Finding where the money is in health care

October 14, 2013
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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.

  • Spending vs. Margin
    It would be interesting to compare the margin of the various groups you listed. Hospitals are expensive;...but is that truly where the money is? What is the gross margin of a well run hospital vs. the gross margin of a health plan, nursing home, medical device company, or drug company? Answering that question will be more insightful about the money trail in healthcare.
    • Mr. Margin
      Well-stated. I look forward to J.K.'s response.
    • To Mr. Gross Margin
      I agree with you that it would be worth comparing average profit margins in these different sectors of the health care industry. I probably will do exactly that in a future post. However, I would maintain that looking at revenue is valuable for this reason: Because nearly all agree that our overall health care spending is high enough that it is either 1) unsustainable or 2) sustainable but excessive to the point of being a drag on the rest of the economy. Therefore, it's worth knowing who are the largest contributors to that unsustainable or excessive spending. It gives us a proper sense of perspective on what impact various changes to the health care industry would have on overall spending.
      • Revenue vs. Margin. vs. Value
        Clearly unsustainable. However, I'm not sure we can conclude yet that where the money is spent is also where we will find the cause of the unsustainable spending. Let's look at who has the biggest margins - or in other words, who is filling their pockets along the money trail. Lets then debate who deserves to be filling their pockets. Is it the surgeons doing live saving procedures? ...the manufacturers of innovative drugs and implants? ...or the people trying to keep you healthy and not needing the expensive hospitals, doctors, drugs, implants, and nursing homes.
        • Biggest margin should equal biggest risk
          I am a capitalist and an entrepreneur. I have risked my career to pursue profit. I have succeeded and failed. My failures hurt me and my employees. My successes have benefitted thousands and potentially millions. Would you rather I spend my time and energy building a brick and mortar hospital and then advertising the heck out of it? Or would my time be better spent searching for cures to common diseases? The risk and reward is in searching for a cure. I should earn a higher margin than a hospital or a surgeon or a doctor. They lose nothing if I fail. However, they make money off of my innovations. Rewarding the risk-takers is how our economy was built and how it should remain. Don't be quick to judge the risk-takers.
          • To Mr. Gross Margin
            Again, I agree with you that comparing profit margins would be illuminating, though I also agree with Mr. Skeptical that the discussion following such a comparison should consider the different missions, different maturity levels in each industry and even the tax status of the entities involved. But what I'm trying to point out in this post is this: It's Management 101 that when you must make expense reductions, you look for the largest buckets of spending because those are the best opportunities for moving the needle overall. A 20% cut to hospital spending (which seems to be our current experiment) would yield the same overall savings as completely getting rid of private health insurers (the proposal of single-payer advocates). Let's debate which one would be better. Prescription drug spending is in the process of dropping by 25% because of major blockbusters going generic. But a 10% cut to hospital spending would achieve the same overall result. Which one would be better policy? We at least need to ask these questions of proportionality in our broader discussion of how to reform health care.
          • Margin? Why should we care?
            The gross margin of IN hospitals is irrelevant to me.I want our hospitals to have both the lowest fees and highest quality (best outcomes) in the country. Unfortunately in Indiana we don't enjoy low fees or superior outcomes on any standard measurement that I am aware. Just because a hospital spends, for example, 97 cents of every dollar it brings in doesn't mean it is doing a great or poor job in taking care of it's customers. Hospitals should be measured by the best outcomes at the lowest cost relative to other hospitals of similar size, patient mix, local cost of living, and type of hospital.
          • Hospital Expenses
            I agree with the Margin questions. However, hospitals spend 50% of costs on labor, too much to handle government regulations and litigation exposure. 35% on supplies and services from vendors whose margins are 10 times that of a hospital. What is the root cause of the run away train. Too much government and vendor excessive margins??? Thoughts.
            • It's not the margin but the utilization
              If we can all agree that utilization of hospital services represents a failure of our "health care" investment, I think we can move to the next phase of analysis. How do we prevent hospitalizations in the first place? There is no accountability in our current system. An employee can eat whatever he/she wants and as often as he/she wants. He/She can choose to exercise or not. He/She can get preventive exams or not. Until their is a carrot or stick uniquely designed to appropriately motivate each person to take better care of their health, we are nibbling around the edges of our huge health care cost pie. I know I should eat better, exercise more and see my doctor for a regular check up. Do I do it? No! Do I feel properly motivated to do it? No! Are there things that would motivate me to do it or are there penalties that would be painful enough to motivate me? Yes! Are these motivators going to work for everyone? No! Therein lies the rub! There is no one way to motivate better health and the resulting lower costs of care. Whether it is employers or the individual consumers of health care or the federal government (who likes to think it knows what's better for me than I do), someone needs to acknowledge that we have not placed enough emphasis on wellness. Until we do and until we hold people accountable for their poor choices, our health care cost problems will persist.

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