Healthcare – The 6 Things That Will Help You Understand Why Health Costs Are Going Up
Health care is a market and an industry – depending on how you define it the market potential is over $ 1 trillion and growing each year. Health care, by its very nature, is wrapped up in politics, ethics, regulation and the potential to make huge profits. It's also an area shrouded in mystery for such common place things like costs, standards, and products. It's bewildering and certainly more ambiguous than airline ticket pricing. How can you sort through all the rhetoric and emotion for some clarity? Use the approach Deep Throat told Woodward and Bernstein – follow the money.
To be clear – it's a huge, high profile market and using the term "health care" is very misleading. It can encompass everything from heart surgery to nutritional supplements to electric wheelchairs. The focus will be one area of health care – the medical services industry. This includes drug / equipment manufacturers, their distribution network (doctors and hospitals) through customers / users (patients). This is where the current national debate is unfolding and where costs are spiraling out of control.
1. Customers (patients)
The number one reason why medical costs skyrocket is the patient – more patients going to doctors for more ailments as the population ages and doctors accommodating them with more drugs and operations. Consider how one factor, entirely within control of the customer drives your medical costs – obesity. One third of the population is considered clinically obese. Considering an adult population of around 200 million, that's around 66 million + people. Improper diet is the number one contributor to the growth of heart disease, diabetes, cholesterol, blood pressure, fatigue, etc.
Medicare estimates that they spend $ 1400 to $ 6000 more per person annually for an obese senior than they do for a non obese senior. The prolonged results of poor diet and nutrition cause medical costs to increase because of the artificial load they place on the system. However, doctors and drug companies are not interested in overall solutions because they make money by treating, testing and operating on symptoms – it is literally outside their business model.
That's why in general they are distrustful of nutrition and supplement companies. This driver will not be solved in the doctor's office but in changing community norms.
2. Doctors and Hospitals
If you're into sports or business, you have stats for everything. Americans love numbers. Now try and get the same level of information or even close so you make an informed decision about your doctor or hospital. You can not. Ever wonder why they do not keep what you would consider normal business records? It's so the public and government can not rate and rank them based on performance. The information is consciouslyheld, not kept, or manipulated – scary. You'd like to be able to choose your doctor or hospital – would not you like to do that based on facts not whether they're a good salesman? Examples:
· There is a federal law that requires hospitals to report any doctors suspended for 30 days or more. In the last year, no hospital in the country reported any doctor that met this requirement. They suspended them for 29 days or finished them or in some way worked around the requirement. They did it most of the time "not to damage" the person's career – this is like not knowing a truck driver's accident record.
· Business Week did a great report a year ago. 80% of all heart stint operations were unnecessary – the procedure was even questioned for any value at all. There is a physician in Redding, California who had done hundreds of these operations. Most unnecessary and the hospital OK'd them all because it makes them money.
· I have my own health insurance so I pay very close attention to my costs. I found that my family was being charged for tests I had never requested and not told about. When I go to get my car lubed and oil – they can tell me what they're going to charge me – you doctor can not.
3. Drug / equipment manufacturers
Everything about pharmaceuticals and medical equipment manufacturers flows just like any other company. For drug companies the purpose is to create, test, develop and distribute drugs for profit. They've even changed the name of their market area from drugs to pharmaceuticals to not be confused with the guy on the corner.
Their mission is not to make people well – it is to sell drugs that fit a viable market opportunity. If the market is not large initially but carries emotional appeal they will enlarge the market through advertising. Drug companies spend two times more money marketing a drug than it takes to actually create it – even if the drug has no greater benefits than existing medications or even over the counter products. They know that simply marketing the idea of an ailment can stimulate sales because the customer goes to the doctor and requests if it will benefit them. Doctors are their
distributors. Very classic for any business – doctor gives you a sample for free and then you have to start paying after that.
4. Information technology
One of the keys to controlling costs and being able to identify appropriate medical practices is information technology. Hospitals are scrambling to bring the 90s into their organizations as quickly as possible. The sheet paper volume and the risk averse nature of the medical profession to modernization has made the whole process an administrator's nightmare. Because they have delayed updating their information management systems, your local retailer has more real time information about their business than a hospital.
In their rush to bring themselves up to date, they are literally throwing millions away on obsolete or poorly designed technology that does not fit their operations. Nurses have to stop and input data but the keyboards are too small and the software does not match the old forms so they have to waste time figuring out how to put the information and get it out. Systems do not talk and it is taking billions to update all these systems through the country.
5. Understanding costs
True costs are really a mystery in the medical services industry. Unnecessary and unneeded drugs, operations and tests are all packaged to ensure repeat business. There are no real cost controls except for administrators or insurance companies – the bad guys in TV hospital dramas.
There are two types of costs – fixed (building, supplies, equipment, etc.) and variable (personnel costs). These costs are estimated using two methods -incremental costing or what it costs to do this one operation / procedure right now and embedded costing or what it costs to do the operation and cover the cost of the building, staff, equipment, taxes, etc. The hospital has to know these numbers to do its books and the insurance should know them to understand its risk. You and I know nothing. If a hospital's done 10,000 appendectomies, they should know what the average operation costs and the stats on the doctor. Hospitals have seemed to lose control of costs because of the changing demographics, rise of ailments that were not formally treated in hospitals and the growth of prescription drug environment.
You and I can not work to control our costs if we do not know what costs are. You can control nutrition, stress levels, etc. but when I have to go for treatment I do not know what's best, how to make good choices and what their financial impact is. Doctors are not god – most are just people trying to the best they can to make a buck and maybe help some people.
They are the bogeyman – the impersonal corporation trying to wring the last dollar and unjustly denying claims to the needy. Let's do a quick reality check – insurance companies are in the gambling business. They "manage risk" by making a bet with you that your promotions will cover your costs when you go in for medical services. They spread this risk across millions of customers knowing on average they will make money. As a result, they are focused on costs and as costs increase premiums in order to increase the risk.
Medical insurance is the only insurance that is paid for by the employer, perceived as a benefit and not taxed. This means that the patient / user has no idea of costs, other than a nominal copay and sometimes the copay is covered. Because the end user is shielded from the real cost of the service, the insurance company becomes the perceived bottle neck.
Health insurance was never designed to cover all the new drugs, services and operations available and its products reflect the confusing options. As it's come to be seen as a social subsidy that should pay for the myriad of new capabilities; drug companies and hospitals have leapt in to increase sales because the patient does not pay. When serious illness strikes, the cost of services becomes more transparent as coverage runs out and these company's take on the role of bad guy. Read your contract, understand your options, take a gamble and select what you think is right for you.
It is this gamble that has become the social and political football. The fundamental assumptions about the purpose of health insurance are at odds with reality. Because risk has been shared and the customer has not paid their fair share – some people believe that everyone regardless of personal habits and previous condition should be treated the same – that doctors because they're doctors have some intrinsic wisdom that escapes mere mortals. This is not a good business for anyone. If you need an organ you go on a list based on availability, urgency and factors like age. People get moved and bumped based on the opinion of a small group of "experts" – does that make it right? Is it "fair"? These are ethical questions not business questions and do not expect anyone to get it right, especially the government ..
Costs will continue to escalate in the medical services industry and the public debate about how and whether to distribute those costs will continue. More insurance will not provide better medical services – it will just serve to cover more inefficiency and poor business practices. As consumers we should demand the cost drivers and personal performance statistics of drug companies, doctors and hospitals so we can make intelligent decisions. BUT we can do our part by good nutritional habits and little exercise to get ourselves in better shape and save the country billions.