Hidden Costs of Health Care

CHW LogoMy father (who was a cost accountant for a big pharmaceutical firm), used to say “If you think medicine is expensive, consider the alternative.”  Although we didn’t use the term “value” much in the context of health care back then, I think he was trying to get at that concept.  The real question isn’t the cost, it’s what are you getting for it.

Our awareness of the importance of the cost part of the value equation has outpaced our ability to measure the cost.  Oh, we’re getting quite good at determining the cost from the perspective of the provider and the payer.  We talk about fixed vs. variable costs, and direct vs. indirect costs.  While health care costing is complex, there are some very sophisticated systems for measuring those components.  When someone wants to know why a hospital charges $8 for an aspirin that can be purchased at Walgreen’s for $0.03 (as an aside, notice how keyboards no longer have the ₵ symbol?), we can explain that the price includes not only the direct cost of the materials, but also the indirect costs for handling, storage, documentation, administration, etc., much of which is mandated by regulations.  People may still feel the price is ridiculous, but at least it’s understandable.

This works if we’re trying to calculate the value of health care services to the individual who is paying.  It doesn’t work when we determine the value of health care to society.  A basic tenet of health economics is that any cost-effectiveness (i.e., value) analysis must specify the perspective of the analysis.  Much of what we do, especially at the more expensive academic health centers, benefits society as a whole.  But in addition, much of what we do also has costs to society that go beyond what typical cost accounting measures.  There are a host of what economists term “externalities” – essentially, unaccounted for costs.

Charles Bitmann illustrates this concept in a New York Times article called “The True Cost of a Cheeseburger.”  The price of a burger includes direct costs (e.g., ingredients, labor for preparing and serving) and indirect costs (e.g., rent and utilities for the restaurant, advertising), and of course a profit for the vendor.  Among the externalities, however, are things like the maintenance of the highway system used to transport the ingredients, and the cost of caring for illnesses that may be the result of consuming too many burgers.  Because these costs are not incurred by the restaurant owner, they aren’t included in the price.  But someone has to bear those costs.  Most often, they are spread out across society at large.  In the context of a for-profit business, ignoring externalities inflates the profit by passing on the costs to someone else.  Bitmann’s calculation is that the true cost of a cheeseburger would be 15-50% higher if these costs were accounted for.

In the context of health care, there are other implications.  First, in the debate over the cost of medical care to society, things may be even worse than we believe.  Instead of 17% of GDP being spent on health care, it would be substantially higher.  Second, our mission is not to make a profit.  It is to heal people or keep them well, to improve the health of society.  Some of the externalities we ignore may have the opposite effect.  While undoubtedly there are many such externalities applicable to health care, I want to consider two.

The first is the cost of our environmental impact.  Hospitals are among the most energy intense buildings around.  Our carbon footprint is enormous.  There are highly variable estimates of the cost of controlling carbon emissions and dealing with the related climate changes, but they run into the many trillions.  In the current state, those doing the emitting do not bear any of those costs.  (This could, of course, change if there were a carbon fee or tax, but that’s unlikely in the US any time soon.)  At the Milwaukee Regional Medical Center, our heat and cooling come from a coal-fired thermal plant.  This will eventually be converted to natural gas, which has about half the carbon emissions, but they are still substantial.  Since there is no cost to the hospital for those emissions, there is no financial incentive to do something to eliminate them (e.g., geothermal).  But should we be looking more broadly at the cost to society, from an economic perspective?  Or the health impact, from a moral perspective?  Some health systems, notably Gundersen Lutheran in La Crosse, WI, have done so in a big way.

The second externality is lost productivity to patients and families due to unnecessary waiting.  I have never seen anything about this in print.  But the amount of time people spend waiting in our facilities is simply extraordinary.  Societal-perspective economic analyses typically include an estimate of the monetary value of lost time.  Imagine what the cost of an ER visit would look like if it included not only the usual direct and indirect costs, but also the 120 minutes of lost work for the parents?

Research, education, public health, preventive care: these are an important part of the quality part of the value equation.  Payers, policy makers, and individuals need to be reminded that when they think about what health care costs, this is part of what they are getting in return.  We, in turn, need to be mindful that we actually cost even more than we know.  As my father might have said, “If you think medicine is expensive, it’s worse than you thought.”

2 Responses to Hidden Costs of Health Care

  1. Cheryl Armus says:

    What about the lights and computers that are left on in every office and clinic including the exam rooms every evening when there is no one using that energy? And that is just our facility. Think how much money and energy we would save if people just thought to turn off lights and log off/shut down computers every evening. And the environmental benefit would go a long way in reducing our carbon footprint as an institution. We are pediatric providers. Let’s do our part to give the children we fight so hard to care for everyday a clean and healthy planet to live on; clean air to breath, clean water to drink. That is our moral responsibility.

  2. Brad says:

    I’m curious how including the costs of externalities would change the comparitive health care costs between countries. Differences in wait times, differences in the size of the populations across which these external costs are spread… Hmmm.

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