How hospitals are driving up the cost of health care

However, in addition to saving many lives, hospitals have also become the biggest drivers of increasingly unaffordable health care costs. Spending on hospital care has grown faster in the past five years than any other type of health care spending, and payments to hospitals are the largest single category of total health care spending.

Cost of maintenance

A significant part of those fixed costs are those that are incurred by maintenance of facilities and equipment. The design of hospitals in many cases lack the inclusion of maintenance reducing design-elements.

Cost of risks

 Hospitals have a lot of fixed costs they have to pay for regardless of how many patients they admit. Everyone wants the emergency room, surgery suite and burn unit to be equipped, staffed and ready to go even if there are no patients who need them on any given day. But hospitals don't get paid for services that aren't used. The emergency room runs a deficit if there aren't enough true emergencies, so is it any wonder that hospitals advertise how quickly you can be seen in their emergency rooms even for minor problems?

The more fixed costs a hospital has, the more lucrative every additional admission is and the more problematic it is to have fewer admissions.

Here's a simple example. Assume that a hospital has 200 million euro in annual costs and that two-thirds of those costs (euro 133 million) are fixed (they don't change with fewer patients), while one third (euro67 million) are variable (i.e., the costs decrease with fewer patients). The hospital admits 15,000 patients per year and is paid an average of euro 13,500 per patient, for a total of euro 202.5 million in revenue. Since total revenue exceeds total cost, the hospital has a slim but positive 1.25 percent operating margin.

Now let's suppose that improved primary care in the community results in 10 percent fewer people needing hospital care. What would happen to our hypothetical hospital? Its variable costs would decrease by 10 percent to euro60 million, but its fixed costs would remain at euro133 million. Total costs would now be euro193 million, 3 percent less than before. Revenues, however, would decrease by 10 percent (to euro 182 million) because there are 10 percent fewer patients. The net result is an euro 11 million loss (a negative 6 percent margin).

Conversely, if primary care in the community deteriorates and 5 percent more people are hospitalized, the hospital's revenues will increase by 5 percent, but its costs will increase by less than 2 percent, giving the hospital a margin of 5 percent, better than before. The hospital only "wins" when people in the community are sicker.