Don Grady is a CPA and Professor of Accounting at National Louis University, Chicago
One of the courses I teach at the university is Financial and Physical Resource Administration – a course in our Healthcare Leadership Bachelor’s program. The short name for the course is Health Care Finance. The course was designed for nonfinancial managers in the healthcare industry who need to learn how to manage costs effectively and efficiently in their organizations.
The healthcare industry is going through tremendous change with the implementation of medical informatics (the use of technology to automate both clinical and financial medical systems). Such changes have added to the already spiraling costs of health care. Did you know that the costs of health care have doubled in the U.S. in the last 10 years? Did you also know that according to a 2012 PBS report, the costs of health care in the U.S. are the highest in the world? Why?
The answers to these questions are more complex than you might think. There are numerous articles and papers that have been written on this topic, and they seem to all have similar results. The costs are higher in the U.S. because they can be – yes, just because they can be.
For example, take drug costs in the U.S. and compare them to any other developed country, and you will find them to be considerably more expensive here. In other countries, drugs are purchased centrally through negotiated prices in large volumes. The sales price in those countries is a set price for the drug, which in many cases will be cheaper than generic drugs here. In other countries, leveraged buying drives drug prices down, but in the U.S., brand-named drugs keep the price higher, and we have a choice of buying the brand name or the generic version of the drug.
Of course, the heavy marketing and advertising costs the drug companies incur drives the cost of the drugs up as well. In other countries, there is little or no need for advertising, since the drug is centrally purchased. Many have argued the reason drug prices are higher in the U.S. is because the quality is better. Look closer and you will see that in most cases the drugs are the same.
What is true for drugs is also true for medical supplies and equipment. You would think that the competitive open market would keep the price down, but it doesn’t when the market is the U.S. where prices are higher and purchases are not all managed by one central purchasing agent.
The more you analyze the problem, the more complex it seems to get. So, what is the future of healthcare costs in the U.S.? Unless some dramatic changes are made, expect healthcare costs to double in the next 10 years.
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