Philadelphia Reflections

Hospital Cost-Shifting by Age Group, Patient Income, and Payer Class

When kids get sick, the parents pay the costs. When the grandparents get sick, Medicare may well pay a large part out of tax withholdings, premiums, and government borrowing, but working children still are the last resort for the grandparent generation, if resources fail. What's the common theme, here?

All medical costs, whatever the age of the patient, ultimately rest on the contributions of some working person, aged 21 to 66. The medical payment system is largely driven toward transferring funds from non-sick people to sickly non-working ones. The non-sick increasingly resent this stubborn fact, but as long as we continue an employer-based system it will only get worse. It is necessarily a dangerous hostility to encourage.

Indeed, our whole society is somewhat based on the interdependent family unit, using the assumption breadwinners pay for themselves and children, and are ultimately responsible for their parents as well. It's somewhat dismaying to reflect, that with a decline in the power of religion, a decline of the importance of the family may threaten the stability of many under-examined issues, just like healthcare financing. If the employer or the government supersede the family, the family is still the fall-back; and anyway, all taxes and profits ultimately derive from working people, just not the family's own, particular, working people.

Whole generations vocalize decreased respect for marriage in various ways, but do not seem to have considered the disruption it would cause, to get taken at their word. Viewed both ways, if we discuss the ability to pay for healthcare, we have to admit there is nobody to stand behind those bills, whatever the age of the patient -- except some breadwinner. Then, when we ask whether the country can support the cost of healthcare, we are actually questioning whether a solitary age generation of workers can really afford to pay the current costs of everyone else. Must demographics somehow be twisted to suffice, or can we tweak the system? Can we all live ninety years, and only work for thirty of them?

The Demographic Distribution of Health Costs. Unfortunately, health costs do not self-distribute to match health revenues without some pushing. Mostly, the process is, revenues are twisted to match costs.

About 3% of health costs concentrate in the first year of life, about 15% of costs are generated in the last year of life. The last year of life itself has shifted, from age 47 in 1900 to 83, today. Given some time, longevity will grow to 93. From these facts alone we see a minimum of 18% of costs being redistributed from workers to non-workers, and inter-generational cost shifts as a whole are probably closer to 68%. That's variable and inaccurate because hospitals know you have to be born and you have to die, so they find ways to pay bills, shifting the cost of what isn't mandatory, onto the bills of those who cannot escape. That, in turn, is shifted a second time, to the people who can better afford to pay them. It seems to the business office like money going in and out of the accounting office door, but in fact, it goes in one door and goes out through quite a different door.

Mostly, revenues are twisted to match costs.

Hospital Cost Shifting

It just has to be that way; no other way will work. It isn't rocketing science to figure out, it actually doesn't cost thousands of dollars to deliver a baby, or to pronounce an old fellow dead. Just compare the price of a five-star hotel with the price of (one half of) a semiprivate hospital room or the cost of a frozen food dinner with a hospital meal. This isn't cheating; it's just an institution trying to serve the community.

Indirect Overhead. One of the generalizations which is made fairly, however, is a typical hospital ends up with too much indirect overhead. Somebody has to be paid to mow the lawn, but you can't very well bill patients individually for lawn-cutting. Somebody must answer the telephone for the institution. Over the past centuries, a lot of activity was dumped on the hospital, because hospitals are nice, they are handy, and everybody shares a piece. They are a favorite place to hold local elections on the second Tuesday in November, for example, because they generally have some spare space in the lobby, and they belong to everybody in the community. They have cafeterias and gift shops because that is part of their function. As long as they have them, why can't the community use them? They also have parking garages, partly with the same motive banks use, to issue mortgages for buildings which could be sold for some other use in a pinch. And mortgages are cheap, right now. The point is not they are building things they don't really need, the point is an accumulation of such costs provides a handy vehicle for -- large indirect overhead charges on the cost report. Every overhead cost must eventually be added to some bill, and can thus -- why not-- be re-assigned to areas of the hospital which normally house patients of a target group.

There once was a time when indirect costs avoided elderly patients; as soon as Medicare became an entitlement, the incentives shifted. Now, serious expensive diseases are all migrating into the Medicare age group. As they do with computerized cost-shifting of pediatric units, and as they will when Obamacare pays for some indigents. But please don't pass regulations to suppress the salaries of cost accountants, in order to control all this abuse you have suddenly discovered.

When 100% of the costs must be supported by 20% of the patients, no hospital in existence could stay in business for a week, without cost-shifting. No doubt, most hospital administrators would welcome insurance companies doing this cost-shifting on their own books, but they would be foolish to permit it. Sooner or later, some community activist would protest it was dishonest, and the insurance companies would promptly dump it back in the hospitals' laps. In a sense, hospitals are reinsurers of last resort and must remain reluctant to give away the tools of their trade.

Originally published: Sunday, April 12, 2015; most-recently modified: Tuesday, May 21, 2019