A Look From Within: Why Are U.S. Healthcare Costs so High?

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President Barack Obama signed the Patient Protection and Affordable Care Act into law in 2010 for, what many could say, two main reasons: to expand access to healthcare for most U.S. citizens and to control the country's rising healthcare costs.

Rising national healthcare expenditures continue to be a burning issue today, as CMS reported this summer that national health spending reached $2.7 trillion in 2011, and it will be a burning issue until total costs are reigned in. Ever since the United States has had a modern healthcare system, hospital executives, physicians and academics have tried to answer the underlying question: Why are U.S. healthcare costs so high, and what can be done to rectify this path?

Single-payor healthcare, more focus on preventive care, new payment models — these ideas and several more are floating around to build off the PPACA to control healthcare costs. Here, nine healthcare professionals, including physicians and former hospital executives, give their take on how U.S. healthcare costs have gotten out of control in the past 10-plus years and what more needs to be done.


Kevin Campbell, MD. Cardiologist at UNC Health Care's Wake Heart & Vascular in Raleigh, N.C.
Healthcare spending in the U.S. today far exceeds other comparable industrialized nations. For example, in 2011, U.S. spending reached $8,660 per capita. The next closest nations were Switzerland and Norway at around $5,000 per capita. Even when adjusted for national wealth, the United States outspends all others at around 17 percent of its gross domestic product compared with 12 percent or less in all other countries. The most obvious question is "Why?"

I believe there are several factors that may contribute to this. Although it may be easy to blame increased healthcare expenditures on an aging population of baby boomers, increased per capita income and an overwhelming supply of physicians and hospital facilities, I believe that other factors may be more important to examine.  

1. Obesity. Obesity is epidemic in the United States today. One-third of the population is classified as obese. More children and adults are sedentary and are becoming overweight at earlier ages. Physical activity is not emphasized nearly enough. Obesity predisposes patients to type 2 diabetes, coronary artery disease, cerebrovascular disease and many other chronic illnesses. These illnesses are expensive and account for a large number of hospital admissions.

2. Access to and use of expensive technologies. Today, we are fortunate to have access to the best technologies in the world. We do not ration healthcare, and we continue to treat patients who we know have a very poor overall prognosis. For example, we place elderly patients who may [have dementia] and have a very poor overall quality of life on hemodialysis when their kidneys fail. This is a very expensive endeavor that will do nothing to change overall mortality or patient quality of life. In addition, the United States has a high percentage of use of expensive diagnostic technology such as MRI and CT scanning compared with other industrialized nations. The overuse of expensive diagnostic testing contributes greatly to the excess healthcare expenditures.  

3. Costs of drugs and medical devices. Certainly there is a very complex system of price negotiation among private payors in the United States. There is relatively little regulation of cost and pricing. Drug makers are able to charge nearly anything they want for newly developed drugs, and device makers are able to set prices and negotiate contracts with hospital systems, which in turn pass these prices on to the healthcare consumer or third-party payor.

Jim Fox. Former CFO of Minneapolis-based Fairview Health Services and Senior CFO Consultant at Warbird Consulting Partners. There are a variety of drivers in the delivery and payment systems that have helped lead to increasing healthcare costs.

Supply-driven demand is a major reason costs continue to rise. This means that because there is an excess supply of certain capabilities, these capabilities will be used when they may not be needed. For example, if a city needed one MRI but six were available, there would be a motivation to utilize the excess capacity to cover costs.

A majority of healthcare processes are designed to do more rather than what is necessary. A great example is when a patient experiences back pain. There are two approaches to treating this ailment. If the patient experiences back pain for the first time and he/she needs to visit a physician, the physician is typically going to order four to six weeks of physical therapy. However, the physician could order an MRI, a radiologist to examine the results and a consultation with an orthopedist. Alternatively, the physician could do none of the above and just order physical therapy. More than 80 percent of the time, first-time back pain is resolved by physical therapy.

Patient demand is another factor in rising healthcare costs. A patient visits a physician and will say, "I want this." Typically, most physicians will give them what they want, within reason. Defensive medicine also makes matters worse and has adverse outcomes that are not always expected. Many healthcare providers will treat patients at a higher level than necessary to protect themselves.

The cost of technology, new pharmacy drugs and specialty pharmacy costs are also contributing factors. The amount spent on high-end specialty drugs are expected to double in the next five years. The consolidation of healthcare providers has also provided leverage for the industry to charge more for services.

Drivers for the payment system include rewarding providers for doing more rather than what is necessary. Most patients that receive care do not have an economic responsibility to balance the use of the service.

The final driver for the payment system is society's responsibility to treat an aging U.S. population. Baby boomers are obviously going to use more healthcare as they age. In the United States, a substantial amount of care is provided in the last 12 months of life. If our country wants to keep doing that, it will need to figure out who is going to pay for this type of care. In most other countries, that is not the case. They make higher use of hospice and other methods.

Dave Macdonald, JD. CEO of Aegle Advisors. There are a number of factors contributing to high-cost hospital environments, which if not dealt with effectively, will continue to drive healthcare costs out of control. The existing organizational structures, productivity expectations and lack of true accountability drive most of the cost. Hospital organizations are not immune to the ever-increasing health insurance and benefit premiums that we see nationally. This tends to be the second-highest cost that a hospital will incur behind salaries and wages. For the last few years, most hospitals have seen double-digit increases in premiums and are often reluctant to pass this increase entirely through to the employees, thus absorbing most of it as an expense. In addition, other benefit costs, like pensions and lucrative time-off allowances, are built into the hospital cost structure, many times driven by union contracts and commitments to employees. However, these costs tend to be higher in comparison to their counterparts in the private sector. Unfortunately, pension costs are difficult to address given the impact to the employees and the political ramifications. In addition, when clinical employees take time off, there is often replacement costs associated with caring for the patients.

All of this is enough to send costs spiraling, but then you add outside forces, such as government agencies for Medicare and Medicaid and third-party payors, and suddenly you've created a system that requires enormous administrative burdens — burdens no other industry is subjected to. Highly skilled and educated providers are constantly being challenged about their clinical decision-making in an effort to slow down payments or completely deny payments to the hospital and or physicians. The cost of redundant systems, and the people and processes to manage multiple systems from different government and private payers, forces hospitals to hire additional staff in order to be compliant with the all of the red tape.  

The end result is a high-cost, inefficient healthcare delivery system. Every payor has different rules and/or regulations for a service to be covered and hopefully paid. Both the healthcare organization and the payor have to hire more people to oversee the rules, creating higher premiums and higher administrative costs. Often times, hospitals will have to appeal two to three times simply to get paid for services that were duly earned the day they were performed, not one year from then. Hospitals are forced to spend too much time tracking and chasing payments instead of using their resources to focus on the patient experience and deliver the most efficient and effective care that the patient deserves.

Ricardo Martinez, MD. CMO of consulting firm North Highland. The high fixed costs in the healthcare industry are the Achilles' heel that must be addressed to ensure financial viability. To effectively address those costs will require the alignment of the dyad leadership model, which is the two-pronged approach to the integration of the business and clinical side of management. While heavy investments into expensive assets have traditionally generated additional revenue, revenue has peaked and will generally decrease. High utilization meant higher revenue in the fee-for-service world, but in capped payment schemes such as bundling and forms of capitation, high utilization equals high costs and low margins.  

The focus must shift to margins and eliminating costs as the overall key to financial success. Other industries with high fixed costs have seen market shares erode, sometimes quickly, as lower-cost competitors enter the field. The automotive and airline industries are pertinent examples.

Most industries shifted to activity-based accounting decades ago and can become granular with costs. In contrast, most hospitals know very little about their costs, focusing on charges instead. The Holy Grail for healthcare organizations is cost per unit service — what does it actually cost to provide care?

There are four main ways to decrease the costs per unit service: provider substitution, treatment substitution, setting substitution and improving administrative and care processes, or frictionless healthcare. Provider substitution means using the lowest cost provider to meet the patient's needs and using each provider (licensed practical nurse, nurse, nurse practitioner or physician assistant) to the top of his/her license. Treatment substitution allows for the maintenance of quality care but uses the most cost-effective approach and treatment. The movement toward evidence-based care is recognition that much of what is done for a patient may add little additional information or therapeutic value. Setting substitution means matching the patient needs with care in the proper setting such as self-care, home, urgent care, outlying clinic or the hospital so that each setting is utilized more efficiently. Finally, improving administrative and care processes can save substantial costs by eliminating unnecessary steps, personnel or resources from important processes or eliminating low-value processes altogether. Improving those processes and moving toward a frictionless healthcare can also have the added benefit of improving the overall patient as customer experience.

Addressing each of these opportunities to cut costs provides hospitals and healthcare organizations with more flexibility with delivering care and new capabilities for taking on new risk-based financial models.

Stephen Rothenberg, JD. Consultant at Numerof & Associates. At a high-level, some of the main reasons for out-of-control healthcare costs are due to the current payment model and the lack of transparency in our system. The current payment model, both for physicians and hospitals, is focused on production. Fee-for-service payment provides incentives for volume. The more patients admitted and the more services provided, the more providers make, with no incentive to keep people out of the hospital or to minimize costs once they are there. Hospitals are clearly in the sickness business, not the prevention or wellness business, and providers have a profit-based motive to increase productivity at the service code level. And measures like DRGs and resource-based RVUs and even accountable care organizations — intended to help control costs — haven't eliminated the fee-for-service payment system that has created this production mentality. With physicians and hospitals paid on a fee-for-service basis, decisions reflect many considerations, but cost effectiveness is probably the last on the list.  

This system has been able to continue because physicians and patients don't have a stake in the cost of care. Businesses and insurers pay, so consumers don't typically ask about the cost, and providers don't need to justify it. In every other market situation, consumer engagement brings quality at a reasonable price — but this engagement is missing in healthcare.  

The entire system also suffers from an extreme lack of transparency around cost and quality outcomes data — which means it's difficult to compare service providers. It's far easier to compare the cost and performance of two flat-screen TVs than to do the same for two physicians or two hospitals. Ultimately, if we are really serious about getting healthcare costs under control, we need to tie payment to outcomes, or we won't be able to crack rising costs in any meaningful way. We need to make certain that consumers are at the center of the new business model. They need to have real economic and clinical value information in order to make good cost/benefit choices. Transparency and increased accountability for costs and outcomes will be critical to tackling out-of-control healthcare costs.

Alexander Salerno, MD. Internist and Founder of Urban Healthcare Initiative Program in Newark, N.J. Healthcare is no different than other industries in that it is measured in dollars spent (gross revenue), it has consumers (patients) and it has producers (physicians, hospitals, insurance and pharmaceutical companies). However, despite having the same classifications as any other prominent industry, the approach and relationship of consumers and producers are much different in healthcare than in other sectors. It is this inherent difference that results in our current philosophy of spending more and getting less.

So what causes these differences? One belief is that physicians and hospitals are often removed from the decision-making process and consequently are unable to work toward a solution. When it comes to "fixing" healthcare, whether it is state, federal or the private sector, policies are too frequently created and authored not by hospital administrators or physicians, but rather by people of legislative, legal and financial backgrounds — many of whom pander to or are beholden to special interest groups. Consequently, we find ourselves stuck in a revolving-door system of politics rather than offering sound solutions to healthcare.

Furthermore, with America being one of the most diverse countries in the world, we simply cannot accept a "one-size-fits-all" model of healthcare. You don't have to go any further than any online news outlet or 24/7 broadcast station to hear sentiments of distrust in the healthcare system and, by association, distrust of physicians and hospital practitioners. This distrust and apathy toward the system that is currently being provided causes patients to be reactive rather proactive with their healthcare, which leads to higher costs for "emergency" care, many times of which could have been avoided with routine medical treatments and education of health management skills.

Studies have shown the majority of healthcare costs are derived from urban and rural areas, most prominently among the Hispanic and African-American minority populations. It is important to educate not only the aforementioned communities but all consumers of healthcare. Just as one wouldn't buy a car without thorough preparation and research, consumers need to be educated about implications of their decisions. Ultimately, if we want to fix the healthcare industry and the fiscal implications of a broken model, we need to understand the problems, players and principles as they exist in each zip code and area code.

Stephen Schimpff, MD. Professor of Medicine and Public Policy at the University of Maryland and Former CEO of the University of Maryland Medical Center in Baltimore. Healthcare costs are rising for many reasons, but the two most important ones are straightforward: There is a rapid rise in the incidence of chronic illness, and primary care physicians find themselves in an unsustainable business model.

The Milliken Institute offered a white paper a few years ago on chronic illnesses and noted that nearly one-half of Americans had one or more chronic illnesses, most of them preventable. These illnesses cost the economy more than $1 trillion per year and continue to rise. Insurers note that 70 to 85 percent of claims paid are for those with chronic illnesses. Why are these diseases increasing at such an alarming rate? There are two key reasons. First, an aging population leads to chronic illnesses, such as hearing and vision loss, mobility impairment and dementia. Second, adverse lifestyle choices — such as poor nutrition from processed foods, lack of exercise leading to rampant obesity, chronic stress and 20 percent of the population still smoking — lead to chronic conditions including heart disease, diabetes, cancer, lung disease, hypertension and others. These are difficult to manage, persist for life (cancer can be an exception) and are expensive to treat.

Diseases of this sort require a multidisciplinary approach (e.g., a person with diabetes might have an endocrinologist, nutritionist, exercise physiologist, ophthalmologist, podiatrist and others). This team of caregivers must be led by a quarterback — the primary care physician. The PCP finds his or her reimbursement for visits has been flat for a decade while office expenses have risen. They try to "make it up with volume," seeing more patients for less time. The result is inadequate preventive care that could stem the tide of chronic illness. In addition, the PCP does not have time to coordinate care of those with a chronic illness, resulting in unnecessary referrals to specialists. Referrals to specialists have more than doubled over the past decade from 41 million to 105 million. Add to this excess tests and imaging procedures and then writing prescriptions when time spent working on lifestyle changes would suffice all add up to higher expenditures without quality improvement.

The healthcare system does not have to function this way. Adequate compensation of the PCP combined with his or her commitment to give good preventive care and comprehensive care coordination will rapidly reduce costs, improve quality and offer satisfaction to both patient and physician alike.

Lawrence Singer, DMD. Assistant Clinical Professor of Surgery at George Washington University Hospital in Washington, D.C. U.S. healthcare costs are out of control for several reasons. First, we have an unhealthy population that consumes a very poor diet of fast and processed foods leading to a high rate of obesity and atherosclerosis, as well as other health maladies associated with a poor diet. Lack of exercise and obesity amongst children is a national disgrace. In addition, high rates of alcohol and drugs — both prescription and illicit — contribute to higher overall acute and chronic disease rates.  

We have a system that is based on giving all people equal access to the highest level of care, which is enforced from within the profession but more truthfully from the legal profession. Technology and treatment modalities are increasing exponentially raising healthcare premiums exponentially while the income of the population is stagnant.

There is an egregious lack of focus on preventive care that cannot be blamed on the profession and is more a cultural issue. Countless dollars could be saved if people kept up with their recommended annual exams and followed advice given in these exams.

A core problem is that everyone is entitled to the same care. There are millions of people who have never paid into the system or paid very little, yet they can end up with hundreds of thousands of dollars in bills that are either paid for by Medicare/Medicaid or written off by the provider. In cases where it is written off by the provider, the paying patients are essentially subsidizing the uninsured.

Most patients I see at the hospital at which I am an attending should never have gotten there if they had observed better health practices. I believe there should be a private and state healthcare system. A state healthcare system would be based on a Veterans Affairs or military system model.

Kurian Thott, MD. Chief of Obstetrics and Gynecology Department at Stafford (Va.) Hospital. There are several layers to the discussion of rising healthcare costs. And we see the government always highlighting a few areas that they seem to always be targeting for cutbacks — namely, decreasing reimbursement for services both to providers and hospitals have always been first on the list. However, political pressures have held those cuts at bay, but they are always looming over our heads.

A point of contention is that physicians are making the same today or less than they did 20 years ago, so basic economics would tell you that any industry that is that stagnant will inevitably not be fiscally viable without something changing for the long term.

But the amount that is paid to physicians and hospitals is only part of the equation that needs to be addressed. The other issue is that the ancillary costs to practice medicine are out of control. Industries that supply hospitals and physician offices with services and goods have put in 40 to 60 percent margins just because they are healthcare.

What it costs me to buy toilet paper from a medical distributor is almost 30 percent higher than if I went to Costco. These are the unmentioned drivers in healthcare. When a landlord can charge more per square foot for leasing medical space than a space for a real estate office, there is a fundamental problem in the system. When it costs a restaurant in town half of what it costs me to run the same size advertisement in the local paper, there is a problem. There are no justifiable reasons for these higher margins added to our bottom line.

Practicing defensive medicine is also a huge factor in driving healthcare costs at the hospital, lab and imaging levels. Physicians are ordering tons of extra tests to cover themselves in the event a lawsuit arises. Medical malpractice premiums are also getting more and more difficult to manage for small- to medium-sized practices.

Finally, healthcare is the only industry when costs go up, there are no scalability options. In other words, we can't increase our charges when our overhead increases. The average person in the street has no idea about this, and this wouldn't be acceptable in any other industry.

What are your thoughts on the financial state of the U.S. healthcare system? What more needs to be done to reach the ideal healthcare system? Email Bob Herman at bherman@beckershealthcare.com to share your thoughts.

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