Is Medicare Profitable?  

A blog about business and economics.
Feb. 22 2013 3:10 PM

Do Health Care Providers Lose Money on Medicare Patients?  

1737592
Grady Memorial Hospital in Atlanta.

Photo by Frank Mullen / Getty Images

This comes up as a subplot in Steven Brill's magnum opus on hospital pricing, but it's worth directly noting that one staple of the lobbying around Medicare provider payments is hospitals' whining that they lose money treating Medicare patients due to the stingy reimbursement rates. As Brill notes, this is a very dubious contention both in theory and in practice.

But to understand some of the nuance of this, it's worth revisiting my analogy between hospital pricing and hotel pricing. Imagine a Caribbean resort in a competitive market. It's going to want to adopt a seasonal pricing strategy, where room fees are higher in the winter when demand is higher and lower in the summer when demand is lower. It's also going to have a cost structure. Now if you parcel out the annual costs of running the resort and compare them to the revenues that come in on a month-by-month basis, it's going to look like the resort "loses money" on its off-peak clients. In other words, many guests are going to pay a fee that is below the resort's average costs per guest. You see the same thing on an airplane. On any given flight, many of the passengers paid less for their tickets than the average price-by-passenger of operating the flight.

Advertisement

Why would anyone sell services on those terms? Well, it's simple. My ticket price may be lower than the average cost-per-passenger of flying the plane, but the plane wouldn't be much cheaper to fly if I wasn't on it. A half-empty flight costs almost as much to fly as a full one, so once you're committed to flying the plane you want to do whatever it takes to fill it up. The resort is the same. You already bought the land and built the buildings. You need to pay the taxes and do the maintainence. The high-price peak season is where you make your profits, but it's worth wrangling extra revenue out of the offseason too.

By the same token, there are a lot of fixed costs associated with running a hospital. Once you have the MRI machine, you might as well use it.

But just as it's a fallacy to say the resort is "losing money" on its off-peak customers, it's also a fallacy to imply that you could force the resort to charge everyone the off-peak price with no adverse consequences. The off-peak price is available in part because investors want to build resorts in order to reap the peak season windfalls. If you reduce the windfalls, you'll get less investment in the resort sector and there will be less overall capacity for Caribbean resort vacations. That's also the downside to using all-payer rate setting to bring down health care prices. If being a health care provider becomes less lucrative, there will be less health-care system capacity. People should take that objection seriously. But it's important to see that it's a downside to any method of reducing health care "costs" (i.e., spending). The health care sector attracts a lot of investment because there's a lot of revenue associated with it. One man's expense is another man's income, and if you want to reduce the expense of health care you have to reduce the aggregate income of the health care sector, and that's going to mean less capacity.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.

Jurisprudence

Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Weigel
Sept. 17 2014 8:15 AM Ted Cruz Will Not Join a Protest of "The Death of Klinghoffer" After All
  Business
Moneybox
Sept. 16 2014 4:16 PM The iPhone 6 Marks a Fresh Chance for Wireless Carriers to Kill Your Unlimited Data
  Life
The Eye
Sept. 16 2014 12:20 PM These Outdoor Cat Shelters Have More Style Than the Average Home
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
  Arts
Brow Beat
Sept. 16 2014 8:43 PM This 17-Minute Tribute to David Fincher Is the Perfect Preparation for Gone Girl
  Technology
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Bad Astronomy
Sept. 17 2014 7:30 AM Ring Around the Rainbow
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.