Profits, Bureaucracy, and Fraud

By Peter Sciaky

The United States Health Care Industry is a trillion dollar per year pie. By far the largest segment goes to the hospitals, taking a 42% bite for themselves. Doctors are next, 20%; followed by nursing homes, 11%; drug companies, 10%; the insurance industr y 7%; and dentists, therapists, etc. take the remaining 10%.

The money comes directly from various sources: insurance companies, government and the consumer. Of course, we should bear in mind the obvious, that the consumer (or his alter-ego, the tax payer) pays the whole tab all of the time. There is nothing intrin sically wrong with this. It is true of all people, in all countries. It is a matter of whether we get what we pay for. In our country, a large portion of our money gets converted to profits. Another large hunk goes for administrative bureaucracy, and, sad to say, a not so piddling amount is siphoned off by fraud.


For-profit health care is one of the fastest growing industries in the United States. Consider that in 1965 health services took 0.11% of American corporate profits. By 1990, for-profit health care had dramatically increased its share of Americ an corporate profits to 2.21%. That doesn't sound too bad, until you consider that in twenty-five years they managed to increase their profit by a factor 20 to over 1900 percent! At the same time, the amount of money shelled out by American consumers for health care has also increased spectacularly. In 1960, the average American spent 5% of his income on medical care and 6% on automobiles and repairs. By 1990, he spent 14% on health care and only 5.4% on the car.

The take-over of community owned and operated non-profit hospitals by for-profit corporate giants has accelerated. In the last decade (1980-90) almost 200 hospital mergers occurred. In 1981 about 82% of the HMOs were non-profit; by 1995 that percentage ha d plummeted to 30%. According to industry analysts, managed care profits are expected to rise this year to $3.3 billion on revenues of over $125 billion.

The pharmaceutical industry has long led the nation in profits as a return on equity. They returned a whopping 31% in 1995, compared to the airlines (18%) or petroleum refining (9%). When the president revealed his plan to guarantee all school children with preventative inoculations, the pharmaceutical industry balked. The discounted prices that the government would pay for the shots, they said, would severely curtail their ability to carry on research, but it was a diminishment of profits that was really on their mind.


"Of the $817-billion that we will spend this year on health care, we will throw away at least $200-billion on overpriced, useless, even harmful treatments and on a bloated bureaucracy," so says Consumer Reports. In July, 1997, The Inspector General of the Department of Health stated, "We estimate that during fiscal year 1996 net overpayments totaled $23.2 billion nationwide, or about 14 percent of total Medicare fee-for-service benefit payments." She could not "quantify what portion of the error rate is attributable to fraud." $3.2 billion is enough to take care of the health needs of about 5.8 million people.

Bureaucracy Most Americans fear big government. It is wasteful, we cry; it is laden with bureaucratic inefficiency. This inefficiency is not limited to government alone. Managed care providers gobble up about 30% of their premiums for profits and overh ead. But the truth of the matter is that we pay more than six times per capita than do the Canadians for health care overhead (US, $212; Canada, $34). In the US health insurance alone eats up 1% of the Gross National Product (GNP), while in Canada the per centage is 0.10 - only one-tenth of ours. Obviously, the Canadians do not have a magic potion; the difference lies in how the health care systems are managed.