There are about 7,000 hospitals in America. Each has an administrator. And the perversity of the system is this: the better those administrators do their jobs, the higher the national medical bill will be.
The reason is no secret. There are more hospital beds in the country than people needing hospitalization. Almost every hospital is striving to raise its occupancy rate; hospitals are expansionist forces in health care.
"You can't be a good hospital administrator unless you have a full house," says Robert Derzon, a former hospital administrator and until recently head of the federal government's Health Care Financing Administration. "You can't reduce unit costs without high volume."
Hospitals unashamedly court doctors -- offer them cut-rate office space in next-door office buildings, for example, or buy them equipment they say they need -- because doctors are the source of patients.
"It is doctors who fill our beds and call the tune," one administrator says. "They have a lot of hospitals where they can take their patients these days. So when they tell us we need a CAT scanner [an especially expensive piece of equipment] or whatever, we buy."
Hospitals also court patients directly. So many hospitals have begun advertising that the American Hospital Association felt compelled to publish guidelines on the subject in 1977. (Among other things, these guidelines discourage quality comparison, either direct or by implications," between one hospital and another. They say such comparisions could prove "counter productive, libelous or difficult to present in a fair and objective manner.")
Some quite reputable hospitals have gone so far as to establish marketing departments. Hospitals are merchandising their wares like businesses -- and in many ways businesses are what they are.
That is plainly true of the one hospital in seven now run for profit in the country. But it is also true of most of the rest, as they increasingly will tell you.
They make unusual businesses in one sense. As an officer of Humana Inc., the nation's largest for-profit hospital company, put it not long ago, "Our definition of a sale is a patient stay."
But in other respects they are ordinary. Most, non-profit as well as investor-owned, are constantly trying to increase "sales."
And as in other business, some kinds of sales are highly profitable, some not.
The profit-generating patient, the kind whose arrival makes a hospital administrator smile secretly into his adding machine, tends to be one who:
Is well-insured by a large commercial insurance company like Aetna or Prudential, and is not a Blue Cross-Blue Shield, Medicare or Medicaid patient.
Will need lab tests and/or X-rays or other so-called ancillary services.
Will end up having a fair-sized standard operation.
But basically is not that sick. This perfect patient, whose surgery was probably elective, will be able to go home by the weekend or, in the best of all possible worlds, will stay in the hospital over the weekend but by then require little care.
The reason this last is a desirable quality from the hospital's point of view is fairly obvious. A hospital administrator wants, insofar as he safely can, to skeletonize his staff on the weekend to cut costs. And to the extent that he can do that and still keep paying patients around, he wins on both sides of the ledger.
The other points are more complicated. They have to do with the convoluted way a hospital bill is constructed.
The myth about hospital bills, which hospitals have helped nurture over the years, is that charges for individual items bear some relationship to those items' cost.
Most hospitals charge far more than cost for some items, then use the surpluses generated to subsidize other services, or to finance expansion, or, in the case of proprietory hospitals, to pay a return on investment.
Typically (but not everywhere; in Maryland, for example, this kind of tilt in rates is forbidden by regulation), hospitals make money in their ancillary departments and operating rooms. They lose money on their maternity wards. They break even on their hotel business -- the daily room rates on their medical and surgical wards.
(Some hospitals, however, say they use surpluses generated elsewhere to subsidize their medical and surgical wards. Mainly because it is so visible, they say they keep their daily room rate below cost.)
This traditional rate tilt is the reason the short-term surgery patient who may need a little diagnostic work on the side looks so good to a hospital. This kind of patient is buying only high-margin services. (Forprofit hospital companies are often accused of positioning and designing their hospitals precisely to serve such patients, skimming the market and putting extra pressure on nonprofit hospitals. The companies almost always deny the charge.)
Rate tilt is also why at least some hospitals -- busy ones -- prefer short-stay patients who can go home fairly quickly.
"A majority of the money is made up front" in the normal patient stay, a Humana official pointed out -- in the ancillary departments and operating room rather than later on the ward. In this busy hospital, high turnover means high profit. (But in an empty hospital, that is not so; any paying patient is preferable to an empty bed.)
That is the world of charges. Variations in insurance add another layer of complication.
The most important of those have to do with Medicare and Medicaid, the federal programs that help pay the medical bills of the elderly and poor.
Neither Medicare nor Medicaid will pay a hospital's charges; they will pay only costs. One reason for this is the obvious protective one. Another is legal. If Medicare paid charges, Medicare trust fund money would end up being used in part to pay costs incurred by non-Medicare patients; funds held in trust for the elderly would be helping to defray maternity bills, for example.
Thus hospitals are required by law to give the government what the forprofit companies and many nonprofit administrators regard as a "discount" on Medicare and Medicaid patients.
Partly because of their size and market power, partly for other reasons, Blue Cros-Blue Shield insurance plans have also involved discounts of various sizes.
Only patients with commercial insurance or those rare paying patients with no insurance pay full price.
There are some interesting distributional implications in all this.
Medicare and Medicaid, for example, do not include in the costs they will pay any allowance for bad debts and free care -- those patients who, one way or another, end up paying nothing.
Medicare and Medicaid also make smaller allowances than hospitals say they need for depreciation -- the cost of replacing equipment. And they do not allow as large a rate of return as the proprietary institutions say they need to attract investment.
Patients with commercial insurance thus end up paying all these items. Next-door neighbors can end up paying very different prices at the same hospital for the same thing.