FutureOfCapitalism.com is no great defender of the Senate's expansion of the government role in health care, but some of the bill's critics seem willing to throw even flawed arguments at the plan. Here's the Wall Street Journal editorial this morning: "Medicare reimburses doctors and hospitals at rates 70% to 80% below those of private insurers, which means below the actual treatment costs in many cities and regions. Providers either eat these losses—about half of U.S. hospitals are running a deficit or close to it—or they raise prices for private payers. This cost-shifting isn't dollar for dollar, but all empirical research shows that it adds tens of billions of dollars to consumer health bills."
These three sentences are flawed in at least four ways. First, the Senate bill is talking about expanding Medicare to cover people who now have no insurance at all. Hospitals now treat those patients as charity or uncompensated care. If the payment from the government on those patients goes to 70% of the cost of treatment up from 0%, it's a net gain for the hospitals, not a loss.
Second, "actual treatment costs" don't have to be fixed in the way that the Journal editorial assumes. Hospital costs include things like fancy hospital lobbies and boardrooms, separate round-the-clock parking lot attendants for the physicians-only parking lot at my local non-profit hospital here in Brooklyn that serves a heavily Medicare and Medicaid population (why can't the doctors park their BMWs, Lexuses, and Mercedes with their MD plates in the same lot as everyone else?), and salaries that reach $4.8 million a year for a dermatologist and $3 million a year for a reproductive endicrinologist. Not to mention Harvard Medical School-New Yorker writer surgeons confessing to performing operations "in which we opened up about a thousand dollars' worth of disposable materials that we never used." The costs, in other words, are subject to some controls, and, in a normally functioning market, benefits would accrue to low-cost providers, in the same way that Wal-Mart attracts customers with low prices made possible by cost-conscious policies like making Wal-Mart employees share hotel rooms on business trips. But if the Wall Street Journal editorial page is going to rush to defend the hospitals every time a payer wants to cover less than 100% of what the hospital claims its costs are, what's the incentive to control costs?
Third, the claim "about half of U.S. hospitals are running a deficit or close to it" is both vague and absurd. Some hospitals in America, such as the Veterans Administration hospitals or city-run hospitals in New York, are part of the government, set up to be subsidized by taxpayers. The key measure of their finances is less whether they are running a deficit than how much tax dollars they absorb. Other hospitals, including the one that pays the dermatologist $4.8 million a year and the reproductive endicrinologist $3 million a year, are non-profits. They are not supposed to be making lots of money -- they're non-profits. As for the part of the hospital system that is for-profit, it's doing okay. Tenet Health Care, which runs 53 hospitals, had net income last year of $25 million and paid its chief operating officer $1.75 million; Universal Health Services, which runs 26 hospitals, had net income of $199 million and paid its chief executive $4.72 million; Community Health Systems, which runs 118 hospitals, had net income of $218 million and paid its chief executive $3.15 million; and Health Management Associates, which operates 56 hospitals, had net income of $167 million and paid its executive vice president $1.11 million. As one longtime healthcare industry figure put it to me, "they're complaining about their reimbursement rates all the way to the bank." FutureOfCapitalism.com has nothing against either profits or multi-million-dollar compensation. They provide incentives for investment of human and financial capital. But when these profits and compensation are funded with Medicare and Medicaid payments that the government uses the force of its authority to wrest from ordinary American taxpayers, there's a point at which it starts to look like a Reverse Robin-Hood, driven by interest groups leaning on politicians with the help of the Journal editorialists.
Fourth, the claim that "all empirical research" shows that cost-shifting "adds tens of billions of dollars to consumer health bills" is just false. The best anology I've seen to puncture the cost-shifting claim is the one that Michael Morrissey uses to begin his 1994 book from AEI Press, "Cost-Shifting In Health Care: Separating Evidence From Rhetoric." He writes about a movie theater that charges $3 for tickets to a 5 p.m. movie, but $7 for tickets to the same movie at 3 p.m. or 8 p.m. Are people upset that the $3 tickets don't cover the full costs of the movie, and that costs of the 5 p.m. showing are being shifted to the customers who go at 8 p.m. and pay more? Not so much, but the same pricing structure, in health care, provokes outcries of "cost shifting." The Wall Street Journal treats the Medicare reimbursement rate at less than the hospital's "cost" as an outrage, but in fact, "loss-leaders" are hardly unheard of in capitalism. The Wall Street Journal itself has been covering the practice in the book industry, where retailers are selling some bestsellers for less than their wholesale costs. Where's the Journal editorial complaining about cost-shifting to buyers of non-bestselling books? As for the "empirical research," Mr. Morrissey writes, "The empirical evidence on hospitals is mixed, at best. Two studies find evidence of less-than complete cost shifting and argue that there are significant limits on its use. Two other studies find no evidence of cost shifting."
For an assessment of health care that's different and perhaps more sensible than the Journal's, check out the report by HealthLeaders Media from the Institute for Healthcare Improvement's national forum on quality improvement. It's interesting to see someone within the health care industry -- IHI president Don Berwick -- acknowledging that ever-increasing spending on health care may not be such a great thing.