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The baffling economics of Marin General Hospital

How much should a major surgery cost?

I am thinking of a coronary bypass surgery or any operation that is as intensive. So, let's price it out just as if we were pricing a major contract. I built a model to figure this out.

The model starts by capturing the yearly salaries of all the surgeons and other medical staff necessary to conduct this major surgery.

The operating team's annual salary adds up to $2.4 million.

Benefits account for 38% of total compensation for local municipalities, hospital districts, etc. (researched with Perplexity).

When factoring benefits, the cost of the operating team is:

$2.4 million/(1-38%) = $3.9 million

But, Marin General has a lot more operating expenses than just salary & benefits. The latter accounts for only 50% of total operating expenses (source: Marin General audited financial statements).

So, the total yearly cost for this operating team, when factoring in all supporting expenses (drugs, blood supply, equipment, leases, etc.) is:

$3.9 million/50% = $7.8 million

Healthcare staff work between 200 to 240 days per year. We will use 200 to generate a conservatively high estimate of the surgery's cost (assuming the surgery would tie up the entire operating team for a full day's work).

So the estimated cost of the surgery is:

$7.9 million/ 200 days = $39,000

Now, how much does a major surgery really cost?

Well, it of course depends on what it is and who pays.

Let's review sequentially the three highlighted rows with surgeries coming in 1st, 6th, and 12th most expensive surgeries.

A liver transplant is the most expensive surgery coming in at $2.77 million (Gross charge). If you come in with a truckload of cash, it will cost you "only" $1.66 million. And, private insurers (derived contracted rate), Medicare, and Medicaid either do not cover this procedure or do not disclose their negotiated prices within this specific data set.

In 6th place, is the coronary bypass surgery we modeled earlier. Cash price is $554 K, private insurer $154.9 K, and Medicare $118.3 K. Notice that even the Medicare cost is 3 times higher than our estimated cost for this procedure. Given that, you would think that Marin General would be extremely profitable with operating profit margins of 66% or so. This is not the case, Marin General's operating profit margins are typically close to breakeven and often negative. This is common within the hospital industry.

If Marin General gets $118.3 K from Medicare for a bypass surgery, and its costs are only $39K, where does the other $79.3 K go?

As we will soon uncover, part of the $79.3 K may go to subsidize Medicaid patients, as the Medicaid program pays materially nothing for any hospital services. But, a boatload of the $79.3 K probably just confirms that US hospital care is unexplainably high compared to anywhere else in the world; see international comparison at the end of the article.

The third highlighted row consists of another cardiovascular-related surgery. It comes in 12th place with a cash price of $407.9 K and private insurers and Medicare come in at only $2.2 K! The insurers' negotiated price is only 0.5% of the price that a patient would pay with a truckload of cash. That's astonishing. However, it is not a typo. We will soon see that the discrepancies between cash and insurers' costs (especially Medicaid) are enormous. In this specific case, we can readily figure that Marin General would actually lose a ton of money on such an operation. You can't fund a complete operating team for a day with all add-on expenses for just $2,200 a day.

Studying the hospital pricing transparency data

The hospital data discloses over 4,400 procedures. I cut off the data focusing on procedures with a gross charge of at least $1,000. This reduced the sample size to 3,210. I focused on 5 different payment-price points:

1. Gross charge (Charge)
2. Cash (that's the patient's truckload of cash)
3. Price negotiated by private insurer (Contract)
4. Medicare
5. Medicaid

The data has a ton of rows with missing values. The more payment-price points variables I include in a grouping, the more missing values. When I just include Charge and Cash, I get a large sample size of 3,210 procedures. But, by the time I include all 5 payment-price points variables, the sample size is only 990 procedures.

First grouping: Charge and Cash

When paying cash, the customers/patients get a 40% discount across the board regardless of the procedure's cost level.

Second grouping: Charge, Cash, Contract

Private insurers, when they disclose a negotiated price, get very high discounts ranging from -53% to - 98%. Their weighted average discount for this specific grouping sample is - 72.7%.

Third grouping: Charge, Cash, Contract, Medicare

Medicare discounts are close to but a bit lower than the private insurers. The Medicare weighted average comes in at - 67.9% vs - 72.6% for the private insurers (Contract). This was surprising. You often hear that Medicare pays so much less than private insurers, and that it really hurts hospital financial solvency. This data set contradicts this assumption.

Fourth grouping: Charge, Cash, Contract, Medicare, Medicaid

Before looking at the data below, keep in mind that this grouping data set is different from the others. The sample is so much smaller at only 990 rows. And, it includes typically procedures that are very much at the low end of the scale. Within this data set of procedures' cost, the 99th percentile comes in at $75 K. For all the other groupings, the 99th percentile came in at over $480 K.

This grouping is associated with lower procedure costs, Medicare does not discount them much (weighted average discount rate is only - 2.4%). Meanwhile, Medicaid's weighted average discount rate is - 97.4%!

Summary for all four groupings

Below see a visual representation of the same data

The American Hospital Association discloses that the majority of hospitals lose money on both Medicare and Medicaid.

Marin General's pricing data diverges from this finding, as it does pretty well with Medicare. But, it gets hammered on Medicaid (- 97.4% discount!).

A short international comparison

Based on data gathered using Perplexity, I got the following price comparison for the average coronary artery bypass grafting surgery cost or price in a few countries.

I could not find hard data for France, Germany, Japan, or Canada. However, we can be pretty sure they would come in lower than Switzerland.

Shockingly, other developed countries can do the same surgery at much less than half of the US costs. Their respective costs are a lot closer to my model estimate. Given that, I do not understand why the US costs for such surgeries should be so much higher than Switzerland or Australia.

India is an interesting outlier because it is renowned for excellent healthcare in its major hospitals. And, its prices are just 3% of the US prices. This cost and value advantage is associated with a huge inflow of "medical tourists." In 2019, there were 700,000 medical tourists to India. This figure dropped during COVID. But, as we speak this trend is back up again.

THE END

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