Defining Healthcare Costs
Doctors, Drugs, Hospitals & MRIs Generate Medical Expenses
An examination of the cost of healthcare, Total Healthcare Expenditures (THE), in any nation is comprised of five fundamental, yet analogous, parts. THE, is best viewed as a relation between those fees and the nation’s Gross Domestic Product (GDP.) In their book, Containing Health Care Costs in Japan, Naoki Ikegami and John Campbell, state that “…in the United States there has been a continuous increase in the ratio of the health expenditure to GDP....This pattern [is] unique to the US….”
The nonpartisan Organization for Economic Cooperation and Development’s (OECD) 2009 fact book states the USA spent in 2006 (the last year available for world data) 15.5% of its GDP on healthcare. A staggering 72% above the 30 industrialized countries’ world average of 9%.
Ikegami and Campbell argue, “from a public policy point of view, it is not the absolute growth in health expenditure that is important, but its relative share [of] GDP.” This is valid as a comparison between national healthcare systems; however, it does not explain America’s overwhelming cost differential mentioned by the OECD.
Ikegami and Campbell propose that all industrialized nations' healthcare systems consist of five cost areas. To understand the disparity between the 30-nation average and the USA, it is necessary to identify and examine those comparable parts that make up the cost systems.
- Administrative
- Capital
- Drugs and Pharmaceuticals
- Doctors and Hospitals
- Technological
Administrative Healthcare Costs
This is a fundamental argument of the healthcare debate; what constitutes administrative costs? Doctor Steffie Woolhandler, M.D., Terry Campbell, M.H.A., and Dr. David Himmelstein, M.D. (collectively called WCH) wrote in the New England Journal of Medicine on August 21, 2003, administrative costs are the cost of “…insurance, including collecting revenues, managing use of services, and paying physicians and hospitals.” They are born by “…health insurers, employers' health benefit programs, hospitals, practitioners' offices, nursing homes, and home care agencies…” and they “…accounted for 31% of health care expenditures in the United States….”
Professor KE Thorpe of Emory University writes in his book Inside the Black Box of Administrative Costs, “…administrative costs are translations-related costs, that is, benefit management, selling and marketing costs and regulatory compliance costs.”
This article uses a conservative definition that excludes hospital, doctor and health product marketing costs (included below in separate categories.) It includes those costs (revenue collection, management services, selling and company marketing) born only by insurance companies (public and private.) Furthermore, it includes the cost of purchasing and maintaining health coverage by corporate and individual users. It is simply the cost of insurance excluding capital costs and profits.
Capital Costs
These are those tangible and intangible expenses unassociated with actually providing health care, such as, but not limited to, buildings, utilities, rents, taxes and insurance. Professor Thorpe also includes regulatory compliance within this area.
Drugs and Pharmaceuticals
This is the cost of not only producing, transporting and marketing medicines but also research, testing and patents!
Physician and Hospital Cost
Another large portion of the healthcare profile, Ikegami and Campbell place this value at six times the cost associated with Japan and nearly 25% of the USA cost. These include worker salaries and benefits (including physician and nurses,) inventories, billing and collection, diversification through duplication, medical testing and continuing education.
Technology
America is the leader in technology and technological costs. Whether for competitive reasons or regional necessities, medical technology costs are similar to pharmaceutical requirements but specialize in the “hardware” of medicine. A MRI machine or new diagnostic computer software is associated with this high cost of technological hardware.
The debate over national health expenditures (NHE) will continue and healthcare costs will rise; however, understanding the terminology may further the debate along productive lines.
Hospital Staff
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