Healthcare has been steadily expanding to become the largest sector in the U.S. economy, attracting clinicians, entrepreneurs and other professionals who want to help patients and make money from this booming sector. Like all enterprises, healthcare businesses live and die by their revenue, also conveniently called the top line because it is always reported at the very top of an income statement. Good revenue is a necessary condition for making money. Two rules follow.
Rule 1: Revenues – Expenses = Profit
Businesses and individuals earn revenue by delivering goods and rendering services to customers. Revenue represents what customers give us in exchange for our efforts to serve them. The efforts are measured as expenses. Profit is made when revenues exceed expenses. It can be distributed to shareholders as dividends or through stock buybacks, or be retained and accumulated internally. Wealth creation begins with revenue.
Not all goods delivery and service rendering translate into revenue. For instance, if a hospital offers charity care to a patient, the hospital does not earn revenue but incurs expenses. Assuming no subsidy received for the service, the hospital experiences a financial loss, which explains why hospitals are often reluctant to provide charity care.
Rule 2: To Make Profit, First Make Whoever Controls Revenue Happy
The critical role played by revenue in the wealth-creating process dictates that no effort should be spared to please those who control revenue. In most markets, customers control businesses’ revenue, and they like products and services with a value-price combination that meets their individual needs and tastes. When businesses compete to please their customers, innovations take place, constantly bringing forth new products, quality improvement, and price cuts. The end result is a dynamic and vigorous ecosystem that maximizes consumers’ best interests. Businesses survive or perish, but consumers are the ultimate winners.
For many healthcare providers, revenues are controlled more by the government than by consumers. For example, the Medicare and Medicaid programs determine whether and how much they pay for medical services and products. These government programs’ policies on coverage and pricing, distribution of grants and appropriations, as well as compliance requirements for reimbursement, directly influence the revenue of providers serving Medicare and Medicaid patients.
As another example, starting from November 20, 2023, every household can order four free at-home COVID testing kits, paid for by the Department of Health and Human Services with an undisclosed price tag. It should be self-evident that, without this government decision, the revenue of the manufacturers of these kits would differ dramatically.
As this rule states, healthcare businesses whose revenue is heavily influenced by the government must treat policymakers as customers, making them happy. Instead of pleasing consumers by offering services and products they want, these businesses have to channel money, effort and creativity to influence every step of the legislative and regulatory process. Billions and billions of dollars are on the line. These are rational business decisions. Such a system does not serve consumers’ best interests. It makes powerful policymakers the ultimate winners.
Money talks. Revenue matters. Who controls others’ revenues possesses immense power. The customer is the king, whoever the customer is.
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