Increased Customers Not Always Equal to Increased Profits – Updated

In the past week or so I heard someone on one of those talking heads show state that insurance companies and medical providers should be happy with the government’s health care bill because they’ll all get more customers and that means more money.

Mayo Clinic in Glendale, Arizona is going to stop taking Medicare patients because the government pays too little. This will be a two year pilot project that may or may not have implications for the rest of the Mayo system.

Through the government, Medicare and Medicaid pay a certain amount to doctors. The amount the government pays has no direct correlation to what it costs to provide the product or service. The government can’t cut the costs to the provider simply by paying said provider less.

I’d sure like to be able to do that. Mortgage payment too high? Why just pay a lower amount to the bank. The only costs that are cut are your own (and probably only temporarily at that – until the bank forecloses).

If it costs me, let’s say, $30.00 to provide a particular product or service (including all overhead, wholesale, etc) and the government only wants to pay me $17 for it, I lose money. One hundred customers for that product or service equals $1,300* loss.

More customers won’t necessarily reduce the cost. Sure, fixed costs are the same no matter how many customers one has, and the more customers, the less per customer the fixed costs are. So let’s assume that what costs me $30 with 100 customers may cost $28 with 200 customers. But the government is still only paying me $17. So now I’m losing $2,200* on 200 customers rather than losing $1,300* on 100 customers.

The government in its infinite wisdom wants to cut Medicare by half a trillion dollars. That means they’ll pay me even less than they are now for the same services. So let’s say there’re 200 customers for a product or service that costs me $28 to provide, but the government will now pay only $14. Oh, and they’ll send me 200 more customers. So even though, because of fixed costs, my costs goes down a dollar, but Big Government drops its payment to me by $3. So I’m getting $5,600 for something that costs me $11,200. Now, instead of losing $13 per customer with 100 customers, I’m losing $14 per customer with 400 customers.

You know what? I think I’ll just stop losing money on these customers. Why should I be paying even the $13 per customer with 100 customers (less work) let alone pay $14 per customer (much more work). Me paying for them to get my product or service. Not worth it.

I think I’ll do what Mayo Glendale is doing. I’ll stop taking those customers.

Update: Dr. C.L. Gray writes similarly from a physician’s point of view at Big Government.

Update 2: Ed Morrissey has more on the closing of the Glendale Mayo Clinic.

*amounts changed because math was previously wrong, thanks Jeanette!