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Where Our High Health Care Costs Come From


The average Joe on the street and the average doctor are in disagreement about why health care is so expensive. Here are eight reasons for why the U.S. pays more for its health care and gets less than other developed nations.

Duh. So why am I beating this dead horse?

If you ask the average Joe on the street why health care is so expensive you might be told that 1) American medicine is the best in the world, 2) the system is full of fraud and waste and 3) doctors make too much money. In turn, the average doctor might claim that high costs are due to 1) overwhelming paperwork, 2) malpractice costs and 3) interference by insurers and the government.

To be charitable, these are questionable and/or misstated and underline the ignorance and lack of focus that abounds in the national debate on what is wrong and what should be corrected to save money and improve access and care.

JAMA recently ran a book review of Victor Fuchs’, MD, latest effort. In his book, Fuchs gives eight broad reasons for why the U.S. pays more and gets less than other developed nations. These ought to be widely introduced into the national debate as a start on what to do to bring down costs and improve quality so that we can focus on what will actually make a difference instead of just grumbling.

1. Administrative costs

The first reason for uncontrolled cost expansion, according to Fuchs, is that the U.S. has higher administrative costs because of awkward and inefficient monitoring and payment practices. Everyone in contact with this sector of the economy will readily agree to this one. And, surprisingly to some, private insurers are worse at administration costs than Medicare; a few percent of overhead for Medicare compared to double digits for private pay.

This is an argument for making the process non-profit. For even a few percentage points of the health care’s 18% of the gross national product (GNP) are big bucks in potential savings.

2. Specialist abundance

The second factor in sky-high expenses, Fuchs says, is an overabundance of specialists who charge more and get it, and who use more expensive technology, than primary care doctors. No argument, but doctors in training with big debts — and perhaps visions of sugarplums — will always be attracted to go where our society pays them to go. As of today that is not primary care, which everyone agrees is a more cost efficient alternative to shift young doctors toward.

3. Excess capacity

We pay dearly to maintain an unplanned and irrationally sited excess capacity in the system, according to Fuchs. Many underutilized hospital beds, for instance, whose cost is amortized through silly high fees for the ones that are used. (see my ninth addendum at the end.)

4. System

Next is our open-ended fee-for-service system with only a vestigial nod to some sort of checks and balances. This is an ad hoc system where the usual economic laws, such as supply and demand, do not apply — a larger supply of health care resources paradoxically raises, not reduces, demand. In this day and age, as I have written before, this kind of approach makes no sense and left alone will break us.

5. Treatment

Our uncoordinated and confused treatment of the health needs of the poor is also a factor, Fuchs argues. Just look at the hue and cry raised by the Affordable Care Act (Obamacare) — attempting to expand care to the uninsured — to see how we collectively haven't sorted this whole area out.

6. Malpractice

For the sixth factor, Fuchs does tip the hat to our malpractice mess. Most studies show that this amount is actually less than 10% of the economic distortion, but that is not a small number. Now if we can just get the Trial Lawyers Association to step away from the vehicle so we can set up no-fault State Boards… But it probably won't happen without a groundswell of arm twisting.

7. Drug prices

The next issue is our phenomenally high drug prices, partially due to U.S. research subsidizing the rest of the world, according to Fuchs. And part of the sometimes jaw-dropping cost is the cockamamie combo of confused and restrictive regulations that make it hard to get new drugs to market and then make it hard to compete with generics to get down the artificially high prices engendered by the regulations!

8. Incomes

Lastly, Fuchs throws a populist bone in with higher physician incomes being an actual factor in swelling health care payments. Yes, there are opportunities for giant paychecks in our open-ended fee-for-service system, especially for some surgical specialties, but the total amount of physician payment is dwarfed by the weight of hospital spending — my nominee for the number one reason for uncontrolled expense.

9. Hospital spending (my addition)

Hospitals consume, by far, the largest chunk of health care, and more than Social Security and the defense department, to put it in perspective ($880 billion vs. $769 billion and $671 billion, respectively). And the hospitals' portion is going up faster than any other sector of health care, 8.2% expected this year.

Hospitals now employ over 50% (!) of U.S. physicians to control their business, making them the agents of further compounded cost growth. And hospitals' recent merger mania — 86 in 2011 alone — in the name of integrated system cost containment, has led not to reduced prices, but instead to price increases. Prices are 13% to 25% higher in those particular markets where the mergers occurred.

Yes, we all agree health care costs are going to ruin us — care is fragmented and we can always do better on coverage and quality. But let us not be confused about where the problems are and, therefore, what our range of choices to correct them is. The chief practical conundrum in limiting progress seems to be a lack of vision — from public discourse and especially in this election season — about how to override the slew of oxen that will be gored in a piecemeal correction process such as has been attempted so far.

I remember a line from Proverbs that seems appropriate to our health care debate; "Where there is no vision, the people perish." Amen.

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