hour on that. The amount of time/money that health care workers spend to accommodate the insurance companies is beyond ridiculous.

    And don’t even get me started on health records. One of the untold reasons that companies like to do research outside the US is the clarity and relative uniformity of the health care records. Data is clear and accessible with single payer systems, and data is one of the largest chunks of any clinical research budget.

    Long waits for surgery? A friend with a very bad knee was denied for many years a knee replacement. I’ve known him for 6 years… and his knee was very bad for that long. Last month he was finally approved for a knee replacement. Long waits in the ER? My son, who has a neuro/cardio condition had to wait 6 hours in the ER before he was taken back to see a doc. Well, maybe he wasn’t that sick, you might say. Except he was brought to the ER by paramedics on order of his primary doc – where he went first. So the ambulance brought him straight from the doc’s office. And he was admitted and hospitalized for a week.

    And for those of you who think your personal anecdote is valid support or condemnation of any country’s healthcare (surprise… it’s not just about YOU), I’ll just add mine. My husband was first seen at one of the hallowed, big-name, much-praised hospitals in the US. After a CT scan, he was told directly “well at least we know you don’t have cancer”. Just a few weeks later, a simple CXR done on order of another doctor’s office showed something alarming. Tests showed stage IV lung cancer.

    And for those who still think it’s mostly about you because you have your health insurance (for now), consider a few points. First, the fragility of insurance coverage that is either tied to an employer or to the whim of an insurance company. Second, medical issues are the number 1 cause of personal bankruptcy in the US. That’s middle class people like you and me. The poor aren’t filing for bankruptcy. Their health care gets written off by the hospital. Third, it is BOTH compassionate and economically sensible to provide health care. One example from the free clinic where I volunteer… one man in his 40s, a roofer with a bad knee, is becoming increasingly disabled and will soon be unable to work. His job doesn’t have health insurance. He has a wife and 3 kids. Lacking the cost of a simple knee surgery, this man will soon be unemployed. A very sad story and another financial burden on our broken economy.

    I don’t understand how anyone who embraces the Jesus Creed can look at this abomination and not be deeply concerned for its victims. Excuse me, patients. An issue near and dear to my heart. Rant over.

  • Dianne P., thank you for your “rant”. Actually, it’s not a rant but a well-reasoned argument based on actual facts, not myth. It will be interesting to see how many more trillions are wastefully spent before we realize that there are sound reasons why every other advanced liberal democracy in the world has some form of a single-payer healthcare system.

  • Joshua

    I thought it was interesting how the author himself did not believe that universal, single-payer healthcare was a realistic option. He never explains why, though, and it makes me curious.

  • RobS

    With consumers touching so few of the actual payments, it’s not likely that most people feel the effect of the payments.

    I’d really like to see the cost break-downs on many of the inputs. And, then see them as a % of total for other developed countries with advanced systems (Canada, some European, Asian, and other systems). Where is the USA “really out of whack”…? Is it preventative, hospitals, uninsured problems, lawsuits/legal (ie. malpractice and medical insurance), bureaucracy & administration, salaries, etc.

    Then we might learn some things: maybe salaries are high here, but it’s because our nurses work a lot of overtime due to shortages. Then examine more and drill down on those things and look for solutions. Maybe term limits is a solution too… (!)

  • Dianne P

    Wow! Did I get censored? Thanks for your encouraging comments Stephen.

  • RJS

    Dianne P,

    Whoops – no, not censored. You posted the same (long) comment twice, but on two different posts. I thought it was twice on the same post. Double post comments happen somewhat often these days.

  • Dianne P

    Sorry RJS. My bad. Don’t know how I even got into that 2 year old post. The internet black hole. At one moment you’re on the event horizon, and the next, sliding into nothingness. Thx.

  • Jim Sullivan

    When I left the business world to become a pastor of a small church the biggest hit our family took was the lose of corprate insurance. The cheapest insurance we could find cost over $400 a month, and that was with a $7,000 deductable, and would not cover maternaty cost. We simply cannot afford that, so we have been without for a year and a half. A couple of weeks ago my 2 year old hit my 6 year old with a toy which resulted in my wife taking my son to a care-now facility, not the emergancy room. My wife said the doctor spent only minutes with my son giving him a staple and then we went to pay. At the counter they charged us $220 or around that. We thought that was a bit high, but resonable. Last week though we got another bill in the mail saying we owed an additional $375, making the total cost over $600! My wife called explaining that we are uninsured and they did lower it so that the total cost was a little over $500, but still there was not much we could do but pay for it. We have been scratching our heads trying to figure out why a procedure which is fairly routine and took less than 10 minutes cost so much money

  • Robin

    One thing that has to be considered is the steep discount that insurance companies are able to negotiate and the steeper discounts that the government is able to negotiate.

    In Kentucky Medicare and Medicaid pay around 30-35% of billed charges. Private Insurance usually pays quite a bit higher. So when you consider Jim Sullivan’s situation above…had he been on Medicaid the center would have received about $180 total. From some people without insurance they probably receive $0 and from stand up guys like Jim they get the Lion’s share.

    This leads me to wonder if the reason billed amounts for private insurance and self-insured people are so high because they have to set them exhorbitantly high in order to ensure that their 30% Medicare and Medicaid payments cover the bills. After all, if they set Jim’s visit at what it probably cost (~$180), then Medicare and Medicaid would only want to pay around $60.

    This also varies by state, not all state have a quasi-standard policy where Medicaid pays 30% of billed costs. I am sure some states set their rates appropriately and this accounting magic isn’t necessary.

  • Joshua

    Robin, interesting, but the article also argued that, in fact, the uninsured overwhelmingly are the ones getting the biggest bills (people who make too little for insurance but too much for medicaid, which isn’t very much at all), and the already insured on receiving negligible coverage. What do you think is a plausible solution for reducing the costs.

  • James Petticrew

    We are Scots during a year when I studied in Kentucky my wife who is a qualified UK nurse with huge experience was surprised by the way the health care system in the States, in her experience, was constantly adding expensive tests when simpler and cheaper ones would have achieved the same results. Ie for s suspected fracture being sent for a CT scan when an X Ray would have sufficied. Only explanation she could see was higher profit margins.

  • ktb

    Society wrings its hands and wonders why costs are so high. Unless and until consumers can compare prices and shop around for the best deal, I.e. until there is actual competition and a semblance of transparency, there is no competitive mechanism to rein in costs. Add to that the doctors’ guild which unreasonably and artificially restricts both entry into the profession and the ability of non-guild members to engage in competition, and you have a recipe for skyrocketing costs.

  • Rob

    Everyone has their own experiences I guess. My relatives experiences in a foreign country for cancer treatment were abysmal. They ended up coming to the US, which is my understanding the approach that the well-to-do take when faced with something that isn’t just routine care. I’ve had good and bad experiences here in the United States too, I’m surprised no one has really touched on the reason that healthcare is so expensive. Doctors, nurses, PA’s, etc. all make a ton of money, the hospitals staff a ton of people, the insurance companies staff a TON of people, and all the support services and companies staff a MONSTER LOAD of people. These people all need salaries, retirement, their own health care plans, professional development, etc. and all these things cost quite a bit of money. Most people aren’t willing to take 20% pay decreases so that the cost of their service can go down….in any industry, this isn’t exclusive to healthcare.
    More than that, there are always consequences for actions…particularly in economics. Cutting what we pay in healthcare, while I agree is necessary, will have a reactionary effect. People will lose jobs….everyone needs to be okay with that. Is the cost we currently pay a bigger or worse problem than millions more people being unemployed? I’m not advocating either side, I’m just saying that’s what will happen. It’s like the reduction in federal spending, we all agree it’s necessary but it will have it’s own consequence of many jobs lost. We just all need to understand that when we proceed with plans like this.

  • Jim

    Perhaps we could do better if (a) we were not almost $17 trillion in debt (before entitlement costs kick in), (b) facing a shrinking fertility rate and (c) not defending some of the single payer countries with the U.S. military.

  • Bob K

    We would never go to a grocery store that did not have the prices listed on the shelves. Only to find out how much things cost when we got to the register. Plus having the use of the shopping cart added on. That is exactly the way we go into the health market though. I understand those who do not want a single payer system. But to have a real free market the prices have to be known and then we the consumer have to have a choice to go somewhere else.

  • Joshua

    ktb and perhaps Bob K as well:

    What I thought the article made clear was that the medical field is not comparable to other for-profit businesses: People enter into it unwillingly, without knowing the costs up-front, without understanding the cost when they are finally presented with a bill, without having any leverage to negotiate the costs. In addition, hospital complexes own the equipment, the doctors – everything – the means of production as well as the means of labor. That’s not a free market, and I don’t see how one is possible given the manner in which “consumers” enter into the “market” to begin with.

    Knowing the costs up-front wouldn’t change anything if hospitals have the market monopolized, or if the competitions charges similar rates.

  • Joshua

    As a quick follow-up, I realize that your comments actually agree with certain points that I made (ktb suggested breaking up guilds, for instance), but the point is that a free market, as far as healthcare is concerned, sounds more and more like a pipe-dream when I consider the amount of power this industry possesses.

  • Robin


    I think you and I are trying to make the same point. Hospital bill by CPT codes, so when someone comes into the ER with the stomach flu and is dehydrated, they are going to get the same treatment and have the same codes entered on those cases. The codes correspond to dollar values in the accounting system so for all the patients with that bill they are going to be billed exactly the same. The difference in the amount paid comes from the payor source.

    In Kentucky if the bill is $1,000 and Medicaid is paying the hospital is only going to get $200 on average. If the patient has private insurance they might get $400 or $500. All of these payments are based on negotiated discounts. If you don’t have insurance…you get stuck with whatever discount the hospital is willing to give you. So yes, I suspect that the uninsured would get stuck paying the highest percentage of billed charges.

    My larger point is that the reason the billed charges are $1000 to start with is that the hospital wants to ensure it gets at least $200-300 from Medicaid and $400-500 from Private insurance. The billed charges have to be high so that the contracted rates with Medicaid and Private insurance won’t drain the hospital. The people that really end up with the worst deal are those that can’t take advantage of some form of collective bargaining.

  • Robin

    As to the free market in a more general sense…it is not possible for some forms of Medical treatment like ER and some hospital services, but it is absolutely possible for most forms of preventive medicine and elective medicine.

    The medical fields where prices are consistently dropping while technology and outcomes are improving are elective….think plastic surgery, lasik, etc. These are things that insurance generally doesn’t cover so people are price conscious and compare their alternatives based on price.

    This type of model could work as well for primary care, immunization, routine treatment…etc. My insurance company has very high deductibles but I get $1,500 on a Visa Card at the beginning to cover medical expenses until we meet the deductible, so I am very conscious of asking how much routine thins cost…I know that the further I can stretch that card the longer I get to avoid paying extra cash out of pocket.

    Won’t work for everything, but there are certain sectors where it will.

  • Joshua

    Robin, that makes good sense for both comments. What would the solution look like, though? How would we make markets more competitive in those fields?

  • ktb

    But you do enter the healthcare system voluntarily, either de facto with a written consent (such as undergoing an eye exam) or under an implied consent (going to the ER after a car wreck). In either case, the law requires consent, express or implied, for treatment to be rendered. With emergency care, I can see where exigent circumstances might curtail a meaningful opportunity to compare costs among providers, but to say that healtcare is “different”, even sui generis, with respect to other commercial transactions is just wrong.

  • Rob Henderson

    I am sitting on a U-shaped cushion in my easy chair. That U-shaped cushion takes the pressure off of my spine and helps to some degree with my terrible back problems. (I used to be a roofer and Youth Pastor in my former life.) At the urging of one of my doctors, my wife ordered this U-shaped cushion for $14.99 through a mail-order magazine.

    A few months ago she was in a pharmacy in Muskegon and saw the same- EXACT SAME- cushion on display with a sticker price of $95.

    Something is seriously wrong with the health-care industry. I’m not saying everyone in the industry is ripping people off. However, I wonder what some of these will say in their defense to God on the day of judgment?

  • EricG

    This is a great article – very good details on the problem (which are consistent with my experiences dealing with hospital and drug company pricing), and a nonpartisan look at possible solutions. There are things suggested both Dems and the GOP should reconsider. One thing not mentioned in the comments above is tort reform, which Dems have been way too resistant to, and which would drive down excessive use of expensive tests and doc’s insurance premiums (the cost of which is passed on to payers like us).

    Great comments by Diane P. Single payer would drive down the cost of the entire system; if the government used its size to negotiate with hospitals and drug cos the same way it does with Medicare, overall costs would be many times lower. We would also cut out all those crazy high administrative costs and insurance co profits.

    Robin, you question whether private payers are effectively subsidizing Medicare, but the detail in the article suggests that isn’t true. And hospitals wouldn’t choose to accept Medicare if they weren’t profiting from it.

    The article does raise an important concern about single payer though – all else equal, it would be hard to attract enough docs because their compensation would go down. But there are potential workarounds – like using some of the savings to incentivize docs. Compensation to docs is not the source of the current sky high costs, as the article’s stats suggest – it is hospital profits, admin costs, etc.

  • EricG

    Robin (23),

    I would be in favor of making the current system more of a free market if it could work, but like Joshua I’m having trouble envisioning it. For most big ticket items – like cancer care, surgery, etc. – the stuff that drives most of the overall cost – it is insurance co’s paying most of the bill. Consumers internalize very little of the cost of individual decisions, even in the deductible example you give (which represents a very small portion of overall health system costs). So it would be hard to tie the high costs to consumer’s specific choices. Is there a system where this has been shown to work? Single payer models do work in other countries – with far lower costs than in the US.

  • Robin

    I don’t mean to suggest that they are subsidizing Medicare, but that because of the way hospitals have to game Medicare, Medicaid, and the Insurers…they are the ones getting hurt.

    Imagine a restaurant where old people eat, let’s say Bob Evans…and they get 50% of their business from Seniors. They give a 10% discount to AARP members, so the question is where to they have to set their menu price. They have to set it high enough that even giving a 10% discount to 50% of their customers…they still make a profit. This isn’t exactly saying that non-seniors are subsidizing the seniors, but that Bob Evans is inflating their menu prices to make sure they can cover the 10% discount for 50% of their customers.

  • Robin

    As for helping consumers respond properly to price incentives…insurance companies, and even Medicaid are already trying some of this. My insurance policy has a $100 co-pay, in addition to meeting the deductible, for ER visits that gets returned if you are admitted.

    What are they communicating to me? “If you go to the ER for something that isn’t really an emergency, it is going to cost you $100 up front, and then you will still pay 100% if your deductible hasn’t been met.”

    The same principle holds true for preventive care and free well-care visits. These minimize future medical costs so they provide them free of charge.

    On a side note I sat in a legislative committee hearing this week where a hospital discussed 1 Medicaid patient who visited the ER 133 times in 2012 for renal dialysis (and 20 or so visits for other non-emergency care). They have begged and pleaded with him to just got o an outpatient center, but he refuses and there is no financial reason for him to do so (Medicaid pays the bills). The managed care company is considering giving him gift cards to places like Wal-Mart if he will comply and go to the lower cost center.

  • Joshua

    EricG: couldn’t have articulated my opinion of the article any better. Well said.

    Robin: I’m just not understanding your position, or what you would suggest as a viable solution. Setting the prices high, in order to make a profit, even after the discount, A) only makes sense in hospitals that are not non-profit, and B) Doesn’t make sense anyway, since hospitals are still making a profit of medicare patients (medicare pays a certain percentage above the cost, so they still make a profit, whether they’re non-profit or not).

  • Joshua

    ktb, I don’t know if I would say healthcare is unique (I actually had to look up “sui generis” – nice use of the term), but the fact that it’s “different” seem more-or-less obvious to me, as evidenced by the fact that individuals, even with insurance, have less and less bargaining power, and fewer and fewer options, then pretty much any product on the market.

    I understand the impetus behind the free market mentality, but I wouldn’t apply it to healthcare because it doesn’t seem to be working there. Blaming it on government intervention seems fallacious, given that countries with universal healthcare pay less per person than we do (as little as half as what we spend per person), EVAN AS they care for everyone in their country. I just don’t see how the free market will drive costs down, when, as I already pointed out, many hospitals own both the means of production and the means of labor, and constantly lobby congress to stay above the competition. This isn’t to say that single-payer is likely, but regardless, it is better.

  • Robin #29
    I really get what you are talking about. Six and a half years ago I had a liver and kidney transplant. Due to a billing fiasco I received both the correct bill that the insurance company would pay for $250,000 and the bill that I would have received if I didn’t have insurance for $390,000. Without insurance I would have paid half again as much. Later on I became good friends with one of the doctors. She told me that the hospital only EXPECTED to be paid $250,000 for the operation. When they do their budgeting they don’t count on the higher number, they count on the lower number.

    From my view, the problem is that there are too many people involved in the business end of health care. The insurance companies are not terribly efficient (redundant paper work, high administrative costs). Health care records are not shared easily despite the fact that different doctors may be treating the same patient for the same illness. We now have the technology to fix much of this. Unfortunately, medical facilities need to ramp up quicker than they have AND the information needs to be shared facility to facility.

  • EricG


    The specific stats in the article suggest that hospitals are the ones making out like bandits – their profit margins are in the stratosphere. Their margins are certainly lower for Medicaid, but if they weren’t making money on Medicaid they wouldn’t choose to accept it. They aren’t getting hurt. In your example, it is as if Bob Evans has a 150 percent overall profit margin, with the margin on non-seniors more, but the margin on seniors still sizable. The key point is that if the government was the only payor (as with Medicare), we could still expect hospitals to turn a profit, or so the article suggests (and the stats suggest this is true).

    The incentives you suggest that insurance co’s are giving consumers sound great. But insurance co’s can never get consumers to internalize all the costs – or anything close to all the costs. So consumers will never have anything close to efficient incentives with respect to most health care choices (in the sense of efficient incentives required for a free market). It is very similar to the moral hazard issue with insurance. I don’t see how we can get a free market system that will solve the current problem of out-of-whack health care prices that don’t bear any resemblance to hospital costs. It looks like there is too much of a market failure.

  • EricG

    One criticism I have of the article: I wonder if it doesn’t give adequate consideration of the need to incentivize R&D by drug companies. The article suggests that their costs of producing and selling drugs are low, and don’t justify high prices. But their R&D costs are very high, and most drugs don’t pan out. I would want to know more before we start regulating incentives for drug cos to create novel drugs – to fight cancer for example (a topic near and dear to me).

  • Rob Dunbar

    Actually, Robin has nailed one of the biggest problems in the way the US does healthcare. Hospitals do in fact charge the uninsured more for the very reasons she noted. And no, hospitals are not finding Medicare or Medicaid to be profitable. Dr. Douglas Perednia covered some of this in an FT Press book, “

  • Rob Dunbar

    Sorry, meant to give a title there: “Overhauling America’s Healthcare Machine: Stop The Bleeding and Save Trillions.”

  • Joshua

    Rob, if Medicare is not profitable, then why are they accepting it?

  • EricG

    Rob –

    I was going to ask the same question as Joshua.

    I agree that it is a huge problem that hospitals are charging so much more to the uninsured. That was one of the main points in the article too.

    I was also curious what what the author of the book you mentioned proposed to save money in the healthcare system? Would be interesting to know. Thanks.

  • Robin

    I apologize for the length, I wanted to separate it into two or three disctinct ideas, but I will get the “posting too quickly” message.

    First, I think in many cases Medicare and Medicaid are still profitable. I am not disputing that. In the Bob Evans example…Seniors are still profitable at the 10% discount…BECAUSE they set the prices high enough that it will still generate a profit. It is their pricing that determines their pofit.

    In Kentucky Medicare does not pay “cost.” They pay a scheduled rate that should theoretically should cover cost (but may not if a particular hospitals units costs are higher than average). Traditional Medicaid pays a certain percentage of Medicare rates. In Kentucky it is around 75% of Medicare, in other states it is as low as 50% to 60%.

    Bottom line is that Hospitals are definitely still making a profit. Even the non-profit hospitals are storing up cash to build multi-million dollar expansions, pay their CEOs six-figures, etc. (which looks like profit to me). My original point is that the gaming required to generate that profit off of Medicare and Medicaid reimbursements leads to inflated bills for those without coverage.

    Onto the last question, if they weren’t covering costs (which I think in generally they are) why serve them? A hospital has two types of costs – unit costs and fixed costs. Unit costs stay the same regardless of who the patient is, fixed costs per person drop depending on the volume you serve, so even if Medicare and Medicaid didn’t cover all costs, you would still welcome a high volume so that you could lower your average fixed costs.

    This means that even though private insurance or the uninsured might be subsidizing Medicaid on a unit cost basis…the total volume of Medicare and Medicaid (even if they don’t cover unit costs) make the average fixed costs low enough that you can afford to operate the hospital.

    Going back to the Bob Evans example. The non-seniors might be subsidizing the Seniors on a cost per plate basis, but if you took away the 50% of Seniors that got the discounted rate…you couldn’t afford to keep the Bob Evans open at all.

    As for solutions…I don’t see them. We could go to single payor, but the government doesn’t have the sophistication or the backbone to selectively weed out bad behavior. I work with Medicaid (in the belly of the beast) on a daily basis. The best we could do is something like the Fiscal Cliff…”we need to save 40% on Hospital Costs, so we are cutting all reimbursement rates by 40%.” This would penalize the good and bad actors and only encourage the bad actors to find more inventive ways to upcode and increase their billables.

    This is just the reality when you have a system as complicated as ours. Managed Care has some promise, but they are just as likely to try and short the hospitals (and gouge the government) as the hospitals.

    Perhaps if we moved to a Federal single payor they could develop the technological expertise to monitor the system effectively, but that would just make it easier to lobby them. Can you imagine the outrage that would occur if they ‘rightly’ tried to cut Medical costs by 20%. The pressure from the AMA or National Hospital Association (and the legislators they have influence with) would be immense.

    In the end I think maybe Single Payor (Federal payor), administered through Managed Care companies who could serve as a political buffer and bring technological expertise might be the best-bad option.

  • Chas

    As I read through this article my mind drifted from the health care industry to our higher education system. Seems to me that there are some very real parallels.

  • Joshua


    That makes more sense – I wasn’t on the same page as you. As for solutions, you’re probably right; and as I mentioned many comments above, the author of the article didn’t think single-payer was realistic either.

  • Dianne P

    I think there might be a little confounding of medicare and medicaid. Rules for medicaid reimbursement are largely written by each state within a loose framework of federal guidelines. Thus my state’s (Arizona) current notoriety for refusing to pay for life-saving organ transplants for those on medicaid. Don’t ascribe the inefficiencies of medicaid to the federal govt or medicare.

    If there is a person on medicaid going to the ER to get free pregnancy tests (one extreme) or renal dialysis (the other), then the state needs to get its act together. If AZ can allow someone to die by not paying for transplants, then I think someone can figure out the pregnancy test/dialysis dilemmas. This is

    There is much talk here about insurance subsidizing medicare/medicaid and under-uninsured, but a huge draw on hospitals’ budgets is the uninsured who pay nothing. Which is one of the gold star points of Obamacare. Let’s get everyone insured so the hospitals know that there will be revenue from everyone walking through their doors. That is a bandaid to help the “rob Peter to pay Paul” economic approach. IMO, a single payer is the solution. We only need to look at all the other countries where this works – albeit there are some problems in many or even all – but none that even compare to ours. We don’t need to let the perfect be the enemy of the good, because we’ve got a long way to go to get close to good. As my granddaughter says, we are “bad-bad”.

    Another point is the runaway competition among hospitals. Billboards? Really? Doctors as celebrities performing the “latest and greatest” hot new procedures? Who would have thought that a proper repertoire for a physician was agency-quality head shots? Lobbies that resemble grand hotels? The near-constant building programs for grand new centers of this and that. Yeah, I guess health care is profitable. Don’t confuse an organization’s status as a non-profit with not making money. And the money that goes to health insurance companies and their profit margins is unnecessary and outrageous.

  • Joshua

    Dianne, thank you so much for your comments on this post.

  • Mike M

    Since Reagan introduced DRG’s in the 80’s corporate executive salaries have sky-rocketed while doctors’ and nurses’ incomes have declined. This is all predicated on the “trickle down theory” of economics and has only inreased the distance between the 1 percent and the rest of us. The money is out there folks to take care of all of us. Unfortunately it’s used to build the hospital CEO’s new pool. Think I’m exagerating? Aurora health care system here in SE Wisconsin stopped building new clinics and hospitals in the city of Milwaukee because of a $20 million loss in projected profits last year. Ironically, the former CEO’s golden parachute retirement package was worth $20 million.

  • Kenton

    Thank you to someone for finally telling the truth. All I hear around my county are pro-pharma pablum talking points repeated ad naseum.

    I fear the reality is that the efficiency of the “free market” is being intentionally circumvented because of the fabulous possibilities for profit to be made from a rich country… where health is naturally the thing that anyone will pay through the nose for. The complications and complexities are intentional.