Why Is Health Care So Expensive?

We finance America’s health care through health insurance. Health insurance companies are often stated as being the cause of rising premiums and are realizing huge profits.  The Morningstar stock performance reports state Health Net, Aetna and Well Point have an average Return on Equity indicator (a profitability indicator) of about 11 since 2001 and their stocks have been remaining relatively flat while premiums continue to rise faster than inflation. In comparison, performance of Microsoft, Intel and IBM have an average Return on Equity indicator of over 22 since 2001 and each are indicating an upward trend in their stocks. The health insurance industry is regulated and many companies are publically traded. If there were so much profit, people should buy the stock, but they are not. The facts do not support claims that health insurance companies have runaway profits as a result of increasing premiums; in fact they seem to be worse off than traditional companies. So why is health care so expensive?

The U.S. currently spends about $8,000 per person per year on health care. This is two or three times what countries like Canada, France, Germany or Britain spend. Why do we spend so much? Gary Fradin, President of Health lnsuranceCE and others report the following issues with our health care distribution system:

• High Rate of Uninsured in America

• Moral Hazard

• Medical Arms Race

• Ineffective Chronic and Preventive Care

• Treatment Variation

• Poor Care Quality and Safety

• Inefficient General Hospitals

• Prescription Drug Costs

• Reduce the Cost of Malpractice Insurance (by James J. Scholl)

• Medicare: Pay the Doctors and Stop System Fraud

A summary of each of each report item is included below and a few may be later updated. Note that the high rate of uninsured in America has intentionally been left out as this has already been reported extensively including one of Mark’s Blogs. Briefly, thirty-two percent of the uninsured earn over $50,000 per year and another 34% of the uninsured are currently eligible for a government- sponsored program but have not signed up. Fourteen percent are only temporarily uninsured because they changed jobs, recently graduated or had some event where they temporarily lost their health coverage. That leaves 20% of the uninsured, or approximately 11 million people (3.6% of the US population), who are long-term uninsured. The 11 million or so illegal aliens are additional uninsured.

You are encouraged to use these summaries two ways: First, as a lens through which to view health care reform proposals. Which proposals address all these issues? Which address only some? Do the proposals focus on the root cause of the problem? Second, how you can help improve our health care system. How do your own activities address or ameliorate one or more of these problems? Hopefully you find this informative, interesting, useful, and will stimulate your own thinking. Please let me know your thoughts.

The Medical Arms Race

This describes competition among hospitals for physician referrals and patients. Hospitals compete with each other by offering the latest in medical technologies and most modern facilities, often at great expense and sometimes without indications that the newest technologies significantly improve outcomes.

Why? Physicians want to refer to the most up-to-date facility, patients want treatment at the ‘best’ hospitals, and malpractice lawsuits may be lost for failure to use the latest technologies. No one wants to use a hospital with old machines or old technologies- even if these work perfectly well.

When a new machine or technology becomes available, all hospitals in a competitive environment purchase it for fear that if they don’t and their competitors do their referral sources will dry up and they’ll go out of business.

Interestingly, hospitals do not compete on results, such as mortality rates by operation or by surgical team, 30-day readmission rates after surgery, post-operative infection rates, etc. Rather they compete based on inputs – machinery, technology or staffing ratios, for example.

This type of competition differentiates health care from other parts of our economy. The auto industry, for example, competes on price and quality. We typically purchase a car knowing its miles per gallon and resale estimate – both outcome measures.

The health care industry operates differently. It does not publish outcome measures of medical interventions. As a consequence, hospitals compete on inputs, using these as a proxy for quality.

Robinson and Luft found surprisingly that these competitive hospitals sometimes had higher mortality rates (i.e., poorer outcomes) than non-competitive hospitals. Here’s why: Surgeons, surgical teams and hospitals with the most experience with a particular treatment get the best outcomes, and those with the least experience generate the highest mortality rates. In other words, practice makes perfect in medicine.

In the Medical Arms Race, hospitals compete based on treatment components, machinery, technologies, staffing ratios, etc. – rather than outcomes or cost. This happens to be extremely expensive and makes health care unlike most other businesses in our economy. Increasing medical component costs does not necessarily improve patient outcomes; it may, in fact, worsen them. This form of hospital competition is a huge problem for our health care system. Prices don’t fall when hospitals compete and insurance payments maintain price levels in response to the consumer market demands.

You may read Gary’s entire article here: 

http://www.hiu-digital.com/hiu/200911/?pg=65&pm=2&u1=friend#pg67

Moral Hazard

This identifies how consumer behavior changes when an insurance company pays: We have more doctor visits, tests and procedures than if we paid individually, out of pocket. We shop less wisely or aggressively using the insurance carriers’ money than our own. Health care moral hazard is an elusive, difficult to grasp concept. It’s hard to define but recognizable upon sight: it is health care system inefficiency.

Health care efficiency is: 1) The patient get all care that is worth at least what it costs, but get no care that is worth less than what it costs; 2) The treatment plan your physician would approve, absent any economic considerations; 3) getting the maximum treatment benefit at the lowest cost.

Physicians only get paid if they perform a service. Hospitals get paid only if they treat. The physician or hospital has a financial interest to treat and earns the most by providing the most expensive treatment. Meanwhile, the patient has little or no financial interest in receiving low-cost treatment, or avoiding treatment altogether.

Patients use medical services as long as the probable benefits outweigh their co-payment cost (often $10 to $20). This is classic moral hazard: The patient only pays a small percentage of treatment costs, and thus faces an artificial cost-benefit analysis.

Patients also have difficulty determining which physicians and hospitals provide the highest-quality service, as our medical system provides notoriously poor outcome data. Without outcome data, patients take two positions simultaneously. First, they substitute physician trust and credentials for knowledge of physician quality. Second, consumers demand wide provider choice and few referral restrictions when choosing health insurance. This allows them to change providers should they so desire.

Consumers demand this choice because they lack information about provider quality and treatment outcomes. Carriers want to satisfy their customers. As consumers demand easier referrals and wider provider networks, the carriers comply. They simply determine the underlying medical costs, add their overhead factor (generally about 10%) and provide the product that consumers demand. HMOs—with referral restrictions that help reduce moral hazard waste—have lost market share to PPO plans.

Controlling moral hazard waste can significantly reduce our health care expenses without reducing health care quality. We annually waste some $500 billion to $700 billion on unnecessary care.

But we must control waste appropriately so acute and chronic patients get their necessary levels of service. Designing an appropriate health care finance system is fraught with difficulties.

We’ve implemented dozens of controls – including prospective payment systems, utilization review, treatment guidelines, health savings accounts, pay for performance and others. None significantly reduce moral hazard systemic waste without compromising patient care.

Reducing our current levels of moral hazard waste is a laudable, though an extremely difficult to achieve goal. We have know about this problem at least since the 1960s but, unfortunately, are no closer to a solution today than then.

You may read Gary’s entire article here:

http://www.hiu-digital.com/hiu/200910/?pg=64&pm=2&u1=friend#pg64

Ineffective Chronic and Preventive Care

Medical conditions can usefully be divided into two types: ‘chronic’ and ‘episodic.’

Chronic medical conditions are long-term, often presenting multiple, inter-related medical problems. Diabetes is such a chronic condition, often caused by obesity and requiring a coordinated team of specialists and technicians, including endocrinologists, psychologists, podiatrists, nephrologists, nutritionists, educators and others for proper treatment. The chronic condition is never ‘cured’ – the disease is only ‘controlled’, requiring an on-going, long-term effort.

Episodic conditions are one-off. Once treated and rehabilitated, the patient returns to good health without much need for on-going medical treatments. Episodic conditions and treatments include broken bones, illnesses such as pneumonia, and many coronary procedures.

Our provider payment system is primarily episodically based. Yet the majority of US medical problems today are chronic disease-based. Chronic disease treatment requires multiple healthcare interactions every year to ensure small but steady advances that can prolong life.

More than half of all Americans have at least one chronic illness. The American Diabetes Association estimates the direct medical costs of diabetes in 2002 alone were over $95 billion, more than double the 1997 bill. Today however, perhaps 75% of our healthcare costs go to treating patients with chronic conditions, often a combination of obesity, hypertension, diabetes and depression. Emory University’s Professor Kenneth Thorpe suggests that obesity related (i.e. chronic) conditions alone may account for up to 1/3 of the total US healthcare cost increases over the past 15 years.

In March, 1999, Beth Israel opened its diabetes center, designed as a ‘boot camps for diabetics…The center would teach them to check blood sugar levels, count calories and exercise with discipline, while undergoing prolonged monitoring by teams of specialists.’ In other words, it was a moderately long-term, team approach to a chronic disease.

The program was ‘an unqualified success’ according to the New York Times. Within 5 months more than 60% of the center’s patients had their blood sugar under control. Close to half had lost weight. Competing hospitals directed their diabetic patients to Beth Israel. Patient volumes grew by 20% monthly as success stories spread.

But Beth Israel lost money – $1.1 million. And within 10 month the hospital decided to close its diabetes program. Why?

Carriers pay more for sickness procedures than wellness visits. There is little reimbursement for ‘reducing a patient’s blood sugar level’. Insurers often balked at paying $75 for diabetic’s regular nutrition counseling, but regularly paid $315 per kidney dialysis session – a byproduct of diabetes.

The tragedy: We could save more lives and improve more people’s quality of life by investing in prevention and chronic disease treatment for the masses than for sickness procedures.

What is the economic impact of our current ineffective chronic disease management? The Milken Institute (October 2007) estimated the economic and business costs of the 7 most common chronic diseases – cancer, diabetes, hypertension, stroke, heart disease, pulmonary conditions and mental disorders – at $1.1 trillion annually, due primarily to lost productivity.  Approximatley 70% of the medical expenses in America are due to Asthma, Coronary Heart Disease, Conjunctive Heart Disease, Diabetes and Depression (note cancer is not in the list) – obesity is a common thread.  Obesity is increasing at an alarming rate in America. The Institute also reports that over 109 million Americans have at least one of these 7 diseases, with incidence rising. Better obesity prevention and treatment alone could generate productivity gains of $254 billion annually and avoid $60 billion in treatment expenditures per year…not to mention, alleviate untold suffering by the patients and their families.

 

Treatment Variation

Medical treatment protocols vary tremendously by region, even for the same demographic and epidemiological population. Some people get appropriately treated; others get undertreated; others get over treated; still others get inappropriately treated. But most insurance plans including Medicare do not differentiate among these categories.

Medicare spends, for example, twice as much on enrollees in Miami as on enrollees in Minneapolis with the same age, socio-economic and health status. The same holds for Medicare beneficiaries in Manhattan ($10,000 in 2003 for example) vs. beneficiaries in Portland, Oregon ($5,000). And in 2001, Medicare paid more than 3x as much for beneficiaries in D.C. ($10,373) as in Iowa ($3051).

We lack national treatment protocols for two main reasons: politics and medical individuality / variability / complexity.

These two issues underscore a key problem in medicine: that it’s a young and extremely complex science. There is enormous individuality and variability among patients and diagnoses. We’re still at an early stage of learning, innovating and discovering processes and treatment plans. We have, for many medical conditions, only identified the easiest to quantify variables – not necessarily the most important.

You may read Gary’s entire article here:

 http://www.hiu-digital.com/hiu/200912/?pg=64&pm=2&u1=friend#pg40

 

Poor Care Quality and Safety

Preventable medical errors are extremely expensive and lead to many preventable deaths.

The Institute for Medicine issued a report in 1999 indicating that up to 98,000 people die of medical or medical systemic errors annually. These errors include diagnostic, treatment, preventive and systemic problems. The Institute for Medicine believes that faulty systems, processes and conditions, rather than individual physician mistakes are the root causes.

The Centers for Disease Control and Prevention estimate that hospital acquired infections – almost entirely preventable – account for another 90,000 deaths annually.

The RAND Corporation estimates that another 126,000 die due to their physician’s failure to observe evidence-based medicine for 4 common conditions: hypertension, heart attack, pneumonia and colorectal cancer.

The US has no national database of citizen health. Your primary care physician has some information; the hospital that performed your colonoscopy has other, your specialists have still more. Should you suddenly become ill, physicians likely will be unable to review your medical past – putting them at a diagnostic disadvantage and you at unnecessary risk.

Contrasting Information Technologies: A casino, before it processes your credit cards or lends you money, uses advanced but routine information technology to discover details about your life. These details include who is your employer, whether or not you have a history of cheating in casinos and how much money you have in the bank. The casino just needed some basic information about you and a serious investment in up to date computer technologies. The casino made this investment because business required it. Absent the computer technologies, it would lose money or customers. However, when you arrive at the emergency room, in pain, delirious or unconscious, the hospital is usually unable to access similar or necessary types of information about you.

Prescription Drug Costs

Today, 91% of seniors and 61% of nonelderly adults rely on a prescription medicine on a regular basis. Although still only a modest part of total health care spending in the U.S (11% – 14%), with so many people relying on prescriptions, the cost implications loom large for the American public, health insurers, and government payors.  Furthermore, the drug industry’s profits margins have raised considerable attention. Pharmaceutical manufacturing was the most profitable industry in the U.S. from 1995 to 2002, and in 2004 it ranked third with profits after taxes of about 16 percent. Compared to the figures at the beginning of this blog, Return on Equity for companies like Amgen, Pfizer, Merck, Johnson & Johnson have averaged 30% since 2001!

Several factors have contributed to this growth in spending on pharmaceuticals, including:

• Increased utilization and demand for prescription drugs – From 1994 to 2004, the number of prescriptions purchased in the United States increased 68%, while the population only grew 12%.
• Price increases – Retail prescription prices have increased on average 8.3% annually between 1994 and 2004, much faster than the average inflation rate of 2.5%. These prices include, in some cases, those of newer, higher-priced brand name drugs that have replaced older, less expensive drugs, and also the impact of movement from brand name drugs to their generic equivalents.
• Marketing to Consumers and Health Care Providers - Pharmaceutical manufacturers make substantial investments on marketing to consumers and physicians, which may influence consumer demand and physician prescribing practices. Furthermore, the most heavily advertised products tend to be newer, more expensive drugs. This results in overall increases in spending. 

The prescription drug industry is based on the discovery and development of new products and understanding patent laws is necessary to understanding the prices charged by manufacturers for their products. Drug manufacturers obtain a form of legal protection called a ‘patent’ for new chemical compounds and new products they develop, and these patents provide manufacturers with an exclusive right to sell new drug products for up to 20 years from the date of the patent filing. Once the patent expires, the drug may be manufactured in generic versions by any number of manufacturers, thus lowering the prices for the drug. 

Brand name prescription products generally are more expensive in the United States than they are in other countries with developed economies, largely because the governments in those countries play a direct role in establishing prescription drug prices and regulating profits. Rising prescription costs in the United States have led some to call for greater government involvement in regulating the pharmaceutical industry as a way of constraining cost growth. Opponents however, argue that government involvement will not guarantee lower prices, may have unintended consequences for the rest of the market, and would negatively affect patients because regulatory actions would stifle industry incentives to invest in research and development of new therapies.

While there are a number of policy options under consideration for addressing rising drug costs, the two that are currently receiving the most attention from policymakers involve the government’s role in drug pricing for the Medicare program and importation from other countries.

Government’s role in Medicare drug prices:  A major issue currently under debate involves the appropriate role for government regarding drug prices for Medicare beneficiaries under the new drug benefit. The law specifically prohibits the government from interfering in negotiations between the drug plan sponsors and drug manufacturers and pharmacies, establishing any specific list of drugs that will be covered (formulary), or imposing any price controls on drugs. Supporters of this market-based approach believe that the competition for enrollees will cause plans to negotiate with drug manufacturers and pharmacies to offer drugs at the lowest possible prices, while opponents fear that the lack of federal regulation and negotiating power will lead to higher costs for Medicare and for Medicare beneficiaries, many of whom will still face sizable out-of-pocket costs for prescription medications.

Importation:  The significantly lower prices available for common brand name prescription drugs in Canada and other countries has led some individuals as well as state governments to import drugs from those countries. Although it is currently illegal, the FDA generally has not enforced the law banning importation. A number of proposals on importation have been introduced in Congress, varying in scope, the countries from which drugs could be imported, safety standards, regulatory requirements, and fees that would be levied to help pay the costs of increased government regulation. Supporters believe that if importation were legal from other countries, including Canada and the Asian and European markets, there would be enough volume to significantly affect prices in the U.S. market. Opponents question the safety of imported drugs and caution that cost savings would be small if foreign governments were to restrict the supply of drugs leaving their borders or pharmaceutical manufacturers limited the supply of drugs sold to foreign nations that facilitate sales to U.S. purchasers.

Read the entire Article Here:

 http://www.kaiseredu.org/topics_im.asp?id=352&parentID=68&imID=1

 

Reduce the Cost of Malpractice Insurance  

by James J. Scholl

By far, one of the greatest costs to our health care system is the volume of unnecessary procedures performed for the sake of defensive medicine and the time physicians and nurses need to spend documenting their daily work to protect them from lawsuits. In their paper “Radical Prescription,” Peter Weiss, MD, and Martin Meyer Weiss, MD, say the cost of unnecessary, yet legally warranted, defensive medicine takes up to nine percent of total national health care spending. Others place the figure much higher, at 20% to 25%, when you include the time doctors and nurses spend documenting medical files to protect themselves. The smaller part of malpractice reform, approximately five percent, is the cost of lawsuits, settlements and higher malpractice insurance premiums.

Tort reform is desperately needed to reduce unnecessary tests, reduce malpractice rates and reduce the cost of health care. A large group of doctors recently pegged the cost of unnecessary tests and excessive insurance at over $2 billion dollars. Many, many tests are performed by doctors afraid of the liability if they don’t do them. Doctors in some markets are paying $200,000 per year in liability premiums.

Comprehensive medical malpractice reform would reduce health care costs by a minimum of 15% and as much as 25%. Taxpayer savings in the form of lower premiums and lower costs of government programs would be at least $375 billion annually.

Read James entire article here:

http://www.hiu-digital.com/hiu/200911/?pg=64&pm=2&u1=friend#pg57

Pay the Doctors, Reduce System Fraud

This year, Medicare and Medicaid spending will exceed $900 billion. On May 20, Harvard professor Malcolm Sparrow testified before the Senate Judiciary Committee, “The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don’t know the first digit. Fraud might be as low as one hundred billion. More likely two or three. Possibly four or five.”

At the same time, Medicare and Medicaid underpay doctors and hospitals. Studies show that hospitals lose about 18% on Medicare and Medicaid because government programs underpay providers by about 25%. To make up for underpayments, doctors and hospitals need to charge individuals with private insurance 15% more than they would pay otherwise. This government cost-shift adds $1,788 per family in additional annual premium costs. If the state and federal government stopped fraud and abuse in Medicare and Medicaid, the amount saved could be used to completely eliminate the cost-shift to private plans.

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