Wednesday, November 30, 2011

Why is health care so costly? Hint: it’s not (mostly) how much care we get.

Conventional wisdom is that the high cost of health care in the United States is principally caused by overutilization—that is, excessive volume of tests, procedures, and treatments, much of which may have marginal clinical effectiveness.

But if higher spending is the result of higher volume, then it would stand to reason that Americans get more health care services than other countries with lower costs, right? Not so, writes Washington Post columnist Robert Samuelson, citing data from the Organization of Economic Cooperation and Development (OECD):


If we aren’t getting more health care, then why do we spend more on it? The answer, Samuelson argues, is higher prices:


In other words, the higher the price, the more services we get, and the greater the cost. Throw in the lack of price transparency and competition, low patient cost-sharing, and a whole lot of lawsuits, and it is not hard to understand why the United States spends more on health care than just about anyone else.

Samuelson offers two options to drive down prices: “a voucher system that, through tax credits and fixed Medicare premium subsidies, would allow patients to shop for the best health plan. Competition, the theory goes, would force hospitals and doctors to restructure the delivery system; health plans would compete on the basis of price and quality. The other way is a government-run, single-payer system that would — somehow — include strict budget limits on doctors, hospitals and other providers.”

But both of these options have their own problems, practical and political. Vouchers shift more costs onto the individual, making them responsible for the costs of care that exceed the voucher amount, yet they don't really give patients the levers to control the cost of the care they receive. And where is the evidence that insurance company competition will lower costs? Plus, voters don’t want vouchers—look at the intense public opposition to Rep. Paul Ryan’s proposal to replace Medicare with a voucher program. A single payer, government run health care system runs against the grain of American individualism and distrust of government (now at an all-time high), and likely would carry with it price and capacity controls that would limit individuals’ access to care (rationing, anyone?).

There are other alternatives that might be considered. Instead of competition among insurance companies, how about we eliminate price controls, get insurance company middleman out of the equation except for catastrophic care, enroll people in high deductible health savings accounts, and allow doctors and hospitals to compete based on price and quality? Sounds good—in theory—but the reality is that patients are not likely to shop around to find the cheapest care at a time when they are seriously ill and have the greatest need for it. Also, knowing the price charged for an office visit or procedure tells little about the actual cost. (See my October blog about why buying health care isn’t like shopping for a can of soup).

Another approach would be to give health plans and government the tools to drive down prices. Allow Medicare to negotiate drug prices with pharmaceutical companies. Pay physicians based on the value to the patient of the care being provided, instead of their relative costs (RBRVS). Allow Medicare to use “dynamic pricing” so that it could pay more for therapies with "superior" clinical results and less for therapies with poorer results. These options could potentially lower the price of care—and overall costs—but would be difficult to fairly administer (how can value to the patient be measured?) and would face intense opposition from providers who benefit from higher prices.

There you have it: high health care spending in the United States has more to do with higher prices than higher volume, yet the policy tools to lower prices all carry with them significant political and practical challenges. But as Samuelson concludes, “One way or another, if we don’t act, we’re surrendering our future to runaway health spending.”

Today’s questions: Do you agree that the price of health care is the biggest reason why the United States spends more than other countries? If so, what should be done about it?


Steve Lucas said...

Of interest may be this post:

The British Primary Care System and Its Lessons for America

Posted on November 30, 2011 by Brian Klepper

Bob Wachter

While far from perfect the NHS has developed a system where the GP is the gatekeeper and all people must go through the GP for any test or referral. Along with this comes a healthy debate in the doctor’s office of the need for any test or procedure.

In the US it is a drive to maximize insurance through high cost test and procedures, needed or not.

Steve Lucas

ryanjo said...


The British Primary Care System is just a gatekeeper HMO. I had the unfortunate experience to work in this type of system for years. Patients just get angry when discussing the appropriateness of tests and referrals. They don't have to pay anything, so why can't I give them what they want? Patients need some "skin in the game", as do we all.

Steve Lucas said...


Good point. Bob D., in his post, notes that all systems have draw backs. I like the system where people pay for, and interact, with their doctor and insurance becomes a back up for a catastrophic event.

As you note, we have the Tragedy of the Commons, where if people think something is free, they want all they can get, and let the next guy worry about his. People in the UK and EU do understand that their high taxes are due in great part to their medical system.

What I like about the UK system is the strength of the front line doctor to determine the care plan. Here in the US we turn people over to specialist, who have their own financial agenda, and it becomes almost impossible to get away from a never ending demand for test and procedures.

Co-pays have distorted the whole process where people think in terms of $20 or $30 as the cost of a test, and surprisingly I have spoken to doctors who look at co-pay as their income from a test or procedure. Out the door cost never enter into the conversation.

Medicine is organic. We in this country have developed our own perspective, just as those in other countries have developed their own perspective, on what is appropriate care and who should pay. I would like to see a little more of a direct relationship between doctors, patients and payments.

Steve Lucas

Harrison said...

Although it is counterintuitive, I think Medicare would do well to release price controls.
For the federal budget it has to be okay for Medicare to cap the amount it is willing to pay, but we should be able to compete for fee levels on top of that.

If we don't do that it is hard to see how we redesign systems of care in the U.S.
We are stuck with models that are driven by face to face visits.
If we were free to offer care in other ways but still charge for care delivered at rates we choose, we could improve our business models and our care delivery models.