24 May 2012

Are healthcare providers profiteering?

Andrew Sullivan fumes over the fact that the price of healthcare continues to go up despite the fact that utilization is not, and concludes that healthcare providers (generally hospitals and doctors) are "rent -seeking." The allegation here is that doctors and hospitals are jacking up the prices for services simply because they can, because they (we) enjoy a monopoly on the provision of healthcare and are able to set rates as we see fit.

There is a grain of truth to this logic which makes it an appealing argument. Part of my job is to fight with insurance company executives for the highest possible reimbursement. It's always, as the euphemism goes, a "spirited discussion." Sometimes I win and get more money, sometimes not. In my state, and in my experience, there's been a balanced power dynamic where neither the payers nor the providers enjoy significant leverage over the other. There are, however, many states where payers have de facto rate-setting power, and there are some markets in which certain providers, due to their size or cachet, are able to drive these negotiations towards outsized reimbursements.

But what of Andrew's central allegation? Is this, as the puts it, "The Great Healthcare Rip-off"?

I don't think so, at least not in the sense that we are using whatever leverage we enjoy to create outsized profits. Healthcare is a low-profit business. According to the AHA's Trends in Hospital Financing, the typical hospital's operating margin hovers between 2-4%, and about a third of hospitals run a negative operating margin in any given year.

hosp margin

Point is, that if hospitals do have price-fixing capabilities, they're certainly not using them to pad the bottom line. At least, not very effectively.

Similarly, physicians' income does not seem to be positively affected by this market power. Last time I looked at the raw data was in 2008, when I found that for the previous decade physicians' income had been flat-to-declining compared to inflation. I haven't seen any evidence that that trend has changed, and a quick glance at BLS data doesn't seem to show a spike in doctors' income.

So again, across the industry, I don't see evidence of profiteering. If anything, healthcare providers are just frantically trying to offset the losses from the economic downturn and reductions in public insurance reimbursements.

So why is US healthcare so damn expensive?  I can't add anything rigorous to Aaron Carroll and Austin Frakt's extensive analysis of this issue from a couple of years ago, so I won't even try. But I will add one anecdote in the way of explanation.

The DaVinci robot. It's the coolest, got-to-have medical gadget of the decade. It does minimally invasive surgeries, particularly pelvic surgeries like prostate removal. And it is awesome. Check out this video of Swedish Hospital neurosurgeon Dr James Porter as he makes a paper airplane the size of a penny with the DaVinci:

As a gadget guy, I get the allure of such a toy, and the promise is exceptional. All the other hospitals in our area got these, at a cost of a couple of million dollars each, and the urologists at our hospital demanded that our facility purchase one also. If we didn't, they worried, we would be at a competitive disadvantage and would lose cases to regional rivals. Despite the relatively lower case volume and lack of a business case for the investment, they got their wish and we have the gadget too.

So the medical market is dysfunctional in a unique way: competition increases costs.  This turns the laws of economics on it head, since in most other industry, increased competition drives prices down, not up. See: Walmart.

The kicker is that the outcomes for the robotic surgery do not seem to be any better than the traditional method of doing the procedure.*

Which brings us to the other big reason that US healthcare is so damn expensive. Physicians continue, over and over, to do procedures like DaVinci prostatectomies, like knee arthroscopies, like lumbar diskectomies, like coronary stenting for stable angina, like MRIs for low back pain, and many more, despite the fact that they have not been proven to be more effective or in some cases have been proven to be ineffective or harmful!

Of course, it's hard to convince someone that a procedure doesn't work when their income depends on their not understanding that fact.

So, returning to Andrew's thesis -- is American healthcare a "rip-off"? Yes, in the sense that the market is broken and full of perverse incentives and inefficiencies, and yes in the simple sense that we pay twice as much as the rest of the world and get no more value from that extra investment. But no, not in the sense that physicians and hospitals are deliberately maximizing their monopoly powers to realize excess value.

*Disclaimer: yes, I know the data is conflicting, and am very skeptical of the industry supported data showing benefit, given the huge profits the device manufacturers are making. Suffice it to say the technology is controversial, and that the enthusiasm for its adoption far exceeds any reasonable demonstrated cost-benefit ratio. 


  1. The microeconomics/game theory of the hospital argument seems a touch off here. Hospitals are, on average, low-margin, but they make up for it (in fact, profiteer) in volume. This is sort of necessary - they have limited ability to compete over margin since there's no arguing with Medicare or Medicaid. The overuse you describe, including DaVinci's, is profiteering in a slightly unusual form.

  2. The money isn't being made by the health CARE providers, it is being made by the INSURANCE companies and their employees. Made by denying services to patients who need them. Made by hiking premiums, co-pays, deductibles and share of cost. There are Billions of dollars being made denying patients coverage and thus the care they need to become again functioning members of our societies.

  3. The statistics you cite are a joke.

    Most hospitals are non-profits. Any surplus left over at the end of the year is of no use to anyone. The profits simply become "expenses" in the form of compensation and capital programs.

    Regarding the occupational employment statistics for physicians...

    The estimates don't include self-employed workers (including partners in a partnership). They don't include business income (say from ownership of imaging equipment, a surgical center, or the sales of pharmaceuticals). They don't include overtime pay, or nonproduction bonuses.

    Prices are going up, provider income is going up, and providers and hospitals have been actively consolidating in order to increase their market power (e.g. Proliance Surgeons).

  4. The money isn't being made by the health CARE providers, it is being made by the INSURANCE companies and their employees. Made by denying services to patients who need them. Made by hiking premiums, co-pays, deductibles and share of cost. There are Billions of dollars being made denying patients coverage and thus the care they need to become again functioning members of our societies.

    Had to print Lynda's comment again, because DINGDINGDING, this is spot-on.

    We lost our insurance coverage last December after the company raised the premium twice in a year and we were paying close to $4K per month for an individual policy (family of 5, all healthy, non-obese nonsmokers). With the economy still lagging in Florida, we simply could not afford to pay that bill, and they cancelled us within a couple of days of being late!

    We finally found an "affordable" policy last month. Premiums are still in the 4-figures, and deductibles are monstrous. There is even a deductible of $500 per person for prescriptions.

    And I cannot actually use the coverage for a year, for anything other than a well-care checkup, because they consider that evidence of a "pre-existing condition" that has been ongoing and we neglected to mention, so they'll cancel the entire family.

    This country is headed over a cliff with healthcare costs. We need to get the for-profit insurers out of the game and move to single-payer YESTERDAY.

  5. The idea that lumbar discectomies don't work is left over from a willful misreporting of the SPORT trials in which the nearly 50% crossover was ignored and results were still presented in a intention to treat analysis. Any intervention will look like a failure when there is a 50% crossover. Go back and look at the as treated analysis and there is no question of benefit for lumbar discectomy after a failure of initial conservative management. Unfortunately, most news sources and JAMA failed to report on the follow up articles and accepted at face value an essentially meaningless analysis of data. Since this is the field I am more familiar with, I can state that your conclusions are false, and I have to wonder about you conclusions on the rest.

  6. Ensuring that your family has reliable medical cover is so important, and when its cheap it’s a bonus!

  7. Proper incentives can come into play in health care; look at laser eye surgery, where costs go down or safety & efficacy improve, or both.

    It's interesting that you've brought up Walmart. Obamacare is going to crank its way to being a single-payer system, and then every health care provider will be selling to a monopsony -- rather like being a manufacturer whose ONLY customer is Walmart. And such manufacturers can really be squeezed to lower prices when the time comes to renegotiate contracts....


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