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Why Is Healthcare So Expensive? Here's One Reason

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#1 Who_Do_You_Trust

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Posted 16 June 2017 - 12:18 PM

Everyone hears about the escalating costs of healthcare in America.  There are many reasons, but an article in today’s SacBee focuses on one of those reasons.  It shows that a few are becoming very wealthy in healthcare, but doesn’t connect the dots on how.  It’s a tale of manipulation and market distortions that place corporate health, wealth, and growth above better customer care and lower prices.  (What other industries are following this model?  Been on a plane lately?)

 

The SacBee article shows a list of CEO compensation for the 50 largest non-profits in the region.  21 of these are healthcare related businesses.  And the CEO paychecks are substantial, ranging from $300k up to $7.5M.

 

First, why are healthcare related companies mostly registered as non-profits?  One simple reason – tax avoidance.  These non-profits get all the benefits of local, state, and federal governments (use of streets, infrastructure, police & fire protection, etc) and they get it all for FREE.     

 

Second, non-profits are actually required to NOT make a profit.  But in many cases, their net revenues are very large.  In 2016, Sutter Health had total revenue of about $12B with a net revenue (profit) of $554M.  And this was a 784% increase over net revenue in 2015.  (Source – Sutter Health Annual Reports for 2015 & 2016)  Because they are not allowed to make a profit, they must spend it all, and some of it goes to extremely generous executive compensation.   Why don’t they use some of the revenue for the benefit of their patients in the form of reduced pricing?

 

Here’s why – the healthcare industry has mastered the art of a distorted market.  For most other products we use, as the technology advances and the products become more common, the prices go down.  Think of big screen TV’s.  10 years ago, they cost $1000’s.  Today they cost $100’s.   Not so with healthcare.  As medical technologies advance and procedures become more commonplace, the prices go up.  A distorted market. 

 

So rather than share their wealth with customers (like Walmart does), healthcare uses it to richly reward top executives, create lavish facilities, and populate them with medical equipment that’s not needed or seldom used.  A couple years ago, I got a tour of a new hospital in Denver and they showed me a storeroom in the basement that was filled with brand new patient monitors.  They told me they bought more patient monitors than the number of beds in the hospital.  When asked why, they said “We needed to spend some money before the end of the fiscal year and this is what they bought.”  Why not use it for patient benefit, like rebates or lower prices?   No response.

 

I get upset at the way the healthcare industry scams Americans.  They know people will pay anything to stay alive and healthcare takes advantage of them.  It’s a travesty and no one has the courage to confront it thanks to the army of lobbyists they hire in Washington.

 

I’m done ranting.  If you’ve kept reading this far, I appreciate your attention.  It’s not a terribly riveting topic.

 

 

 



#2 The Average Joe

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Posted 16 June 2017 - 01:19 PM

What other industry does not have a price list? There is ZERO competition for clients.  Hard to make a decision to go to a more value option when there are NO OPTIONS. Much like Obamacare, if you only have one (or in some cases no) option for healthcare you are the only one getting screwed. not the government, not the provider, not the insurer. You. And, because of the mandate, you have no other option but to bend over.  Yawn about the CEO salary. Pennies in the grand scheme.


"Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive." -- C.S. Lewis

 

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#3 Who_Do_You_Trust

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Posted 16 June 2017 - 07:55 PM

Not quite pennies, maybe quarters.  I was unable to get Sutter's total executive compensation for 2015.  Would need to submit a FIA request to the IRS.  But from what I could find, it appears Sutter's total executive compensation for 2015 was nearly $100M.  



#4 The Average Joe

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Posted 16 June 2017 - 09:33 PM

So the executive compensation amounts to 0.8% of revenue?   Pennies.


"Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive." -- C.S. Lewis

 

If the only way to combat "global warming" was to lower taxes, we would never hear of the issue again. - Anonymous

 

                                                                  It is Natural when Intelligence sees Stupid, it rejects Stupid, and Opts for Truth..... Stupid then labels Truth as Hate.-  Anonymous

 


 


#5 Who_Do_You_Trust

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Posted 17 June 2017 - 06:49 AM

It's worse than that.  Much of executive compensation is not direct salary.  It comes in the form of bonuses, options, deferred compensation, golden hellos and golden parachutes, pensions, and perks.  These monies are generally taken from free cash flow.  Lets say their free cash flow is close to their net profit, and half of their compensation is not direct salary.  Then executive compensation is about 16% of free cash flow.  Sutter is a little more generous than most companies.  their annual report shows several projects paid by free cash flow that are programs for the distressed members of our population.  Most corporations use free cash flow to fund stock buy-backs, blue-sky research, acquisitions, rainy day funds, and unbudgeted capital expenditures.  

 

I'm just saying that executive compensation for these non-profits seems out of whack, and certainly doesn't contribute to an "excellent customer experience".  

 

Just want to highlight one point of the distortion in the healthcare market.  There are many others. 



#6 Steve Heard

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Posted 17 June 2017 - 08:59 AM

So the executive compensation amounts to 0.8% of revenue?   Pennies.

That's the attitude of everyone who defends waste. 

 

A poor mother on welfare selling her free diapers is a drop in the bucket. 


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#7 Chris

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Posted 17 June 2017 - 09:29 AM

I actually work in a pharmaceutical plant who_do and you would not believe how expensive it is to produce drugs, you have no idea....!  You are a "journalist" who leans pretty far to the left so it's only natural that you dislike the pharma industry and people other than yourself, or the ones you approve of, making any money.  What you guys on the left don't realize is that drug companies are like any other business and must make a profit to survive, pay off it's investors, capital providers, risk takers, attract excellent workers, businessmen, scientists, and return some of that profit back into research.  In the pharma industry R&D budgets are huge....!   The research we do creates the drugs of tomorrow that just might save your life and let you live another 5 to 10 years basking in the glory of your grandchildren.  The cost to bring a new drug to market is about 3 billion dollars now, more for a bio pharmaceutical which is my specialty.  Someday, you just might owe your very existence to we "evil drug makers".   Chris


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#8 bordercolliefan

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Posted 17 June 2017 - 10:03 AM

Chris, it's  not about whether Big Pharma makes a profit; it's about what the magnitude of the profit is.  And, as someone knowledgeable in Econ, you should know it is a classic distorted  market since one company will have a monopoly on a new drug, and the drug may be essential to life.  In this situation, there are no normal market-based price controls, and Big Pharma takes full advantage.  

 

It is also significant that many of the drugs sold here  for exorbitant prices are sold in other First word countries--Canada, France,  etc. for much less.  When  did we become the world's stooge while Big Pharma laughs all the way to the bank?

 

Those claiming that more market competition will solve our healthcare crisis ignore one crucial thing:  healthcare consumers often are not in a position to compare prices and haggle for the best deal--while they bleed to death in  the ambulance or their heart pumps at 40% awaiting bypass surgery.  Competition will work great for some things, like an eyelift or bunion surgery, but not for the  life-threatening conditions that really drive up costs.  That's why we  need government to step in  and  put the brakes on those who would profit unconscionably from others' illnesses.



#9 Chris

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Posted 17 June 2017 - 11:16 AM

BC, what you call a "monopoly" is what others call a "patent".   Drug companies get a longer patent to re-coup their costs of development which are staggering compared to any other types of development except for maybe aerospace.  There are plenty of generics and bio-similars already here and many more coming down the pipeline to keep costs down and increase competition.  And in third world countries pharma companies sell at a loss, give it away essentially, a loss that you and I in the first world subsidize and I am happy to do it. Everyday at work it's about our patients, that is our first concern, we have to be on the ball and not lose a batch or a run.  We can barely make enough for worldwide demand.  If we do lose a batch our patients can go without our drug and this can be life threatening to them.  Our patients are people we know and love, in our own families, our neighbors, our friends.  I met a woman the other day who was taking a medicine that I make along with a chemo drug from another company.  It's what kept her alive these last five years, the stuff I make, me and a 1000 other people at my plant, 24 hours a day, 365 days a year.  She is having a rough time of it but she's alive and fighting breast cancer.  This is what we do, this is what we dedicate our careers to, not dollar signs....!   One day spent with the people I work with would change your world view of pharma and you would understand how wrong you guys are.  Plus you'd realize how expensive our components, procedures, and processes are......  Oh, and my company spends 10 billion dollars a year on R&D, that's 20% of revenue....   Chris


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#10 The Average Joe

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Posted 17 June 2017 - 11:53 AM

That's the attitude of everyone who defends waste. 

 

A poor mother on welfare selling her free diapers is a drop in the bucket. 

 

Paying people is not "a waste" in my book. Can I defend their salary? Seems high for a non-profit, but in line with for profit. Decisions these people make have an effect on whether a 12 billion dollar company lives or dies (and all the corresponding jobs with that).  That 0.8% of gross is not what is driving 30% jumps a year in costs though.  

 

BCF was right. There are no normal market based controls.  What we have is a bad system with (generally) good people. There is no pressure to be competitive because you have  a marketplace with no options. Add in fear of lawsuit, government intrusion/regulations, a 3rd party payment system and a general lack of understanding of economics by a populace who wants "free" healthcare, and it's a recipe for poor results for the consumer.

 

There should definitely be a price list available for consumers. We have labeling on food, cars, homes, etc. Why not healthcare? Heck, most people have no idea what their doctor or hospital is charging for anything.  Cosmetic surgery is quite different as prices are spelled out and they compete for clients.  You might note that their prices are dropping (implants for example have dropped every year since 2010)

While you may not have a choice in an emergency, you would certainly have a choice for non emergency procedures. If Kaiser would remove tonsils for 1200 and Sutter charged 1800, you would have that option. 


"Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive." -- C.S. Lewis

 

If the only way to combat "global warming" was to lower taxes, we would never hear of the issue again. - Anonymous

 

                                                                  It is Natural when Intelligence sees Stupid, it rejects Stupid, and Opts for Truth..... Stupid then labels Truth as Hate.-  Anonymous

 


 


#11 Chris

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Posted 17 June 2017 - 04:14 PM

So just a note to who_do and BC.   What if we regulated journalist salaries and news organizations profits or what lawyers and attorneys make, cap what law firms could make in a year....?  Cap what "partners" could make and then take everything on top of that.  Cap what they could earn, regulate what they get for every service....?   Word for word who_do and BC, or page by page of legal output.   Be careful here you two, lawyers and journalists are very low on the public popularity scale right now, trust me.  Probably a notch below drug company workers, a notch or two I think.   How about if I start a blog or a national position that we should limit attorney salaries and journalist salaries and legal office corporate profits....?   Let's say journalists can make no more than 50K a year and lawyers maybe 65K a year, anymore and you have to send it to the government, because you are evil and make too much...?.   Hey, that kinda sounds good....?   Maybe I'll add a special "paper usage" and "economic mitigation tax" at 15K a year just to make up for all that paper you waste, and maybe hot air you produce, and maybe a left wing "fake news" tax for the journalists, I'll decide what is hot air and what is fake news and have the IRS bill you accordingly...?   Of course I know very little about your professions but I will make these rules and taxes anyway because you appear bad and make enormous profits from what I can tell.....!   Fix your own house before you come after mine, please.....!   A lot to be fixed in both of your professions, both of your houses and you know it....!  Do you really want a Trump or Pence government regulating to the nano particle what you do....?  How you make your living, judging you on your profit and not your hard work and innovation...?  No you don't.  That would limit your output and ability to improvise, use your experience and knowledge, the core of what you do....!    You know nothing about pharma production so back off until you study it for years and maybe work in it. And the funny thing is, in the future you might just have to thank me and the big pharma industry for that extra 5 to 7 years you lived above and beyond your expiration date...!  Sure, it will be expensive because it costs billions to bring them, those new, innovative and super cool drugs to market....   But if you are so against the cost then maybe you'll go without.....?   Drop off of this Earth a littIe early, 5 to 7 years early, just before your daughter gets married or just before the birth of your first Grandchild, or that trip to Ireland or Sante Fe that you always wanted to take.....?    I think not.  Me neither.....  Think it all out before you judge something that you know nothing about, have no experience in, but what you are told on the progressive, dnc, huff post websites.   Think before you act, do your due diligence and research and you will find the truth....!   Chris


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#12 Who_Do_You_Trust

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Posted 17 June 2017 - 10:49 PM

BCF - I share your thoughts.  As a freelance writer, I've made a career out of authoring articles that promote businesses and industries.  (Semi-retired now)  However,  I get upset when a particular industry or market group does well on a tilted playing field and at the expense of their customers.  It's certainly unethical, and in a few cases illegal.

 

There are features of the healthcare industry that clearly show how distorted their market is:

 

1)  Profit margins for healthcare companies, and especially the drug companies, are off the charts.  Pre-tax margins for the lowest performing drug companies are about 10%.  this is the same profit margin as the highest performing automotive manufacturer.  Also, many drug companies spend nearly twice as much on marketing and advertising as they do on research.  Those ads during the 5:30pm news are expensive.  Here are some numbers on the big drug manufacturers:

 

Pharma%20profit%20margins_zpsgtloziyg.pn

Source:  BBC - http://www.bbc.com/news/business-28212223 

 

2)  Drug companies get 20 years exclusivity protection for anything they patent.  No problem with that.  Patents drive innovation.  but the drug companies play a game where they make minor tweaks to a product whose patent is about to expire, then file for another 20 year patent because the tweaked product is a tiny bit different.  They claim it's "new" and get the patent.  But it's really not new.  During this entire period, no generics are allowed to be manufactured.

 

3)  Federal law prevents any negotiation between Medicare and the drug companies over pricing (thanks to drug company lobbyists), Drug companies can charge any price they wish.  And they do to Americans.  The price of the same drug in Canada is substantially less because the Canadian healthcare systems are allowed to negotiate prices.

 

4)  And as pointed out already,  there are no price lists for medical procedures or drugs.  Price lists are necessary for free enterprise to work.  Patients often don't know how much something costs until the bill arrives.

 

The entire industry operates unethically IMO.  Their priority list has stock holders at the top and patients at the bottom.



#13 2 Aces

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Posted 20 June 2017 - 02:00 PM

So just a note to who_do and BC.   What if we regulated journalist salaries and news organizations profits or what lawyers and attorneys make, cap what law firms could make in a year....?  Cap what "partners" could make and then take everything on top of that.  Cap what they could earn, regulate what they get for every service....?   Word for word who_do and BC, or page by page of legal output.   Be careful here you two, lawyers and journalists are very low on the public popularity scale right now, trust me.  Probably a notch below drug company workers, a notch or two I think.   Fix your own house before you come after mine, please.....!   A lot to be fixed in both of your professions, both of your houses and you know it....!

 

Man, you got that right. Pharma is already one of the most regulated industries on the planet, so not sure what those two *Leftists* are whining about. Oh, wait, they are Leftists, and we all know how Leftists feel about big business, corporations, etc: they are the sworn enemy of the Left, yet in private they are the first ones in line for campaign cash and other goodies and graft while making promises to CEO's that "it's only talk.. I have to criticize you when I talk to my voters, but I don't really mean it". Too many examples to enumerate here. Talk about *Fake*. Sad that the Leftists here buy the fraud hook, line, and sinker. Seems ignorant and disingenuous to me, but we've become accustomed to the hypocrisy of the modern day Left in America. Oh, and isn't it amusing that the "problems" they cite happened in large part under Obama, the *man of the people*, who they supported bigtime? I hear crickets...

 

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