The motivation for the deduction is simply average cost. In the Olden Days, of individual craftsmen serving the liege, production happened with little to no capital cost. It made sense, in a macro way of thinking, to put the serfs to work making bling for the elite. Today's a bit different. On two points. As labor diminishes as percent of production cost, killing off employees has diminishing effect on cost/price. A 10% reduction in 80% of total cost makes a bigger difference than a 1% reduction in 10% of total cost. The other side of that coin is that average cost is now more driven by capital amortization than before, and thus more dependent on total shipment. Lose money on each widget, but make it up on volume. Again, if amortization is 80% of cost, the more widgets shipped the lower total average cost.
Which brings us to an object lesson from today's news. Turns out we have a parable of rising price driven by capital amortization. Forgive my chuckling at the fact the widget is mostly in Rural Red States. Hehe.
Air ambulance companies, which indisputably save lives, often in dramatic circumstances, have consistently raised their rates and aggressively expanded their networks, adding scores of expensive new helicopters.
Here's the punch line:
Asked about the increase, Michael D. Allen, president of domestic air medical services at Air Methods, said charges had risen in part to offset the decline in insurance payments.
Not to mention silly amounts of helicopter buying, leading to amortization heavy production.
The numbers provide some support for that view. In 2013, there were an average of 469 flight hours per helicopter, a nearly 20 percent decline from 2006, and the lowest number since at least 1980, according to research by Dr. Ira J. Blumen, a professor of medicine at the University of Chicago and an expert in emergency medical transport.
The effect is exactly the same as what happens if the number of "buyers" of healthcare are sharply cut with some fixed capacity. The arithmetic works out the same: over capacity which is capital driven.
Mr. Hildenbrand [,executive director of Life Star of Kansas, a nonprofit air ambulance organization in Topeka, Kan.] calculated that each flight cost his operation $7,400 last year, counting all costs involved. Two other operators said their costs were close to that figure.
Even that number, to my way of thinking, is still way too high. Were there a free market in air ambulance, then price would be equal to marginal cost, which is just fuel, pilot, and EMTs (if any). A few hundred bucks. Of course, amortization per flight goes down linearly with the number of flights.
In 2013, there were an average of 469 flight hours per helicopter, a nearly 20 percent decline from 2006, and the lowest number since at least 1980, according to research by Dr. Ira J. Blumen, a professor of medicine at the University of Chicago and an expert in emergency medical transport.
So, to all you 1%-ers out there: be careful what you wish for; since you just might get it.
Greg Hildenbrand:
"There are not enough flights to support the helicopters that are in the market right now."
Or, there aren't enough patients to pay for the existing PCPs, specialists, and hospitals. Even the 1% can't afford to get sick.
[update]
It slipped my mind, but Adam Feuerstein recently noted the following:
Amgen relies on regular price hikes to maintain sales growth of its older drugs, which are being used by fewer patients. As I reported last month, Enbrel sales grew 13% to just over $1.1 billion in the first quarter, but only because Amgen raised the price of the drug 19% to offset a 2% drop in prescription volume.
Just can't avoid the tyranny of average cost.
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