In an ideal world, nearly every dollar that is expended toward health care would be spent on evaluation, testing, treatment or prevention of disease and injury. The goal would be to expend all the money on improving the health of the population being covered. In this country, that is currently not the case, and there are several reasons.
The first area is administrative costs of our health insurance system. When an insurance company receives payment of premiums, the money is used in three basic ways.
First is for the actual expenditure for health care services. Collectively within the insurance industry this is known as the Medical Loss Ratio. Under the Patient Protection and Affordable Care Act, passed in 2010, this ratio should not be less than 80 percent. This still means that four out of every five dollars paid in as insurance premiums is spent on the other two items, including the cost of running the company. I once calculated that it took the entire premium of 6,500 policy holders just to pay the salary of the president of one large insurance company. Two percent of all premium dollars is spent by the insurance companies just to "credential" the physician panel of providers in most managed care programs. For a company that is "for profit," the third item is payment of dividends to the shareholders.
The second area of hidden expense involves the cost of the provider to "process the claim."This is the billing function.
Since the patient does not usually pay cash on the spot for the service, the provider must have a billing staff to create a bill, send it on to the insurance company or companies and await payment. If there is a co-pay it should be collected at the time of the service but often is collected after the fact. If the patient has a deductible on the insurance, the company will pay only a portion of the claim. This means a second bill back to the patient. It is estimated that the cost of processing and sending in a single claim is about $6-7 each time it is processed.
One also has to realize that each insurance company has different rules and systems for the claims submission. This has a hidden cost in that providers would much rather do a few expensive procedures instead of many smaller ones. Hospital billing is equally complex and consumes enormous amounts of manpower. Many patients have more than one insurance plan and still have a part left over for self pay. That means a minimum of three separate billings to collect one fee.
A third area of hidden cost is that associated with liability risk by the provider. This is the so called malpractice issue.
The cost of buying malpractice insurance is a significant cost for every provider. This is true of hospitals as well as for physicians and other health care providers. Even relatively small hospitals like we have in the Adirondack Park often pay $1 million or more per year for coverage. Some larger hospitals in bigger cities pay over $100 million per year. Individual physicians pay anywhere from $10-15,000 for low-risk specialties to over $300,000 for some higher-risk specialties each year.
Perhaps however, much more subtle in the liability realm is the cost of "defensive medicine." This means that we have to order tests to rule out pathology even if the likelihood of pathology is low. It means that there are many tests done that probably are not medically necessary but are "legally" necessary because if we don't do them and something does go wrong we will be in an indefensible position.
A fourth area of hidden expense is in meeting the "documentation or credentialing" needs to practice.
Several years ago when I was affiliated with Glens Falls Hospital they did a survey of the number of different entities that performed some kind of inspection or survey of that facility in a given year. The number was over 100 and ranged from the local fire department to the elevator inspectors on one end to the Joint Commission on Health Care Organizations and State Health Department on the other end. In the private office it is not quite that bad but the number of organizations or agencies we have to report to each year runs in the dozens. The time spent filing reports, documenting information and processing requests adds up very quickly and again that cost is passed on to the patient.
In summary, there are many hidden costs in the health care system that result in spending a lot of money on things other than direct care to the patient. In a perfect system, nearly every dollar would be spent on preventive, diagnostic studies or treatment. We should be able to build a more efficient system.
David G. Welch, M.D. lives in Lake Placid.