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Why Non-Profit Hospitals Are So Profitable

Every business has a business model. Some go for prestige, selling the label as well as the product. That’s why a Mercedes costs a lot more than a comparable Lexus. The cars are equal in design, equipment, and road handling. So, in effect, when you buy a Mercedes, you’re spending a lot of money for the hood ornament. Other businesses go for volume by means of low prices. Wal-Mart is the perfect example. Still others advertise heavily and try to give the illusion that there are bargains to be had. Joseph A. Bank, the men’s clothing chain, advertises endlessly on television with sales pitches such as, “Buy one suit and get three more FREE!” Translation: The first suit has a nominal price four times higher than it should be.

And then there is the business model of “non-profit” hospitals, which are, in fact, among the most profitable enterprises in the country.

Every hospital has what is called a “chargemaster,” a list of what it charges for everything from a day in the ICU to a single aspirin. The hospital guards access to its chargemaster like the federal government guarded the Manhattan Project (only with more success, as Stalin knew all about the atomic bomb).

There’s a reason for that: the charges, like those at Joseph A. Bank, are utterly outrageous. A generic version of Tylenol can be $1.50, when you can buy a hundred of them at the local supermarket for the same price. But, as with Joseph A. Bank, most hospital patients don’t pay them. Medicare and insurance companies pay a fraction of the nominal prices. MD Anderson, a high-powered cancer hospital in Houston, charges $283 for a simple chest X-ray and Medicare pays the hospital $20.44.

But if someone without insurance, or with limited insurance, shows up needing serious medical care, he usually gets charged the full, outrageous, prices. And since the patient has no bargaining power whatever in those circumstances, there is little he can do about it except empty his retirement account or file for bankruptcy.

Time magazine had a long article by Steven Brill on this a few months ago that is well worth reading. Be prepared to become very, very angry. ObamaCare does not address the problem of sky-high prices that hit the most vulnerable the hardest. No wonder MD Anderson’s operating profit in 2010 was $531 million on revenues of $2.05 billion. That’s a 26-percent profit margin, unheard of in any service industry other than hospitals. Being a “non-profit” organization, it pays no income taxes.

The solution, of course, is sunshine: require these non-profit hospitals to post their chargemaster lists. If gas stations and automobile dealers are required to post their prices, why can’t medical service providers? The only reasons they are treated as state secrets is because they are a disgrace. Once the prices are public knowledge, they would, simply through market forces, begin to converge towards the lower end.


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