Demystifying Medicine One Month at a Time

Down the Rabbit Hole

A local business publication recently reported some happy financial news for GlassHospital.

However, if read carefully, the article contains this apparent paradox:

  1. ER traffic is down.
  2. Hospital admissions are down.
  3. Revenue (and profit!) is up!

How can this be?

I mean, if this were a real business, wouldn’t less traffic and fewer ‘units sold’ equal less revenue and lower profits?

Not in Health Care Wonderland.

Welcome to HealthEcon 101.  Since I’m no economist (though I live near a famous Chicago School), I’ll do my best to keep it simple:

When a widget, er, a patient–say, YOU!— comes to the ER, the Oz-like cash-o-meter starts running the minute you’re laid on a gurney.

Everything has a price:  blood tests, sutures, pills, x-rays, casts, IV fluids; and of course, the ‘consultation’ fee of the doctor(s) (hospitals kindly include the nurses’ work in the overall hospital charges).  This includes the doctor that sees you, but also can grow to include any specialist’s fee; for example, a radiologist who might read your x-ray.

Chances are, if you have health insurance, you’re not too worried about the price on the meter. You know that you’re going to be mostly covered, minus some deductible and/or co-pay. (Those are covered in HealthEcon 201).

If you don’t have insurance, things get complicated.  Quick.  Since you can’t see the cash-o-meter, and you likely feel bad enough to come to the ER in the first place, you sanely decide not to worry about it. For now. (We’ll cover this scenario in Advanced HealthEcon [grad level stuff!]. But then you’re going to get a big bill. Much bigger still if you’re admitted to the hospital.

But for now, assume you have insurance.  Phew.

The big question is, are you covered under a Blue plan or a Red plan?

In our example, let’s call Blue plans ‘private’ insurance.  We’ll call Red plans ‘public’ insurance.

Which do you think the hospital likes better?

It turns out that under pre-arranged contracts with Blue plans, GlassHospital makes a margin on most of the patients treated.  In fact, the more complex the care delivered (i.e. involving multiple specialties), the more margin the hospital can make.  This can start to add up and accumulate, and let us do things like construct new buildings.

Red plans don’t reimburse us even at the level of our costs.  So if our patient traffic skews too far toward patients with Red plans, we won’t have operating capital to keep the cranes lifting and the cement trucks pouring.

It’s a tough dilemma.

With a sour economy and people losing jobs, many hard-working people are losing their Blue plans.  This narrows our potential “customer base” even further.

Hospital executives have in many instances reached the conclusion that an empty bed (with the potential to be filled by someone with a Blue plan) is a better ‘value’ for the hospital than a bed filled with a patient under a Red plan.

If you figure that hospitals have a fixed number of beds, staffing for those beds is one of the major fixed costs of doing business.  Therefore, it makes sense that running as close to capacity as possible maximizes the utility of those fixed costs. I’ve highlighted before how bumping up against capacity creates bottlenecks that can often leave patients waiting for beds.

The rest of the paradox is then explainable: if much of a hospital’s ER business is from people with Red plans, then a decrease in Red visits and admissions leaves more opportunity to fill spaces with Blue plan patients. Hence the improved balance sheet.

The bigger question is where have all the Red plan people gone?


  1. joe marlin

    Which proves that the Republican notion of competion in health care to lower costs doesn’t work like it presumably does for the proverbial widget manufacturers. And why a universal health care system would help alleviate the problem of the discrepancy between the Reds and the Blues.

  2. Tom Farrell

    Dr. Schumann, I disagree with your point:

    When looking at a balance sheet (for your students: revenue-expenses=income), ER traffic and hospital admissions do make up part of the revenue stream, but of course not all. Out-patient testing and auxiliary services are a large chunk of change, as are “other income” like investment and rental interest. Flip the coin, and expenses may be down because of a hiring freeze (with less humans doing a larger share of the work), a change in employee benefits, decreased use of utilities, etc.

    Also, are the bean counters using the cash or accrual basis? Might make a difference; it’s amazing what a little bit of fancy-footwork can do to the books.

    Tom Farrell

  3. lauren wilder

    There isn’t enough financial information to come to a conclusion, worse yet, an illogical one. Looking at these posts it looks like the standard arm waving of someone without all the data or the background to understand the data. Stick to medicine, hopefully that works out better.

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