The Profit Of Prestigious Cancer Care

The cash flow for Sloan-Kettering comes from more than just drug markups. It also comes from the high pricing enabled by a great brand and an enterprise that has learned how to expand the reach of its brand

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Like MD Anderson’s aggressive pricing for Sean Recchi’s stay, Sloan-Kettering’s markup on drugs like the Flebogamma given to Alan A. is one reason cancer care is so profitable. In 2011, the hospital and research institution of Sloan-Kettering had an operating profit of $406 million even after everything it spent on research and the education of a small army of young cancer doctors.

The cash flow comes from more than just drug markups. It also comes from the high pricing enabled by a great brand and an enterprise that has learned how to expand the reach of its brand.

One of Sloan-Kettering’s major revenue sources is the outpatient clinics it has been opening around New York City in recent years so that patients don’t have to travel to the busy Upper East Side of Manhattan for the kind of treatments Alan A. gets every six weeks. There is a cancer-screening and treatment outpost (run in partnership with Ralph Lauren’s foundation) in Harlem and a chemotherapy clinic in Brooklyn, and clinical-care facilities can also be found in five of the New York City metropolitan area’s wealthier suburbs, such as Sleepy Hollow in Westchester County, New York, and Basking Ridge, N.J. A sixth is being constructed in Harrison, another wealthy Westchester town.

Building on the deserved allure of the Sloan-Kettering brand, these outposts eat into the profits of area hospitals, which would otherwise be providing the same high-margin outpatient cancer care either on the basis of what their own doctors prescribed or according to instructions from Sloan-Kettering’s specialists. “Sloan-Kettering can open these clinics and treat people 9 to 5 at their [high] rates, and because they’ve got the brand name, they’ll be very successful because they don’t have to run a 24/7 operation,” complains the president of one hospital in a wealthy suburb north of New York City. “But if those patients need help at midnight on Saturday, they’ll end up in our emergency room.” That may be true, but Sloan-Kettering’s foray beyond the Upper East Side of Manhattan also represents a rare outbreak of competition in the current hospital marketplace.

Sloan-Kettering may be fishing for business in these wealthy suburbs, but it does have a financial-aid process that is both proactive and well publicized to patients seeking care. It provides discounts of varying amounts for those who are uninsured or underinsured and have incomes of less than 500% above the poverty line, which comes out to about $115,000 a year for a family of four. Counselors also help patients get other aid from the state or local government, from research programs or, as happened with Sean Recchi in Ohio, from drug companies.

That still leaves out many people, especially the uninsured or underinsured whose incomes are above $115,000 but well below what they would pay for treatment at Sloan-Kettering. And it undoubtedly leaves others struggling just to meet the co-pays required even with good insurance. Sloan-Kettering chief operating officer John Gunn says patients not formally in the financial-assistance program might still be offered discounts of some kind and that only “2% or 3% of our patients pay our full list prices”—chargemaster prices that he acknowledges are high “because we have better outcomes.”

Most of those asked to pay chargemaster rates, Gunn adds, are “wealthy foreigners, whom we screen and tell in advance what it’s likely to cost them.” Insurance companies negotiate discounts off of Sloan-Kettering’s chargemaster prices, but Gunn acknowledges that his hospital can drive a hard bargain because insurers want “to make sure we are in” their network.

That kind of brand strength produces not only lavish cash flow but also lavish incomes for the nondoctors who work to generate it. Six Sloan-Kettering administrators made salaries of over $1 million in 2010, the most recent year for which the hospital filed its nonprofit tax return. (The 2011 return is “on extension,” says Gunn, who was paid $1,531,991 in 2010.) Including those six, 14 made over $500,000.

Compared with their peers at equally venerable nonprofits, these executives are comfortably ensconced in a medical ecosystem that’s in a world of its own. For example, Sloan-Kettering listed two development-office executives, or fundraisers, as making $1,483,000 and $844,000. Another venerable New York nonprofit that mines the same field for donors—the Metropolitan Museum of Art—pays its top development officer $345,000. Harvard pays its chief fundraiser $392,000. Asked why salaries at Sloan-Kettering are so much higher than those at nonprofits like the Met and Harvard, Gunn replies, “All of us hospitals have the same compensation consultants, so I guess it’s a self-fulfilling prophecy.”

Whatever the origins of the compensation rates, the prospectus that Sloan-Kettering’s bankers and lawyers used to sell the bonds that helped finance those suburban clinics struck a tone that is at odds with the daily sight of men and women rushing through the halls of Sloan-Kettering doing God’s work. The halls may be sprinkled with cheerful posters aimed at patients, but the prospectus is sprinkled with phrases like market share, improved pricing and rate and volume increases. Then again, the same prospectus describes the core of the business this way: “higher five-year survival rates for cancer patients as compared to other institutions.”

27 comments
mseth
mseth

 A Single Panacea for All Economic Ills  for Leaders with Courage and Foresight

U.S. health care, indeed, is the best in the world albeit at exorbitant cost. The obvious questions is -what is the use of delicious ripe apples hanging 10' high when only a few can leap to that elevation to enjoy them ? For the rest, they might as well not exist or be content with low hanging low quality fruits.

 An MRI of any organ in India would cost less than $ 150 (Rs. 400-700), the same MRI costs over $ 1000 in the U.S. Likewise aspirin, or common antibiotics costs 10 times in U.S. as compared to India. Last year, it had cost me $ 1600 for a six peace bridge in Mexico (across the border from Texas) which was quoted to be $ 7,500 by my regular US dentist. Surely, the medical equipment and its maintenance costs would be similar, as Siemens or GE would not sell them to the poor Indians at a substantial discount as compared to their wealthy U.S. counterparts. Neither the cost of living differential justifies the disparity. It leads to a obvious implications of higher service charges by the healthcare providers and the price gauging. The price gauging is directly reflected in the healthcare costs rising at more than 3 times the inflation else what  is the justification for the higher cost for healthcare services as opposed to all others (with the exception of University-education which is cleverly following a similar model) - it is just plain and simple greed bordering on  obscenity, and, indeed, mind boggling.

Digging deeper, there are primarily four groups constituting the bulk of the healthcare industry, namely, 1. Hospitals, 2. doctors, nurses, and related supporting staff, 3. insurance providers and administrators, and 4. drug and pharmaceutical industry. Based on the recent data, the pie is divided among these with about 30 % for the hospitals  including diagnostics and labs,  14 % for the pharmaceuticals, and the rest divided essentially equal  between the other two.

The total U.S. health care cost is approaching 3 trillion dollars per year, of which over 1 trillion is contributed under the Medicare and Medicaid programs. [ Of the current 3.7 trillion dollar annual federal budget, a full 62 percent is taken away by Entitlements (Medicare, Medicaid, social security, vet benefits, and like and yet these programs are destined to go bankrupt over a period with nothing much left for  the younger generations.) leaving only 38 percent for the congress to fight over for all other  expenditure including defense, education, and others ].

If the health care costs can be reduced by at least 50 percent (which can be done painlessly as outlined below),  all political grid locks will be unlocked, no tax cut would be necessary, economy will thrive, jobs will be created, and all will be insured and enriched at the expense of excesses  and waste in the healthcare industry.

Suggested below are two bold alternative models for healthcare either of which can accomplish the goal of reduced healthcare cost. Though the models are radical and may not be palatable and even shocking  to many, but opposition would be largely out of ignorance and fear and not the reality.

Pre-requisite for adopting either of the models would be:

1. a drastic reduction in ALL healthcare related lobbyists' activities including that of AMA, drugs, insurance,  hospital care, and other such related entities. All their activities must be transparent for everyone to know the agenda and their interaction with the members of congress and the administration.

2. Major reform in tort laws such that the damages are limited to a certain low finite ceiling, and

3. Provide option to retain the existing plan and offer incentives (such as zero or minimal co-payment for all services except possibly for doctor's visit ) to join the new model.

The suggested models are only conceptual and will require major tune-up based on  feed back and deliberations.



Model I: Restructure the Healthcare service providers:

Restructure the healthcare system along the lines of school systems for public education.  Specifically,

a. Eliminate the middle man- insurance companies (25 percent savings)*
        * savings are judicious estimates based on the current expenses.   b. Form local groups comprising of doctors who will  be responsible for total health care of patients within their area, and in effect, act as health care insurers.   c. Set up one or more hospitals and diagnostic centers within each area. All hospitals, diagnostics, and lab work will be conducted by not-for-profit NGOs, or city or county administrators under the umbrella of the state governor who will act as a czar for ensuring efficient execution of services. (15 percent savings).   d. All drugs be procured on a competitive basis from anywhere in the world. (10 percent savings)- YES

e. Compensate doctors attractively to be sufficiently motivated to be a member of such group of health care providers and be barred from private or independent practice to create any conflict of interest.  
Model II: Open up  the Health services to providers world-wide:

This model is broadly similar to the Information Technology (IT) industry's successful and profitable venture of outsourcing key tasks to foreign entities possessing the needed expertise, and yet significantly less expensive.

The key elements of this model are:

1. Allow all qualified foreign entities (insurance companies, drug manufacturers, quasi or full governmental entities) to compete for providing health care services along with the U.S. companies.

2. Freely permit nurses, doctors and other health care givers to temporarily enter the country on H1-B Visa similar to software development professionals. These professionals will be designated by their sponsors who are under contract with the U.S. government to provide health care services. The professional must pass appropriate qualified examination conducted by the U.S. authorities or be licensed to practice in U.S., to ensure safety and adequacy of their services. There are many well qualified and experienced doctors in low cost countries such as India, Philippines, Mexico, Eastern European countries, and elsewhere. Of the nearly 10 percent practicing Indian doctors in U.S., most of them got their medical education in India, which attest to the competency of the Indian medical graduates, and by extension to other foreign medical practitioners.  
3. The service providers at their option and at the sole discretion of patient may undergo the treatment or major surgical procedures in a foreign country- similar to prevailing 'Medical Tourism' resulting in a dramatic savings in costs and frequently superior care and attention.

4. U.S. government may have a monitoring agency which may oversee all the activities, and set a standard of services expected.


[on a related side note- a few Indian entrepreneurs were planning to harbor ships in  International water off the coast of U.S. and offer comprehensive medical treatment and surgery at a fraction of the U.S. costs.] 







rklarson
rklarson

MSK saved my life last year, but I think I can find a better place for my charitible contributions.  I just cancelled my $10 a month automatic payment to Friends of Memorial Sloan-Kettering.

zyg49
zyg49

Brill is a misleading partisan hack.   Sloan Kettering AND Affiliated Corporations 2011 EBIT was around $200 million, and the 2011 NET LOSS was approximately $50 million.    Not so profitable, eh lawyer/ambulance chaser/ parasite?

Eohummingbird
Eohummingbird

So, can you then provide your own saline drip or Tylenol or test strips or gauze pads if they are, say, unopened and sterile?? Or, can you refuse the Tylenol or test strips or any other procedure?? Hummmm.....

KatyButler
KatyButler

If nonprofit hospitals make enough profit to pay CEOs over $1 million, why not improve nursing staff ratios or plow it back into teaching doctors to wash their hands and not spread clostridium difficile, etc.? 

Sciolle
Sciolle

Prestigious Sloan Kettering?   WHY NOT JUST PURCHASE TY BOLLINGER'S BOOK:  Cancer: Step outside the Box

and check out the various proven cancer cures ....$30 ... Four saved friends.....so far and counting.

Step out the box .......this is an amazing book.... 

dbergan
dbergan

Here's the solution: (1) hospitals must make their chargemaster public on their website. (2) the chargemaster must not exceed Medicare on any code.

We don't need the government to pay for our health care. We just need the government to protect us from gouging.

CarlaBarnes
CarlaBarnes

My husband and I are teachers and we pay over $500 a month for our insurance. Our daughter was born with a birth defect and my husband has been diagnosed with brain cancer. We are hardworking Americans, and yet we have thousands of dollars in medical bills resulting from on going hospitalizations, labs, imaging, and doctor's visits. It is gut wrenching that our medical system is in the state that it is in. And for us, it feels like there is nothing that we can do but keep adding to our medical debt. Thank you for the awareness of a growing problem that faces many. I hope your article makes a difference.

claymcc
claymcc

You mean to tell me that these gigantic, impressive, state of the art centers, that advertize like they are spas are only after our money?

wynn2500
wynn2500

As one interested in the future of community healthcare this is best oveview of America's healthcare distribution system that I have ever read. As one whose primary healthcare is provided by a non-profit hospital it is discouraging to realize that community healthcare is primarily a hugely profitably stream of income and not a professional service. If there ever was a business model in which the rules of the game were rigged, I beleive it is the healthcare industry. Great article and I hope Time continues this level of journalistic reporting!

jelohman
jelohman

OF COURSE! The best way to keep a system broken is to pay off your politicians with a piece of the action. Campaign bribes! Money works! Always has and always will. Get the money our of politics and you'll see this issue fixed overnight. And incidentally, every other "little fire" in the process. Like banking and energy and health care! Get smart, America!

We would have had single-payer healthcare (instead of ObamaCare) had it not been for $125 million in campaign bribes from the hospital, insurance and pharmaceutical industries. Our politicians are sharing in the loot and like it as it is. ONLY a 100% turnover in 2014 will fix it.

Curatiotech
Curatiotech

@picardonhealth @StevenBrill @TIMEHealthland @NightShiftMD Medical profession should allow itself to become a commercial entity. curatio.in

WoodBD
WoodBD

Ouch. @SamBrownInc: @StevenBrill's (from Time magazine) article The Profit Of Prestigious #Cancer Care. http://t.co/b5xIzZM5lZ #oncology

tricia6248
tricia6248

@TIMEHealthland this article is full of so many inaccuracies, I cannot even begin to list all of them...

Royallgal
Royallgal

@StopCancer Having recently gone through breast cancer I was blown away the price tag of my treatment. Almost half million!

mpfox001
mpfox001

Ironically, part of the reason their outcomes are good is patient self selection. One it helps to be wealthy if you want to go to SMK or MD Anderson not only because of the actual treatment costs, but the time and money associated with traveling to such a center requires both capital and the flexible work environment of a white collar worker. Their patients tend to be better educated and care more about their health. These factors have consistently and independently been associated with better health outcomes in general. Moreover, patients with more advanced disease and poorer performance statuses may not be able to tolerate the trip and are self selected out from these centers further inflating their outcomes.

zyg49
zyg49

@dbergan that is the dumbest thing i've read all day.  Maybe we should pay all lawyers according to what public defenders are paid as well.

chemobrainfog
chemobrainfog

@machfowlerbc It's horrible. I saw that yesterday. Long read but real eye opener!

brainsdoc
brainsdoc

@Curatiotech @picardonhealth @stevenbrill @timehealthland @nightshiftmd already is, like everything else.

dbergan
dbergan

@zyg49 What I suggested is similar to how public utilities are handled.  Brill established that healthcare is not a free market, because it lacks the most important component of a free market: price transparency.  Also, often a town only has one hospital (just like it has one electricity or water supplier).  You can shop around for a lawyer, but you can't shop ERs when you're in the middle of a heart attack or appendicitis.