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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            1. Socialized medicine works great for white people in Scandanavia. It works well in Costa Rica for a population that is partly white and partly mestizo. I don't really see Obamacare as something aimed against whites. I think that is a Republican canard designed to elicit support from white people for republican candidates who don't care about them any more than democrats care about the non-whites they pander to with their phony maneuvers. But what is different between Costa Rica nd the Scandanavian nations on one hand and the US on the other? SIZE. Maybe the US is just too damn big. Maybe it just needs to be divided into smaller self governing pieces like when the old Holy Roman Empire was dismantled. Maybe we are always trying the same set of solutions for different kinds of people as if we were all the same. Oh-- I know-- that is liberal dogma, that we are all the same. Which is the most idiotic American notion going right back to the propaganda of 1776. All men are different and their differences are myriad and that which is different is not equal. The state which pretends men are all the same is going to force men to be the same. That is what America does here, that is what we do in our stupid overseas wars, that is how we destroy true diversity and true difference, and we are all as different groups of folks, feeling the pains of how capitalism is grinding us down into equally insignificant proletarian microconsumers with no other identity whether we like it or not. And the Marxists had this much right about the War of Independence: it was fundamentally a war of capitalist against feudal systems. America has been about big money since day one and whatever gets in the way is crushed. Health care is just another market and Obamacare, to the extent that it Rationalizes and makes more uniform a market which should actually be really different in nature and delivery from place to place-- well that will serve the interests of the biggest capitalist stakeholders in health care which is not Walmart for Gosh Sakes it is the INSURANCE INDUSTRY. CUI BONO Obamacare? The insurance industry. So republicans drop the delusion pro capitalist scales from your eyes this has almost nothing to do with race or "socialism" it has to do mostly with what the INSURANCE INDUSTRY wants to have happen in order to make their lives and profits easier.

            2. Read the article - the reason they can't justify staying is they have too many medicare/medicaid patients and the re-imbursements for transporting these patient is so low.

            3. I would not vote for Bayh if he did run. I also wouldn't vote for Pence. My guess is that Bayh does not have the stomach to oppose persons on the far left or far right. Also, outside of capitalizing on his time as U. S. Senator (and his wife's time as a board member to several companies) I don't know if he is willing to fight for anything. If people who claim to be in the middle walk away from fights with the right and left wing, what are we left with? Extremes. It's probably best for Bayh if he does not have the stomach for the fight but the result is no middle ground.

            4. JK - I meant that the results don't ring true. I also questioned the 10-year-old study because so much in the "health care system" has changed since the study was made. Moreover, it was hard to get to any overall conclusion or observation with the article. But....don't be defensive given my comments; I still think you do the best job of any journalist in the area shedding light and insight on important health care issues.

            5. Probably a good idea he doesn't run. I for one do not want someone who lives in VIRGINIA to be the governor. He gave it some thought, but he likes Virginia too much. What a name I cannot say on this site! The way these people think and operate amuses me.