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What Is the Cause of Excess Costs in US Health Care? Take Two


We’ve discussed it before. Why are costs so much higher in US healthcare compared to other countries? The Washington Post has a pointless article which seems to answer with the tautology costs are high because healthcare in America costs more. How much more? Well, we spend nearly twice as much per capita as the next nearest country while failing to provide universal coverage.

In the WaPo article they make a big deal of the costs of individual procedures like MRI being over a thousand in the US compared to $280 in France, but this is a simplistic analysis, and I think it misses the point as most authors do when discussing this issue. The reason things costs more is because in order to subsidize the hidden costs of medical care, providers charge more for imaging and procedures. For instance, Atul Gawande, in his New Yorker piece “The Cost Conundrum” wonders why it is that costs are higher to treat the same conditions in rural areas and in a major academic centers like UCLA than at a highly specialized private hospitals like the Mayo Clinic? I think the reason is it’s not nearly as expensive to administer and provide care for a select group of insured midwesterners at the Mayo than it is to provide care to the underserved in the poor areas of inner-cities and in poor rural locations.

When you are serving a poorer, under-insured population like you get in LA or Baltimore for that matter, the insured are charged more because EMTALA requires hospitals to treat all comers, regardless of insured status. Medical centers like UCLA or the University of Maryland are the final common pathway for the sickest and poorest patients who, even if stabilized at smaller local hospitals, are immediately transferred to such centers. These patients are expensive to treat, often have more co-morbidities like HIV or drug use and mental illness, and there is no reimbursement guarantee for taking care of them even though it is our legal and ethical responsibility to do so.

Further, the cost of defensive medicine, which applies to this patient population as much as any other, ramps the costs of all hospital admissions and medical practice in general. It is also incredibly hard to quantify its contribution to the overall costs of care.

As a result, to pay for excessive care of the uninsured, all procedures, all tests, all imaging, and all hospitalizations cost more. Caring for inpatients and the uninsured is expensive, so the costs are transferred to the prices of outpatient elective care and procedures which are often administered in a fee-for-service model. Hospitals have an incentive to provide as much outpatient elective care as possible in order to offset these other costs and to generate revenue. The providers that perform procedures or expensive testing then become far more expensive to pay as they are the major revenue generators for the hospital (hence surgeon vs pediatrician pay). Especially because in order to generate more revenue they are paid based on how many procedures they perform. All the incentives are towards more utilization, more procedures, more revenue generation. This is the hidden tax of the uninsured.

In a way, we have universal healthcare already, but we pay for it in the most irresponsible and costly way possible. We wait for small problems to become emergent, treat them in the most expensive outpatient provider possible (the ER), and then when we can’t pay the bills for the uninsured, we transfer the balance by increasing the costs of the care of insured patients showing up for their cholecystectomies or back surgery. Tack on the costs of defensive medicine and the fear of being sued unless everything is done to cover your ass, and you have a recipe for extremely costly care.

Other factors figure into higher costs as well, including hugely higher costs of medicare administration since Bush privatized it, higher prescription drug costs since Bush passed medicare part D and prevented bargaining with drug companies, and our incredibly high ICU expenditures at the end of life. The McKinsey report on excess costs demonstrated most of these issues in 2008. This is not news. The US spends far more on medical administration, outpatient/ambulatory care (with hospital-based outpatient care increasing most rapidly in costs), drugs, doctors salaries, and end-of-life care than we should as a percentage of our GDP.

So what should we do about it? At every step we need dismantle the tendency towards increasing costs. Here are my suggestions:

We should have universal health care so that everyone can visit a physician early, take care of their problems while they are still manageable, and to provide cheap preventative care.

We need to strongly discourage overuse of the ER, as it is the most expensive form of ambulatory care and they are currently overburdened with treatment of non-emergency conditions.

We need to change the destructive Medicare part D legislation to allow collective bargaining by Medicare for cheaper drug costs as they do in other countries or as they do in VA health system where drug costs are 50% less.

We have to end fee-for-service reimbursement systems that create incentives for hospitals to generate revenue by pushing more procedures, more tests, and more expensive utilization of resources. One thing that Atul Gawande got correct was that when physicians were salaried independent of their revenue-generation for the hospital, as at Mayo, costs go down. When incentives are created for physicians to generate more revenue for the hospital, physicians will generate more revenue for the hospital.

We have to pay physicians based on their amount of training. Surgeons will still win under this system, as they should, because their training is typically 4 years of medical school, 5-7 years of residency followed by 2 years of fellowship compared to 3-5 years for most internal medicine specialties. Paying for all that education is expensive.

Further the opportunity costs of the lost income-generating years in training compared to comparable careers in law or business need to be paid back to physicians somehow. We dedicate hundreds of thousands of dollars to medical school, work 80 hour weeks for years as residents for a puny salary, and basically defer a decent income for an additional decade in order to gain skills to take care of patients. The quality of physicians will suffer, especially those that require longer training, if they are not paid commensurate with their personal investment in training. We could reasonably expect physicians to expect less compensation if their education costs are drastically reduced or eliminated, and if resident incomes can be improved relative to the amount of work they perform. Granted, this will never happen.

Finally, we have to fire those who have decided any discussion of making end-of-life care more evidence-based means creating “death panels” to kill grandma. We need better science about about outcomes at end of life. We need to get better at knowing when care is futile and when it should be stopped for the benefit of the patient as well as health care resources. And as part of universal care everyone should discuss a living will and end-of-life decisions with their physicians. Initially the health care reform act included provisions to reimburse physicians for discussing living wills with their patients as a separate consultation. This, under the death panels stigma, was eliminated.

I can think of few other acts of such far reaching harm for cheap political points in my lifetime. People need to make decisions about how they want to die before these decisions are out of their hands. They also need to understand what death looks like in the ICU. Most physicians would not chose this end for themselves. When physicians are called upon to do everything at the end of life the patient will likely end up with tubes in every orifice, central lines, ventilators, powerful drugs, and lots, and lots, of iatrogenic pain. It’s not the way I want my life to end, and I think if people understood that maximum intervention often generates suffering with no real benefit, they would be less likely to chose this path for their loved ones. Not that ICUs aren’t amazing places where a great deal can be done for many patients, but they also can be a place for needless suffering when the patient has little to no chance of meaningful recovery. It is heartbreaking that Republicans destroyed the well-meaning efforts to scientifically study these situations so physicians and patients could be better informed and equipped to make such end of life decisions.

Mark Hoofnagle has a MD and PhD in physiology from the University of Virginia, and is now a general surgery resident. You can follow him at the Denialism blog where this post first appeared.

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Corina
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MarkH
Guest

Defensive medicine is pervasive. It’s not a matter of a shortage of time or just relationships with patients because you never know when a reelationship might sour, when a complication might happen to change the feeling the patient had about their care, or which physician might piss off the patient during the course of their care. When patients sue over a hospitalization, they sue everybody, from the attendings to the consults to the residents. Granted, based on your actions this typically gets whittled down, but you’d be crazy not to cover your a** all the time, because it doesn’t have… Read more »

Nate Ogden
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Nate Ogden

“In the first 11 months of 2011 health spending increased by 4.5%, compared to 3.9% for all of 2010.”

Maybe all those improvements weren’t the cause after all

Barry Carol
Guest
Barry Carol

Sandra_R – As I said previously, defensive medicine is virtually impossible to quantify precisely and there are other factors involved as well. Let’s pretend I’m a doctor (I’m not) who works for a hospital and is paid a salary. I’m chatting with you after my workday about defensive medicine and how it affects my practice. I might say something like the following: I ordered several expensive imaging tests today that If I were treating a family member and paying the bill out of my own pocket, I wouldn’t have ordered them because I either don’t think they were medically necessary… Read more »

Sandra_R
Guest

I’m sure most of these commentaries do little to change perceptions but I appreciate your sharing. The scenario you described reminded me of a discussion in my healthcare economics class a few years ago. The professor, a healthcare economist not a healthcare professional, spoke of a conversation he had with a physician acquaintance. The physician relayed that “a patient walked into my office, and I could tell with 95% certainty that he had multiple sclerosis”. Our professor asked, “How much are we willing to pay to increase that level of cetainty?” What’s clear to me is that those statements (95%… Read more »

John Ballard
Guest

…doctors who follow evidence based guidelines where they exist. We seem to be getting there one inch at a time. I don’t know how many times I have come across comments from doctors complaining that evidence-based guidelines are just another way that a panel of government bureaucrats is getting in their business, or socialized medicine is trying to get a foot in the door. A lot of doctors will have to be dragged kicking and screaming into the concept for the same very human reason that Dr. Gawande’s modest suggestion that checklists are a simple way to avert mistakes has… Read more »

Sandra_R
Guest

John, I couldn’t agree more. In fact, some states did enact such legislation but constitutional questions arose because (I believe) in each instance, EBGs were only allowed to be used for defensive purposes and not for plaintiffs (patients). Last I saw, most of those laws are no longer in effect. I wrote a paper on this subject in 2004, and was amazed at how complex the issue was. I think that the anesthesia example you describe has another component – evaluation of the effectiveness of the guidelines in reducing poor outcomes and malpractice cases. Both are important – thanks for… Read more »

Barry Carol
Guest
Barry Carol

Sandra_R – While I’ve stated before that I think uncompensated care is overstated as an issue in driving healthcare costs, especially hospital costs, up, I believe defensive medicine is understated. While virtually impossible to quantify with any precision, if you talk to doctors, both PCP’s and specialists, you will find that it pervades the medical culture. My New York City based cardiologist / PCP estimates that about 15% of the cost of the medical decisions he makes are driven primarily by defensive medicine. Moreover, he tells me that it’s the same story for virtually every practice he knows of, at… Read more »

Sandra_R
Guest

Barry, I appreciate your point of view – I’ve heard it quite a bit over the years. I would appreciate, however, an accounting of the 15% of costs to see what they really entail. For such a precise number, are there numbers to back it up? Often what we perceive is not exactly the truth. This is an area that I agree has not had much scrutiny, but rather different groups putting out different perceptions of reality. You also should look at the cases that are brought and what happens to them. If we do want real “tort reform” in… Read more »

Sandra_R
Guest

Sorry to add one more thing. It is not correct that Americans are more litigious. Some systems put up more barriers, but talk to physicians in the U.K. and they complain about the same thing – “patients want to sue when anything goes wrong”. It’s more difficult to sue because they don’t allow contingency arrangements for bringing lawsuits in the U.K., I believe. In contrast, New Zealand uses a no fault system to reduce costs – both for patients and providers – and also allows a more open evaluation of what, if anything, went wrong and how to reduce the… Read more »

Barry Carol
Guest
Barry Carol

Sandra_R – I don’t think it’s appropriate to look at the UK as a basis for comparison to the U.S. because the UK, as a society, decided long ago to spend a significantly lower percentage of its GDP on healthcare than not only the U.S. but other Western European countries including Germany, France, Switzerland, Netherlands and the Scandinavian countries. All the Western European countries I mentioned spend between 10% and 12% of GDP on healthcare as compared to roughly 8% or so in the UK. To hit that target, the UK is willing to use explicit rationing including refusing to… Read more »

Sandra_R
Guest

I’m not sure our model is sustainable, even with tweaking around the edges. I’ve heard health provider executives speak of the need to reduce costs by 30% over the next few years – that sounds like a major shift such as what happened in the 1970’s with hospital consolidations and substantial reductions in lengths of stay. I don’t know what you mean by sensible tort reform – are you thinking of a no fault system such as they have in New Zealand? I would be in favor of that as that would bring an element of accountability and at least… Read more »

Larry and Lincoln Weed
Guest
Larry and Lincoln Weed

This post, the commentary and the original Washington Post article do not sufficiently address the interrelationship among pricing, quality and competition. High prices are a symptom of not only cost-shifting to pay for the uninsured but also out-of-control quality. Quality failures produce unnecessary, ineffective and harmful care, which is not only wasteful in itself but also sets in motion more medical activity with the same risks and costs. These problems exist in many countries, not just the U.S. Both cost and quality problems are symptoms of the same underlying cause: lack of a system of care to assure quality. Without… Read more »

BobbyG
Guest

I have been studying in line-by-line detail and writing about your book since I first became aware of it. Two recent posts, “Down in the Weeds'”

http://regionalextensioncenter.blogspot.com/2012/01/down-in-weeds.html

and my subsequent Feb 3rd 2012 “Back Down in the Weeds'” comprise but a start.

i would make this book required reading for pre-med 101.

MarkH
Guest

I have written about these issues extensively in other posts.

John Ballard
Guest

It’s hard to know if this discussion is more about medicine, politics or insurance, but that seems to be the nature of public discourse these days. Thus far religion hasn’t reared it’s pious head but one mention of contraceptives and we can have a scene like a saloon fight in an old cowboy movie with all sides getting in a lick or two. On a more serious note, I came across a link just now that has relevance to insurance (risk management, actually) which we all know has direct bearing on costs, the main subject of this discussion. No matter… Read more »

BobbyG
Guest

“…Eventually, genomic testing will be a powerful predictor of future illness. And it raises the potential that young people will get themselves tested and then purchase insurance based off the result. ” __ “Powerful Predictor” as defined by and validated by whom? To what end? I used to work in subprime credit risk modeling. We could be “wrong” 99% of the time, as long as the True Positives 1% beat the stress-tested ROI hurdle and surpassed the CPA requirement (Cost Per Acquisition). My bonus got bigger every year without exception. “purchase insurance based off the result.” There are presently NO… Read more »

John Ballard
Guest

No argument from me. (The part you cited was part of the article that failed to be italicized cuz I messed up an HTML tag.)
I’m sure you are much better informed than I. This is one of those I-report-you-decide links.

bob hertz
Guest

Cutting the fee per service is only part of the struggle in cost control. There are numerous examples (Maryland is one) where the entire state was put on a common reasonable fee schedule for inpatient care. So, hospitals responded by increasing the number of admissions, and of course by steering more cases into wildly over-priced outpatient care. George Halvorson’s first book called Strong Medicine is still a decent guide to this problem. One step that is long overdue would be to mount legal challenges to ridiculous outpatient billings. Day surgery done in a hospital should be reimbursed at the same… Read more »

Ben Geisler
Guest

At least in theory, urban hospitals with a disproportionate share of poor patients should receive higher payments from Medicaid and Medicare. In addition to the geographic factor there is a “large urban” and a “disproportionate share hospital factor” which is defined in Wikipedia as “patient percentage […] equal to the sum of the percentage of Medicare inpatient days attributable to patients entitled to both Medicare Part A and Supplemental Security Income and the percentage of total inpatient days attributable to patients eligible for Medicaid […]”

Barry Carol
Guest
Barry Carol

Sandra_R – Prices are not dictated and the basket of services is not narrower. If we just focus on hospital based care for a moment, suppose every hospital in a region agrees to accept somewhere between 100% and 110% of Medicare rates for every service, test or procedure that it offers and they all have at least acceptable quality. If healthcare utilization doesn’t change, costs will still decline significantly because the more powerful hospitals charge and collect substantially more than 110% of Medicare today from commercial insurers and they bill the uninsured at astronomical rates. The biggest reason why U.S.… Read more »

Sandra_R
Guest

Barry, I agree that many of your solutions would make a difference, but I don’t agree that this is the biggest difference in overall costs between the U.S. and Europe. There are many differences in how we address healthcare – just look at renal failure, for instance. First, we offer dialysis to many, many more people than they do in the U.K. Looking at the differences in outcomes between the 2 countries is comparing apples to oranges because they only offer it to people who are likely to do well, while we offer it to almost everyone. Second, they operate… Read more »

John Ballard
Guest

I must admit healthcare financing, especially the financing of care provided by hospitals, is not at all transparent to me, so I don’t know where the funding comes from for all those new facilities.

It’s not transparent to anyone. But you can be certain that every dime, one way or another, comes from someone’s medical bill. It may be sliced and diced as delicately as a neurologist working on a brain tumor (or a banker packaging a mortgage-backed security) but every penny watering the health care garden is squeezed from a medical bill sent by a provider to a patient.

Bob Hertz
Guest

Thanks to Nate and to Barry. I have had the intuition for 20 years that the liability of patients was on very shaky grounds. Hospital Patients who are half-comatose in some cases and terrified in most cases are treated legally as though they just bought a plasma screen TV after reading Consumer Reports. The motto for the future might be “No Liability without full price disclosure.” Since price comparison is ludicrous for the 15 or 20 per cent of health care that is a true emergency, those areas could be subject to price ceilings immediately. An out of network doctor… Read more »

Nate Ogden
Guest
Nate Ogden

My concern with the Chaves route is they don’t stop there. Until someone comes up with a better idea we need to let employers fight the fight. They are big enough to take on providers, have the vested interest., and are willing. In exchange we need to stop tieing one hand behind their back and making them the demons. Stop penalizing and fineing them for trying to insure their employees and families. We also need to get our priorities straight. Fighting over birth control and rather $5000 is an acceptable deductible compared to $2000 while we have 50 million uninsured… Read more »

BobbyG
Guest

See, how difficult was that? (in terms of substantive assertions, exclusive of the spelling).

Barry Carol
Guest
Barry Carol

Sandra_R – The purpose of tiered networks is to steer patients toward the most cost-effective high quality providers, and, in doing so, create some countervailing power against the hospitals and large physician groups that command well above average reimbursement rates because of their local or regional market power, not the quality of the care they provide. In a tiered network, the insured member can go to a higher cost provider but will pay a higher co-pay or coinsurance amount for the privilege. In a narrow network, the high cost providers will be out of network and the insured may have… Read more »

Sandra_R
Guest

Thanks – that’s one of the ways I’ve seen it implemented, but it doesn’t seem sustainable if everyone’s in the same tier. In other words, it’s logical to me that all providers would attempt to get into the tier where the volume of patients are going, but that would shift with time to drive down the price. I’ve also seen it tied to quality measures, where it’s not entirely price driven but also requires at least reporting some quality results – maybe that’s not always the case. My question – is there a threshhold for all services in the tier?… Read more »