There is growing concern about the outrageous costs of medical care in America, but it’s also not surprising that it takes a lot of money to run a hospital. Statistically, more than 1 out of 10 Americans are admitted to the hospital every year, and it costs millions of dollars to treat them. But hospitals are one of the largest and most important drivers of most local economies, and with the shift towards transparency that comes along with health care reform, the hospital industry could be in jeopardy. Most experts estimate that one third of hospitals will close by 2020, mostly because the enormous cost of medical insurance makes it hard for them to compete in an increasingly competitive market. In order to understand this crisis, it’s important to understand how hospitals make money and how they spend it.
1. Non-profit versus For-profit Hospitals
According to the American Hospital Association, the majority of hospitals in the United States are non-profit facilities not owned by the government. There are nearly 3,000 of these hospitals across the country (see largest hospitals in the united states), compared to 1,025 for-profit hospitals, and there are some distinct differences in how for-profit hospitals operate. Hospitals designed to make a profit are owned by investors, and they offer more elective procedures such as plastic surgery. They often cater to an elite clientele, although statistically they actually pay their doctors and nurses a lower salary. Non-profit hospitals offer larger-scale emergency care, and they lose about $75 billion a year because they accept anyone who walks through their doors, regardless of their ability to pay. But the tax breaks offered to non-profit hospitals are essential to keeping them afloat.
2. What Hospitals Spend Money On
Hospitals spend over 50 percent of their annual income on salary and benefits for their staff. The second-largest expense is supply, which mostly refers to the prices they pay for medication and drugs, and this is yet another area of the health care industry that is in crisis. WebMD says cancer rates are expected to grow by 75 percent by 2030, and that’s a big factor in the drug shortage that leaves hospitals paying an average of $600 for a $7 vial of medicine. Technological advances in medical equipment are also costing hospitals money. Renting or purchasing equipment, hiring technicians to repair and maintain their machines, and training staff to perform high-tech surgeries all make a dent in the amount of money spent per year. Add to that the cost of hiring extra staff to deal with increasingly strict health insurance companies, most of which require daily contact, and you have a long list of expenses.
3. How Hospitals Make Money
Naturally, hospitals make the bulk of their income from insurance companies, but the amount than an insurance company pays often varies for no real reason.Most insurance companies pay per diem, so their fee is based on each day a patient remains in the hospital and their level of illness or injury. The insurance companies must be contacted every day to be updated on a patient’s condition, and if they disagree with the hospital’s facts, they can refuse payment. Insurance companies also give financial incentives to hospitals if they can reduce or shorten stays. Medicare and Medicaid also pay the hospitals, though they usually have a flat fee for certain kinds of cases, depending on potential complications. Non-profit hospitals are also able to fundraise and receive donations. If these hospitals are involved in medical research, they can receive large grants from the government.
The reasons for rising hospitals costs and the large variation from facility to facility can often be complicated and chaotic. And with the Affordable Care Act, many things about the hospital system are expected to change. But one thing that’s unlikely to change is that medical care is an industry, and the country must continue finding new ways to offset the costs associated with saving lives.