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Health Team

Cost of health care tough to compare

Posted November 3, 2012
Updated November 5, 2012

Editor’s note: Sheldon Gulinson has more than 35 years of senior executive experience in the health care industry and earned his master’s degree in health administration from Duke University. 

Overheard at an early morning breakfast spot: Conversation about a friend, a terrible accident, incredibly leading-edge and complicated surgery, a likely year or more of hospitalization, and, oh, by the way, the patient has just lost his job and insurance coverage. Who will pay the bill, and how will they be able to do that?

You probably could hear this same conversation almost any day at Big Ed’s City Market in Raleigh, Ye Olde Waffle Shop in Chapel Hill, Rick’s Diner in Durham, or just about anywhere else in the Triangle – or, for that matter, anywhere in the United States, as I recently did, at the Morning Glory Restaurant in Sturgeon Bay, Wisc.

While the federal Patient Protection and Affordable Care Act will probably address the bulk of the issue of those without insurance coverage, it is unlikely to have much impact on the high cost of care and whether individuals, companies and governments will continue to be able to afford it. In fact, the PPACA, colloquially known as Obamacare, might even exacerbate the cost and affordability problems. It most definitely won’t address the fact that the amount paid for a given treatment can vary widely by locale or even among hospitals in the same community.

Think about it. The cost of fixing something, say, a refrigerator compressor, doesn’t vary much whether you are in Durham or Poughkeepsie, N.Y. But the cost of treating something, even a relatively straightforward condition like appendicitis, can vary by thousands of dollars depending on where you go for care. And research has shown that high cost does not necessarily mean better results. As the Dartmouth Atlas of Healthcare notes, “Dartmouth research comparing spending differences across both regions and hospitals found that most of the spending was due to differences in use of the hospital as a site of care (versus, say, hospice, nursing home or the doctor’s office) and to discretionary specialist visits and tests. Higher spending on these services does not appear to offer overall benefits. Other Dartmouth research suggests that hospitals spending more on effective care do in fact get better outcomes … More importantly, many health systems are able to provide high-quality care at low cost, suggesting that we don’t need to spend more to get better outcomes.”

Why should you care about how much health care costs and how much it varies from hospital to hospital, doctor to doctor or geography to geography? There are at least four reasons.

First, in reality, there is no such thing as free medical care. In the end, those who can pay end up supporting those who can not. Second, because the cost of health care is so high and rising so fast, you are likely to pay even more in the future through higher co-pays, deductibles and co-insurance, as well as paying a higher percentage of your employer’s health insurance premiums. Third, you may well have to pay higher taxes, or have a higher percentage of what you pay in taxes be used to cover increases in government-funded Medicare and Medicaid spending. Fourth, if you are eligible for Medicare or Medicaid, you may well experience cutbacks in services, find fewer doctors who accept patients covered by these programs and/or have to pay more out-of-pocket.

So, since the money ultimately comes from you, and even more is likely to in the future, the more you know, the better buyer you can be.

Triangle costs compare favorably

Like most health care-related topics, determining how the Triangle stacks up against other locales on the cost of care is, at best, complicated. But the bottom line is that we stack up quite well.

Comparing health care providers and geographies on the basis of cost is difficult. Yes, as in the car business, there are “list prices” for patient rooms, outpatient visits, aspirin tablets, physician visits, etc. But hardly anyone pays for care based on “list prices.”

Medicare pays most hospitals for inpatient care based on a flat rate tied to the patient’s diagnosis and on a Medicare-determined fee schedule for anything else. Very small hospitals containing 25 beds or less and officially classified as Critical Access Hospitals are paid by Medicare on the basis of their costs for inpatient care.

Medicaid fee schedules are set by each state. For hospital care, commercial insurers (ex: Blue Cross, Aetna, Cigna, Humana) usually negotiate a discount from “list” and pay physicians using fee schedules based on something called “usual and customary charges,” or as a percentage of the Medicare fee schedule. The discounts vary from insurer to insurer and could even vary based on which insurance product a company or individual buys from any given insurer.

Increasingly, those who pay for their care themselves are granted discounts similar to those provided to commercial insurers, at least for hospital care. In those instances where payment is based on a fee schedule, it depends on what is included in the room rate and what is charged separately. The severity of a given patient’s illness and whether he or she has co-morbidities (i.e., multiple diagnoses) can affect the bill as well.

According to Troy Siter, senior manager of proposal operations for Truven Health Analytics, a health care data collection and analytics firm, hospital comparison data are available for as many as 22 states. In most cases, a state government agency collects and reports the data; in some it is the state’s hospital association that does so. But there is no consistency on what data are collected and reported.

California, Pennsylvania and most other states report hospital-by-hospital data on the basis of charges. Florida reports on Medicare rates. New Hampshire reports on the basis of amounts paid on behalf of commercially insured patients, including patient deductibles, co-payments and co-insurance. Maryland reports on the basis of charges, but, in its case, the state approves charges for all payers. In North Carolina, the data collection agency is the North Carolina Hospital Association, but its reporting seems to be limited to various quality measures and does not include hospital pricing.

Time frames vary as well (in visiting many of the websites for these states, we found data from 2011, 2010, 2009 and even from 2006 as the latest apparently available). If you would like to check out the data available for these 22 states, please see the table showing the name of the state, the organization that provides the data and the link for accessing the information.

I am not aware of any databases that capture the amounts actually paid for all care by all payers to all providers in a given geography or across geographies. And, even where data are available, I have not found any that track the cost associated with a patient’s full course of treatment for a given illness. It is important to know the total cost of care for a given illness because, while some health care providers or geographies may be associated with low outpatient costs for a given illness, they may more than make up for that in what is spent on inpatient hospital care, or vice versa.

The best database of which I am aware for comparing the cost of care is the Medicare database. That is because it uses the same definitions throughout the country, tracks all care provided to its beneficiaries and is at least able to report how much it pays per enrollee, if not for a given episode of care or diagnosis. The Dartmouth Atlas of Health Care, mentioned earlier, is a not-for-profit organization that has been tracking geographic differences in health utilization for specific illnesses and for total care costs for more than 20 years. The Dartmouth Atlas uses a sample of 20 percent of Medicare enrollees residing in a given area, known as a Hospital Referral Region, to compare the cost of care from locale to locale. Its theory is that patients tend to obtain most of their care close to home (i.e., within the HRR in which they reside).

The Dartmouth Atlas of Health Care shows the total Medicare payments per enrollee for 2009 for each of the top 25 HRRs in the U.S. in terms of population. The data are shown with age, sex and race adjustments to make the data for each region as comparable as possible. The data are also adjusted to reflect differences in cost of living. Data: Dartmouth Atlas of Health Care comparision of Medicare payments in U.S. communities

The former reflects primarily regional differences in both prices and utilization. Differences in the latter measure, for the most part, are due to differences in utilization or really how physicians manage their patients’ care.

For the entire United States, note that average total spending per Medicare enrollee in 2009 was $9,477. The Raleigh and Durham HRRs stack up quite well against that. Raleigh is at $8,612 when not price-adjusted and $8,852 when price adjustment is included. Durham comes in at $8,073 and $8,301, respectively. Charlotte, at $8,440 and $8,751, ranks somewhere between them. Wilmington, at $8,650 and $8,926, came in slightly higher than the other North Carolina communities, but still below the national average.

Medicare expenses compared in NC cities

Compare that to some of the most expensive places. Miami comes in at $16,639 and $16,125. McAllen, Texas, comes in at $14,576 and $14,750. Since the populations in this database are pretty similar in terms of age, sex and race, the main reasons for these high numbers are probably the ordering by physicians of lots of tests, procedures and hospitalizations, especially when the data are adjusted for price differences.

Looking at HRRs that we know to be high cost-of-living areas further supports the conclusion that utilization differences account for the bulk of the cost-per-capita variances in the Medicare data. For example, Manhattan in New York City comes in at $13,453 when not price-adjusted, but comes down to $10,196 when adjusted for price differences. San Francisco comes in lower than expected on both measures at $9,913 and then drops to $7,649 when adjusting for price differences. Similarly, Los Angeles is at $12,711 and drops to $11,112 when adjusting for price. Think about the money to be saved if utilization in Los Angeles dropped to what is appears to be in San Francisco, or even if we were able to do the same here in our area.

Where the money goes

So, where does the money Americans spend on health care go? According to the federal government’s Centers for Medicare and Medicaid Services, U.S. health care spending in 2010 totaled $2.6 trillion. The breakdown on where that money was spent is as follows:

  • Hospital care – 31 percent*
  • Physician/clinical services – 20 percent
  • Prescription drugs – 10 percent
  • Other professional services (ex: physical therapy) – 7 percent
  • Net cost of health insurance (ex: operating expenses, profits) – 6 percent
  • Investment (research, construction, etc.) – 6 percent
  • Nursing home care – 6 percent
  • Other health, residential and personal care – 5 percent
  • Home health care – 3 percent
  • Retail – other products (ex: wheelchairs, prosthetics, etc.) – 3 percent
  • Government public health activities – 3 percent
  • Government administration – 1 percent

*The total exceeds 100 percent due to rounding.

CMS reports that the $2.6 trillion spent on health care in 2010 equated to about 17.9 percent of the United States’ Gross Domestic Product. By dividing the total amount spent for health care in the U.S. in 2010 by the 309 million people living in the U.S. then, one can derive how much was spent per person for health care that year. That amount comes to $8,402 per person, or a little more than $700 per person per month.

According to the U.S. Bureau of Economic Analysis (BEA), there is no other industry that makes up so large a portion of the GDP.

The BEA publishes reports showing how much value major industries add to our economy (i.e., the value of all of the goods and services they produce) and then totals the values produced by each industry to calculate total GDP for the country ($14.5 trillion in 2010, as you will recall).

BEA’s numbers don’t fully enable apples to apples comparisons. However, the percentages of GDP for these other industries help put our nation’s health care bill into perspective.

Here are some of the major industries BEA tracks and the percent of GDP each accounted for in 2010:

  • Government: 13.6 percent
  • Real estate and rental and leasing: 12.2 percent (this appears to be the sum total of the rental equivalent of owned houses and office and all other commercial buildings, plus rental and leasing of same)
  • Manufacturing: 11.7 percent (the auto industry, by the way, accounted for only 0.4 percent of GDP)
  • Construction: 3.5 percent

By almost any comparison, what America spends on health care is huge. For example, using data NationMaster.com extracted from the United States Central Intelligence Agency World Factbook, America’s $2.6 trillion spent for health care is slightly lower than the total GDP for Germany for that year (about $2.9 trillion) and was higher than the total GDPs for Brazil and the United Kingdom (about $2.2 trillion each).

Most industrialized countries spend considerably less, as reported by 24/7 Wall Street on March 29 (using data from the Organization for Economic Co-Operation and Development). The amount spent in each country listed per capita and the percent of each listed country’s GDP devoted to health care was as follows:

  • France - $3,878 per capita (11.8 percent of GDP)
  • Germany - $4,218 per capita (11.6 percent of GDP)
  • Austria - $4,298 per capita (11 percent of GDP)
  • Denmark - $4,348 per capita (11.5 percent of GDP)
  • Canada - $4,478 per capita (11.3 percent of GDP)
  • Luxembourg - $4,808 per capita (7.8 percent of GDP)
  • The Netherlands - $4,914 per capita (12 percent of GDP)
  • Switzerland - $5,352 per capita (11.6 percent of GDP)
  • Norway - $5,352 per capita (9.6 percent of GDP)
  • U.S. - $7,960 per capita (17.4 percent of GDP)

(Note: The OECD per capita spending amount for the U.S. is lower than the $8,402 reported above by CMS. OECD appears to have excluded spending on medical research and investments, such as construction of facilities, major information system costs, etc., for comparisons.)

Not only is the U.S. the highest, both in terms of percent of GDP devoted to health care and the amount spent per year per capita, the difference is striking. For example, in the Netherlands, the second highest in terms of percent of GDP devoted to health care, per capita spending is almost 40 percent less than for the U.S. ($4,914 vs. $7,960).

Where the money comes from

So, where does the money spent on American health care come from? According to the CMS in 2010:

Government paid for 45 percent of America’s health care bill (29 percent came from the federal government; state and local governments paid for 16 percent);

Private business paid for 21 percent;

Households paid for 28 percent;

other sources provided the remaining 6 percent – ex: philanthropy, investment income, gift shop sales, cafeteria revenues, etc.

For those with employer-sponsored health insurance, employer premiums averaged $5,049 per year for single coverage and $13,770 for family coverage. Workers contributed on average $694 toward single coverage and $3,281 annually toward the cost of family coverage. These figures are exclusive of what workers pay out of their pockets for co-pays, deductibles and co-insurance.

If you think about it, though, any government spending is ultimately taxpayer spending. Americans pay for health care, co-pays, deductibles, co-insurance, over-the-counter medicines and the portion of any employer’s health insurance premium. Those who buy individual health insurance pay for it all, of course. Americans also pay the government’s portion of health care spending through taxes (the payroll tax you pay for Medicare; state and local taxes, some of which then goes to pay for care for Medicaid and other state and local government health care programs; and federal taxes that pay for 50 to almost 70 percent of Medicaid costs – state governments, also taxpayer-funded, pay for the remainder of Medicaid expenses).

Also, every time you buy a good or service from a company that offers health insurance to its employees, some of what you pay is used by the company to pay those health insurance premiums. You also pay for those who obtain care, have no coverage and do not pay for their care themselves. That is because hospitals and doctors raise their prices to cover their costs for those who can not pay, passing that cost on to your insurer and to you.

Hospitals generally use philanthropic donations for major construction or large equipment purchases versus using it to pay for “charity care” or for those who just do not pay. 

2 Comments

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  • jlhpcarew Nov 5, 11:10 a.m.

    Obamacare does NOTHING to reduce costs and EVERYTHNING to ration care. It is a direct assault on our freedoms and to democracy and needs to be repealed.

  • whatelseisnew Nov 5, 9:43 a.m.

    "Government paid for 45 percent of America’s health care bill (29 percent came from the federal government; state and local governments paid for 16 percent);"

    Government PAID FOR 0 percent. The taxpayer paid some of this cost. Some portion of this cost was added to the debt and thus it is a future liability to be paid for by the taxpayer. GOVERNMENT PAYS FOR NOTHING. I really wish writers of all articles would stop using the phrase Government PAYS. It does not.