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,

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?

Courage,

Alan Grayson

“These prices are insane!”
—“Crazy Eddie” pitchman Jerry Carroll

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.

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.

GP
 

Hospitals-- A Place People Go To Get Even Sicker?

I'm sure many people think of hospitals as places to go to be cured of sickness. I always think of hospitals as places to go to die. And not just to die because medicine doesn't cure much of anything but die because hospitals all filled with disease so that patients who go to them are at risk of catching something unrelated to whatever brought them there in the first place-- and dying. Does that sound crazy?

Thursday Reuters published a report from London that over 3 million Europeans come down with just such an infection in a hospital every year! That's 80,000 people a day, every day. And some of these infections are fatal or can take months of expensive and intense treatment to overcome. One in 18 patients in any given hospital at any given time has something he acquired in the hospital. "Healthcare-associated infections pose a major public health problem and a threat to European patients," said Marc Sprenger, director of the Stockholm-based European Centre for Diseases Prevention and Control (ECDC).

The most common types of infection are respiratory tract infections such as pneumonia and infections of the bloodstream. These are often caused by Klebsiella pneumonia and E. coli bacteria, both of which have shown an ability to develop resistance to some of the most powerful antibiotics.

Among a total 15,000 reported healthcare-associated infections, surgical site infections and urinary tract infections are also common. Many of the infections are also found to be drug-resistant "superbugs," the survey showed.

Among all infections with Staphylococcus aureus bacteria in which full testing was carried out, more than 40 percent were reported as resistant to methicillin-- in other words they were MRSA infections, the ECDC said.

Worldwide, MRSA infects an estimated 53 million people annually and costs more than $20 billion a year to treat. It kills around 20,000 people a year in the United States and a similar number in Europe.

EU health and consumer affairs commissioner Paola Testori Coggi said the findings of the European survey were "worrying" and urged health authorities to do more to protect patients in hospital and to step up the fight against antibiotic resistance.

Drug resistance is driven by the misuse and overuse of antibiotics, which encourages bacteria to develop new ways of overcoming them.

Experts say hospitals are often guilty of overusing antibiotics, giving them as "blanket" treatments before full testing has established which drugs are really needed.

That tendency to over-use antibiotics is even worse among American doctors. In fact in the U.S. hospital-acquired infections cost over $25 billion a year. A report from CBS News last month pointed out that one of the problems with hospital-acquired infection is not just that they can be deadly, they can also take a long time to diagnose. American doctors are hopelessly bad, notoriously so, at diagnosing anything that they didn't learn about in Med School.

One of the major problems is that bacteria found in hospitals has been evolving for generations. These organisms are subjected to antibiotics and disinfectants constantly, so those that survive are considered superbugs.

"These hospital-acquired infections are typically driven by bacteria, and bacteria are living organisms," Accelerate Diagnostics CEO Lawrence Mehren said on CBS This Morning: Saturday. "Like all living organisms, they try to survive and bacteria living in hospitals are living in a high threat environment."

Mehren says that you should not blame the institutions, that they are in fact very clean and that it is really about the biology of the bacteria.

Accelerate Diagnostics, a Tucson, Ariz., biotech firm, has come up with a way to more quickly diagnose these organisms for quicker treatment options. The firm developed a non-cultured testing for the rapid identification of drug-resistant organisms and hospital-acquired infections.

Thursday, the Toronto Star looked at some ways hospitals have been fighting back against this plague, beyond just washing your hands, which is what most older doctors tell you to do.

Progress is being made by hospitals to prevent infections from all causes and specifically from superbugs. You can always ask about a hospital’s infection rate, both overall and within each department. You also can ask about the technology used to avoid infections. Here’s what’s new and tried-and-true.

There’s ever-improving older technology. Ultraviolet (UV) germicidal technology continues to be upgraded and is used for sterilizing operating rooms, air ducts, hospital equipment, hallways and patient rooms. And steam/vacuum sterilization (by autoclaving for instruments) and the use of germicides are effective.

New stuff includes robotlike devices that can clean a room by dispersing hydrogen peroxide into the air and then detoxifying it. Some hospitals say this can reduce a patient’s chances of becoming infected with drug-resistant bacterial strains of vancomycin-resistant enterococci (VRE), methicillin-resistant Staphylococcus aureus (MRSA) and C. difficile by 80 per cent.

Lastly there’s what we call the “all-hands-on-deck” approach, combining the latest technological solutions with standard cleaning.

Dr. Mike’s Cleveland Clinic has been a leader in achieving hand hygiene-- the single most effective front-line defence against infection in hospitals. The national average for hand-hygiene compliance in hospitals is less than 50 per cent. An extensive education campaign and the addition of hand-hygiene monitors improved the compliance rate at the Cleveland Clinic to greater than 98 per cent.

Can you imagine yourself insisting that the doctor-- and the nurses-- wash their hands before touching you?