(Bloomberg View) — You’ve probably read about huge disparities in regional Medicare spending, without equivalently huge disparities in health outcomes. You’ve probably read that quite a few times. It is one of the most favorite data points for people writing about health care costs, because it suggests there’s a magic pot of money that can be neatly drained out of the system without making anyone worse off.
Unfortunately, like the other magic pots of money that people thought they’d found in the health care system, this one turns out to be underwhelming. A new study looks at hospital spending not just by Medicare, but by private insurers. And it turns out that areas where Medicare spending is low often have high private spending, and vice versa.
This is not really that surprising. Health care is an industry with substantial cross-subsidies between different classes of customers. Hospitals can make most of their money on private patients, then get a little extra revenue by filling beds with Medicare or Medicaid patients paying lower rates. Countries that pay higher prices for prescription drugs subsidize the research that benefits countries paying less. Doctors manage their caseloads to make sure that they can take some patients whose insurers (government or private) reimburse less generously, while still paying the rent and the staff.
Just looking at prices is often very confusing. One of the easiest ways to write a compulsively clickable article on health care is to find the list price of some procedure, and compare it across providers, states, or countries. Yet this metric is not very useful, because prices are set with reference to lots of other things — expected discount rates for various insurers, fixed costs, the price of other procedures. What we want to look at is cash flows, not an isolated price.
You may still be confused. Well, let me see if I can’t make it clearer with an old accounting joke. Yes, there are such things as accounting jokes, but don’t worry: You don’t need to know any actual accounting to understand this one.
A long time ago, back when people still filled out expense reports by hand instead of spending three hours trying to get the online expense system to work, a man took a client out for a week on the town. He had a very good week, and at the end of it, he escorted the man out of the restaurant where they’d had lunch to put him in a cab to the airport. Noticing that it was raining, he whipped out an umbrella to protect his customer from the rain. Unfortunately, just as the happy man climbed into the cab, a gust of wind shredded the salesman’s umbrella.
Fret not, the delighted customer gave his firm a huge order. And the salesman duly submitted his expense report for $122.46. At the bottom, he listed “1 Umbrella: $3.99”. (Yes, as I said, it was a very long time ago.)