The Secret Santa

Once again, sadly, it's subscription only (I almost wrote prescription only), but the new Health Affairs theme issue on hospitals does an excellent job of telling the same important story 8 different ways. I'll depend mostly on Stuart Altman's version since I am a Heller School alum, with an assist from Alan Dobson and colleagues. (Links take you to the abstracts.)

First Dobson. Americans, we are told, don't like to pay taxes, even to pay for stuff they actually need and use. Or at least the people who make the largest campaign contributions make sure they keep their own taxes low. So, one way to keep taxes low is for government to underpay for the stuff it buys. Specifically, in 2002, Medicare payments to hospitals paid 95 cents on the dollar for the cost of hospital services, and Medicaid, on average, paid 92 cents. So-called "free care," schemes by which states reimburse hospitals for care of the uninsured and indigent, paid less than 20% of those costs. Hospitals aren't allowed to print money, so where does all that free money come from? It comes from overcharging private payers, mostly insurers. They paid 122% of the cost of the services they paid for in 2002, and that subsidized Medicare, Medicaid and free care. So one thing that will happen as Congress continues to tighten the screws on Medicare and Medicaid is that hospitals will either have to jack up their prices for private payers, or cut back on services.

Enter Stuart. In the name of spreading freedom and democracy to the United States, we are about to hear in the State of the Union address that we're going to have consumer directed health care. Yes, we've already worked that over pretty well here. But Dr. Altman et al point up another little problem with it. Part of the idea is that hospitals will have to post their prices for everything, and since "consumers" (that what we'll be, instead of patients) will be paying for a big chunk of hospital services out of their own pockets (from big deductibles, co-payments, and whatever is in their finite Health Savings Accounts), they'll presumably go shopping around for the cheapest hospitals.

The classic version of a hospital in the U.S. is a non-profit charitable institution that provides a broad range of services and has a social mission, such that it tries to take care of everybody in need and provide benefits to the community. That's why all that cost-shifting happens in the first place -- it's the only way for hospitals to fulfill their social mission. Otherwise they'd have to refuse all Medicare and Medicaid beneficiaries, and uninsured patients. But there are already growing number of specialty hospitals, usually for-profit, that don't have emergency departments and that only provide particularly profitable services. They'll easily beat out general hospitals for the cherry picked customers in a brave new world of price transparency and comparison shopping by consumers. Meanwhile, in trying to compete with each other, the charitable general hospitals will have to drive down their own prices.

Stuart predicts that the hospital industry could end up like the airline industry -- highly cost-efficient specialty hospitals will drive the classic hospitals into bankruptcy, just as carriers that service limited, highly profitable routes with scanty amenities have sent the big airlines that used to fly everywhere the way of the dinosaur. Write the Brandeis Jeremiahs:

Downsizing, service reduction and salary cuts are not the only eventualities that could occur. It is also likely that the hospital industry could become tiered -- one system with modern up-to-date facilities, some focused and specialized, that serve the privately insured, and one poorer, underfunded and possibly publicly supported system that serves everyone else (Medicare and Medicaid patients, the poor, the uninsured, and many of the chronically ill); one system that dominates suburban areas with high income, high employment, and extensive insurance coverage, and one that serves the inner city, poor rural areas, and retirement communities.

And I'll just add, if those latter constituencies get served at all. Welcome to The Ownership Society, and the Culture of Life, backing into the future, over a cliff.

[Cross-posted at Stayin' Alive.]