By and large, current efforts in Congress to enact health care reform are focused on expanding access to health insurance, not on containing health care costs. But cost is the motivation for much, if not most, of healthcare reform. It is helpful to understand why costs are so high and increasing at such a rate in the United States, what cost containment measures are being debated in Congress as part of health reform, and what other measures might help to control health care spending.
If medical inflation continues at the same rate as it has over the last 10 years, the average annual premium for family insurance in 10 years will exceed $30,000.
In October 2009, the CBO released a report that found that malpractice reforms would reduce health care spending by more than $40 billion over the next 10 years. This is far lower than the figures for defensive medicine that had been put forward by organized medicine, and would save only about 1/10 of 1 percent of current annual health care expenditures. More importantly, the CBO report does not necessarily support the idea that malpractice reforms reduce defensive medicine, defined as practices that do not produce overall patient benefit. One of the three recent studies that the CBO relied on stated:
Our estimates do not imply that any change in spending was necessarily “defensive medicine.” To the extent that additional malpractice costs mean greater precautionary testing with some medical value, any additional procedures might be protective of patient health or valued regardless of their therapeutic properties. We did not find that higher malpractice liability costs were associated with reductions in total or disease−specific mortality. This evidence is clearly not sufficient to rule out a potential benefit from malpractice liability–induced medical spending, but there is also some evidence from other studies that the increases in use associated with malpractice liability costs could actually lead to harm.
If aging, wealth, better outcomes, and malpractice costs do not explain the high cost of U.S. health care, what does?
In 2008, pharmaceuticals were the third most profitable industry sector in the country (following communications and oil), with a profit margin of 19.3%.
The McKinsey Global Institute estimates that U.S. drug prices are 50% higher than the average prices for other industrialized countries. This is almost entirely attributable to higher costs for brand name drugs. The drug industry argues that these prices are necessary in order to pay for the research and development costs of new drugs. This is disingenuous. In the first place, the drug industry makes enormous profits. In 2008, pharmaceuticals were the third most profitable industry sector in the country (following communications and oil), with a profit margin of 19.3%. Second, the vast majority of new drugs on the market do not offer significant improvements over existing modalities. Finally, as a lawyer who represented drug manufacturers for nine years, I can attest that drug prices are not based on the costs of manufacturing and R&D, but on what the market will bear.
U.S. physicians earn on average far more than their counterparts in other countries: twice as much as doctors in Germany and four times as much as doctors in the U.K. The gap is even greater for specialists. One argument in favor of physician incomes is that they provide the ultimate in social benefit by promoting health and saving lives, and therefore deserve to earn as much as they do. Given the lack of evidence−based medicine, however, the amount of good that physicians do is debatable. Moreover, this argument ignores the fact that physicians in other countries provide the same social benefit for far less money.
Another argument that is often asserted to justify physician incomes in the U.S. is that medical school in other countries such as Germany and Britain is free, while in the U.S., physicians need to repay large medical school loans. A 2007 report by the American Association of Medical Colleges (AAMC) states that most medical school graduates defer loan repayment until after their relatively low−paid residency periods, and that they then will pay between approximately $1,000 and $2,300 a month to retire their debt, depending on the type of medical school (public or private), the type of loan (federal, MEDLOAN), and the repayment period (10 years vs. 25 years). The report also estimates that the average physician income after taxes in 2006 was $119,130, which would make the loan repayment between 10 and 23 percent of after−tax income. This is a hefty chunk, particularly for lower paid practice areas such as family medicine and pediatrics. What about specialists? According to the Wall Street Journal, in their first year after residency, neurologists, cardiologists, and anesthesiologists earn on average between $200,000 and $400,000, suggesting that the argument about medical school debt is less compelling for these practitioners (and, of course, helping to explain why these specialties are so popular).
Why is utilization so high in the U.S.? A major reason is the technological imperative, the desire by hospitals and physicians to offer the most advanced medical techniques, fueled by intense industry marketing efforts. Another reason is patient demand. This too is encouraged by industry marketing, such as direct−to−consumer drug ads, which account for almost 15% of drug company promotional expenditures, and results in increased spending on prescription drugs. In addition, the more the patient’s care is paid for by insurance, the less incentive the patient has to restrain demand.
But the overriding reason for why utilization is so high is simply that it can be. With the exception of the number and duration of hospital stays, it has proven extremely difficult to dampen the intensity of services. One cause is “patient creep”—the tendency to provide high tech care to broader and broader populations of patients, including older patients and those with less severe symptoms, which has been widely documented. Another cause is the lobbying power of organized medicine. When Medicare has tried to limit physician payments through the use of a mechanism called a “sustainable growth rate” (SGR), which is supposed to reduce physician payments across the board in the following year if total annual Medicare physician spending exceeds a certain limit, Congress has been prevailed upon to block the reduction and replace it with a payment increase. (In fairness to the opponents of SGR, it has been criticized for indiscriminately reducing payments to all physicians rather than just to those who are particularly responsible for increases in utilization.)
Another proposal is to place greater financial risk on patients and their families so that they will have an incentive to spend more wisely. This approach, called “consumer−driven health care,” is the subject of another feature story. As explained there, it has too many problems to become a significant cost−cutting option. In any event, patients in the U.S. already bear one of the greatest financial burdens for their health care compared to patients in other countries, and yet this has not reduced the rate of health care cost increases. More importantly, only 10% of patients are responsible for 70% of all health care expenditures, and these patients, who have acute medical emergencies or prolonged chronic ailments, are unlikely to be able substantially to limit their spending.
A final idea that is not likely to be implemented is to place hospitals on annual budgets, similar to the way hospital care is financed in Canada. Although this was proposed during the current reform debate by both Representative John Conyers and Senator Bernie Sanders, administrative hurdles and concerns about longer queues for care make it an unrealistic option.
More promising approaches are summarized by the phrase “crack the WIP,” with WIP standing for reducing waste, intensity, and prices.
[Between] 18-45% of surgery patients cannot recall the major risks of surgery, many cannot answer basic questions about the services or procedures they agreed to receive, and 44% do not know the exact nature of their operation.
Obviously, the determination of whether or not a treatment will provide net benefit depends in part on the patient’s preferences and aversion to risk. Discovering these specifics about the patient is the task of the informed consent process, but we know that this process is highly flawed. For example, 18−45% of surgery patients cannot recall the major risks of surgery, many cannot answer basic questions about the services or procedures they agreed to receive, and 44% do not know the exact nature of their operation.
As for the role of cost, we have already acknowledged that the more that patients are covered by health insurance, the less reason they have to care about costs versus benefits. This means that, in order to reduce spending, the balancing of costs and benefits will have to be done by someone other than the patient, and under a fee−for−service payment system, someone other than the physician, who stands to gain financially the more services that are provided. Yet this is what managed care tried to do through utilization review, and what triggered the backlash against managed care by physicians and patients that crippled its ability to hold down costs.
Unfortunately, this is easier said than done. One enormous challenge is that the clinical studies that traditionally have been relied upon to generate evidence are extremely expensive and so time−consuming that the interventions being tested often have been overtaken by newer technologies before or shortly after the studies are completed. An even greater obstacle is the fact that clinical studies measure outcomes in large cohorts of subjects. Given our growing understanding of individual differences in the nature of disease and in response to treatment, the results of most of these studies cannot tell us much about what the outcome will be in the case of an individual patient. One solution is to design studies that take individual genetic and other differences into greater account, but this makes them harder and more expensive to conduct. Another solution being advocated by the Obama administration is to mine effectiveness data from large electronic medical records systems. But this requires setting up and maintaining these systems. This is incredibly costly in itself, and diverts attention away from tending patients in order for caregivers to complete increasingly detailed and lengthy computerized forms.
Even if a substantial amount of personalized evidence of effectiveness becomes available, there is likely to be considerable political resistance if it is used by government officials or insurers to deny services. Critics already are characterizing such decision−makers as “death panels.” Opposition successfully derailed the Administration’s initial proposal to use stimulus money to spur “cost−effectiveness” research, which attempts to translate the benefits of alternative treatment approaches into standardized units called “quality−adjusted life years” (QALYs), and then to compare the treatments in terms of their cost per QALY. (Cost−effectiveness research does indeed raise many ethical and legal concerns. Not the least is that it tends to devalue the lives of persons with disabilities, which is a violation of the Americans with Disabilities Act.) More recently, resistance to evidence−based practice has been illustrated by the backlash against revised practice guidelines for mammograms.
Most physicians are paid on a fee−for−service basis, giving them an incentive to provide as many services for patients as possible. Managed care has tried to limit this by penalizing physicians financially for providing too much, and by paying them a lump sum per patient per calendar period (“capitation”). This has spawned criticisms that physicians then have an incentive to provide too few services. The solution would seem to be to put physicians on salaries, and not allow their salaries to fluctuate based on behaviors that are cost−saving but not beneficial to patients. Some physicians fear that this will convert them into mere employees, with too little professional status or autonomy, but there are plenty of successful models of salaried professionals, including, in the case of physicians, Mayo and other multi−specialty clinics, about which more later.
Practice guidelines may be based on opinion and habit rather than on sound science. As John D. Ayres observes in an understatement quoted by Noah, guidelines "are constructed on a somewhat fragile data base." Second, Noah points out, “[t]he process of developing guidelines, which some commentators have described as ‘haphazard,’ may itself introduce serious distortions.” There may be conflicts of interest on the part of the entity issuing the guidelines, such as when specialty societies seek to preserve their turf against inroads by non−specialists, or when guidelines are issued by health insurers or drug companies. Third, a guideline may become out of date, and the issuing entity may not employ an adequate method for updating it. Fourth, there is a proliferation of guidelines and no clear way to identify which guidelines are better than others, and which are definitive. Conceivably, the push for better evidence−based medicine will make better guidelines possible, but this depends on overcoming the problems with evidence−based research discussed earlier.
The alternative is for health care purchasers to have enough market power to drive hard bargains with providers. Democratic health reform efforts therefore would give the government the power to negotiate drug prices on behalf of Part D of Medicare, rather than leave prices to be negotiated between suppliers and smaller private health plans that provide Part D coverage, and one rationale for a public insurance plan option is that it would be able to spearhead price reductions that would then spread to private plans as well.
One way to cushion a significant drop in physician income would be to reduce or eliminate their medical school indebtedness. But no one is seriously proposing this, presumably because of the cost to taxpayers.
But critics point to the fact that these clinics operate under very special circumstances, and doubt that their experience can be widely duplicated. According to the Washington Post, for example, “Mayo's patients are wealthier, healthier and less racially diverse than those elsewhere in the country. It has few poor patients. It limits the number of procedures it performs per patient, but the rates it charges private insurers and self−paying patients is higher than average, allowing it to thrive despite the lower Medicare spending cited by its supporters.” The Cleveland Clinic also has received criticism for overcharging uninsured patients and for not providing enough care to poorer members of the local community.