Healthcare Cost And Price: A Seemingly Precarious Tango

Forbes January 28, 2024
Ge Bai

Cost stands between revenue and profit. Keeping revenue constant, the higher the cost, the lower the profit. For healthcare providers, cost and price tango together in a seemingly precarious, but actually predictable, style.

The total cost of a provider consists of direct labor cost, direct supply cost, and fixed cost (overhead). Numerous factors influence cost. Take a hospital for example: hiring travel nurses increases its direct labor cost; purchasing physician-administered drugs at discounts through the 340B Drug Pricing Program decreases its direct supply cost; quality reporting, regulatory compliance, executive compensation, depreciation, and paying taxes all add to its overhead.

Output volume affects how much overhead is averaged to each unit. Assuming two surgical practices incur the same overhead, if one...

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