When will we deal with the cost of health care, really? (Part 1)

Published on
September 25, 2017

It’s no longer a secret that the U.S. spends far more on health care than any other country and can’t show corresponding benefits. But since 2007, and even going back to 1991, the public dialogue has focused on reducing the large number of uninsured.  The debate for the last few years has narrowed even further, to focus on the mechanics of the individual market, with such arcane topics as cost-sharing reductions and reinsurance now on the lips of legislators. 

This policy focus on how to finance expanded coverage is often compared to moving the deck chairs around on the Titanic: the whole health care enterprise is sinking under the weight of its high costs, and no amount of shifting who pays how much will keep us all from going under.

So why is our health care spending so far out of whack?

  • Total spending is too high: The U.S. now spends $10,345 for every person.  For 2014, when the OECD estimated U.S. spending at $9,024 per person, Germany spent $5,119 and Canada spent $4,506 per capita. For people with employer-sponsored insurance,  the average cost of a family premium was $18,142 in 2016 - 33% of median household income – a massive wealth shift from working people to the health care sector.
  • Cost increase trend is too high: Health care costs continue to rise at about 6% per year, almost three times higher than the general cost-of-living.
  • Share of national wealth is too high: In 2012, we spent 17% of our Gross Domestic Product on health care, compared to 9% in Australia or England, and we are not getting a healthier public for this high investment.  Money that could be going to education or housing or infrastructure is instead being shifted to health care organizations and their employees.

I wish we could point to a single culprit for why the U.S. spends so much on health care, but the reality is that we have created a complex tangle of policies and structures that make every straightforward proposal to address costs and reduce spending implausible and ineffective.

Here are five factors that push costs up:

1. Prices:  Uwe Reinhardt, the Princeton economist, has long argued that we just pay too much. We pay doctors about 33%-50% higher salaries than in other advanced countries; we pay two or three times more for drugs than other developed countries. If we did the same for cars or food, people would be outraged.  One expert jokes that we could fix all of America’s health care financing problems if everyone working in health care just took a 20% pay cut —which most could afford.

2. Utilization:  Researchers have spent the last thirty years showing that we use far too much health care, much of which does not translate into better health. We also use health care very unsystematically, which is reflected in large variations in how health care is practiced between doctors and between regions. This is true for hospital stays, caesarian sections, imaging studies, and many drugs.  We use too much specialty care and too little primary care.  Estimates are that we spend $500 million each year in unnecessary back x-rays and CT scans alone.

3.  Intermediaries:  In pursuit of some theoretical ideal of “the market,” we’ve allowed innumerable middle-men to crop up in every area of health care.  Two of the most obvious and expensive are private insurance companies and pharmacy benefit managers — but there are innumerable others (consultants, data aggregators, brokers, distributors, etc.). For example, every dollar spent on prescription drugs, manufacturers get about 58 cents, the pharmacy that dispenses your pills gets about 15 cents – and the other 37 cents goes to others in the middle.

4.  Overall administrative costs: Trudy Lieberman recently wrote about the the excessive administrative costs in our system — perhaps as much as 25% of hospital spending.  All hospitals and most doctors’ offices hire squads of billing clerks to interact with insurance companies; many pharmacists spend their time contacting doctors to make changes to prescriptions dictated by insurance and employer lists of preferred drugs. 

5.  Fragmentation and inefficiency in care:  We often use the term “health care system” knowing full well that there is none.  Most people go to a generalist doctor and then, if necessary, to a specialist, and perhaps other specialists. For most people, no one is charged with coordinating all of the visits and treatments; no single place keeps your entire medical record, lab results, images; no one has the information or responsibility to make sure all of your drugs work well together.  By one estimate, 20% of all radiology studies are essentially duplicates of ones already done, but not easily accessed.  Just making sure patients are on the right drugs before they leave the hospital can save about $206 per patient.

In my next post, I’ll outline five factors that should bring costs down, but don’t because of the nature of health care and our uniquely American system.

[Photo Credit: Wellness GM via Flickr]


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When will we deal with the cost of health care, really? (Part 2)

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