Wednesday, June 23, 2004

Sticker Shock & Awe

Blue ParrotsMy bookkeeper's husband recently underwent coronary angioplasty with stents - a procedure which opens clogged arteries in the heart and keeps them open with synthetic tubes. He was hospitalized for less than 24 hours. This miracle of modern medicine came with a price, however - his hospital bill alone (excluding physicians' fees, which are billed separately and will be much less) was nearly $100,000. Breathtaking.

Now, in reality, this staggering price tag is a mirage. Because of contractual agreements with insurance carriers, the hospital will likely receive somewhere between $30,000-$50,000. Not chump change, mind you, but somewhat less shocking than the sticker price. I suspect their net profit on this procedure will be only a few thousand dollars. So what drives the cost of such procedures, and medical services in general, to such stratospheric heights?

I am not privy to the accounting details of hospital finances, but it is not hard to understand some of the factors involved. Take, for example, the stents themselves: tiny collapsible tubes which are passed through a narrow catheter into the arteries of the heart, then expand in place, coated with a drug to resist clotting. The raw materials to produce these stents cost less than $100, but the purchase price for the hospitals is in the thousands. Carefully tested and researched on animals first, then human studies taking many years, they must pass an arduous and very expensive journey before being approved for use by the FDA - and many developed products never survive these hurdles. The cost of both the successful and unsuccessful must be amortized over what is likely to be a short product life - the next-generation device, although very similar, will need to go through the same set of animal and clinical trials, which are likely already underway when the product is approved for general use.

Now, assume for a moment that the device, so promising at first, develops problems or complications after several years which were not apparent despite long and detailed clinical trials prior to release. The complexity of human physiology and disease virtually guarantees such an unpredictable outcome in some medical products, no matter how thorough the prerelease vetting. The device will then be pulled before its projected product life, killing future sales, with no small likelihood of a class-action suit by injured patients against the manufacturer. Suddenly the apparently-lucrative medical device business begins to look more and more like a high-stakes dot-com gamble. So companies recoup the costs of these risks with sky-high product prices.

On top of these inflationary factors for medical drugs, supplies and devices, you have the cost of the hospital's own liability risk, with their malpractice premiums soaring to cover spiraling malpractice settlements which compete with the lottery for big winnings. And then, of course, there is the unintended consequences and costs of health care regulation. According to the Law of Rules, in a regulation-heavy society, rules intended to solve one problem invariably create more. So regulations designed to prevent "dumping" (transferring sick patients without insurance to other hospitals - a relatively rare abuse) have required hospital emergency rooms to care for the uninsured in record numbers with no reimbursement whatsoever. The costs of expensive emergency room diagnostics and medical care must be absorbed by increasing charges for services to insured patients. Federal health care reimbursements - Medicare and Medicaid - are also typically at or below the costs of providing those services, and therefore act as another large hidden tax on the insured which drive up costs.

There are no simple solutions to these problems, until we as a society address issues which until now we have been unwilling to face: the "somebody owes me" mentality and greed which helps drive the malpractice and liability crisis; the loss of perspective on the inevitability of error in complex human endeavors such as medicine; and the unwillingness to accept death and suffering as an inevitable part of life, even when the costs of such denial are prohibitive.