Cutting Costs Doesn’t Cut Costs

by Deane on February 20, 2012

Everyone is talking about healthcare – talking, but not communicating. To communicate successfully, we first need a common language.

In healthcare, people don’t agree about the meanings of simple words such as control, cost, cut, free, and charge.

The five phrases below are quotes taken from two recent online articles about our dying U.S. healthcare system. They epitomize the 2012 American Towel of Babel.

1) “Control the costs of medical care” starts our mass confusion. A payer, whether government or private insurer, does not control costs. They control their expenditures.

Most people define the word cost as “the sum of resources required to deliver a service or to offer a product for sale.” In health care, only patients can control costs, acting on advice of doctors. Government or private insurance companies control what they pay. They cannot control what things cost.

The true cost of medical services is unknown. That’s right! Neither your doctor nor your medical institution  knows the actual cost (defined as above) for the services they provide. When I asked two different hospitals the true cost of a cardiac catheterization and specified that cost should be measured as specific resources utilized, they both replied, “We do not account our costs that way.”

2) “Free care to poor patients” is another misnomer. Medical care may be free to (not paid by) a specific patient. Health care is never free. Someone has to pay nurses’ salaries, amortization on buildings, disposables, electricity, and the ever-popular liability insurance premiums. Medical care that is “free” to one patient must be paid by another, without permission. (Isn’t that called, ah, stealing?)

When it comes to modern technological medical care, “poor patient” refers to virtually all of us. If your household income is $100,000, you are in the lucky top 16% of the population. You could not begin to pay out of pocket the bill for your open heart surgery ($250,000) or the defibrillator pacemaker you need ($125,000).

3) The Service Employees Union of California has proposed that “hospitals would be limited [in what they are] charging patients.” But, hospitals already are. There are strict Federal rules governing how much a hospital or a doctor can charge. Further, they must charge the same regardless of payer source. This includes patients who have no payment source at all (unfunded care). So, they provide care and then charge, knowing they won’t get paid.

To sort out this mess, just remember two NON-relationships.

  • Charges for medical care have no relationship to revenue received.
  • Costs to provide medical care have no relationship to charges.

These two statements: a) Are absolutely true; b) Are not common knowledge; and c) Explain much of the confusion about money in healthcare, the system, as well as health care, the service.

4) “Charges [are] significantly more than actual costs.” Well, duh!? Any business – Ford Motor Company, your local hospital, your family doctor, or your family – either makes more than it spends or it goes bankrupt. Unlike the Federal government, the rest of us cannot print money. We either cover our costs or we go out of business (as many hospitals are doing).

The quote above (#4) about ‘charges exceeding costs’ was talking about individual patients, not overall finances.  It implied that patients were being ripped off because the charges the patient sees on the hospital’s or doctor’s Bill for Services Rendered are so much greater than what the patient thinks the costs are.

But recall that: A) No one knows the true costs of care per patient, and B) Actual reimbursements are only a tiny fraction of billed charges. When I do a cardiac catheterization in a critically ill baby, my fee is generally $4000-$7000. Want to guess the actual payment from Medicaid? Answer: $387.

5) “If a hospital’s charges…exceed [a] threshold for the year, the hospital would be required to issue refunds.” This proposal is nothing less than government-sanctioned theft. Revenue to hospitals and providers is always a small fraction of the billed charges, ranging from as high as 60% to as low as 3%. Do not forget mandated but unfunded care where the reimbursement rate is zero – no revenue at all, but plenty of costs that must be paid.

So, if a hospital’s charges (not revenue) exceed some arbitrary level, say 80% of last year’s charges, the hospital will have to refund the difference, money that it never received.  I can just see the Federal government enforcing a law where an undocumented resident needed and received emergency surgery; where the patient paid nothing; where the hospital was paid nothing; and where the hospital was required – by law – to give a “refund.”

Welcome to the Dictionary of Medical Terminology, 2012 Edition, written by the Mad Hatter (of Alice in Wonderland.)

  • Cost ≠ cost. Cost = unknown.
  • Charge >>> payment. Both are government-determined.
  • Control and free care are meaningless terms.
  • Cost cutting = reducing payer outlay. Cost cutting = cutting services.
  • Consumer does not pay for what is consumed.
  • Supply ≠ demand.

Is it any wonder that both healthcare and health care are drowning in red ink, and taking us with them?

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