Some Rough Health Care Math

Today I looked at the aggregate EBITDA of all publicly traded companies in the medical industry, from medical products, dentistry, biotechs, pharmaceutical companies, health insurance, distributors etc. I used a database from Zacks Investments and can email a spreadsheet to anyone interested. From giant money machine Abbott Labs to tiny money loser Vision Sciences.

There are some meaningful flaws in the dataset (these are only public companies traded on a domestic exchange and not every company reports EBITDA info to Zacks). Nevertheless, roughly a thousand companies, on average, earn before interest, taxes, depreciation and amortization about $300,000,000/year. The highest absolute profits were earned by Johnson & Johnson ($19B), the biggest loser was Celgene (-$1.2B). One standard deviation is $1.6B, which means roughly 66% of the companies earned somewhere between -$1.3B and +$1.9B.

As a rough guess to include all private companies, let's double the pretax earnings, then take out ITDA and I'm comfortable saying industry net profits are around $300,000,000,000/year. None of this includes private physicians or adjusts for how they view profits (is the salary of a physician who owns her practice profit or tax deductible compensation?).

If my estimates are reasonably accurate, and we strip all the profit out, we're still spending over $2T a year on health care.

Is profit the problem with health care?


Zack said...

"I used a database from Zacks Investments and can email a spreadsheet to anyone interested"

Oh you can, huh?

Anonymous said...

Well, until today, I was satisfied with our health system here and while there is a large number of people herewho do not have health insurance, there is a problem here that needs to be addressed. I have a PPO with Blue Cross, and it allows me to use any doctor I want. I work with people who can't afford the PPO and have to use the HMO program. One young family man has a wife who found a lump in her breast and needs a digital scan of her breast for the doctors to prescribe. Unfortunately for them, in their "network" and location there is no digital scan available. The only choice is to change their primary care doctor in another network in a different county about an hour away. I'm under the impression that the best tools and doctors should be available to patients, but apparently not. It sounds to me like our health system needs to be redesigned and while I don't like the idea of government intervention, it may just be necessary.

Anonymous said...

Your estimate of profit corresponds to about 15% of spending. Interestingly, according to Dean Baker, insurance companies typically have ratios of expenses to payouts that exceed 15%. (I am assuming profit is included in expenses.)

The most liberal health care reform under consideration would only directly reduce profits of insurance companies. The others could see profits reduced as a result of greater negotiating power or other market and nonmarket forces lowering prices.

The profit on the P&L is not the only place where the profit motive increases costs. Insurance companies have higher administrative costs. Reform should eliminate the need to filter out people with pre-existing conditions.

A single payer plan would reduce costs across the system because providers would no longer have to manage hundreds of different plans, all with different copays, coinsurance, deductibles, out of pocket maximums, etc.

Regarding the extent to which physician pay is profit, that is hard to say. Private corporations are unlikely to have a significant amount of retained earnings. Whatever profit they have will likely be paid out as bonuses. I would call that profit. But it is not so clear. Some might pay low salaries, so that compensation is strongly liked to how many patients they treat. Others might pay relatively high salaries, and much of this would be better understood as profit.

It would be interesting to see a comparative study of costs between the US system, a single payer system, and a nation health system. Do you know of one?

There is also a moral imperative for health care reform. A significant chunk of Americans do not have health insurance. Further, the racial disparities in the health care system belie the claim that the U.S. system is the best in the world. For some minorities, its not even in the ballpark.

So profit is one problem, but not the only one.

P.S. For geeks only. 66% of companies earn between -1.3 and 1.9 if earnings are normally distributed. But I wouldn't expect earnings are generally not distributed normally, and when mu - sigma < min, they almost certainly aren't. It would be more informative to report quartiles, and perhaps 95th percentile.