The Association of U S West Retirees



Assigning Blame For Rising Medical Costs


by Maggie Mahar

Published October 24, 2008

The conventional wisdom about skyrocketing healthcare costs tends to blame someone: patients who demand too much care; doctors who practice defensive medicine because they fear being sued; aging boomers, and finally, everyone’s favorite, “the insurance companies.”

In fact, none of the above is the driving force behind the nation’s spiraling health care bill, according to a brand new report from the Center for Studying Health System Change (HSC) titled “High and Rising Health Care Costs: Demystifying Health Care Spending.” (Many thanks to Robert Laszewski at Healthcare Policy and Marketplace Review for calling my attention to this report).

The culprit behind long-term health care inflation, the study reveals, is not a “who” but a what: “advancing medical technologies” combined with low productivity. Yes, that’s right: while improved technology has boosted efficiency in other sectors of the economy, when it comes to healthcare, technological advances are associated with lower productivity.  There is no one group to be blamed for runaway healthcare inflation; the problem is systemic.

The HSC report is part of the Robert Wood Johnson Foundation’s “Synthesis Project” and it is indeed, synthetic. Paul Ginsburg, the report’s author, bases his study on an in-depth review of an “extensive literature that examines which drivers are most important in explaining increases in health spending over time.”  The conclusions “have been very consistent,” he observes. “Technological change (which in the world of medicine includes innovations in equipment, devices, drugs, tests, and surgical procedures) is the most important factor.”

But one thinks of ongoing technological advances as one of the great virtues of U.S. healthcare: how can we regret the high cost of that technology?

The answer: some of the treatments are valuable, some are not. As Ginsburg notes, “Advancing technology may have a particularly large impact on spending in the United States because of few requirements that effectiveness be demonstrated before technologies are used broadly.” 

Moreover, much of our technology is overpriced. The U.S. pays significantly more than other nations for precisely the same products and services. Finally, and most importantly, we often use the technology on a broad swathe of patients when only a few, who fit a very specific profile, actually benefit from it.

Excess Capacity and Low Productivity                   

But the technology itself is not the only problem; low productivity also contributes mightily to runaway health care inflation. In other industries, technology has boosted productivity. Not so in healthcare, Ginsburg explains, in large part because “healthcare delivers these new technologies relatively inefficiently.” For example, the report notes that “too many small facilities” that invest in bleeding edge technologies run "well below capacity.”

The problem is this: rather than collaborating to share new technology, hospitals and outpatient centers all invest in the same equipment as they vie for well-insured patients. As a result, “costs in outpatient settings are higher” than they need be, and higher than in many hospitals “because of subscale operation of facilities.”  Ginsburg explains: “In contrast to a hospital where CT equipment is being used for 20–30 scans per day, freestanding outpatient facilities,” which charge “very high prices” and enjoy “lower overhead” can “earn a profit at 4–8 scans per day.”

In Escape Fire, Dr. Donald Berwick, president and co-founder of the Institute for Healthcare Improvement, expands on how competition leads to redundancy and lower productivity: “Duplication of services results in higher costs, higher usage rates and inefficient use of capital…Most metropolitan areas in the United States,” he argues, “should reduce the number of centers engaging in cardiac surgery, high-risk obstetrics, neonatal intensive care, organ transplantation, tertiary cancer care, high-level trauma care and high-level imaging.”

Berwick acknowledges that “this is not an easy change for physicians to accept. Some physicians in high-technology specialties will lose income and job opportunities as a result. For-profit entrepreneurial providers of medical imaging, renal dialysis and outpatient surgery, for example, may find their business opportunities constrained.

“It will be necessary for other physicians, who see the benefits of consolidation of services, to insist on sensible regionalization nonetheless, even at the risk of internal professional conflicts,” Berwick continues. “Courage in medicine now includes the courage not to demand the highest level of technology ‘right here, on site,’ but to seek instead the more challenging form of integrated, interinstitutional relationships that, in the long run, achieve more for less.”

Ultimately, Berwick points out that “Much of the waste and delay in health care comes from mismatches between supply and demand; in particular, we tend to maintain high capacities in order to meet sporadic demands.”  In medical school, he recalls, we used to talk about how “doctors were sitting in emergency rooms waiting for the busload of hemophiliacs to hit the tree”—a perfect metaphor for overcapacity. “In the privacy of their homes,” Berwick adds, “each [hospital] CEO says the same thing: “This is silly. We could do a lot better if we worked together, but it’s impossible...” 

Impossible?  Berwick would say that this is just another example of the “deficiency of will and ambition in the major centers of power” that stands in the way of delivering more efficient, affordable, higher quality healthcare in America.

How Excess Capacity Affects the Patient

Patients as well as doctors may object if they don’t find all of the diagnostic equipment they might possibly need, on site, at a hospital within twenty minutes of home. Going to a second medical center located 25 minutes in the other direction might be inconvenient. But not as inconvenient as finding that you cannot afford the technology you need five years from now because we as a society chose to let healthcare inflation race ahead, unchecked.

Moreover, as always, when we waste healthcare dollars, there is a real danger that patients will be harmed.  In the current situation, “extensive investments in inefficiently used capacity” leads to overtreatment—especially, Ginsburg observes, when physicians are referring patients to facilities in which they have a financial interest. Too often, physician- investors send patients to these facilities for a test or a treatment on the theory that “it can't do any harm”—even while there is no medical evidence that they will benefit.

As we have argued in past posts, in the healthcare market, it is the seller, not the consumer, who decides how much care a patient needs. And this, Ginsburg explains, is one reason economists believe that we are spending too much and patients are undergoing “too many” cutting edge procedures:

“Nobody asks whether spending on computers or automobiles is too high because only private purchasing decisions are involved. Consumers decide what they want to buy, based on their preferences and their budgets. If spending on computers increased sharply, most would label this a success story, meaning that improvements in the products were so meaningful to consumers that they have decided to sacrifice other goods and services to spend more on computers.”

By contrast, “when it comes to medicine, consumers here are dependent on physicians…Although service providers outside of health care also have incentives to convince consumers to spend more, health care professionals are likely to have more influence because of consumers’ limited technical knowledge and the urgency, fear and pain involved in many medical episodes.” Patients don’t “decide to sacrifice other goods and services to spend more on healthcare”; they feel they have no choice.  Given these circumstances, some economists are unwilling to accept the current proportion of GDP spent on health care as optimal.”

As I have indicated before, in the vast majority of cases the health care provider sincerely believes that the product or service he recommends will help the patient—after all, it has helped other patients. Even when physicians are aware of evidence-based guidelines that would limit the use of a technology to patients in a particular group, research shows that doctors tend to ignore the evidence. U.S. physicians don’t like to follow “rules.”

Moreover, they, like their patients, tend to believe that more healthcare is always better—forgetting that, as Dr. Gilbert Welch recently argued in the New York Times, all medical products and procedures –even “screening for heart disease, problems in major blood vessels and a variety of cancers”—carry some risks. “These interventions do prevent advanced illness in some patients,” Gilbert adds, “but relatively few.” (Gilbert’s point is that while some patients benefit from some tests, other tests are likely to do more harm than good. For his full argument, see this post on preventive care.)

What about Obesity and Fear of Malpractice?

Frequently,  when commenting on our $2.3 trillion health care bill, observers point to the epidemic of obesity in this country: “A well-known analysis by Kevin Thorpe attributes 27 percent of increased inflation-adjusted spending from 1987 to 2001” to rising rates of obesity,” writes Ginsburg. But he goes on to note that a closer look by the Congressional Budget Office reveals that obesity itself accounts for only 12 percentage points of the 27 percent; “the remaining [15 percent] increase results from changing treatment patterns...which would be more appropriately be classified as the contribution of technology.”

According to the CBO’s 2008 report “In 1987, spending on treatments per morbidly obese person was about 18 percent higher than spending per person of normal weight, but by 2001 it was 70 percent higher.” Yet sadly, outlays for medical technologies to help obese patients have proven largely ineffective. New medications have added greatly to the jump in the cost of treating these patients, but as the Internal Medicine World Report notes: “New data presented at the annual meeting of the Endocrine Society in 2007 demonstrated that currently available medications for weight loss produce only marginal benefits in the long-term.” It turns out the effectiveness of these medications attenuates after 4 months of continued use. This is not “because of a lack of compliance, researchers found, but rather due to leptin resistance, which persists even in the face of pharmacotherapy.” 

This helps explain why, even when obese patients are under a doctor’s care, and do their best to follow his instructions, only 5 percent mange to lose weight and keep it off.  This has nothing to do with will power, physicians explain. “It’s a very complex disease.” [Note to HealthBeat readers: I plan to write about the mysteries of obesity in a later post, so keep your powder dry—you’ll have a chance to comment on this then.]

Bariatric surgery is another new technology that helps account for the more than three-fold increase in spending on obese patients. But while it works for some, the risks of mortality and long-term health problems rule it out as effective solution for most patients.

Moreover, Ginsburg points out,  “analyses” that claim that obesity is a major factor behind soaring health care costs  “do not factor in life expectancy.”  If we did manage to reduce obesity, he points out,  “this would  reduce spending in the short run but increase spending in the long run”  because once-obese patients would live longer and “be exposed to other, expensive illnesses” like Alzheimer’s. (This, of course, is not a reason to suspend research on obesity. It merely explains why we shouldn’t blame the obese for health care inflation—or charge them more for insurance.  In the long run, they cost society less than many trimmer patients.)

HSC’s report also pokes holes in the notion that lawyers who bring malpractice suits are responsible for a large portion of health care inflation. First, consider malpractice premiums: without question, premiums are exorbitant for some specialties in certain states, but research shows that “over the thirty years from 1970 to 2000 total malpractice premiums rose from 5.5 percent to just 7.5 percent of total physician practice expenses—so premiums cannot be an important cost driver.”

Research on how much the practice of “defensive medicine” affects spending is “challenging” Ginsburg notes, “because liability risk pushes physicians in the same direction as fee-for-service payment incentives—providing more services.” How do you untangle the two motives?

“The best research,” he observes, “has focused on comparisons of states with tort reforms with other states.” This study published in the Quarterly Journal of Economics analyzed Medicare data for beneficiaries with serious heart disease and found that "reforms that directly reduce liability pressure (such as limits on noneconomic damages) lead to reductions of  5 percent to 9 percent in medical expenditures…Studies of obstetrics find smaller impacts. Only this study, which focused on cesarean delivery rates, found evidence of defensive medicine, concluding that a total cap on damages would reduce cesarean deliveries by 3 percent and total obstetrical charges by 0.27 percent.”

Ginsburg sums up other reviews of tort reform: “A 2006 synthesis of this literature concluded that caps on noneconomic damages do reduce award size substantially, but the reductions in medical malpractice premiums are modest and other tort reforms did not have significant impacts. A 2006 report by the Congressional Budget Office finds the evidence of impact of tort reforms to be inconsistent…”

He concludes: “These results confirm that the shortcomings of the liability system are not an important driver of cost trends or even a large factor behind costs being high. Indeed,” he adds, “the literature emphasizes that the larger potential for true reform is in the area of better quality of care and more equitable compensation of those suffering large losses.”  (For further discussion of myths and facts about malpractice see this HealthBeat post: “Malpractice Reform: Fiction, Facts and the Future.”)

We Pay More for Everything (Except Nurses)

Our inefficient use of ever-more expensive medical technologies stands as the major explanation for unaffordable healthcare. But a question remains: why are these new technologies so expensive?

The answer is that the U.S. is the only nation in the developed world that has decided to let healthcare become a largely unregulated, for-profit enterprise. As a result, in the U.S., those who produce new medical technologies set prices without much push-back. The producer is the “price-maker;” we are the “price-takers.”  In other nations, the government protects taxpayers and consumers by negotiating with drug-makers, device-makers, hospitals and doctors, setting limits on how high prices can go.

Our government doesn’t do this, so we shell out more for every pill and procedure.  The HSC report cites a McKinsey Global Institute (MGI) study which estimates that drug prices are 70 percent higher in the United States compared with OECD countries. When it comes to devices, The United States spends 54 percent more than OECD countries for the top-five inpatient medical devices (e.g. implants, stents).” 

Here the report observes that “many studies show that other healthcare systems effectively exercise monopsony power in setting payment rates for providers, which fragmented U.S. payers cannot muster.”

This, however, is not the whole truth. In the U.S., the government (i.e. taxpayers) picks up more than half of our national  healthcare tab by paying for Medicare, Medicaid, care for government employees, the Veterans administration and other government health programs. As a purchaser, the government does have the size and the clout needed to insist on discounts.

The problem is that Congress does not have the spine to stand up to the lobbyists and let Medicare begin negotiating for lower prices. Though I suspect that, in the recession ahead, this will change.

Ginsburg also notes that physician pay in the U.S. is more generous—particularly if they are using those bleeding edge medical technologies that we so admire. Physician compensation in the United States is 6.6 times per capita GDP for specialists and 4.2 times for primary care physicians. By contrast, in the average OECD country, specialists 4 percent of GDP per capita, while primary care doctors take home 3 .2 percent. 

Only the “salaries of [U.S.] nurses are in line with OECD countries.” Although they have campaigned for—and won—higher compensation, nurses just don’t have the political power that manufacturers or the best-paid physicians possess. Yet they are the life-blood of our hospital system. One can only wonder how many fewer errors there would be in our hospitals if  they had fewer MRI units, and all of the openings in the their nursing staffs were filled.

As for physicians, our doctors must be paid more in part because they graduate from medical school with enormous loans. Other countries subsidize the cost of medical education. As I have suggested before, if we followed that model, covering medical school tuition and expenses would cost all of us far less than paying specialists 6.6 percent of GDP per capita over the course of a 35-year-career. 

Of course in the context of a culture that pays mediocre CEOs millions, we would have to continue to pay physicians a much larger share of GDP than in other countries. By allowing CEO compensation to rise to such absurd levels, we have  distorted pay for everyone on the top step of our income ladder—a problem that I suspect we will have to address as we trim some of the excesses from an economy in distress.

In Part 2 of this post, I plan to examine Congressional  Budget Office Director Peter Orszag’s warning that, going forward, it will "be crucial to address the nation’s looming fiscal gap — which is driven primarily by rising health care costs." Otherwise, he warns, other nations will stop buying our Treasuries—which would be disastrous for our economy.

I’ll go on to consider what this implies for health care reforms, how rising insurance premiums reflect rising health care costs, how much a single-payer system could or couldn’t save; how negotiating for lower prices might lead producers to set new priorities when developing medical technologies, and whether universal coverage would make healthcare cheaper—or more expensive.