One of the reasons I find it so difficult to take “progressive” policy wonks seriously on health care reform is that they seem utterly incapable of honest and informed analysis. A typical manifestation of that intellectual handicap can be found in this post by Maggie Mahar, which begins with a misleading conflation of disparate data:
A combination of spending on new construction and hi-tech equipment pushed the nation’s hospital bill to $648.2 billion … As a result, by 2006, spending on hospitals represented nearly one-third of the $2.1 trillion we shelled out for health care that year.
By gratuitously mixing data on new construction and aggregate hospital costs, Mahar disingenuously implies that a significant driver of health care inflation is an unncecessary building boom perpetrated by greedy hospital administrators. As usual, however, she leaves out important information that doesn’t support her conspiracy theory.
The recent uptick in hospital construction is motivated by nothing more sinister than an effort to make up for a lull in capital investment that occurred in the late 1990s. From 1997 to 2001, capital spending by hospitals rose only 1% per year. When interest rates declined at the beginning of the decade, hospitals began making up for lost time.
Moreover, the insinuation that capital expenditures are the main driver of hospital costs is uninformed or dishonest or both. The single largest cost of running a hospital is human resources. For most hospitals, wages and benefits constitute between 60% and 70% of operating expenses, while capital expenditures range between 5% and 10%.
Mahar’s post also demonstrates that she has yet to do her homework on how hospitals are paid for their services. Although I have attempted to enlighten her on this point (see the 2nd comment on this post), she still insists on depicting a fictional reimbursement world. This allows her to produce false dichotomies such as the following:
While hospitals that vie for the most affluent patients raise the price on every pill and every pillow in order to cover the cost of the mahogany, the marble, the waterfalls and the spacious rooms, patients in less affluent areas suffer.
In reality, Medicare, Medicaid and SCHIP pay according to DRG and APC, while managed care and other private insurance products almost always pay contract case rates. This means that, for all intents and purposes, there is no increase in net income to be had by raising prices for “pills,” “pillows,” or anything else.
Even if there were some benefit to be derived from raising prices in suburban hospitals, it would have no effect on hospitals in less affluent areas. Health care is not a zero sum game. Hospitals in less affluent and rural areas are suffering not because of capital expansions in Suburbia, but because of the very sort government meddling in health care that Mahar advocates.
The above examples are merely a sample of the fallacies that Mahar’s post contains. And sadly, they are typical of the nonsense that “progressive” health wonks routinely produce. The debate over health care reform would be much more productive if Mahar and other advocates of government-run health care were capable of moving beyond this kind of BS.
Comments 4
Actually what you say is not true
IF you are really interested, you should read MedPac’s 500 -page plus March report.
But I suspect that, rather than doing reserach, you prefer to ramble on . . .
Hospitals did less spending on construction in th 1990s for various reasons: the biggest was that they didn’t need to. Inpatient stays became much shorter, and many more patients were treated on an outpatient basis.
So hospitals don’t need more beds.
In fact, in many areas of the country, we already had too many beds and too much duplication of very expensive equipment in hospitals located in the same area. (See numerous articles in “Health Affairs” on the “medical arms race.”)
Eight-five percent of the construction spending, according to MedPac, was not for remodeling worn out buildings–it was for “New facilities and expansion of existing hospitals. ”
MedPac questions whether this building boom is actually adding to the efficiency of hospitals–i.e. is it leading to higher quality care at a lower cost?
There is little evidence that it is. Meanwhile, the number of “adverse events” climbs.
As for passing on the costs of the building boom, perhaps you haven’t heard, but as of 2008, Medicare began phasing out DRG payments and is moving to a MS DRG system (medical severity) made up fo 745 groups (in contrast to the 538 DRG groups.)
Most importantly, these reimbursements will be based, not “on hospital charges, but on hospital costs.”
In addition, to diganostic group payments “add–on payments are made for cases using specified technologies.”
Hospitals can capture those add-on payments by contructing a new wing and installing the new technology–even if the hospital 1/4 mile away already has the same technology.
We also know that when hospitals expand capacity, they always manage to fill the beds–even if patients don’t need to be hospitalized. In areas of the country where there are more hospital beds, Medicare spends twice as much per Medicare beneficiary (after adjusting for race, overall health in that geogaphic area, etc.), largely due to unnecessary hospitalizatoins–and the outcomes are no better, and often they are worse. Hospitals are dangerous places, especially if you don’t need to be there. (MedPac also talks about this in its March report, should you care to read it.)
AS I reported, the Center for Health System Change reports that much of the building is in the suburbs, and to expand on delivering the most lucrative services–with little or no attention paid to whether the community needs extra beds–or those services.But again, supply will drive demand–raising Medicare spending.
As to passing on the costs of construction,one way to do that is to jack up the volume of sersvices provided to a given patient.
MedPac reports that much of the increase in Medicare spending on hospitals is related to “increases in the number of servcices patients received each day.”
More diagnostic tests, for example, is a good way to pay for the new wing and all of the new diagnostic imaging equipment that a hospital has bought. Putting a new born in an neo-natal intensive care unit is a good way to help pay for the unit–even if he doesn’t need to be there. (See Health Affairs on over-use of neo-natal ICUs and how that hurts newborns.)
Next time you decide to attack someone,
Posted 10 Apr 2008 at 10:52 am ¶check your facts.
“Eight-five percent of the construction spending, according to MedPac, was not for remodeling worn out buildings–it was for ‘New facilities and expansion of existing hospitals.’”
This doesn’t speak to my point, Maggie. No matter why the construction is being done, it still isn’t the main force behind rising hospital costs.
“As for passing on the costs … Medicare began phasing out DRG payments and is moving to a MS DRG system … these reimbursements will be based … ‘on hospital costs’”
You haven’t done your homework. The MS-DRG isn’t based on the costs of an individual hospital. “Cost” to CMS is only a single component of a formula used to determine a one-size-fits-all payment. This payment, under the MS-DRG system, will average well below cost.
“Hospitals can capture those add-on payments by contructing a new wing and installing the new technology.”
Again, you’re not getting how the system works. When I showed this part of your comment to one of my colleagues, she laughed aloud.
“Supply will drive demand–raising Medicare spending.”
This odd mutation of supply-side economics is obviously a popular talking point among “progressive” policy wonks, but it has no basis in reality.
Here, BTW, is an AHA chart showing how Medicare and Medicaid payments relate to hospital costs in the aggregate. As you can see, payments have been well south of cost for some time.
Posted 10 Apr 2008 at 2:36 pm ¶Being below average cost is not the same as being below marginal cost. Since so many of a hospital’s costs are sunk costs, it still is in the hospital’s best interest to drive Medicare and Medicaid utilization higher in preference to empty beds.
Posted 11 Apr 2008 at 9:06 pm ¶Err, fixed costs, not sunk costs, my bad.
Posted 11 Apr 2008 at 9:06 pm ¶Trackbacks & Pingbacks 2
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