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The Atlantic Article "How American Healthcare Killed My Father" is weak.

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August 30, 2009 – Comments (4)

A few days ago TMFMmbop referred us all to an article titled ‘How American Healthcare Killed My Father  published in The Atlantic, by David Goldhill and asked for comments.
For this post I choose to comment on the chapter titled ‘The Strange Beast of Health-Care Technology’ on page 5 of the article.

Mr. Goldhill writes; But most health-care technologies don’t exist in the same world as other technologies. Recall the MRI my wife needed a few years ago: $1,200 for 20 minutes’ use of a then 20-year-old technology, requiring a little electricity and a little labor from a single technician and a radiologist. Why was the price so high? Mr. Goldhill then compares the cost of an MRI to the cost of LASIK eye surgery at $499 per eye. He points out for us that $499 per eye represents an 80% decline from the $2500 per eye price from when the procedure was first introduced in the 1990’s. Because LASIK is not covered by insurance he credits the competitive market place for lowering the cost of LASIK while blaming the Medicare model of paying for MRI’s for the reason we have not had the same cost savings in MRI procedures.

Mr. Goldhill leads us to assume that an MRI cost $1200 in the 1990’s when it was first introduced. He does not actually give us the number (As near as I can tell the fee Medicare pays for an MRI has increased over time with inflation). If an MRI originally cost $6000 then it also would have experienced the same 80% price reduction and Medicare costs would have been 400% higher in the past. But we do not know that information from the article. He also suggests that $1200 is expensive for an MRI (Why was the price so high?), but what if it is not “high”. Comparing the cost of an MRI to the cost of LASIK might be like comparing the cost of a recreational sailboat to the cost of a Panamax cargo vessel. One costs more because it is worth more. Perhaps comparing LASIK and an MRI is not valid. Perhaps the cost of an MRI needs to be estimated upon its own merits and the fact that it replaces the costs of invasive surgery. Perhaps the cost savings against invasive surgery from an MRI has freed up substantial money to surgeries to improve the quality of life for millions.

Mr. Goldhill also compares the cost timelines differently. He describes an MRI from a timeline starting point of “20 year old technology” and the LASIK timeline from “when it was commercially introduced”.  It could be that the MRI is younger than LASIK and still at the higher cost point. I do not know, but these are not comparable timelines. I apologize for my not investigating the timeline better for you, so should Mr. Goldhill, but I suspect I am writing for less money.

What if Mr Goldhill has it wrong, and that the insurance model kept the early costs of an MRI down, not the current costs up? One way to know that would be to calculate the ROI on investing in MRI equipment. According to the Pennsylvania Health Care Cost Containment Council The equipment itself comes with a high price tag: an average MRI machine costs approximately (as much as $4mil) $2 million to buy and install and $800,000 per year to run, or as Mr Goldhill describes it, “some electrical costs”. Bear in mind that the $800,000 does not include the technician, radiologist, building costs, room lighting, waiting room, billing costs, etc. Mr. Goldhill also describes a twenty minute MRI, but many MRI procedures last 90 minutes, and patients find it so uncomfortable that “open” MRI’s were developed. Let’s say the average MRI lasts 60 minutes, and we can do 5 per day.Let’s say the each MRI is actually paid the $1200 Mr Goldhill suggests they are, not the $700- $900 the National Imaging Associates says is actually paid for each MRI. $1200 x 5/day x 260 days per year (5 day weeks) = $1,560,000.$1,560,000 - $800,000 in annual operating costs = $760,000.$760,000/12 months = $63,000/month profit is a 44% annual ROIC and a 31 month payback on that original 2mil investment, assuming a 15yr equipment life expectancy. Nice.

Of course your hospital may have to borrow at 8% to fund that MRI equipment. That is a $13,000 chunk out of that monthly profit.

$50,000/month is a 32% annual ROIC and a five year payback, assuming that same 15 year life expectancy. Still a very nice return.

Let’s say the National Imaging Associates is correct and medical facilities are paid $800/MRI. Now it takes you 279 months to pay back the equipment, and your annual ROIC is -12% after 15 years. You don’t get that 8% loan, because if you do, you are losing 12% on your business/money every year and I know you will default.

Now let’s do LASIK.

The most expensive equipment cost I could find was from a LASIK surgeon trying to justify $2000/eye LASIK costs, not the $499/eye price given by Mr. Goldhill. http://www.drdellorusso.com/blog/?p=22

Using the expenses given by Dr Dellorusso and the $499 price suggested by Mr Goldhill, lets calculate ROIC.

Let’s presume the same 5 treatments/day, and the same 8% interest. We’ll use the highest annual operating costs of the $3-6k/month cited by Dr Dellorusso.

$499/eye - $150 LASIK royalty = $350 x 5/day x 260 days = $455,000/year.

$455,000 - $72,000 (8% interest for two required machines) - $144,000 the most expensive service cost estimate for 2 machines = $239,000/12 months. Your equipment is paid off in 48 months and your ROIC over 15 years is 25%. Not quite as good as an MRI, but not bad.

One truth however, is that LASIK eye surgery actually does take 15 minutes to do two eyes, and you can do many more than 5/day. If you did just ten/day at $499 your ROIC would blow away the best case MRI returns, which suggests that the Medicare payment system saved us all 400% higher costs of supporting the early mover expenses of the competitive market, and is still saving us money today at $1200, and allows room for the hospital to make money. The Medicare payment also subsidizes the private insurers who are paying less, and bringing down that average payment to $700-$900 bankrupting healthcare providers (Doctors and Hospitals).

Pages 1 through 4 of the article did not impress me either.

4 Comments – Post Your Own

#1) On August 30, 2009 at 5:25 PM, streetflame (30.04) wrote:

"Let’s say the average MRI lasts 60 minutes, and we can do 5 per day."

Again for laser eye surgery, "Let’s presume the same 5 treatments/day".

OK. While we're at it, let's presume the sky is green.  I have personally undergone both and can assure you much higher throughputs are standard for MRIs.  If a hospital is only doing 5 MRIs per day, the reason is that there are too many MRI machines in the area because of health care system inefficiencies.  Eye surgery is a shorter procedure, but because it has a lower cost structure, it doesn't require as high a throughput to pay for itself. Furthermore, my doctor spent over 5x as much time with me in visits before and after the procedure as during the procedure. Your argument rests on shaky assumptions.

I think the point is that laser eye technology has improved a huge amount in the last 20 years while MRI technology has not improved that much.  From my perspective it is mainly a technological problem, not an economic one.

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#2) On August 30, 2009 at 6:07 PM, caterpillar10 wrote:

Thanks for some much needed reasoning in the healthcare conversation - the free enterprise v.s. commies polemic has been well covered, is getting repetitive, & goes nowhere. It's time for people to inform themselves and start breaking things down as you've done.

I spent the better part of my working life cutting checks for medical procedures and, without looking stuff up, your numbers seem close enough for the purpose at hand. The MRI - Lasik comparison, as you suspect, has many problems. 

Lasik, mostly used for refractive correction, is covered by almost no plans at all so has been more of a cash enterprise from the beginning and is a good example of a technology price model, over time, that is not skewed by fee scheduling overall.

The one exception is cataract removal, a covered surgery w/medicare for obvious reasons. Once approved, lasik immediately cut the cost in half compared to surgery by hand - down from $4000/eye, and has since come down as you noted. Plus, it took an overnight stay w/ two surgical preps with lots of stress  & risk, and turned into a routine day surgery.

....gotta run - thanks again       

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#3) On August 30, 2009 at 7:25 PM, starbucks4ever (97.15) wrote:

Somebody has built himself a monopoly in MRI equipment, and 80% of that $2M per machine is the cost of guarding that monopoly and of hiring the sherif to drive out legit competition.

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#4) On August 30, 2009 at 9:42 PM, devoish (98.42) wrote:

Streetflame,

Excellent answer. If you actually have better numbers than I estimated, put them on the table. Caterpillar10 claims experience and suggests I am close.

Streetflame,

Not so excellent answer, The point of this chapter of the article was that a competitive market lowered the price of LASIK, and that the Medicare as payer model kept the cost of MRI's high. My point is that did not happen and is likely another of many "free"...er "competitive market" myths. After lowering the cost of "competitive market" LASIK the ROIC is similar to, and probably still higher (more profitable), than with an MRI. (remember I exaggerated LASIK's costs as much as possible to give it the lowest ROIC possible, and used an exaggerated price of an MRI to give it the highest ROIC possible) So if, as Mr Goldhill suggests, today is the right price point for LASIK then yesterdays higher prices were excessive which he says they were and argues they are deserved by the first movers, in a "competitive market", with a wanted service. If, as Mr Goldhill suggests, todays ROIC on a LASIK investment is reasonable, then so too is todays similar ROIC on an MRI investment. If, as Mr Goldhill suggests, MRI prices have not come down, then they were never excessively high to begin with, and the Medicare as payer model saved us all substantial medical expenses. It does not cost us as he claims.

That LASIK technology has improved in the last twenty years while MRI tech has not was not the point of Mr Goldhills article and is not true. Both technologies have improved, the MRI's have gotten faster, take more pictures/inch, have improved clarity, found many additional uses and increased patient comfort.

If a hospital is only doing 5 MRIs per day, the reason is that there are too many MRI machines in the area because of health care system inefficiencies

This comment stands out to me as another failure of the "competitive market" model as it concerns medical care. At some point as "competitive markets" make more and more efficient use of fewer and fewer ambulances, they go to far and we only learn after we find ourselves unprepared for an emergency.

Zloj,

Monopoly? no. Collusion? maybe. J&J, Siemens, GE, Fonar, Hitachi, Phillips, and probably many other companies make MRI machines. At some point there is a lowest common denominator to the cost of making anything whether it is labor, raw materials or whatever.

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