January 19, 2014

Up, Up, and Away!

“Patients’ costs skyrocket; specialists’ incomes soar,” screams the headline in the lead article in the Sunday New York Times. The thrust of the article is that the incomes of dermatologists, gastroenterologists and oncologists rose 50% (or more) between 1995 and 2012, adjusting for inflation, while those of primary care physicians rose 10%. This dirty little secret about physician compensation has to come out if the US is going to be able to control health care spending, which was 17.2% of GDP in 2012 (actually down slightly since 2011, but expected to rise steadily for the foreseeable future beginning in 2014). But the recognition that prices are at the heart of the problem is nothing new.

In 2007, the McKinsey Global Institute released a report called “Accounting for the Cost of Health Care in the United States, ” which compared what we spend money on and how much it costs to how other countries spend on healthcare—and what they pay for it. The report recognized that rich countries typically choose to spend a larger fraction of their wealth on healthcare than countries that are less well off. To take this into account, they used a measure called the Estimated Spending According to Wealth (ESAW): the ESAW adjusts spending according to the per capital GDP of the country. Even after these adjustments, the US was found to spend $477 billion more on healthcare than our peers, or $1645 per person. 

Where does all this extra spending go? The US outspends other OECD nations in 5 principal areas: in hospital care, outpatient care, drugs, administrative costs, and public investment in health. Only in the areas of long term care (nursing homes and home care) and durable medical equipment (things like hospital beds and wheelchairs) is spending in the US less than in other developed countries. And when we look more closely at each of the big 5, we find something very interesting: the US doesn’t spend more because it uses more hospital days or medications or doctor’s visits; it spends more because prices are higher. 

Take medications. American patients take 20% fewer prescription drugs than the Germans or the Swiss, but our medication costs are 50-70% higher. This is because we use new drugs rather than established drugs, brand name drugs rather than generics—and because drug companies charge more in America. Or consider hospital care. The average number of hospital days per person is lower in the US than in all other OECD countries except Canada. But we spent an excess of $224 billion over what the ESAW predicts for hospital care because hospitals get paid a great deal more in the US. Next look at outpatient visits. Patients in the US go to the doctor less often than in other countries: the OECD average in 2011 was between 6 and 7 visits per year, with over 13 visits in Korea and Japan and over 11 in Hungary and the Czech Republic. In the US, the average was 4. But spending on outpatient care is $178 billion over the ESAW prediction, because each visit costs much more in the US. 

To get back to the NY Times article about specialty care, take physician compensation. In other countries, specialists get paid on average 4 times the per capita GDP; in the US they get paid 6.6 times as much. These doctors contribute to the high cost of medical care by referring patients for more procedures than do primary care doctors. And the US has 31.5 MRI machines for every million people, compared to the OECD average of 13.3 and 40.9 CT scanners compared to the OECD average of 23.6/million population.

So what can we do about all this? Many economists (and health insurance companies) believe that patients are the key—if only patients had “more skin in the game,” if they had to pay extra for specialist care and procedures and if they had to pay more for going to hospitals and physicians that charge more, costs would come down. But this perspective fails to recognize that health care is not a commodity analogous to toasters or televisions. Medical care is more important to well-being than typical consumer products. And deciding wisely what medical care is appropriate for a given person requires professional input from a physician, not just consultation with Consumer Reports. That professional input, in turn, is shaped both by highly specialized knowledge and by the culture of the medical profession, a culture which today values certainty (keep doing tests until you know for sure what’s going on, even if the information won’t change what you do) and the use of technology (newer, more elaborate devices are always better than older ones). The "skin in the game" idea has other problems as well--best addressed in a separate post.

Over the long run, lowering the cost of medical care in the US will require culture change in the medical profession. Doctors will need to endorse sustainable health care, not the relentless pursuit of life-prolongation, as the bioethicist Daniel Callahan has been arguing for years. 

But in the meantime, the glaringly obvious way to begin to address the cost problem is to introduce price controls. Not mickey mouse price controls such as Medicare has been able to offer, in which the doctors affected by pricing decisions set the prices. Real price controls. All the European countries have instituted price controls. So have Australia and Japan. Physicians, hospitals, pharmaceutical companies, and device manufacturers need price controls--they have worked in other countries and they won't mean the end of the world here. Young people will continue to go into medicine even if they can’t earn $500,000 a year as a dermatologist. Drug companies will be able to remain in business even if they don’t have a profit margin of 30%, as the 10 biggest ones do today. Innovation will not be stifled if the profit margins in the medical device industry fall below the current level of 20.3% in the top tier. As the Princeton health economist Uwe Reinhardt has been saying for years, “it’s the prices, stupid.” 

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