Monday, June 22, 2009

RTRP Health Care: What’s Wrong With Our Health Care System, Out-of-Control Costs

The United States health care system costs too much and achieves too little. Seven out of ten Americans say the system needs “fundamental change” or must be “completely rebuilt.”

Before we can talk about repairing the system, however, we must first understand what is wrong with the system. The problems with the American system fall into three broad categories: (1) out-of-control costs, (2) access to health care, and (3) quality control. Today we talk about out-of-control costs.

In 2007, Americans spent $2.26 trillion dollars, or $7,439 per American, on health care. This works out to 16% of our gross domestic product (GDP) -- more than double the 7.2% of GDP spent in 1970 and more than any other country spends (except the Marshall Islands). Most European countries spend between 9-10%. And every year, these costs continue to grow, far in excess of inflation or wage growth. This is the core problem at the heart of our health care system.

Following are some facts that you need to know to understand this problem:

Medical Advances: Half of the growth in health care spending over the past decade has been the result of medical advances.

Overhead Costs: According to Harvard Medical School, 31% of health care spending goes to pay administrative/overhead costs (this is nearly double the 16% percent spent in Canada). A reduction to even Canadian levels would save Americans $339 billion annually.

Medically Unnecessary Procedures: It is estimated that $500-$700 billion is spent annually on treatments, tests, or hospitalizations that do nothing to improve health. Studies have shown a direct relationship between the amount of tests/procedures ordered and the availability of such tests/procedures in the local area, even though such increased testing/procedures do not result in improved care. Moreover, where doctors are paid for level of care provided, rather than results obtained, they order more care whether or not it is medically helpful.

Prescription drugs account for 10% of total spending. The government pays for 34% of these, private insurance for 44% and individual consumers for 22%. Prescription drugs are the most rapidly growing portion of health care costs in the country, though recent shifts to generic drugs are reversing this trend.

Hospitals provided $35 billion worth of uncompensated care (for the uninsured) in 2008. 80% of this was reimbursed by the government.

Malpractice Insurance: The legal system is often blamed for causing medical costs to skyrocket. This is not true. According to the CBO, effective tort reform could reduce the cost to physicians of malpractice insurance by as much as 25 to 30 percent. BUT, the overall savings to the health care system would be a minuscule 0.5% (roughly $11.3 billion).

A 1996 study found that 1% of health care users accounted for 27% of the total spending on health care.

Thus, effective reform must (in order of importance) do the following:

1. Reduce the costs of medical innovation, without reducing the incentive to innovate.
2. Decrease the amount of medically unnecessary procedures/tests.
3. Decrease administrative costs.
4. Reduce the costs of care required by the top 1% of users.
5. Reduce the growth of prescription drug costs.
6. Decrease the amount of uncompensated care.
7. Reform the legal system to reduce the costs of malpractice insurance.


Writer X said...

Interesting: "Reduce the costs of medical innovation, without reducing the incentive to innovate." How do you do that, I wonder? Don't medical innovations by definition reduce overall costs anyway--e.g. by curing diseases, reducing hospital stays, treatments, etc?

Really interesting post! Thanks!

Mike Kriskey said...

Aren't a substantial number of medically unnecessary procedures due to spurious malpractice lawsuits?

It was my understanding that the drastic rise in C-sections could be attributed to John Edwards-style attorneys.

(No offense!)

AndrewPrice said...

Writer X, many innovations often increase costs because they open up new methods of treatment. Most of these are good ideas. But sometimes, innovations only add costs. For example, drug companies often combine existing drugs to form a new drug, which then costs far more than the two older drugs. We'll discuss this more in our quality control discussion. Also, we'll discuss how to solve this when we discuss our solutions.

Mike, there is no doubt that some portion of the unnecessary procedures are the result of the legal environment (which is why we do need legal reform). However, several studies, including a famous study by Dartmouth College, have found that (1) the greater the availability of local services, the greater the use of those services, whether or not they were medically justified, and (2) where the payment system gives doctors an incentive to order more tests, they do, again whether or not those tests are justified.

We will discuss this further in our quality control discussion in a couple days.

BevfromNYC said...

No offense Andrew and Lawhawk, but I have yet to hear a lawyer admit that the legal profession is the least bit culpable for any of the high cost of healthcare. And since the Trial Lawyers Association is one of the biggest lobbies in Washington and in just about every state in Union, I doubt we ever will. All of the points you make do not account for the reason for out of control costs in the first place - Has anyone bothered to ask doctors? No - we ask bureaucrats, politicians, "non-medical experts", and, God forbid, lawyers (who fit into most of the other catagories anyway).

All I want is for my doctor to administer my healthcare, not a bureaucrat, not a lawyer and certainly not the government. One way is to let doctors back into the medical profession and to get lawyers out of the medical malpractice business by loser pay legislation.

AndrewPrice said...

Bev, there is no doubt that malpractice suits are in part responsible for the increased costs. But they are only one factor.

The information provided here comes from various sources, none of which are attorneys.

The information on the costs of legal malpractice insurance comes from the Congressional Budget Office, as does the information on costs attributable to innovation.

The information on overhead costs come from Harvard Medical School and the Canadian Institute for Health Information.

The information on prescribing medically unnecessary tests/procedures come from a study by Dartmouth’s Institute for Health Policy and Clinical Practice, various follow up studies, and studies published by the Journal of American Medical Asssociation (i.e. doctors).

AndrewPrice said...

Bev, On legal reform, which we will discuss in depth, fee shifting can help, but that alone won't solve the problem.

Also, you said "All I want is for my doctor to administer my healthcare, not a bureaucrat, not a lawyer and certainly not the government."

I think you'll be happy with our solution.

patti said...

we have just gone thru the circus that is inpatient healthcare. oh the stories i can tell. something that always strikes me, as a savvy consumer in all other areas of my life, is how i am not offered a price menu of options. you tell me what's wrong and then get out of my way as i research the best methods and pricing.

this works best in non-emergency settings, but you get the idea.

LawHawkSF said...

Bev: Dont' blame me. It's all Andrew's fault! I was too busy springing criminals, putting union employees out of work, and breaking up marriages to have time for personal injury suits.

Andrew's Solutions 2 and 7 go hand in hand. Legal reform and medical reform must be accomplished at the same time, or the overall reform will be insufficient. The cost of medical malpractice insurance is a direct result of the number of successful claims, but also of the size of the damages awards. Once the legal system is reformed so that medical malpractice suits can recover only reasonable damages for ordinary negligence the doctors can reform their own profession (with the help of legislators) to break the connection between tests ordered and fees earned.

Currently, huge damages are being awarded largely for what doctors didn't do but could (not should) have done. When the medical profession and the legal profession can make genuine decisions based on the difference between ordinary negligence and genuine malpractice (gross negligence), the much-heralded punitive damages awards can be brought under control.

AndrewPrice said...

Patti, without moving too far ahead, the biggest problem in the health care system today is that the buyers (patients) and the sellers (doctors) aren't the people making the decisions. This skews everything.

And you are 100% correct about the lack of price information. Most people don't know what things costs, nor is it easy to find this information out.

Medical costs vary wildly by provider, by whether you have insurance, and how good your insurance is. Also, each provider bills separately, even when it is all one procedure, and no one will ever give you an estimate.

Even many of the doctors I have spoken with don't know what most things cost outside of their own personal practice.


Numbers 2 and 7 are related to a degree. BUT as I will explain in the quality control article (Thursday), ordering medically unnecessary procedures is not primarily the result of lawsuits. It is primarily the result of payment incentives and poor standards. (And yes, that conclusion comes from doctors.)

Still, legal reform is absolutely necessary.

In that regard, I personally think that punitive damages should be abolished.

LawHawkSF said...

Andrew: I find a little stronger connection between medical malpractice suits and tests ordered/performed, but I don't think it changes your concept much. I agree that without a single medical malpractice suit, unnecessary tests connected to fees earned would continue. That was why I suggested that the medical and legal agendas have to be accomplished at about the same time. So long as the doctors blame the lawyers and the lawyers blame the doctors, nothing will be accomplished.

As for unnecessary tests, and malpractice suits aside, basic medicine has been affected somewhat negatively by the advances in technology. Doctors are no longer willing to use their education, good sense, experience and personal diagnostic skills when they can have others perform multiple technical tests and rely on those. Actually listening to what a patient is saying before sending him off for a battery of expensive tests could cut health care costs immensely.

Oddly, I find myself in minor disagreement with you on punitive damages. I believe that some cases where all the standards of good medical practice have been ignored by the doctor and/or the hospital should result in punitive damages (although not unlimited punitive damages). In many states, California included, punitive damages can be awarded even in cases of ordinary negligence where a doctor facing a multitude of possible treatments chose the wrong one, making a mistake that any number of his perfectly competent peers might also have made. An extreme hypothetical example of true medical malpractice deserving punitive damages would be the classic tale of the doctor performing heart surgery on a hernia patient.

Melissa Marsh said...

Fascinating discussion. I eagerly await more. :-)

AndrewPrice said...


I'm glad you're enjoying it. I think this should be a very interesting series.


Since this seems to be an issue of much concern, I'm going to post an article this evening about the relationship between tort law and "defensive medicine." It think people will be surprised.

On punitive damages, I see your point, but I would rather deal with the issue by compensating the plaintiff and improving the oversight board to take the doctor's license.

Tennessee Jed said...

Just a couple of thoughts on a Great piece Andrew.

In my opinion, government mandates increase cost significantly. They are behind requiring medical insurance contracts to constantly increase coverage for procedures or for medical conditions and forcing them across the board.

Historically, medical malpractice insurance has been controlled by state pools where premiums do not always accurately reflect risk. This is usually a result of politics rather than the courts, providers. or insurors.

Innovation can dramatically increase costs. I suffer from severe Crohn's disease. Fortunately, a new drug (trade name Remicade) has been a tremendous breakthrough, but is manufactured, as I recall, partially from chicken embryo stem cells and is very, very expensive. Thankfully, having worked for Cigna, I have a very good policy which covers Remicade.

AndrewPrice said...


Thanks. I think you're absolutely right. One article I read said that during a 10 year period, the entire rise in malpractice insurance costs was the result of poor performance by the investments of the insurance carriers.

I also agree that government mandates are almost always a bad thing because they tend to be political rather than rational, and they costs usually far exceed the benefits.

StanH said...

Hey Andrew! On Cavuto I saw a statement that Sen. Max Baucus (D) said health insurance should be taxed as earnings on anyone making 100k or above. This is a prime example why people can not afford health insurance, plainly put this is stupid. The tax cuts should extend to all health insurance policies IMO this would do a lot to get people to buy insurance if they can write it off? But no, these imbeciles are going in the opposite direction so that the only option is government care, breathtaking.

BevfromNYC said...

Lawhawk, I think you have actually touched on something very important. We need to be clear about what is "malpractice". Sometimes a doctor can do everything right and the patient still dies. Even in these cases, doctors can and are sued for which they put their professional and private livehoods on the line.

The face of medicine has changed over the last 20 years because of the outrageous med-mal suits and the intrusion of insurance companies more and more in the treatment of patients. Don't get me wrong, there are doctors who pad the bills and commit malpractice. More often it is doctors being overly inclusive out of fear of being sued and mostly an honest attempt to locate the source of a medical problem. Not all diseases present themselves all wrapped up in a nice bow with a tag saying "Hi, My name is Frank and I'm your spastic colon".

If we can resolve the malpractice issue, then doctors and hospitals can get back to the practice of listening to their patients and healing the sick.

Tennessee Jed said...

I would doubt that investment returns would have that much of an impact on premiums. Commercial insurors have largely left this market leaving it to physician and institutional owned companies. One of the huge problems is that insurance needs to be predictable to be stable, and claims tend to flucuate widely by jurisdiction. State Insurance Commissioners regulate this stuff and they tend to be politicians. There is a nice article that can be googled "Understanding Medical Malpractice Insurance: A Primer. It's a little technical to a non-insurance person, but can give folks an idea of some of the issues. Rest assured, whatever flaws we have will be magnified under government run system.

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