Are the Economics of Healthcare Getting You Sick?

Feb 24 2014, 7:19am CST | by

Are the Economics of Healthcare Getting You Sick?
Photo Credit: Forbes Business

Have you ever wondered why your doctor is always running late while you’re sick and sitting in a cold examination room?  The answer is simple economics.  Your doctor’s office operates under the same economic pressures as any other business, but that fact may not be apparent to your doctor nor to you.

PROFIT = (PRICE – COSTS) x QUANTITY.  If you’ve ever taken an economics course, you’re undoubtedly familiar with this formula for profit.  Let’s take for example a local retailer that purchases their batteries wholesale for $2.50 per pack.  The retailer wants to maintain a 50% profit margin and sells the batteries to you for $5.00.  Makes sense so far, right?  Well, when the wholesaler of the batteries increases their price to $2.75 per pack, the retailer now has to sell the batteries for $5.50 in order to maintain that 50% margin.

Healthcare’s formula for profit is different.  As Dr. Darren Sommer, Chief Medical Officer of the Optimized Care Network, points out, “Most doctors don’t set the price of the care they provide.  They view price as reimbursement.”  That alteration makes our formula look like this: PROFIT = (REIMBURSEMENT – COSTS) x QUANTITY.  Reimbursement is a reflection of the contracted price that is paid when an insured patient receives care from their doctor.  These prices are set in advance and are generally a reflection of what Medicare is reimbursing for a given service.

If doctors can’t adjust their prices, then how do they maintain their profit margins?  Well, the only two options left based on the PROFIT formula are to either (a) reduce costs or (b) increase quantity.  When we think of quantity in a medical context, we’re referring to the number of patients a doctor will provide care to on a given day.  Unfortunately, those numbers have been rising over the last 20 years.  According to a 2013 Heritage Foundation report, as Medicare reimbursement rates have either declined or not kept up with inflation, physician practices are offsetting those losses by increasing the number of patients they see on a daily basis.  The American Enterprise Institute estimates that during the government shutdown, providers of Medicare services faced a 2% reduction in reimbursement.  Sommer explains, “if your family doctor had a strictly Medicare practice and earned $600,000 gross per year, a 2% loss of revenue would be $12,000.  Assuming the average patient encounter is reimbursed at $100, your doctor would have to see an additional 120 patients per year to offset that loss.  That works out to one additional patient every other day (if you consider the average practice is open 250 days per year).”

A physician’s reimbursement, relative to inflation, has been steadily declining for more than 10 years.  We see the impact of this every time we go to the doctor.  It takes longer and longer to get an appointment, and when we do, we have to deal with overcrowded waiting rooms, long waits, and shorter and shorter visits with the doctor.  Unfortunately, we’re approaching a tipping point.  It doesn’t take an MBA to realize that quantity and quality are inversely related.  A physician’s ability to add additional patients to their already burdened day is ending.  This is especially true when you consider all the other responsibilities a doctor has.  It’s estimated there are 36 non-compensated tasks a physician is responsible for in a given day, and those tasks are beyond direct patient care.  You might be thinking, ok, why doesn’t my doctor just lower costs?  That might be easier said than done with a brick and mortar clinic.   If we believe the PROFIT formula to be correct, then we would have expected a physician to lower their costs long ago, in an effort to maximize their profits.  Any new costs savings require reinvesting in a practice or reducing the amount of staff, both of which can have unintended consequences on quality of care.

What we need in the healthcare industry is to find new ways that truly revolutionize the way we deliver and receive care.  Consider that the biggest change to the healthcare delivery system in the U.S. over the last 100 years has been physicians practicing out of offices, rather than making house calls.  Sommer predicts that “the independent office-based physician may no longer be feasible due to the high costs of running a practice.”  Consider the revolutionary changes the banking industry has undergone just over the last 10 years.  Have you had to set foot in a bank to deposit a check or withdraw cash recently?  Chances are you deposited a check by phone, withdrew cash from an ATM, or checked your balance online.  So why are we so dependent on a physician’s office that is only open 24% of the hours in a week?

It’s obvious that a change is needed.  However, technological, financial, regulatory, and legislative forces are all at play here and it’s unclear how that change will manifest itself over the coming years.  What we can be sure of though is that technology and practice consolidation will play a major role in the evolution of healthcare delivery.  In time, you will likely visit your physician remotely via a cloud-based platform or in a brick and mortar facility that is part of a larger health system.  The economies of scale offered through either of these modalities are all that is left to save an economically struggling healthcare system.  The days of the small independent medical practice are sadly coming to an end.

Robert J. Szczerba is the CEO of X Tech Ventures and author of the Forbes column “Rocket Science Meets Brain Surgery.”  Follow him via TwitterFacebook, or LinkedIn.

Source: Forbes Business

 
 

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