The Dose

Welcome to The Dose, which tackles the finances behind local health care and life sciences and points to the most interesting national analysis. Your host is J.K. Wall.

Health Care & Life Sciences / Life Science & Biotech

Finding where the money is in health care

October 14, 2013

Willie Sutton had a famously simple explanation for why he robbed banks: “Because that’s where the money is.”

I take a similar approach when writing about health care. I always ask where the money is.

Many times, what I’m really asking is, where is the profit? I’m curious which medical procedures make the most money for hospitals, which patients make the most profit for health insurers, which products bring home the bacon for medical device companies.

But it’s also helpful to know, overall, where the $2.5 trillion Americans spend on health care every year actually ends up.

Here is the quick-and-dirty answer, in order of size: first the hospitals, then the doctors, then the drug companies, then the long-term care providers, and then the health insurers.

Here is how the spending breaks down, according to the most recent data from the Centers for Medicare & Medicaid Services.

Hospitals: 32 percent
Physicians/Clinicians: 21 percent
Prescription drugs: 11 percent
Nursing homes and home health care: 9 percent
Health insurance: 6 percent
Government administration: 4 percent
Retail purchases of other medical equipment: 3 percent
Public health: 3 percent
Other (including dentistry): 12 percent

The data are from 2011, and I have rounded each category into the nearest whole number, which makes the total add up to 101.

It’s worth noting that hospitals soak up five times more in health spending than health insurers and three times as much spending as drug companies.

To be sure, some pharmaceuticals are sold directly to hospitals, and not through retail stores. The same is true for most medical devices and equipment. So hospitals' revenue is a bit inflated by those items.

At the same time, however, hospitals nowadays own or control a large percentage of the physicians and other health clinicians. So their total revenue should actually include a sizable chunk of their revenue.

When we’re talking about employer-sponsored insurance, the percentage that goes to hospitals and doctors is even greater. That’s because, for the most part, employers do not pay, directly, for long-term care, government administration or public health programs.

A report issued in September by the Health Care Cost Institute concluded that U.S. employers spend an average of $4,701 per person on health care. The institute, which is funded by four large health insurers, conveniently failed to account for any spending on health insurers’ administrative costs, although other research has pegged this as at least 11 percent of employers' overall health spending.

If we adjust the institute’s figures to include 11 percent spending on health benefits administration, we get annual per person spending of $5,282. Based on that amount, here is how employer-sponsored patients spend their money:

Hospitals: 43 percent
- Inpatient facilities: 18 percent
- Outpatient facilities: 25 percent
Physicians/Clinicians: 30 percent
Drug companies: 16 percent
Health insurers/administrators: 11 percent

Since starting The Dose in May, I have focused a lot on hospital systems in Indiana and Indianapolis. Some think this is because of some special animus I hold toward hospitals and doctors. It’s not. It’s just that, when it comes to health care, that’s where the money is.

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