Health Care "Market" Matters
| Mar 15, 2013 11:00 AM
Time magazine’s cover story a few weeks ago, headlined “Bitter Pill: Why Medical Bills Are Killing Us” highlights some of the major challenges of health care delivery—the lack of standardization of charges and the lack of transparency about those charges for the patients who must pay them. He concludes, “The health care market is not a market at all. It’s a crapshoot.”
Frequently, the business of health care is discussed in market terms where patients are consumers and health care systems are businesses that provide a service. Examples of this thinking include arguments for PPO and POS plans to provide patients with more choice, giving patients health savings accounts so that they can make decisions about how to spend their health care dollars, and even on-line physician ratings systems like vitals.com as an analogy to cars.com.
But health care isn’t a real market, or at least not a functioning market. From the business literature, where market failures have been studied in great detail, it’s clear that the health care system is one giant market failure. Sources of market failure, including information asymmetry, adverse selection, moral hazard and more, are pervasive in health care.
What author Steven Brill emphasizes in his Time Magazine article, is a profound source of market failure, unthinkable in any other business—the lack of consistent and transparent pricing. The seemingly outrageous prices that he quotes in his article make it seem that hospitals are abusing the system, and some may be. But many are not. The disconnect between charges and costs has a long and complex history. Few institutions truly know their costs, and payments have been negotiated based on rates for as long as most remember. One reason that charges don’t reflect costs is because there is a tremendous amount of cost shifting in health care. Margins from some patients are used to underwrite others. Paying patients subsidize charity care. Insured patients subsidize Medicaid patients. Clinical revenues subsidize research and education. Should uninsured patients have to declare bankruptcy to deal with their unexpected medical bills? Clearly not. But this necessary cost shifting is a clear indication that the system is broken, and these individuals are the victims. Just as troubling if not more so are the millions of Americans who did not receive care when they needed it. Those stories can be even more tragic.
Today, the operating margins of academic medical centers around the nation average 5% for their hospitals. Profits pay for upkeep of the hospital and new facilities as well as to support education and research, both of which are seriously underfunded. Tuition and state funding covers only 44% of our medical school education costs. For every research dollar we receive, the institution must put in another 25 – 40 cents minimum, in additional support. Why are education and research so underfunded? Because administrators at the NIH and in the state and federal government expect us to use clinical profits to fund them. This means that part of Mrs. Jones’s spine surgery may help to pay for a zebrafish tank for the lab.
If the academic medical health care system applied to everyday living, it would be as if every time you bought a GE lightbulb, you paid an extra $10 to subsidize the MRI research and development programs at GE. It doesn’t make sense. But it is how the system currently operates. And it is one of many reasons why health care transformation is so hard and so necessary. We at the University of Utah are committed to developing a more transparent cost system as an important step forward.
Author: Vivian S. Lee, M.D., Ph.D., M.B.A.
About the Author: Dr. Vivian S. Lee is the Senior Vice President for Health Sciences at the University of Utah, Dean of the University of Utah School of Medicine, and CEO of University of Utah Health Care. Read her full bio herecomments powered by Disqus