What is the real cost of health care?

The fact that health care is expensive is all over the news. Let’s do some math. Don’t worry, we will not need a calculator. Let’s look at “mathematical” cost of health care from a simple transaction perspective: someone selling a service or product, and someone buying it. This approach works well when we talk about ice cream sellers and ice cream buyers. A customer is interested in buying some ice cream. A seller packages the ice cream in such a way, so that customers perceive price as fair for any given “ice cream value.” Ice cream transactions happen in grocery stores, ice cream shops, and restaurants. Prices vary quite a bit. But, in general, customers walk away after the transaction with a feeling that they got a good deal whether they spend a few dollars on a pint of ice cream in a store, or much more in a steak house setting. So, why is it not this simple when we discuss health care service buyers and health care providers?

What is the patient (customer) want to buy?

This is the most important question in this equation. Many people who are considered “customers” of heath care system have no idea of what they are actually buying. They come to offices, clinics, centers, hospitals and “exchanges” with an ache or ailment, or because someone else advised them to go there. Ideological debates on whether patients should even be called “clients” or “customers” are widespread. It is no surprise that some patients may not even know why they seek any specific “episode of care.” Some may know what their “co-pay” is. Fewer understand the difference between billed amount and actual reimbursement. Add the insurance component to this equation and the picture becomes even more complex. Not being able to clearly understand what is the exact service or product being “sold” during each health care encounter remains the main reason why it is so difficult to explain health care costs in simple terms.

Who or what is health care or what is the cost?

Is there such a person who is able to “provide” health care without the organization? Can three people do it, how about twenty? Or, is it the entire organization with thousands of people, a health care system with thousands of employees. Where are the shareholders in this equation, and who are they? Is an insurance company also a “health care” provider? Clearly more questions here than straight forward answers.

If ice cream is defective, the owner of ice cream shop will quickly find out that something is wrong with the product they are selling. If a registration computer stops working at the front desk of a hospital, how long before the shareholders of publicly traded health care system realize that something is wrong. How long before the regional manager is aware of the problem? Is there even a need to find out? The provider of the computer system, which is malfunctioning is most likely not physically nearby anyway. There is an 800 support number to call. A technician will login remotely and most likely… reboot the system.

Let’s be honest, most patients (customers) do not think that “health care” is being provided by 2,000 people and magnitudes more of subcontractors in any given health care “transaction”. While patients may know an individual doctor, nurse or technologist with whom they are directly interacting, they do not realize that these individuals will not be able to function without thousands of co-dependencies.

In banking industry, some top steak holders start campaigns of trying to talk to customers directly through billboards and news articles. This hardly happens in health care. The usual billboard uses words like “we” and “our” and includes a picture of a few doctors and nurses and other “team” members. The chance of individual “health care provider” marketing directly to his/her customers is extremely small.

The cost of health care service in a large organization is the cost of complex co-dependencies. The patient is not paying the bill of Dr Small Office, the patient or insurance reimburses the organization.

Would the cost be different if a single radiologist provided service in a small imaging center? Google search on cost of MRI quickly returns that the same MRI study can cost anywhere from $410-$6100. Take a look at this chart from ModernHealthCare.com. An average multiplier of about 2.5x in calculating the cost of obtaining imaging study at large hospital compared to small outpatient imaging center sounds about right. Unfortunately, small imaging centers are becoming extinct or get absorbed by larger entities.

Who among health care providers actually knows what their specific product or service costs?

Many questions here as well. Again, what is the actual product or service and who exactly are the people offering the service or product?

Near flat-lined interest among recent radiology graduates to start their own businesses is a relatively recent development. It is impossible to learn the intricacies of day to day business, and how various factors affect the bottom lime without actually doing it. Many dentists, accountants, taxi drivers run their own businesses and deal with quarterly/monthly tax deposits, payroll, negotiations as both buyers and sellers of services and products. Very few new graduate radiologists do the same. Even seasoned radiologists have mostly been bought out by mega groups or simply retired. Practice of radiology as a small business that provides imaging services with it’s extremely high start up costs is practically impossible for the 99% of radiology residency graduates or single physicians today.

So, what is going to happen?

No one has a crystal ball, but we can look at other countries and look at history. Whether US continues with it’s current hodgepodge of growing and consolidating health care systems, or decides to make it even larger and more complex as a single payer entity, it is pretty clear that in near future, only the dentists will be able to continue their trade in small practice settings. The medical arm of health care (doctors, PA, NPs) will continue to function as “employees” or “semi-partners/semi-employees” in mega groups.

A wise leader in a large health care system once said: “A large hospital like ours will never be able to compete with level of personal service that a single person owned imaging center can provide.” Yet, the customers want that personal service. Two tiers of service tend to always emerge, no matter what part of the world, and what their specific names are. One, is a large organization that takes care of “everything” and “everyone.” The other, is few providers who have small community based practices.

It is only a matter of time before US health care will resemble the health care anywhere else in the world. Individual providers or very small groups of providers will take care of problems that can be paid for with cash or individually affordable insurance: simple aches and pains, long term prescriptions for stable chronic problems, simple in-office procedures, and some imaging studies. The “hospitals,” “health care organizations,” “single payer systems” will take care of “everything” and “everyone” with much larger total and per patient cost. Some of these “complex problems” may or may not be related to actual “health” of any given individual. More on that at some other time.

How long exactly before we get back to basics? Anyone with a crystal ball, please raise your hand.