Why
Does My Band-Aid Cost $50 in the Emergency Room?
Everyone who has the misfortune of needing the
emergency room eventually gets a bill.
Many of them wonder why simple supplies and treatments cost so much when
they are delivered in the emergency setting.
The specter of gouging by greedy hospitals is frequently raised. There are actually reasons that are obvious
for the huge markup when analyzed with financial data. I propose to clarify this situation by
explaining the income and expenses portion of an emergency room’s financial
statements. While many hospitals are
non-profits, I believe that the analysis is the same, whether the goal is
profit or continued operation of the hospital.
Income,
or revenue, comes almost exclusively from payments made to the emergency room
for services rendered. In looking at
these revenues, it helps to think of the different payers, Medicaid, Medicare
and the private insurances, as different lines of products. In the same way that a department store may
sell several different lines of jeans, most of which have similar costs, at far
different price points, an emergency room providing a certain service has
several different price points. Medicaid
and Medicare reimbursement rates are set up the government, and not open to
change. Private insurance payments are
negotiated on an annual basis. Like any
business, when a product is sold for a higher price, if the cost of the product
remains similar, profit goes up.
Medicaid and Medicare are frequently priced below the hospital’s
breakeven point for providing services.
This results in most of the profit coming from the private insurance
payments, which requires more markup. Medicaid
and Medicare act as loss leaders, providing the hospital with marketing and
volume, but their price points require augmentation from the private
insurances. Currently, in Pennsylvania,
Medicare is paying between 70-85% of private payers. Medicaid pays on average 66% of that. Clearly, if the payment is coming from
private insurance, prices will be higher than if the payers were all
equivalent.
Fixed
expenses in an emergency room are quite high.
Usually, there is a great deal of square footage that is needed to
operate. Staff expenses are fixed in a
set range of the number of patient visits.
Physicians, nurses, aides, physician extenders, registration clerks,
housekeeping, financial services counselors, respiratory technicians, radiology
technicians, social workers are a few of the myriad positions that need to be
staffed around the clock, regardless of the patient volume. As most businesses know, payroll is
frequently a large portion of expenses, as it involves benefits, and tax
consequences. Also, malpractice
insurance is necessary for all involved in the emergency room, including the
hospital itself. Another large fixed expense is the equipment necessary
for modern medical care, x-ray machines, CT scanners, ultrasounds, MRIs,
ambulances, sometimes even helicopters.
Each of these expensive machines requires staff to ensure that they
continue to operate at all times. These purchases
can be depreciated on a financial statement, but frequently become obsolete
quickly. The useful lifespan of each
generation of machine can be quite short.
Each certification that is required, JCAHO (Joint Commission on Accreditation
of Healthcare Organizations), trauma certification, emergency nursing
certification, board certification for physicians, is another fixed expense,
requiring licensing fees, and personnel time to maintain paperwork. Mandated electronic medical records require
computers, programs, backups, and information technology personnel, also around
the clock.
Variable expenses could be thought of as
supplies, medications and utilities. However,
in the emergency room, many of these variable expenses are less variable than
is commonly thought. Medications that
are used for specific purposes frequently need to be replaced because of
expiration dates. For example, a “code
cart”, the cart holding medications for reviving a patient who has stopped
breathing, has to be constantly up to date, even though it is hopefully not
used often. Once a month, the cart will
be cycled and all the medications thrown out.
Even utilities, thought to be variable, are really not in the emergency
setting, since all the equipment needs to be kept powered on and ready to go at
a moment’s notice.
If the goal is to deliver quality medical
care at a lower price point, there are several things that can be changed in
this system. On the revenue side,
equalizing price points between the payers will bring down the costs for
private insurers, but may increase the overall spending by increasing Medicare
and Medicaid costs. To decrease medical
system costs, ideally, only problems that require all the expensive resources
of a fully functioning emergency room would enter. A system could be put in place to direct less
urgent problems to centers with less fixed costs. Currently, federal law prohibits this. Hospitals can increase the number of patient
encounters to move further from the breakeven point. There is a practical limit to this, as none
of us wishes to be rushed through our emergencies without adequate time and
attention. On the expense side, we must
realize that every mandate and requirement added to the system increases fixed
expenses that need to be covered. Malpractice
reform resulting in lower malpractice insurance premiums for all parties would
decrease expenses. Under the current
system, however, a $50 Band-Aid pays only a small portion of all the technology
needed to run a modern emergency room.
