Where has all the money gone?

Not into your pockets, but hospitals and health plan executives are making good money, indeed.

By Ken Terry
Senior Editor

Primary care physicians lost ground to inflation for two years in a row. Yet the media voice loud concerns about soaring health care costs, and employers complain about skyrocketing health insurance premiums. Where's all the money going?

Health insurers' profits grew an average of 25 percent in 2001. And the average hospital's operating margin jumped from 2.8 percent in 2000 to 4.3 percent the next year.

Hospital outpatient spending rose 16.3 percent in 2001, surpassing outlays for prescription drugs, which increased by 13.8 percent, according to the Washington, DC-based Center for Studying Health System Change. Inpatient spending, which had declined in the mid-'90s' heyday of managed care, leaped 7.1 percent in 2001—its third straight year of expansion. More than half the total growth in health spending came from inpatient and outpatient expenditures.

This is good news for some doctors. Outpatient procedures are the bread and butter of many specialists, including cardiologists, orthopedic surgeons, and ophthalmologists. Hospital-based doctors and surgeons benefit from rising inpatient expenditures. But primary care doctors aren't on this gravy train.

Ironically, neither are HMOs. While they've jacked up their premiums dramatically—the average raise for 2003 will be 17 percent—HMO profit margins have been close to zero for the past few years, according to Steve Cigich, consulting actuary for Milliman USA, which tracks HMO financial data. Insurance companies have made their money on PPOs, which require far less administration, and on fees from self-insured employers, rather than on HMOs.