The reason that hospitals charge so much for an aspirin is a rather simple one, and if I tell you why they do it might help me make my point better. (I will talk about hospitals here, but what I say will more or less apply to doctors and other kinds of medical professionals.)
If we categorize them in terms of how and how much they pay, there are five kinds of people that go to hospital. These are Medicare patients, commercial insurance patients, self-pay patients, Medicaid patients, and indigent patients.
Like any business, hospitals have a cost structure, which is the sum total of how much it costs them to perform whatever it is that they perform. Any good enterprise will include in their cost structure a “profit”. (It’s a profit if it is a for profit concern and it is a surplus if it is a not for profit concern. But it’s the same thing.)
To cover its costs, any concern will have what is called a “cost to charge ratio”, which is simply what it charges against its own costs. So for example if some concern wanted to break even, it would charge precisely what its costs are. That is, for every dollar it pays out for salaries or equipment or whatever, it would charge a dollar. In this case, the cost to charge ratio would be 1:1.
The cost to charge ratio at a hospital in the United States is typically about 2:1 (they charge 2 dollars for every one they spend) to about 10:1 (they charge 10 dollars for every one they spend). In the case of your mother, she happened to go to a hospital with a high cost to charge ratio. But the thing is, with all of these high cost to charge ratios, hospitals only manage a profit margin (in general) of 1 to maybe 5 percent, with most of them at the lower end of the range. If they are charging at least double to ten times their cost, how can this be?
The real question is: “who pays what and why do they pay what they pay?”
Most of a hospitals business comes from Medicare patients. Medicare patients (and they are not all old, but they all tend to be sicker than everyone else) do account for most of the hospital work in this country. The government pays the hospitals from the Medicare taxes that most of us pay. But the government only pays 98 percent of charges. This means that most of the income that a hospital gets (think about 2/3 of its income) is paid to them below cost. There is a good reason why the government does this. The basic hospital rate (the “base rate”) is set by statute for the whole country each year. This rate is adjusted for each hospital based on location (New York has higher costs than Hope Arkansas, so its hospitals get paid more) and some other things, including volume of charity care, whether the hospital is a teaching hospital, etc. The reason that the government pays less than cost is that this is the only mechanism that it can use to create an incentive for the hospital to become more efficient and cut its own costs.
Now usually it would be the “free market” that would do this. Is the government displacing the Invisible Hand of Adam Smith here? It would seem so. But the government has to do this, in fact, because there is no free market for medical services in the United States. For a free market to work, one needs to have two things: 1) prices have to be transparent and 2) quality has to be transparent. In order for prices to move, one has to be able to compare prices between providers of a service. One also has to know which provider is better, because part of a price is the quality of the service. The consumer doesn’t just want the cheapest price, they want the cheapest price for the best service, so they have to measure this as well.
There is neither price nor quality transparency for medical costs in the US, so the market can’t act in the way that it does for the price of bread. There is a reason why this is that I won’t get into here. But you can’t comparison shop for your appendectomy nor is there an objective and reliable way to compare one doctor to another in terms of their abilities.
The point is, hospitals are paid below cost at the get go for most of their services. But they still have to break even or make a small profit. But the next group of patients are Medicaid patients. Medicaid patients are paid for basically by the state. The state pays for them at about 30 to 60 percent of cost. The state does this because our society thinks that we need to provide some minimum of medical service. The problem here is that state has one idea of what “minimum” means and the hospital has another idea. The hospital wants to treat a Medicaid patient like any other patient. So they just suck it off. Medicaid patients are a variable percentage of a hospital’s patient mix. Let’s pretend that it’s 10 percent. If Medicare patients are 66 percent and Medicaid patients are 10 percent of the patients, then 76 percent of patients are seen at below cost. The hospital now has to find a way to break even on a patient base of only 24 percent (100% – 76%).
But in this 24 percent is another group of patients. These are the ones that can’t pay for anything. This population consists of people who do not qualify for Medicaid (and states have been cutting more and more people out of the Medicaid pool over the last 10 – 20 years to save themselves money.) The hospital is required by state law to provide emergency care for these people and in some (rare) cases they will also provide other kinds of free care. (Emergency room care, by the way, is the most expensive form a care in general). But since all of this care is provided for free, if you add it to the 66% of patients who are paid below cost, you have a larger group of patients who are paid even more below cost. Let’s say that these people amount to 4% of the hospital census. This means that a full 80% of the patients are paying below hospital costs.
So in order for the hospital to even break even, it has to inflate, massively inflate what it charges for the last two categories of patients; those insured commercially and those (like your mother) who have no insurance and will have to pay out of pocket.
Now of these last two groups, those with commercial insurance pay different amounts depending on what insurance company (and product) they have. Insurance companies negotiate discounts from the massive mark-ups that a hospital has to make in order to break even. The size of the discount will depend in general on how much business the insurance company has with the hospital. The more business it has, the larger the discount it can command. Of course, this leads to two things. First, this means that the majority of a hospital’s commercial business will be at the highest discount rate. This discounted rate is (and has to be) at a more than 100 percent of cost, since insurance companies know that they have to cover the costs of (in this case) the 80% of patients who are paying below cost. Otherwise, the hospital would go out of business. But the largest insurer pays the least, followed by each payer in its turn by size. The irony here is that in a free market the largest one who pays the least will have the lower price in the market and end up with a higher market share, which means that the hospital’s reimbursement will continue to fall absolutely.
This leaves a single group of people left for the hospital to use to break even. This is people like your mother who don’t have insurance, but who aren’t on Medicare, Medicaid, or who aren’t indigent enough to get straight charity. So the hospital is bound to charge her a lot for even an aspirin. It has no choice.
Now for all of this to work in a “free market”, everyone would have to pay their appropriate share or else not get services; just like you do when you get your oil changed. You, the guy next to you in the Mercedes and the guy next to him in the beat up 20 year old pick up truck all pay exactly the same for the oil change. No one subsidizes anyone. But the market can’t work this way with medical care. First, because we as a society will not allow people to be turned away. Second, because the people who need the most care (the elderly) have no cash flow to pay full price as a rule. And in fact, since no one could have predicted that kinds of expensive medical advances would occur when these people were working and saving, even the good savers would not have been able to save enough. So the reason the market doesn’t work for the 50 million that don’t have insurance turns out to be very simple. The market works for people who can afford the service and 50 million people either can’t or won’t. The genius of American capitalism will never figure out a way to serve these people for free. Never.
The good news is that there is now just about enough money flowing through the system to fund the whole system, even before “Obamacare”. (The Right even admits this when they say the the US already has “universal” insurance because everyone gets to go to the ER when necessary.) The problem isn’t that there isn’t money enough in the system and not Uncle Sam has to pay for things through your tax dollars. The problem is that there is plenty of money in the system for everyone but it is not being allocated in a way to promote maximum efficiency. This is why the US has the best health care technology and the worst outcomes in the civilized world. The health care reform is not some socialist plot (if it was, the doctors and hospitals would be nationalized) to get the government to pay for everything. The health care reform is a plan (not a very good one, but better than nothing) to do the reallocation of resources that the market is unable to do. It is no more and no less than this.
People who think that their rights are being violated if they can’t opt out of a national health care system are simply disregarding the fact that they are already in a system that they can’t opt out of. Whatever they say or do, if they have an accident or a heart attack they WILL go and WILL be seen in an ER, although someone else will pay for it. From the point of view of we who are paying for it, people who want the right to “opt out” think they have a right to be paid for by people like me. So do I want you to be compelled to pay your share? Well, yes. Is this unjust? I don’t think so. If you think that you have conservative argument about why I should pay your hospital bill because you have some right not to have to, I would love to hear it.