SJK Consulting
Making IT Happen
Making IT Happen
April, 2014
April, 2017
Transparent Health Care Competition

 Health care reform to-date has ignored the biggest problem in U.S. health care - the costs!  Here's a way to fix that.


The United States spends more money on health care than any other nation in the world.  According to the World Health Organization (WHO), the U.S. spends about twice as much per person on health care as the top-ranked health systems in the world; such as those in France and Italy.  Health care costs per person in the U.S. are about $8,900.  In France the average person pays about $4,260, and in Italy it’s $3,040.  Switzerland – one of the most expensive countries in the world – spends about $6,000 per person.  And we’ve all seen the Gross Domestic Product (GDP) figures regarding national health care spending.  The U.S. leads the world by a large margin spending 17.7% of its GDP on health care.  This compares to other developed-nations’ spending levels of two-thirds or less: France (11.6%), Switzerland (11%), Japan (9.6%), Italy (9.2%) or Australia (8.9%).


But Americans pay more because they get more, right?  Nope.  The U.S. has fewer doctors and hospital beds per capita than most of these other countries.  So, Americans must be healthier due to all that additional spending, right?  Nope.  Americans don’t live as long as people in other rich countries.  When a person is born in the U.S., their average life expectancy is 79 years.  In Japan and Switzerland it’s 83 years.  In Canada and France it’s 82 years.  If an American makes it to age 60, he or she can expect to live another 23 years.  In Japan they can expect to live another 26 years – in France and Italy, another 25 years.  This latter measure, life expectancy after 60, is a better indicator of the effectiveness of a nation’s health care system since medical care is more influential to a person’s life span in the later years of life. 


But a startling fact regarding the quality of U.S. health care is contained in a measurement known as “mortality amenable to health care” (MAHC), that is, deaths that are considered avoidable if proper medical treatment is obtained.  A person can die of a treatable infection if antibiotics aren’t administered soon enough, for example. If a person were to die in such a way, that death would be marked up in the MAHC column.  Using this measure, the U.S. trails other countries – sometimes by a large margin.  In America’s “best health care system in the world” people are 74% more likely to die from treatable ailments than in the top-ranked country, France. 


So, why is that?  Is it because other countries’ doctors and nurses are smarter and better-trained than ours?  I don’t think so.  U.S. medical schools are sought after by aspiring physicians from around the world; and in my personal experience doctors, regardless of where they stand on the globe, are smart.  And, U.S. nurses are second to none.  Is it because their hospitals are better than ours?  From what I’ve researched and seen personally, U.S. hospitals are equally-equipped and many times better-equipped than hospitals in Europe.  And U.S. hospitals are usually shinier and more opulent than European or Japanese hospitals.  So, if it’s not the “inputs”, as economists would say, how is it that other developed nations produce equal or better health results at half the price?


Perhaps it’s because U.S. patients receive twice the medical care for twice the money.  Nope.  A study published in 2003 revealed that Americans enter a hospital 25% less often than people do in OECD countries – a little over half as often as in France – and don’t stay as long when they do check in.  In 2009 Germans saw their doctors twice as many times and the Japanese visited their doctors three times more often than Americans.  Other developed nations use more and pay less.  The 2003 study concluded that the reason U.S. health care spending is so much higher than in other countries is because Americans simply pay higher prices than patients in other developed nations.  Even though they buy less, they pay more because the higher prices more than offset the lower utilization levels. 


Some readers may be saying at this point: “Of course U.S. health care prices are higher – the U.S. is a richer nation where prices are higher for everything.”  Nope.  The prices we are talking about, and the ones used in the 2003 study were adjusted for purchasing power parity (PPP).  With PPP adjustment not only are the comparative costs converted from euros, Swiss francs, yen or whatever to U.S. dollars, they are also adjusted for differences in purchasing power to account for cost-of-living differences.    

So, according to researchers with PhDs in economics and health policy, total U.S. health spending is higher than other countries’ because U.S. health care prices are higher.  It’s actually an explanation elegant in its simplicity – not to mention intuitive.  Let’s look at an example of what the experts are talking about.  Let’s say 1,000 people in two different countries each visit their doctor four times a year.  They receive the same quality of medical care in each country because the doctors and nurses are pretty much equal in skills and knowledge.  Now, let’s say each visit is priced at $50.  At the end of the year, each person has paid $200 in doctors’ fees, received the same quality of care, and the total cost of physician care for each of the 1,000-person groups is $200,000.  Now let’s say in one of the countries the doctors begin charging $100 per visit.  At the end of the year, each of those patients has paid $400, and the total for all 1,000 patients is $400,000.  In the higher-fee country the people receive the same care for twice the amount the other country’s 1,000 people pay.  Guess which country the U.S. is in this example?  That’s what’s going on with U.S. health care.  It’s the prices!


Researchers agree that the top three cost/price drivers of U.S. medicine are:


    Medical Technology – not so much the cost of the equipment itself, but the increased usage of the technology is the primary catalyst to rising health care prices over the past two decades


    Waste and Duplication – researchers and government agencies estimate that 30%-40% of all the health care delivered in the U.S. is unnecessary either because it’s duplicative of services already performed by other practitioners, or it should have never been ordered to begin with based on standard medical practices.  


                Fee-for-Service Billing – the practice of charging on a piece-work basis – a charge for this test, a charge for that procedure, another charge for this medical supply – provides an incentive to caregivers to do more than necessary instead of just enough to make the patient healthy.  


Other drivers include health insurance administration costs, inability to shop for medical services, inflation, industry disincentives to lower costs, drug prices, cost shifting and resource shortages. 


As we think about various health care cost-reduction options, which ones seem the most effective and practical?  That is, what strategies would have the greatest impact as well as the potential for acceptance on the American political scene?  A national health insurance (NHI) solution (e.g., Medicare for all) would address several of the cost drivers.  The cost of private insurance administration would be reduced, disincentives to keep people healthy would be reduced, and cost shifting would all but disappear since there would be no payer to shift the costs to.  But the political chances of implementing it are slim; which is odd since Medicare recipients are generally happy with that existing-since-1965 NHI program.  But equally important, I’m a believer in the power of free markets.  And a single payer system does not engender a free and balanced health care market. 


Price controls don’t work; except with regulated monopolies such as an electrical utility company. Ask any economist.  If the U.S. chose to nationalize health insurance, which would effectively turn it into a regulated monopoly, price controls would be part of the solution.  But first, Americans would need to support a national health insurance program; and so far the NHI supporters are one-for-five on that score.  The one win was a partial one when President Lyndon Johnson pushed through Medicare in 1965.  Attempting to legislate or otherwise governmentally mandate lower prices, whether for drugs, medical devices or medical services in general, would meet eventually with little success.  Too many imbalances would be created, and the overly-bureaucratic nature of America’s health care would only be amplified. 


How about fighting defensive medicine?  It’s a sticky affair.  It’s difficult to separate the peanut butter from the jelly in this issue, that is, determining how much is due to the fear of being sued versus the willful, financially-enriching overutilization in the guise of defensive medicine. Since Harvard researchers tell us that less than 2% of national health expenditures (NHE) is attributable to true, defensive medicine, let’s fight that battle another day. 


You say we should (re)implement physician gatekeeper models?  Gatekeeper models actually are effective in managing service utilization levels down, and thus overall costs. They fell out of favor in the U.S., however, when consumers demanded the ability to see any specialist whenever they wanted; and health plans acceded to the demands in order to preserve market share.  So, the gatekeeper model could be reserved as a cost management strategy if structured and priced palatably. 


While regulating and otherwise controlling medical prices may be untenable, standardizing them is a good idea.  By “standardized prices” I mean presenting prices in a comparable manner to the consumer – a CABG is a CABG is a CABG (heart bypass surgery) wherever the consumer looks, and is not defined differently in terms of services and supplies depending upon the provider.  This would enable price publishing which is another good idea.  Today consumers are unable to find out what anything costs in U.S. health care – until the bill arrives weeks after the services are delivered.  Publishing prices in a standardized format would enable price shopping which always lowers prices. 


Releasing professional medical organizations’ hold on the supply of physicians is a good idea.  It would be fought tooth and nail by the affected organizations; but allowing free market forces to determine supply is far more beneficial to the consumer than allowing those who have the most to gain from limiting the supply to control things.  Remember OPEC?  A larger supply should translate into lower prices and reduced NHE.  Similarly, allowing hospitals to build new facilities and expand the supply of hospital beds is also a good idea.  More beds should translate into more competition and lower prices.  This will not address provider-induced demand, but there are other, better ways to do that. 


As an information technology professional, I love the idea of a national electronic medical record (EMR).  But those who can barely spell IBM should also love the idea.  Gone would be the days of filling out yet another medical history form every time we see a new doctor – and hoping we remembered everything.  No longer would it be necessary to fill out a form so that one of your doctors can send a copy of the medical record she keeps for you to another doctor you’ve begun seeing.  All of your medical record information would be in one place; instead of some of it with your PCP, some of it with this orthopod and some with that orthopod you went to when the first one retired, some with the PBM, and so on.  If you showed up unconscious in an emergency room the doctors would be able to instantly learn everything about you that all your other doctors already know.  The technical capabilities are already here.  Technically, this is an easy fix – it just takes money.  The hard part, believe it or not, is arriving at agreement on the format of the EMR.  People have been working on that for over 30 years, and the results are disappointingly (tragically? shamelessly?) minimal.  I say disappointingly because we can find out more about the service history of our cars than with our bodies.  Vendors such as CARFAX and AutoCheck offer maintenance histories on any car to anyone who can produce the vehicle identification number or even license plate number.  The ER doctor could find out more about the condition of my car than of me if I was rolled into her trauma suite.  Yet, the U.S. hasn’t seriously considered the idea of a national EMR much less attempted to establish one. 


Two remaining and most frequently suggested strategies are evidenced-based medicine and medical outcomes-based payment.  Evidence-based medicine is just what it sounds like.  Doctors practice medicine using procedures and techniques proven to be effective – based on research (I know; when I first heard about evidence-based medicine, I also wondered what they were doing before).  Outcomes-based payments are made to the provider based on medical results rather than piece-by-piece.  The patient survived and left the hospital in x days, for example. The former is really just a means to the latter.  The doctor that practices evidenced-based medicine will normally produce good medical outcomes.  So, the way I see it, if we track and pay for medical services based on the outcomes, the evidence-based medicine part takes care of itself.  Reimbursing providers based on their results, instead of on their tasks, goes a long way toward addressing many of the cost drivers in U.S. health care – especially the top three.  And outcomes-based reimbursement partially addresses the provider-induced demand problem. While some of the provider-induced demand is most certainly created by overly-conscientious physicians with good intentions, perhaps we can send a medical ethics pamphlet to all providers to address the rest of the problem. 


So, let’s summarize the list of practical cost-reduction strategies.  Ranked in order of what I think their cost-reduction impact would be, they are:


1.      Medical outcomes-based reimbursement
2.      National electronic medical record
3.      Standardization and publication of provider prices
4.      Divest professional medical associations of their control over the doctor supply
5.      Relieve hospitals of regulatory pressures regarding new facility construction
6.      Promote prudently-designed gate-keeper models

While they are all useful strategies that we can and should employ in the battle against high health care costs, I think numbers 1 and 3 are the ones we should address immediately.  That would put us on the road to a transparent, competitive health care market - that's the best way to drive down U.S. health care prices.  I also think a national EMR should be in America’s near future.  With these strategies we can and should address this mess we call the U.S. health care system. 

What do you think?  Comments, arguments, name-calling are all welcome.  Just keep it clean.


Copyright: SJK Consulting, LLC


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kelly coburn
12/17/2014 8:28:21 PM
THC - Si!
Sam you nailed it. The apathy toward cost and downright smugness I've encountered as a blessedly infrequent customer of the extortion industry (did I just say that?) makes me angry. Even lawyers can and will name their price. With doctors and hospitals, the very question raises indignation, followed by obfuscation, then numbers that are embarrassingly high, yet still too low. Please spread your koolaid far and wide.
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