Markups In Healthcare: Incentive Misalignment At Its Best (Worst)
Most people in the US know that there is something wrong with health-care costs.
Viewed one way, the problem is that hospitals and health care providers are compensated on a per-action basis. So every test, every scan, every prescription and every visit to a doctor or health-care “provider” comes at a cost (as it must, since each of these requires someone to spend time or use equipment or provide a product such as a medicine).
So the incentive “misalignment” here is that, given human tendencies and business realities, naturally, “quantity” of health-care trumps quality. The Affordable Care Act, more popularly known as Obamacare, aims to change some of that, by emphasizing outcomes or results (among various other things) and prevention.
But this blog post is not about that.
Many infinitely finer minds have written hundreds of books and articles about what is wrong with health-care in the US and how to fix it. A blog post can hardly do justice to such an intriguing, challenging and frustrating topic. Instead, we will pick something easier – like the insane markups in the health-care industry.
I had first noticed this when, on my kids’ specialist visits, a simple blood oxygen measurement test was billed to our insurance company at $125. But 5 seconds of a nurse’s time + one-time use of seemingly inexpensive, non-disposable test equipment = $125? Sadly, like many others fortunate to have health insurance, I was surprised at the cost but didn’t really care because our co-pay doesn’t change. In other words, someone else picks up the tab, so…
Anyway, getting back, interesting (and egregious) markup data comes to us by way of an excellent and well-researched article in Time magazine. Here are some of the nuggets:
Exhibit 1:
“1 ACETAMINOPHE TABS 325 MG.” The charge was only $1.50, but it was for a generic version of a Tylenol pill. You can buy 100 of them on Amazon for $1.49 even without a hospital’s purchasing power.
I will let you calculate the markup there. (Hint: A mind-boggling number!)
Exhibit 2:
Recchi (the patient) was charged $13,702 for “1 RITUXIMAB INJ 660 MG.” That’s an injection of 660 mg of a cancer wonder drug called Rituxan. The average price paid by all hospitals for this dose is about $4,000, but MD Anderson probably gets a volume discount that would make its cost $3,000 to $3,500.
That means the nonprofit cancer center’s paid-in-advance markup on Recchi’s lifesaving shot would be about 400%.
Exhibit 3:
Dozens of midpriced items were embedded with similarly aggressive markups, like $283.00 for a “CHEST, PA AND LAT 71020.” That’s a simple chest X-ray, for which MD Anderson is routinely paid $20.44 when it treats a patient on Medicare, the government health care program for the elderly.
[All 3 exhibits are based on one particular patient's cancer-related care at MD Anderson, a non-profit hospital.]
Of course, markups in isolation are meaningless. A markup, by definition, must be based on some cost data. And that’s where Medicare comes in. The government analyzes a vast amount of data collected from hospitals, etc., to figure out what these costs.
Anyway, what do the type of aggressive markups shown above do for the hospital (sidebar: This is at a so-called non-profit hospital…now imagine what a for-profit hospital might want to do)?
Although it is officially a nonprofit unit of the University of Texas, MD Anderson has revenue that exceeds the cost of the world-class care it provides by so much that its operating profit for the fiscal year 2010, the most recent annual report it filed with the U.S. Department of Health and Human Services, was $531 million.
That’s a profit margin of 26% on revenue of $2.05 billion, an astounding result for such a service-intensive enterprise.
The full article touches on other reasons that drive up providers’ prices and consumers’ costs, and is worth a read.
Additional (Simplistic) Note: In a “real” free market, providers will compete with each other for patients and that should, at least in theory, drive prices down. Perhaps substantially. But because most people, especially those with employer funded insurance, don’t incur these costs at the time they receive a service, providers are free to arbitrarily mark up and charge insurers for the services the insured get. While insurers are for-profit companies, they don’t have access to bottomless pits of money. So the more they get charged by healthcare providers, higher the premiums they charge the insured next time around. Hence the ever-increasing premiums…IMO. Anyone with more industry knowledge care to comment below?
Behaviors should change– patients, providers and payers — across the eco system
Patients — Need to have skin in the game — need to be able to shop for the best deal – high deductible plans with else premiums, incentivs to
Providers – Transparency in costs – so they can compete for your business — as long as Patients shop for the low cost high quality care
Payers — stick and carrot– less utilization, better outcomes — pay the providers more — vice versa – pay less- hold em accountable for better outcomes