The Monopoly-Driven Price of Health Care; Case in Point, Alan Grayson's Hip Replacement
You can see the trend. Hospital "consolidation" — a polite term for monopoly formation — in the hospital industry (source: Federal Reserve of Minneapolis)
by Gaius Publius
I'm on Alan Grayson's email list, and this recently came through. As usual with Grayson's work, it's well (and entertainingly) written. But it's also a shocker.
As a result of a fall playing basketball last year, Grayson found himself in need of a replacement hip, and so had the surgery. For Grayson, things went fine. For the hospital, things went even better. The bill he received for his three-day hospital stay plus the cost of the device itself — not including any doctor fees, which were billed separately — was four times what is charged in the U.K. for the same surgery and ten times what is charged in Spain. Further, Grayson was charged more than twice the usual cost in the U.S.
Shocked, Grayson took a look at these prices, how they compared elsewhere and what keeps them so outrageously high in the U.S. Note the role of monopoly in the discussion below (emphasis mine).
Dear Gaius,One of the biggest scams in the world is monopoly-creation for the purpose of wealth-extraction (the classic "Where else you gonna go?" problem that every major corporation covets). And as an industry, none is more vicious — or deadly — than the health care industry. Since everyone needs health care, those who make it their goal to extract the highest price are literally killing people for money.
I broke my leg a few months ago, playing basketball with my kids. (Note to self: stop lunging for every loose ball I see.) I actually sat cross-legged on the court for a few minutes, thinking that the pain would go away. It certainly did not.
My wife took me to the hospital, where X-rays showed that the part of the bone inside my hip looked like someone had hit it with a sledgehammer. My surgeon expressed extreme skepticism that he could put it back together again. He recommended a hip replacement, which puts a metal head and a plastic shell in place of the ball and socket inside your hip. I said fine.
Not being Henny Youngman, I refrained from asking him whether I would ever be able to play the piano again.
The surgery took place the morning after I was admitted to the hospital, and I was released two days after that. Less than 72 hours from in to out.
The hospital bill was $69,240.
That’s just the hospital bill. The surgeon, emergency room doctor and physical therapist all billed me separately.
Admittedly, this bill was on the high side. According to a report by the International Federation of Health Plans, the average hip replacement in the United States in 2015 cost $29,067. Only the most expensive five percent of hip replacements here cost $57,225 or more. Somehow, my hospital bill alone was more than that astronomical sum. But even $29,067 is a very pretty penny.
(Blue Cross, my insurance carrier, said no to the $69,240 hospital bill, and paid $32,395 instead – which is still a lot of money. I paid a $500 copayment, having already paid my deductible for the year.)
I worked for four years as an economist. Economists associate the price of things with their cost of production. (Specifically, their marginal cost of production, but for present purposes, that’s an unnecessary nuance.) In a free market, competition is supposed to drive prices down to the cost of production.
What did it cost the hospital to host me for those three days? It had to pay the nurses, but there certainly were fewer nurses than patients, so at most we’re talking about three days of nurses’ pay. It had to pay for the metal and plastic parts that the surgeon put inside me, and the surgical glue that was used to close me back up, which are mass-produced. (2.5 million Americans have replacement hips.) The hospital had to buy the medicine that it gave to me, which was modest, because I’m really not into opiates. It had to buy my gown, the kind that ties in the back. It had to feed me eight meals of hospital food. It had to pay for the electricity and water for my room (and the cable TV, which I did not use, but thanks anyway.)
The hospital had to pay for one hour’s worth of time in a surgical room, which I never got to see because I was under general anesthesia during that hour. (I hate the sight of blood, especially mine.) It had to pay for three days’ worth of time in the room where my hospital bed was located, one of 211 in that hospital. My hospital opened in 1993, so those costs have been amortized over 24 years already.
Let’s say that each bed cost $100,000 to build, 24 years ago. Amortize that over a quarter of a century, and it works out to $11 a day.
The hospital didn’t have to pay the doctors, because they billed me directly. It didn’t have to pay taxes, because it’s a non-profit.
Perhaps I’m simply obtuse, but I’m not seeing $69,240 in costs here.
The International Federation of Health Plans helpfully notes that the exact same surgery costs $16,225 in the UK, one of those “socialized medicine” countries that Fox News always warns about. That’s half as much as the cost here. In Spain, a hip replacements costs $6757, less than a quarter of the cost in the United States, and less than a tenth as much as my hospital bill.
Why would the same surgery cost $29,067 in the United States, $16,225 in the United Kingdom, and $6757 in Spain? Well, our hospitals don’t really compete against each other; in Orlando, two hospital chains own pretty much everything. Our insurance companies don’t really compete against each other; in Florida, Blue Cross alone has almost half of the market. (Across the state line, in Alabama, it’s 92%.) Both the hospitals and the insurance companies can charge almost whatever they want, provide as little as possible in return, and keep the difference.
My hip replacement surgery went very well. Two weeks later, I was walking without assistance. Two months later, I walked eight miles in one day at Petra, in Jordan. As to the quality of my care, I have no complaints. And I concede that my health is more important than the cost of care.
But $69,240 for one hour in surgery and three days in the hospital? Come on!
We spend more money on healthcare than any other country, our life expectancy is fiftieth in the world, and even now, one tenth of us have no health coverage. People wonder how we can spend so much, and enjoy so little in return.
As I see the GOP begin its ruthless gutting of Obamacare, I feel constrained to point out that regress is not progress.
Better health, less cost. What’s so complicated? And is that asking so much?
“These prices are insane!”
—“Crazy Eddie” pitchman Jerry Carroll
Think of it this way. If your goal is maximum profit for a product or service, and you own a monopoly on what you sell, literally the only constraint on your profit is a price above the point where too many people stop buying. Not the point where many people stop buying — the point where so many people stop buying that it reduces your "take" and you make less money. You've priced a lot of people off your customer list, but you've maxed your revenue to do it.
Now apply that to health care. The only constraint on profit is to price what you sell above the point where too many people are dying from its unaffordability. Not the point where people are dying — the point where so many people are dying that it reduces your "take." You're killing people with your prices, but not so many people that your gross revenue suffers. Your pricing goal is to find that "sweet spot" (though sweet only to you).
Death for Money
It's as though your goal is to deliver, not life, but death for money — as much death as you can get away with and not lose revenue. If you deliver too little death and there's more total revenue to be had at a higher price, you're not doing it right.
This is well and truly criminal. It's not just pathological behavior, as Jeffrey Sachs once observed about Wall Street executives. It's literal death for money. There are words for deeds that, and punishment too, so long as you're not among the privileged classes.
And it's about to get worse. Now the merely bad — Obamacare, a compromise that increased coverage for some people while protecting both industry monopolies and extractive pricing — is about to get horribly worse.