It's the simple but profound difference between a government monopolistic "cost based pricing" system and a private sector market oriented "price based costing" system.
Cost based pricing is the wasteful and inefficient government monopolistic way. OPM.
Price based costing is the way of the competitive and free choice marketplace. MOM.
Yes, it's as simple as that. In one case, it's the cost plus approach and in the other case it's the price minus methodology.
With government the higher the costs, the more money that goes to the government.
With the private sector, the lower the costs, the more customers for the business and the more profit earned by the owners.
Customer choice rules the private sector, and government mandate rules the government agencies.
Are you still doubtful about all this?
Then let's consider just one example involving why hospitals are buying up the private practices of doctors these days and thereby automatically raising their costs, and therefore the prices they charge, to government for Medicare and such.
In simple language, their costs increase when they take on the practices of doctors, so they can charge more for what those doctors do, even though what they do hasn't changed one little bit, and those very same doctors doing the exact same things couldn't charge those newly higher prices in their previous private practice.
The new cost plus added price element for exactly the same service as before is called the "facility fee."
Ah, the joys of government, cost plus pricing, monopolies and out-of-control health care costs.
Diagnosis: Insufficient Outrage has the story as told by one doctor:
"Medical care is intended to help people, not enrich providers. But the way prices are rising, it’s beginning to look less like help than like highway robbery. And the providers — hospitals, doctors, universities, pharmaceutical companies and device manufactures — are the ones benefiting. . . .
In March, Time magazine ran a cover story exposing outrageous hospital prices, from $108 for a tube of bacitracin — the ointment my mother put on the scrapes I got as a kid and that costs $5 at CVS — to $21,000 for a three-hour emergency room evaluation for chest pain caused by indigestion.
{NOTE: See our post of Saturday, February 23 titled "U.S. Health Care Costs Are a Chaotic Mess and Completely Out of Control, Too ........."}
Of course, Medicare will have none of this — it sets its own prices. And private insurers negotiate discounts. So no one is actually charged these amounts.
Check that. The uninsured are. They are largely young and employed (albeit poorly) and have little education. So the biggest medical bills go to those least able to pay. . . .
Consider another recent shift in health care: hospitals have been aggressively buying up physician practices. This could be desirable, a way to get doctors to use the same medical record so that your primary care practitioner knows what your cardiologist did.
But that may not be the primary motivation for these consolidations. For years Medicare has paid hospitals more than independent physician practices for outpatient care, even when they are providing the same things. The extra payment is called the facility fee, and is meant to compensate hospitals for their public service — taking on the sickest patients and providing the most complex care.
But now hospitals are buying up independent practices, moving nothing, yet calling them part of the hospital, and receiving the higher rate.
In North Carolina, Duke’s health system has been aggressively buying up local cardiology practices, thereby increasing the number of echocardiograms performed “in the hospital” by 68 percent in one year, and bumping the Medicare payment from $200 to $471, according to The Charlotte Observer and The News & Observer, in Raleigh.
It’s happening in my hometown hospital, Boulder Community Hospital, where my late mother was a trustee. The Denver Post reported in May on a patient whose cardiac stress test cost around $2,000 one year, and around $8,000 the next, after his doctor’s practice was bought by the hospital.
Same office, same machine, same doctor, but it cost four times more. Mom would want to know: what happened to the word “community” next to the word “hospital”?
The problem is not just prices, but also volumes: how much we do to patients, and how often. Look at colonoscopies. There are good reasons to believe that they can reduce the number of deaths from colon cancer. Expert panels recommend that most people need a colonoscopy only once every 10 years. But a study published in 2011 in The Journal of the American Medical Association found that 46 percent of Medicare beneficiaries with a normal colonoscopy nevertheless had a repeat exam in fewer than seven years. For some gastroenterologists, it seems, the primary finding from your colonoscopy is that you need another one.
Cardiology has a similar problem. . . .
Finally we’ve learned the value of new capacity: if you build it, they will come....
The word “crime” is awfully strong. Many prefer to call all this a problem of perverse incentives: good people, working in a bad system.
We could make the system better. We could ensure that everyone has access to the same set of prices, like the Medicare fee schedule. We could end the “fee for service” positive feedback loop — in which doctors and hospitals earn more for every procedure they do, which leads to overtreating patients — and instead have a flat fee. But the incentives will never be perfect. Ultimately, society needs individuals to be guided by ethical standards. And in medical care, those standards are getting pretty darn low.
Too many of us have passively accepted the situation as being beyond our control. Medical care in America could use a dose of moral outrage. It would be best for all if it was self-administered."
Summing Up
Health care is our biggest out-of-control cost in America.
The American Medical Association is the most powerful union in America.
The government is the least productive and most wasteful enterprise in America.
Accordingly, when the effects of the third party payment system, government intrusion and regulation of health care access, pricing and cost plus arrangements are considered as a whole, health care costs are totally out-of-control and no amount of government "control" will make things better. Only worse.
What a difference market oriented price based costing in lieu of government driven cost based pricing would make!
But that would require some form of market based competition and some much needed honestly and pricing transparency as well.
Sadly, my take is, "Don't hold you breath." Without outrage spreading among We the People, it won't happen anytime soon and probably not even anytime late either.
That's my take.
Thanks. Bob.
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