Jimmy McMillan ran for mayor of New York City in 2005 as the founder and candidate of the “Rent's Too Damn High Party.” And while he was talking about real estate rent, he might have made a similar complaint about health care’s rent – payments made for costs over what is needed to produce a good or product.
Rent is not profit, because, in economic terms, profit comes from a human activity that adds value; rent, on the other hand, is “unearned,” requiring little or no risk. Rent evolves when an uneven distribution of resources, creates scarcity.
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. …[the laborer] must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ...."
- Adam Smith: The Wealth of Nations
Rent initially referred to those common lands, enclosed and taken by the elite. Today’s landlords are platforms like Facebook, Twitter, or Apple, using their patents, copyrights and “proprietary” algorithms to extract rent. Electronic health records (EHR) are health care’s poster child of the rent-seeking platforms with high purchase costs, private practices spend roughly $30-50,000 per physician and health systems, like Kaiser Permanente, $4 billion. But then comes the rent: maintenance, software and hardware upgrades, and the cost of moving and translating all of those records. Proprietary algorithms and data structure, make purchasers an indentured servant to their EHRs obstructing the flow of data and competition.
Intuitive Surgical with over 5,000 installed robotic platforms globally, uses the same business model as razor blades – the initial cost, at $1.5 million, quickly eclipsed by a long tail of annual maintenance and proprietary instrumentation. According to one calculation, those costs, roughly $2400 per operation surpass the purchase cost by 2-fold. Even in the world of inflated hospital prices, $2400 every time you use the platform for proprietary maintenance and “disposables” is a significant form of rent.
Medical journals charge rent, requiring payment from authors, allowing them to “produce” work on the “land” they control. They charge rent again to libraries at our Universities to make that platform available to students. The University of California spends $10 million to access Elsevier’s journals, not including another million spent in “preparation fees” making their faculty research freely available. What more appropriately reflects the plantation sensibilities of rent then the lopsided costs of journals; authors provide the materials for free, editorial decisions are made by their peers, often at no costs, and then researchers are charged for preparation, publication, and access. What value is added by the publishers, other than owning the journal?
The Cost of Pharmaceuticals
Rent often comes from information known only to one party in an exchange, creating a bargaining advantage. Informational rent thrives in secrecy and “lack of transparency.” Pricing medications involve rent, the manufacturers acquire rent through patents while the rest of the supply chain uses their proprietary information. Insurance companies know what medications their beneficiaries need, wholesalers and retailers know what they actually pay for medications, and pharmacy benefit managers are privy to all of those numbers. While these players add “value” by lowering the price, the prices would be lower still if the rent they charged was not as great. The “synergy” of merging retailers and health insurers is, in part, about rent.
The fertility of land was another classic economic source of rent, some ground was just better. Health systems are health care’s version of fertile land. Health systems pay rent to cities in property and labor cost while acquiring dense populations to increase care volume and expertise, creating markets for highly specialized medical care. These landlords of “brand,” include many well-known health systems like the Cleveland Clinic, subsequently collect rent affiliating with hospitals outside their geography. Some affiliations are tightly integrated, others are mere signage, a halo of quality around a Florida or Arizona hospital, both a source of rent providing a “biosimilar” but not the real deal.
High Demand and Low Supply
When demand outstrips supply, scarcity affords a a rental premium. “Scope of practice” is a barrier to entry forming a physician-controlled rent. While the issue is often posed as more education reflecting greater competence, every physician has a story when a less “educated” but more “experienced” nurse prevented a mistake or bailed their patient out of a jam. Some forms of care can be provided by less trained individuals. While vocally opposing a nurse practitioner or pharmacist reading a rapid strep test and initiating care; we less vocally “give a pass” in these turf battles to other physician-specialists already in our “club.”
Scarcity of primary care leads to a rise of concierge practices – charging an additional fee to “belong” in the practice and receive greater access and attention. Those fees become rent when you consider the turn-key companies in this practice space. MDVIP, for example, has over 900 practices, and more than 300,000 patients, and is currently owned by an investment firm. What value do they add?
Building a free-standing medical facility is a tradeoff between the substantial cost of building and staffing and the subsequent return – a market-driven competition. Many states require “certificates of need,” to build testing and treatment centers; a cumbersome bureaucratic process designed to reduce duplication and assure quality, but creating artificial scarcity. To the extent that a certificate of need constrains entrants more than it monitors competence, it acts as another form of economic rent.
If we viewed health care costs in terms of rent, we might find other means to reduce our spending. Jimmy McMillan is right, “the rent is too damn high."
Charles Dinerstein, MD, MBA, FACS is a retired vascular surgeon and senior fellow at the American Council on Science and Health where he writes on contemporary health issues. His more philosophical thoughts can be found at Surgical Analytics. He was a 2017–2018 Doximity Fellow.