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Must-Read from the Sunday NYT on Health Care costs

by Dan Haley
4/19/2012

Think about nearly any service that you pay for. Take, I don't know, cable television for example. If you notice your monthly bill creeping steadily upwards (crazy, I know - but just pretend), what is the first thing you are going to do? Take a look at the itemized bill to see where your costs are increasing. If the price for a particular movie channel package has suddenly doubled you might consider canceling that package - all the more so if you realize that the movie channels in question hardly ever air anything you want to watch. Or, if those channels are a must-have you might well check out your cable provider's competition to see if the same channels are available anywhere at a lower price.

 


Across the political spectrum there is rare universal agreement on this: health care costs are increasing out of control and something needs to be done about it. And yet, when it comes to the overall cost of health care the first and most obvious analytic step toward getting a grip on the problem - looking at the constituent parts of overall service delivery - is nearly impossible. And despite the obvious, crippling handicap this state of affairs imposes on any government effort to control costs, virtually every major reform effort chooses to ignore this aspect of the problem.

It is safe to assume that the average voter - and the average policymaker - has a hard time getting his or her head around the minutiae (or even the broad strokes) of health care policy. It is incredibly complex stuff, a truth that finds its most vivid illustration in the fact that the Democrats' Health Care Reform Act ran over 3,000 pages (which, all other criticisms of the law aside, is just insane).

All the more reason, then, to appreciate and spread around this clear, concise, and eminently comprehensible article by Robert Kaplan and Michael Porter in this past Sunday's New York Times. Titled "Why Medical Bills Are A Mystery," the piece makes a powerful case for the simple proposition that "measuring [health care] outcomes and costs is indispensable to driving improvements."

Their statement of the problem is straightforward. Health care reform efforts from the local to the federal levels "are failing because of a fundamental and largely unrecognized problem: We don’t know what it costs to deliver health care to individual patients, much less how those costs compare to the outcomes achieved." This willful ignorance of underlying costs has detrimental effects well beyond mere inability to identify cost increase drivers:
 

Because health care charges and reimbursements have become disconnected from actual costs, some procedures are reimbursed very generously, while others are priced below their actual cost or not reimbursed at all. This leads many providers to expand into well-reimbursed procedures, like knee and hip replacements or high-end imaging, producing huge excess capacity for these at the same time that shortages persist in poorly reimbursed but critical services like primary and preventive care.

 

The lack of cost and outcome information also prevents the forces of competition from working: Hospitals and doctors are reimbursed for performing lots of procedures and tests regardless of whether they are necessary to make their patients get better. Providers who excel and achieve better outcomes with fewer visits, procedures and complications are penalized by being paid less.

The opacity of cost information, in other words, actually works to punish efficiency and reward excess - a dynamic that obviously must be reversed for any cost-control reform to take hold.

Here in Massachusetts our legislature has promised yet another comprehensive round of health care reform this year. So far, all indications are that the package being hammered together behind closed doors (of course) will again ignore the cost opacity problem - in which case we can look for the cost problem to continue to grow.

Comments (8)

"...virtually every major reform effort chooses to ignore this aspect of the problem [the rising cost of health care]." Two words: Public option. About 50% of your healthcare premium goes to administrative costs: executive "compensation", overhead, and marketing (including covert propaganda tricks like the "death panels!" nonsense). Single-payer, universal health care coverage is the civilized way and cost-effective way to go, if you look at the evidence from other countries less stupefied by pro-industry, paid-for rhetoric and hamstrung by industry lobbyists. http://healthaffairs.org/blog/2009/04/22/proganda-and-prejudice-distort-the-health-reform-debate/

Dianna Vosburg | 2012-04-24 07:59:41

I think I need to revise and extend my comments. Overpayment by insurers and government is of course at the heart of the runaway costs of health care. I wouldn't know if it is a bigger or lesser driver than the hopelessly inefficient system of employer based purchase of insurance products, but I believe it's widely understood as a substantially bigger part than say, malpractice costs or unnecessary tests and procedures. Unnecessary tests of course are all those tests that come back negative. Hope nothing I post sounds snarky or sanctimonious Although I have a tendency toward both, I write with a sincere and humble heart.

David S. | 2012-04-22 10:56:38

Jenny, you are correct that overpayment by insurers (to the extent it exists) increases our costs, as I clearly stated. This is because we are in a captive market. We cannot forego insurance without risking bankruptcy, which was a common feature of our healthcare system prior to the passage of the most recent health care overhaul. Of course providing emergency care to the uninsured also raises our costs, who essentially force their risk onto us. Also something remedied in the health care reform pending judicial review by the Supreme Court. It is perhaps possible that if we imagine a world where everyone ate right, stayed slim, took excellent care of themselves, avoided disasters and hazards effectively, AND turned into savvy consumers who negotiated optimal costs for only the most necessary health care services, costs would go down. But this of course assumes a world that will never and can never exist. So absent that, perhaps we should look to the way other countries have solved this problem. After all, they insure EVERYONE, cover EVERYTHING, and spend LESS than half what we actually spend per person, despite our leaving huge numbers of people uninsured and underinsured. And no bankruptcies. Not to mention the costs to the economy in the form of misdirected resources (why must all businesses employ people whose sole job is to navigate and manage health insurance plans) and escalating costs with no increase in benefits to workers. As Mr. Spock might have said, "This is illogical."

David S. | 2012-04-21 17:17:22

Ed, you are correct, as more of us only have a choice of a high deductible health plan (mine is $2000 meaning I have to pay for everything until I have spent the first $2000 before insurance payments kick in) we will all have a major incentive. John, many health plans, employers, and state health sites are providing cost information and specifically now your out-of-pocket costs. healthcare.gov provides a great deal of information for healthcare consumers, includeng Medicare. David, when health plans over spend it comes out of our pockets not thiers. All the free care of the uninsured also comes out of our pockets. Also the cost of healthcare is taking money out of our employment as companies have to cut people, benefits,and budgets for such things as raises and incentives. We all need to become educated and demand high quality low cost care. Most physcians are paid by the government (medicare/medicaid) or by health plans and cannot say no to a request for the most cost effective options. Also, the industry is trying to implement performance based payments for MD's where the physicians have to keep you as well as possible and have to take on part of the financial risks. Chronic conditions such as diabetes, COPD, heart disease and the like require the majority of healthcare dollars. Hopefully one day soon we will all be educated healthcare consumers and adopt healthy behaviors to need less care. Jenny

Jenny | 2012-04-21 10:32:34

Great article and discussion comments! In my own case, I found that several years ago with a (now unavailable) "high deductible" health care plan, I became VERY aware of costs in every health decision. While at the same time finding out what something would cost me caused doctors to look at me like I had 2 heads. "Insurance will take care of it" was the knee jerk response. When I say "high deductible", I mean it was $10K a year. So I was paying for everything! Being self employed, this $350 per month plan was the right choice for me, but now with 3 kids later, we switched to more "normal" plans that run $1500 per month. It displayed to me that learning what health care costs truly would empower smart decisions, and incentives for healthy preventive care choices would also kick in. Then consumers would ask about a better value "lab" for bloodwork rather than just agreeing blindly to a hospital outpatient lab like Jenny mentioned.

Ed Daniels | 2012-04-20 21:05:34

It is certainly true that the actual cost of specific services can be hard if not impossible to determine. Furthermore, as insured patients, which most people are, we have little incentive to find out. No matter what, it's a lot more than our co-pay! We leave it up to our insurers to try to keep costs down. If they overpay, that's out of their pocket, at least in theory. Of course, as they overpay, their costs go up, and then soon do ours. But we also know that the per capita cost of health care is about $7500 a year, which is between two and three times that of nearly every other advanced economy in the world. Add to that the fact that a very substantial portion of Americans have no or minimal coverage and thus receive substantially less care than they need, in sharp contrast to ALL those other countries, which cover everyone. And yes, Virginia, they have as good if not better care with better outcomes. I'd say that the private market has failed. Less opacity is not going to change that bottom line, and it's a strange otherworldly fantasy to imagine that that's the magic bullet.

David S. | 2012-04-20 16:59:04

I agree with Jenny's observations. They leave three questions for health-care users (most of us). Where do we find information about economical alternative sources of outside services, and how do we get our physicians to agree to their use? Many doctors have a conflicting vested interest in testing facilities; a questionable arrangement, but one that is legal. What are insurance companies doing to encourage alternative services? If insurers pay excessive costs for medical services there is no reason to make the system more efficient. It looks like some hard bargaining is called for here. And then there are drug costs, with drug companies designing the drug plans available to consumers. Way to go!

john Losch | 2012-04-20 11:51:19

One of the main problems is that we as consumers are not demanding cost and quality information to direct the delivery system as healthcare consumers. Healthcare is complex but so was learning to self-invest in the financial markets. Most consumers have no idea that even going to a "health plan endorsed" lab for blood test is 75% less expensive than using the hospital out patient lab. (I worked for a health plan so this I know). There are so many things that we as consumers need to know such as how to navigate the healthcare system, what are the highest quality providers, what are my out-of-pocket costs going to be just to name a few. So let's all start asking more questions (like where is the most economical place to go for lab tests), demanding high quality (not all hospitals are good at all procedures) and focusing on changing our behaviors to be healty so we do not need as much healthcare!

Jenny | 2012-04-20 09:51:19