The Schizophrenia of Health Care Spending: Cost to Some and Revenue to Others

September 6, 2011

In early August, when the debt ceiling agreement was reached, many news reports noted the agreement did nothing to address core reasons for the debt, namely: Social Security, Medicaid and Medicare. Indeed, nearly every article written about the debt ceiling talked about the need to “deal with” (aka: cut) Medicare, Medicaid, and Social Security.

But every time there is a serious proposal on the table to cut federal spending for health care, health care stocks fall—and this is considered a bad thing.

Recent reports from the Office of Chief Actuary noted the rate of increase in health care spending was at a historic low (3.9 percent) in 2010. Now you would think the media would frame this as good news, especially in light the need to reduce health care spending to address the national debt.

Instead, news reports carried headlines like: “Health-Care Use is Sluggish.” These reports cited the “fragile recovery” as the reason fewer people went to the hospital, which had a negative impact on medical suppliers’ earnings reports (though, a positive impact on for-profit health plans). Indeed, the article profiled stock problems at Johnson and Johnson, noting (among other things) the “sluggish sales of replacement hips and knees.”

We rarely talk about the business of health care in those direct terms: “sluggish sales of hips and knees.” We prefer to think of health care in more altruistic terms: care that is patient-centered, care that helps people in need, care that improves population health. Indeed, in the 1990s, there was a brief, consultant-driven movement when patients were called “customers” with the idea that that would focus practitioners more on quality and service. That movement quickly died because those receiving health care services didn’t like being viewed as “customers” or “consumers,” and those providing services didn’t like being viewed as just any other business.

But the reality is, just as is exemplified in the Wall Street Journal article, today much of health care is developed by or delivered through the for-profit world. And, the for-profit world has different incentives than the federal government or, indeed, consumers at large. In fact, the interests of shareholders may require behaviors that are at cross purposes with the public interest as expressed during the debt ceiling debate. This is part of what makes any discussion about cutting Medicare in particular so difficult. After all, Medicare beneficiaries are among the biggest consumers of health care, based both on their demographics and their generally extensive health benefits. So, any cuts to Medicare means cuts to those whose income and returns are dependent on the use of health care services.

It is important to note that this issue is not just about for-profit health care. Though nonprofit providers do not have shareholders, they often develop a parallel goal to for-profit providers: survival of the entity itself, and not just the services they provide. And, as many of those in religious orders running hospitals came to understand, there is no mission without a margin.

So, though many in health care don’t like to view it as a medical-industrial complex with customers instead of patients, in the end, it truly is. And, until we understand the truth behind the financial structures of health care that create conflicting incentives, we really won’t be able to have a realistic conversation about the need to cut health care spending at all.