When one goes to the doctor for an examination or to have an office procedure performed, notes are made on the patients chart and procedure codes are recorded. Somewhere, a person enters these codes to the accounting system which then makes a ledger entry and generates an invoice.

Here is a crude guess (factor of 2 estimate) as to the labor costs involved for a 2-Doc office in a quiet town, nominally- 2 MD’s @ $250 k each, 2 PA’s at ~$35 k each, 2 office clerks @$25 k each. Add up the salaries plus 25 % for taxes and benefits, it adds to $775,000 per year in direct labor costs.

If we assume the mortgage or rent is $3000 per month, insurance on the facility is $8,000 per year (a guess), and utilities are $5000 per year (a guess), we can add another $49,000 bringing the total to $824,000 per year. 

Spread over 52 weeks at 48 hours per week, the overhead cost runs at $330.01 per hour. If the docs make $150,000 per year, the overhead comes down to $229.97 per hour. In a town away from the major population centers, the real cost is probably between the two numbers. In major markets, the costs may be 2x or more higher than the scribbling I have proposed.

At $330/hr, the labor overhead cost is $5.50 per minute. At $230/hr, the labor overhead cost is $3.83 per minute. This simple mindedly assumes that the docs are running the clinic and not a hospital. So, while a patient rattles away about a dream from the previous night, or gives a recitation of every manner of ache and pain in the last 5 years, the clock is ticking away. It is easy to see why most offices have multiple examination rooms and the doc spends all day popping in and out of these rooms. It is driven by the need to keep up the rate of production.

A practice is a business and there is a reasonable expectation of some kind of net profit. If in this labor intensive business the previous overhead costs consume 60 % of the cash flow (a guess), then the 40 % balance covers materials, misc costs, and profit. So, the high number may be more like $550/hr to afford a 15 % net profit. The low estimate would be $383/hr to give the 15 % net profit.

I don’t know what the numbers really are. If anything, they are likely to be understated. I just did a back of the napkin scientific wild-assed guess (a SWAG).

Now, for the patient add to this the cost of testing, prescription drugs,and procedures by specialists who are likely to have expensive machinery as well as a high hourly rate. All of the parties involved have preset costs and margin requirements for their services. For the patient, there are few options for a Wal-Mart approach with less expensive care services.  The entire system has evolved to soak up the resources provided by insurance companies and the government.

Ultimately, the patient is a minor decision maker when it comes to medical services. Medicine has become an extractive industry where the sick person owns the land but not the mineral rights.  To a great extent, the doc is the gatekeeper as to what service will be needed and the insurance company is the gate keeper on the funds. It is up to the patient to try to connect the two parties in a dispute.

How can we expect to reign in health care costs when there is little option to find alternative services that are affordable?  Increasingly, we have champagne services on a beer budget.

There is no option for selecting a Ford sedan when the dealer only provides Mercedes. If medical schools and medical boards have an exclusive grip on the supply of MD’s in the market, how can the cost of medical labor be brought into line with the needs of the population bell curve? To what extent are MD’s over trained? Any at all?

And, to what extent do caregivers now turn ambiguous cases over to specialists or MRI’s where before they would have tackled it with more modest means? Perhaps litigation is a sort of ratchet that makes testing that was once optional now manditory.

People who provide critical and life saving services in our society should be rewarded in a manner commensurate with the contribution. And we should be willing to pay for such service. But for this service to have grown into a massive business machine that harvests cash from the marketplace, but is somehow immune from equilibrium forces in the market that everyone else is subject to is grossly unfair and cannot be sustained.