Why Does My Band-Aid Cost $50 in the Emergency Room?

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.