360° Coverage : Are the Economics of Healthcare Getting You Sick?

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

Are the Economics of Healthcare Getting You Sick?

Feb 24 2014, 7:19am CST | by

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...

Filed under: news

 
 
 

31 weeks ago

Are the Economics of Healthcare Getting You Sick?

Feb 24 2014, 7:19am CST | by

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

 
Update
2

4 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slas ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

4 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17" hits ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Substance abuse related to future violence among mentally ill
Washington, Oct 2 (IANS) A study conducted by the University of Buffalo suggests that reducing substance abuse can lessen violent acts by patients with severe mental illness.
 
 
Revealed: How species react to climate change
Washington, Oct 2 (IANS) Researchers at the University of Maryland Center for Environmental Science and the University of Vermont in the US have developed a new tool to overcome a major challenge of predicting how organisms may respond to climate change.
 
 
New Zealand ready to fight Ebola
Wellington, Oct 2 (IANS) Though there are no signs of the Ebola virus in New Zealand, the country has prepared itself to fight the epidemic if it occurs.
 
 
Long-acting insulin more effective for type 1 diabetes
Washington, Oct 2 (IANS) Long-acting insulin is safer and more effective than intermediate-acting insulin for patients with type 1 diabetes, reveals a new study.
 
 
 

Latest from the Network

UN chief slams terror attacks in Syria
United Nations, Oct 2 (IANS) UN Secretary General Ban Ki-moon has condemned the twin bomb attacks near a school in Syria that killed 31 people. Several children were among those killed in the Wednesday attack in the...
Read more on Politics Balla
 
C.J. Spillman Being Investigated for Sexual Assault
Dallas Cowboys safety C.J. Spillman is being investigated for sexual assault.According to ESPN Dallas' Calvin Watkins and Todd Archer, the alleged incident took place at the Gaylord Hotel on Sept. 20, a day before the...
Read more on Sport Balla
 
Zach Braff defends Kickstarter project
Zach Braff has hit back at criticism of his Kiskstarter project. The multimillionaire actor and filmmaker - who is best known for playing the character of Dr. John Dorian on US sitcom 'Scrubs' - felt his the response to...
Read more on Movie Balla
 
Modi visit very successful: US think tank
Washington, Oct 2 (IANS) Prime Minister Narendra Modi's US visit was "very successful" on many counts as he reached out to various interest groups in the US in unprecedented ways, according to a leading US think tank...
Read more on Politics Balla
 
IOC 'satisfied' with Rio 2016 preparations
Rio de Janeiro, Oct 2 (IANS) The International Olympic Committee (IOC) said it was 'satisfied' with the state of preparations for the Rio 2016 Olympic Games. IOC representatives completed a three-day visit of Rio...
Read more on Sport Balla
 
Asian Games: Indian women paddlers Manika, Ankita ousted
Incheon, Oct 2 (IANS) Indian women paddlers Manika Batra and Ankita Das lost their respective matches and were knocked out of the women's singles table tennis event of the 17th Asian Games here Thursday. Manika was...
Read more on Sport Balla
 
With Modi momentum, US seeks enhanced energy collaboration
Washington, Oct 2 (IANS) With Indian Prime Minister Narendra Modi "providing a new momentum", the US has suggested four areas where India and the US can enhance collaboration in energy and sustainable development. "We...
Read more on Politics Balla
 
Indian women's kabaddi team in final
Incheon, Oct 2 (IANS) Defending champion India stayed on course for their second consecutive Asian Games gold medal in women's kabaddi as they marched into the final, beating Thailand 41-28 in the semi-final at the...
Read more on Sport Balla
 
Obama very pleased with Modi visit
Washington, Oct 2 (IANS) President Barack Obama was "very pleased" with and "enjoyed" Prime Minister Narendra Modi's visit as it reflected the depth of the strong relationship between the US and India, according to the...
Read more on Politics Balla
 
Leonardo DiCaprio won't have a joint birthday party with Kate Winslet
Leonardo DiCaprio refuses to have a joint 40th birthday party with Kate Winslet. The 'Divergent' star - who will celebrate the milestone in October 2015 - has been close friends with the actor for almost 20 years and he...
Read more on Celebrity Balla