Can Healthcare Be Reformed?

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Is healthcare reform an oxymoron?

Yes.

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What is fee for service?

The doctor establishes the price, and the patient agrees to pay it. This traditional system of exchange has great merit if both parties understand the value of the service provided. If either party (usually the patient) cannot estimate the service value, it is possible (even likely) that the doctor will honestly escalate the service value in a fashion unchecked by the patient’s perceptions. Thus, in a fee-for-service system, medical prices tend to increase.

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What is discounted fee for service?

The patient gets together with a group of friends, and they come to the doctor with the following proposition: “Hey, Doc, you can dazzle us with your fancy medical talk, but we still think that your prices are too high. How about my pals and I pay you 80% of what you charge us?”

4

Is there a difference between hospital costs and hospital charges?

Absolutely. Hospital cost is the sum of the expenses (e.g., sutures, nurses’ salaries, electricity, instrumentation sterilization, Band-Aids) that are expended in suturing a laceration, for example. The hospital typically charges about twice the cost (100% markup) for repairing a cut finger. This markup is highly industry specific. Thus, whereas intensely competitive food chains may make a profit of only one penny on a loaf of bread, hospitals and liquor stores usually charge twice the cost.

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What are fixed costs?

After accounting for light, heat, and staff (nurses, housekeepers, administrators) at a hospital, but before seeing a single patient, doctors and the hospital have already spent a huge amount of money. Doctors and hospitals must pay fixed costs whether or not they provide any medical services at all.

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What are actual costs?

These are the incremental costs of actually providing a service in a hospital (in addition to the fixed costs of light and heat). For example, a patient shows up in the emergency department at midnight complaining of a lump on the tip of his nose. The doctor, with characteristic erudition, says, “Yep, you have a wart on your nose,” and sends the patient home with a bill for $500. The actual cost of this encounter is obviously negligible. The patient is really paying for the fixed costs of nurses and emergency resuscitative equipment should he have a cardiac arrest.

7

Is hospital accounting a precisely scientific and objective analysis of financial data?

No.

8

What is health insurance?

Traditionally, people can purchase insurance that may pay either all or a portion of their hospital and physician charges if they become ill. Insurance companies make a profit, therefore, only if the patient stays healthy. Insurance companies have elaborate tables to predict who will get sick, and they prefer to sell policies exclusively to young, healthy individuals. This practice is termed skimming . The insurance company takes all of the risk—and they like to keep it low. Conversely, hospitals must cover fixed costs—and the more expensive (and more frequent) the healthcare that physicians provide, the better it is for the hospitals.

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