All of us are patients and all of us are Chief Financial Officers of our own humble bank accounts, cast into the shadows of the behemoth bank statements of major medical institutions. How behemoth, you say? Multi-hospital health systems and their owned physicians can generate upwards of $8 billion in annual revenue. To put that into perspective, the NFL generates an estimated $10 billion in annual revenue. That’s the NFL compared to a single health system. The Washington Redskins generate about $380 million in revenue per year (and still can’t win, but that’s an issue for another article altogether).
One of the growing trends in healthcare is to be more cognizant of costs. Those who work in healthcare know that while cost is easy to define theoretically in your intro to economics class during your first year of college, it is practically much more difficult to grapple with in an increasingly complex and dynamic healthcare industry. While a small retail business like a coffee shop can easily quantify the cost of inventory, overhead, and payroll, running a hospital is much different. Spend five minutes talking to someone working in a hospital billing office and you will become intimately familiar with the term write-off.
Ah, but there are some critical differences between revenue, cash, and costs in the healthcare world. These write-offs that are so rightfully perplexing to Jerry Seinfeld are a key indicator of those differences. That same health system that generates revenue at around $8 billion probably only collects payment on about $2 billion of it. What happens to the rest? It is written off. What does that mean in terms of what the hospital incurred in costs? As Stephen Brill’s eye-opening article Bitter Pill: Why Medical Bills Are Killing Us elucidated back in March of 2013, hospital pricing very rarely correlates to cost. So to answer the question of what collecting payments on a quarter of overall revenue means in terms of cost: nothing. And that’s what can be so confusing about having the healthcare financial discussion. Because these distinctions are nuanced and don’t follow an easy narrative, politicians and mainstream media don’t talk about them as part of the national debate. We must address our nation’s healthcare problems head on, and part of that means tossing ideological debates aside and understanding the truth about how the industry’s finances are managed, or in many cases mismanaged.
In the following series of articles, I will peel away the layers of this convoluted system to explain in simple terms to doctors, CXOs, and the lay person alike the following:
What do we really mean when we refer to healthcare costs and how can we reduce them? What are some of the factors that drive a major health system’s bottom line?
When I, the patient, see a statement, where do these prices come from? Why is it so difficult to tell me how much I will owe for a given procedure? What are some tools that health systems employ to better estimate patient liability (what a patient owes after insurance)?
How do the uninsured and underinsured qualify for charity care? How does charity care fit into the Affordable Care Act? What are some new tools available to large health systems to presume patients eligible for charity care and what are some best practices for implementing them?
You’ve reached the bottom of the article and are probably wondering where the list is. I lied to you in the title; this isn’t a listicle and none of the subsequent articles in the series will be. There are more than eight reasons why our country struggles with the healthcare conversation. By the end of the series, I hope that you are more informed to better run your practice, participate meaningfully in the national conversation, run a large health system, or just talk to your doctor as an informed patient.
By: Drew Cohen
Drew Cohen currently works for McKinnis Consulting Services and previously worked for Epic. As a consultant, he works with large and complex health systems, bridging the gap between technical and operational challenges to get the most out of their EHR. He graduated from the University of Virginia with a B.A. in Foreign Affairs.