Healthcare Analogy: 

If Healthcare was like a Car Dealership.

I often get asked by friends and family not in the healthcare industry why the cost of healthcare is so high in the United States. My first attempts to explain it to them was awkward and frankly to confusing. So, I thought how can I explain it in more simple terms and came up with my “If Healthcare was a Car Dealership” analogy.

The intent of my analogy is to paint a simplified picture of how healthcare providers are paid for services and how that relates to the cost of those services. I am intentionally keeping this high level and simple. This is not to mislead anyone, rather, it is to provide a basic understanding to lay the groundwork for a much more complex topic.

So, this post will not go into the detail of whether or not people think access to healthcare is fair or not.  It will not go into the political debate that seems to never end.  It will not go into the discussion around a $10 aspirin tablet.  Not because I do not think all those are fair topics, they are.  It is to help focus on trying to keep this simple.

If you have not heard about an “Elevator Speech” let me introduce that concept to you.  If you get on an elevator and meet someone new, you have a matter of 30 seconds to make your ‘speech’ to them.  I use this technique to capture the attention of people to determine if a more detailed follow up conversation is going to happen.

NOTE – This is a great technique for job hunters as you search.  Hone down your career experience to a 30 second pitch so that when you run into someone you can deliver your speech quickly and get their attention.

This is how I explain the world of healthcare finances to a layperson in less than five minutes (yes, I know it is more than 30 seconds).

I am presenting this like a conversation.

Joe (pseudonym to protect the innocent): “You know, I cannot believe that I just had to pay $250 for that CT Scan my doctor just ordered. It’s crazy.”

Mr. r2e: “That’s actually a lot less than the total cost of the CT.”

Joe: “Yeah, I’m sure. That’s just my co-pay under my health insurance. I don’t even know what the real cost is.”

Mr. r2e: “Well, there are actually two costs. One is the cost to the health insurance plan and one is the actual cost to the healthcare provider to perform the test.”

Joe: “Whatever, the cost to me is what I am having to pay out of my pocket! And it just seems crazy what people have to pay.”

Mr. r2e: “Well, if you have five minutes, I can explain healthcare finances to help you understand it better.”

Joe: “Well, I really did not think my comment would turn into a dissertation about healthcare costs but if you insist….”

Mr. r2e: “Ok, I promise to keep it simple and short.”

Joe: “Fine, go ahead.”

Mr. r2e: “OK, so envision yourself as the owner of a car dealership.”

Joe: “Can I pick the manufacturer? I want to sell Maserati’s.”

Mr. r2e: “Sure, knock yourself out. You can even get some of those special dealer license plates for your new company car.”

Mr. r2e: “Ok, let’s focus. You are the owner of a car dealership. Your first goal is to sell ten cars. You open your doors to the public and customers start coming in.  You start negotiating pricing and then send the first customer to the financing guy (or girl). The financing guy is every customers favorite person (yeah right).”

“The first three customers (or 30%) tells the financing guy that they will pay for the car with Medicare coverage. The financing guy grumbles a little because he knows that this will not be a good sale.

Why? First, based on your dealership license, Medicare must be accepted. You cannot turn that customer away. When you applied for a license you indicated you would accept Medicare.

Second, Medicare will pay you less than your cost. For the sake of argument, all the cars you have on your lot cost you $50,000 a piece. When it comes to Medicare, they decide that the payment they will give you is only $40,000. You take a loss of $10,000 per car, or in this case, you just lost $30,000 ($10,000 times 3 cars).”

“The fourth customer is alone and tells the financing guy that they will pay for the car with Medicaid coverage. The financing guy grumbles even more than when he did with the Medicare group.

Why? First, similar to Medicare, based on your license, you agreed to accept Medicaid as payment in full.

Second, also like Medicare, Medicaid will pay you even less than Medicare. So, in this case, Medicaid will pay you $35,000 for the car that cost you $50,000.”

“The fifth customer is alone and tells the financing guy he had a Medicare “Advantage” plan. This type of plan is sold by third party group insurers as a alternative to traditional Medicare. Well, you can guess the reaction of the financing guy….more grumbling.

Now, a healthcare provider usually has more choice to agree to accept Medicare Advantage plans. In this case, as owner you did NOT contract to accept these Advantage plans. Well, the way the customer arrived at your dealership forced you to accept that customer. This is the equivalent of a healthcare patient coming to the emergency department and you have to comply with the Federal EMTALA laws and see the patient).

So, while Advantage plans are run by third party insurance companies, they will only pay you $45,000 for the car. Thus, you lost $5,000 on the fifth customer.”

The sixth customer is alone and tells the financing guy he has no money and no other means to pay. The financing guy scratches his head and says he won’t sell the car to the customer. But then the finance guy remembers that since the dealership is not for profit they need to comply with State law around charity care.

Charity care is a requirement in many states and also at the federal level. In order to maintain not for profit status, healthcare providers must provide a certain minimum dollar amount of care for free. This is not only a moral obligation (my opinion) but a legal requirement.

So, the sixth customer pays nothing for the car and you lose $50,000.

So, let’s do a quick recap of the first six customers.

Customers        Payment              Cost               Income/(Deficit)

1-3                    $120,000             $150,000       ($ 30,000)

4                        $ 35,000              $  50,000       ($ 15,000)

5                         $ 45,000             $ 50,000          ($ 5,000)

6                                   $ 0             $ 50,000        ($ 50,000)

Sub-total          $210,000            $300,000        ($ 90,000)

Right now, you sold six cars and you are in the hole $90,000.

Right about now you should be questioning your decision to open the dealership. 

This leaves you four more customers (to get to ten total). You are wondering how you can at least get to breakeven let alone make a profit.

The final four customers (or 40%) arrive and tell the financing guy they will pay for the cars with private insurance. The financing guy does his best to not smile with joy.

The finance guy does some math in his head to ensure he can at least get the owner to breakeven on these next four cars.

He knows the cost of each car is $50,000. Times four customers, is $200,000.

He knows that the losses so far on the first six customers is $90,000. (per above)

That means he needs to get $290,000 for those next four cars ($200,000 cost plus $90,000 in losses on the other cars) to get you to the breakeven point.

Dividing that $290,000 by four customers, he needs to average a payment of $72,500 per car on these last customers to breakeven overall. ($290,000 / 4)

Your finance guy, smooth negotiator that he is, successfully negotiates a variety of payments among the four customers, some higher and some lower, and overall averages the $72,500 needed.
Let’s recap the numbers.

Customers            Payment              Cost               Income/(Deficit)

1-6                      $210,000               $300,000       ($ 90,000)

7-10                    $290,000               $200,000         $ 90,000

Sub-Total           $500,000                $500,000         $          0 

At the end of the day, the cost of the car to you as the owner was $50,000 per car.

However, the “cost” of the car to the customers varied tremendously.  The lowest cost was the customer who paid nothing.  The highest cost was the group of the last four customers, whose average cost was $72,500.

So, Joe, I hope this short explanation has helped you better understand this.”

<End Conversational Topic>

Now, translate this into the real healthcare world. If you have employer sponsored healthcare (eg – private insurance), you will be absorbing a higher cost for the same cost (to the provider) item.

Don’t think you are immune to this because you have insurance. This higher cost charged to insurance plans gets passed onto you through deductibles, co-insurance and out of pocket maximums.

This post is not being made to score political points. It is also not being made to say the way it works is good or bad. Lastly, this is not being made to put friction between those who have insurance and those who do not.

This post is merely a simplified explanation of how the mechanics of cost and payments works in healthcare. Payments are unlike any other industry in the United States. There is similarity in that different people pay different prices. There is difference in the fact that in some cases healthcare providers do not have a choice in customers. And this is ok. This is how it works currently.

I hope this may have shed a little insight into this topic.

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