The truth about why the U.S. can’t control healthcare costs

September 17, 2016

Until we create a system that rewards investment in wellness and healthcare dollars not spent, there is reason to fear that the negative effects of healthcare excesses will continue to be borne by households, businesses, and governments.

Editor’s Note: Welcome to Medical Economics' blog section which features contributions from members of the medical community. These blogs are an opportunity for bloggers to engage with readers about a topic that is top of mind, whether it is practice management, experiences with patients, the industry, medicine in general, or healthcare reform. The series continues with this blog by Ryan Gamlin, a former health care management consultant and current medical student at the University of Cincinnati. The views expressed in these blogs are those of their respective contributors and do not represent the views of Medical Economics or UBM Medica.

 

Ryan GamlinA graphic making the rounds on social media has people talking-plots health spending per capita against the average life expectancy for two dozen countries. The chart has renewed the important conversation around why the United States’ experience is such an outlier, spending more than any other country by a wide margin, effectively proving the adage that “more is not better.”

 

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 We spend more on healthcare only to generate outcomes far poorer than any comparable country.

The question of why the U.S. generates so little value for its healthcare dollar is a persistent source of study and debate. While dramatic changes are underway in how care is financed and delivered, two major structural impediments to moving the U.S. “closer to the curve” are rarely discussed.

The Inverted Pyramid

The U.S. spent less than $300 per person on public health in 2014 (the most recent year for which data is available) – this compared to $9,523 in per-capita total healthcare spending. While this figure is not comprehensive (it does not include things such as corporate wellness programs), the best estimate is that only 3% of all healthcare spending goes towards promoting health, response to health emergencies, and the prevention of illness and injury.

A rational system of health promotion would invest in wellness, rather than reveling in its ability to cure disease, yet under traditional fee-for-service compensation models, prevention has been a business model without profit, and the fractured and often fractious landscape of federal, state, and local public health spending has often left public health agencies without adequate resources and direction to achieve their mission.

 

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The bulk of public health expenditures have been shifted to the state level, creating an inefficient patchwork quilt of programs and initiatives. Funding for public health has been feast or famine, leaving delivering agencies and organizations unable to plan for or execute long-term projects. Much as the tragic I-35 bridge collapse in Minneapolis brought the issue of infrastructure under-investment to the public’s attention, Congressional inaction on salient threats to public well-being such as the Zika virus have left Americans in undue danger.

Next: Our dependency on the healthcare jobs machine

 

Dependency on the Healthcare Jobs Machine

Growth in the healthcare sector has been a bright spot in the preceding dismal economic decade. The sector has been a consistent source of jobs growth , but there is reason to believe that economic gains created by

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When healthcare jobs do not increase productivity, the increased real price of healthcare is transmitted, via increased costs of production, to nearly all goods and services throughout the broader economy – a vast “ripple effect” not seen with inefficiency in other jobs sectors.

Unwinding this system quickly would be catastrophic. The U.S. has made a Faustian bargain: a healthcare system that generates fantastic profits for shareholders and delivers well-paying jobs, while straining governments at every level and households across the nation.

 

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While excessive profits are often cited as the cause of runaway spending, it is more important to examine the rampant excesses – the accumulated inefficiencies, myriad costs, large and small – of the system. Healthcare transactions in the U.S. are defined by a complex and unenviable process, during which information and money are transferred between a number of entities, accruing cost and complexity at each step. Each step is marked by administrative duplication.

In the health insurance market, for example, a number of companies offer a similar set of services (charitably, these would include handling claims, answering customer inquiries, and negotiating discounts with facilities and health care providers), yet each organization generates a unique set of transactional and profit totaling in the tens of billions of dollars. With a simplified payment system, insurance – and insurers – would be less complex. Less complex organizations may be run more efficiently, and with a lower managerial burden.

Inefficiency also manifests itself on the provider side. From 1990 to 2012 healthcare jobs grew by 75% -- far faster than patient volumes. Worse, the growth of healthcare administrators far outpaces the rise of the healthcare labor force as a whole; more than 60% of all physician jobs are now purely administrative.

Next: What lies ahead?

 

What Lies Ahead

Physicians, for their part, have begun to push back against administrative waste and excess, moving in large numbers to service delivery models like Direct Primary Care – saving themselves and patients the time, frustration, and costs associated with third party payment.

 

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New reimbursement structures, like shared savings and ACOs, will draw provider and payer incentives closer to one another – and it is within these highly aligned arrangements that the efforts of physician stewardship organizations, such as Costs of Care and Choosing Wisely. will likely be most effective.

But with 53% of physician reimbursement tied to fee-for-service, the majority of dollars saved through these efforts are still subject to recapture by insurers, administrators, or other entities, rather than making their way back to patients in the form of lower out-of-pocket costs.

As Holman W. Jenkins pointed out in a recent, devastating, satire of the Mylan Pharmaceuticals Epi-Pen scandal, many of the incentives in the current healthcare system are aligned only with growing the total scale of healthcare expenditures, not shrinking them.

Until we create a system that rewards investment in wellness and healthcare dollars not spent, there is reason to fear that the negative effects of healthcare excesses will continue to be borne by households, businesses, and governments.