Blog | Tuesday, June 17, 2014

The New York Times says we pay administrators too much

A friend sent me a link to a New York Times article on the ridiculous amount that insurance company executives and hospital administrators make. So the reason that American health care is so expensive is not because doctors earn too much, or drug companies charge too much or device manufacturers are making ever more expensive devices with ever expanded indications. Except that it is all of that and more.

Hospital administrators and insurance company executives do make lots of money. They make more than I ever will, unless I do their jobs. But it’s also pretty easy to make a comfortable living as a physician working for a hospital or even a nurse practitioner in one of the specialty or acute care areas. By “easy” I mean that it is easy to make money, not that the job is easy. The creation of the Affordable Care Act has set into motion some mechanisms for decreasing costs, but it doesn’t come close to dealing with the fundamental dynamic that makes health care expensive. Jobs that are indispensable for the functioning of the strange and overly complex and ridiculously fragmented health care industry are paid very well, both because they are difficult jobs which not everyone can or will do, but also because there is very little pressure to reduce the costs or complexity.

We built it this way. Because it has always been financially terrible to get sick or injured we created insurance which made it less financially devastating. We paid a little every month and then, if we needed care, the insurance company would pay our bill. But that changed incentives. Because we had paid an insurance company to cover our costs, it was more financially shrewd to get expensive medical care so as to recoup the cost of the insurance. Insurance companies would recoup their costs by raising rates, which allowed them to become larger and hire more staff. The vast majority of medical costs are paid that way, through a third party, but with our approval as consumers. Medicare, our large government insurance company, acts the same way.

Hospitals receive the bulk of health care spending and are more successful when they do more business. Costs like administrators’ salaries and new wings and fish tanks and flat screen TV’s are handed on to the consumer, with our permission, because our insurance pays for it. Administrators that can keep hospitals financially successful are worth their salaries to the companies that pay them, so they make a lot of money. Hospitals are businesses. If they are successful it is because they spend their money in a way that increases their profits.

Health care has grown unfettered for a very long time as insurance has become more universal and costs have lacked natural controls. Salaries of bigwigs and doctors have grown and more people in the US support their families on health care dollars. We have reached a point, though, where it is painful to pay for insurance and so we are looking for ways to lower health care costs without the incentives that would be present if we had to pay them by ourselves. Transparency, that is, knowing where the money goes, is an important step. Thanks, New York Times, for publishing information about what hospital administrators and insurance executives make, but I don’t think that being outraged about it is very useful.
