Follow the Money

Many years ago there was a Federal whistleblower, Deep Throat, who leaked confidential Government information about the Nixon White House to reporters from the Washington Post. Fans of the book and movie will remember that his famous line was, “Follow the money.” That line came to mind when an article appeared in Health Affairs summarizing the US health care expenditures for 2010 (1). The main gist of the article is that the rate of growth in health care expenditures had slowed to only 3.9% and approximated the slowed growth from 2009 which was 3.8%. Previously the growth had been much larger averaging 7.2% from 2000-8 (2). The article points out that during recession expenditures usually slow but the expected decline in healthcare expenditures usually occurs far after the beginning of the recession. The authors state that the “lagged slowdown in health spending growth from the recent recession occurred more quickly than was the case in previous recessions. This was the result of a combination of factors, including the highest unemployment rate in twenty-seven years, a substantial loss of private health insurance coverage, employers’ increased caution about hiring and investing during the recovery, and the lowest median inflation adjusted household income since 1996.”

Following Deep Throat’s suggestion to follow the money, healthcare expenditures are listed below in Table 1.  

Table 1. Cost, growth and increase of health care expenditures 2010 compared to 2009 arranged from greatest to least percent growth.

*Calculated as the product of cost X percent growth.

The categories accounting for the largest dollar increase in expenditures appear to be net cost of health insurance, hospital costs and physician and clinical services. Although the article in Health Affairs has a fairly comprehensive discussion of each expenditure, the exact definitions of these categories were unclear. A little searching revealed that net cost of health insurance is calculated as the difference between calendar-year incurred premiums earned and benefits paid for private health insurance (2). This includes expenses such as personnel, executive bonuses, marketing, advertising, etc., but also includes profit. Health insurers average about 20% of their premiums going for expenses and profit (3). It is estimated that about 1-10% of the health insurance premiums go to profit (3). This would translate to about 10-50% of the net cost of health insurance going for profit or about 1.2-6.1 billion in costs during 2010.

A second cost was hospital care costs which accounted for nearly 40% of the increase in expenditures. “Hospital care is a summation of incurred benefits for inpatient hospital care, outpatient hospital care, and hospital-based hospice, hospital-based nursing home care and hospital-based home health care. Also included in hospital care are estimated ’combined billing’ amounts for services of hospital-based physicians…” (2). Examining this definition, administrative costs are glaringly missing. In 1999, administrative costs accounted for 24.3% of hospital expenses and were increasing (4). Conservatively assuming that the same percentage of administrative costs account for the increase in expenditures, this 24.7% would translate to about 9.7 billion in 2010.

Physician and clinical services includes offices of physicians and outpatient care centers, plus the portion of medical and diagnostic laboratories services that are billed independently by laboratories. Physician services account for 81% of these expenditures, but this portion of the physician and clinical services grew only 1.8% in 2010. Recalculating using 81% of the 515.5 billion for physician and clinical services and a 1.8% increase, the increase in expenditures for physician services accounted for 7.5 billion. According to the article in Health Affairs, 2010 was a year when people decided to forgo care, slowing growth in elective hospital procedures, the number of prescriptions dispensed, and physician office visits (1). In other words, less healthcare led to a slowing of expenses.

The above data suggest that physicians account for only about 16% of the healthcare costs and their portion of the healthcare pie seems to be decreasing compared to other healthcare expenditures. To control healthcare costs but not decrease healthcare, policymakers need to focus on those areas of expenditures that account for much of the increase in cost, and especially those that provide no healthcare product. Cuts in the net cost of health insurance and hospital administrative costs would seem two areas where considerable cost savings could be achieved with little to no reduction in patient care.

Richard A. Robbins, MD

Editor, Southwest Journal of Pulmonary and Critical Care

References

1. Martin AB, Lassman D, Washington B, Catlin A; the National Health Expenditure Accounts Team. Growth In US Health Spending Remained Slow In 2010; Health Share Of Gross Domestic Product Was Unchanged From 2009. Health Aff (Millwood) 2012;31:208-219.
2. https://www.cms.gov/NationalHealthExpendData/downloads/dsm-10.pdf (accessed 1-17-12).
3. http://thinkprogress.org/health/2009/08/05/170897/are-health-insurers-making-too-much-money/?mobile=nc (accessed 1-17-12).
4. Woolhandler S, Campbell T, Himmelstein DU. Costs of health care administration in the United States and Canada. N Engl J Med 2003;349:768-75.

Reference as: Robbins RA. Follow the money. Southwest J Pulm Crit Care 2012;4:19-21. (Click here for a PDF version of the editorial)