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Posted by on Jan 16, 2013 in At TMV | 36 comments

America’s Health Care System- Profits Drive Costs

With Congress stalemated over raising the debt ceiling and controlling spending, health care costs could be reduced significantly to lower Medicare expenditures. However, this would require reducing profits in the equation and for Congress to battle the stakeholders (insurance companies, physicians, hospitals, pharmaceutical companies, and so forth). Unfortunately, conservative ideologues refuse to admit that the market does not work where health care is concerned and see more competition as the way to cut costs despite data to the contrary.

Hundreds of private insurance companies compete for business from corporations and consumers, but premium prices escalate yearly never-the-less. Recently, a number of insurance companies raised premiums for small businesses and individuals over 20 percent. This was done in spite of the growth of health care costs in the single digits over the last several years and a predicted increase of 7.5 percent this year. If they can charge more to increase their profits they will do it.

When consumers choose a physician, it is on the basis of convenience or a physician’s competence, not the low price provider. Patients do not want the cheapest neurosurgeon doing their brain surgery or the cheapest oncologist treating their cancer. On the other hand, physicians perform unnecessary tests and procedures to increase their income under a fee-for-service system of payment, incentivized to do so by the market. There are estimates from the Congressional Budget Office that about 30 percent of health care costs are the result of unnecessary care, $900 billion out of last year’s total of $2.7 trillion.

Pharmaceutical companies have been raising their prices on brand name and generic drugs to maximize their profits because they are able to do so. The costs of some cancer drugs are over $100,000 annually, but even long-standing familiar medications that treat diabetes, hypertension, and coronary artery disease have jumped in price with no apparent justification. But because Medicare is not allowed to negotiate prices with pharmaceutical companies, American citizens pay 20 to 40 percent more for their medications than their European counterparts.

Over the last few years, hospitals have increased their purchases of private medical practices since Medicare and insurance companies pay more for tests and procedures when done in a hospital facility. This is an easy way for hospitals to generate income. Electronic health records have also helped hospitals and physicians enhance reimbursement from Medicare and insurance companies for various procedures, by upcoding and raising the complexity of what was actually done.

The health care system needs to be changed and made less market friendly, not allowing the profit motive to drive costs upward. If the majority of physicians were on salary, as more than 30 percent already are, they would not have incentives to perform unnecessary tests and procedures. This is the way the Cleveland Clinic and Kaiser-Permanente operate, providing excellent care and physician satisfaction. If unnecessary care could be cut by two thirds, $600 billion in savings annually would be accomplished. (Though I am not necessarily advocating this, if the 600,000 practicing physicians were paid $300,000 yearly, it would cost $180 billion, leaving $420 billion to reduce the national debt, pay for defense, research, education, infrastructure, and so forth.)

Insurance companies also have to be regulated and made more efficient. One way would be for the government to allow only a limited number of plans as is now done for supplementary Medicare insurance. If that were instituted, businesses and consumers could more easily analyze the different companies on the basis of their charges for the same plans and true competition would ensue on price differentials.

Likewise, hospital charges for outpatient tests and procedures have to be reduced, with the same compensation that is paid in private physicians’ offices. And Medicare has to be given the power to negotiate prices with the pharmaceutical companies, so that Americans don’t have to pay more than Europeans for the same medications.

If these steps were taken by Congress, which would mean taking on the stakeholders and their lobbyists, Medicare costs could be lowered along with health care costs in general. This would provide a major boost to the economy and would be an important victory in the battle to reduce the national debt.

Resurrecting Democracy

em>A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.

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  • Willwright

    The problem is this makes too much sense.

  • Dr. J

    Robert, it would sure be great if in a piece like this you could speak to some of the objections that the market reformers will raise. I’m sure you’ve heard them before. To highlight a few:

    – Conservatives refuse to admit markets cannot work for health care. We certainly do, and our government-dominated system is not a counterexample.

    – Private insurance rates went up 20%, despite single-digit provider inflation. That money is not going to insurers’ profits, as their financials show. The likely culprit lately is Obamacare forcing them to subsidize care for more people.

    – Consumers don’t choose doctors based on price. True. This is evidence that we don’t have a free market in health care, not that we couldn’t.

    – Fee-for-service care is inefficient. True. It persists not because the “market” couldn’t work any other way but because government policy has put insurers rather than consumers at the center of it, starting with Medicare, and they’re very poor at driving cost efficiencies into providers. The fix is more empowered consumers.

    – Insurance companies also have to be regulated and made more efficient. Which did you want? Insurers are heavily regulated already, and the dominant one is a creature of pure regulation. Yet as you point out, Medicare is perpetuating inflated drug prices, wasteful fee-for-service care and other inefficient practices. It’s high time liberals admitted regulation does not create efficiency.

  • dduck

    Medical care is perhaps the most complicated in the U.S. We have the best, would any dictator, except Chavez not go to NYC for a serious problem, and the worst, where chubby is obese and preventive care is lax if at all in some states. RAL states what some of the problems are but Dr. J points out that some conclusions are debatable and not all that obvious. It is simply a mess, a medical Gordian’s knot. Although I was once against it Universal single-payer, it may be the only sword that can cut the knot; Obamacare probably will not and will cost more in the long run. But, I am glad that at least more people will have access to medical that didn’t have it before.

  • slamfu

    Dr. J,

    – Healthcare is not a free market decision based process. This is especially true in the case of emergency medicine, which makes up a HUGE portion of medical expenses that bankrupt people. You break your leg, you’re getting it fixed at the closest place and paying the bill, not shopping around.

    – The medical industry, insurance, medical device makers, pharma companies, and HMO’s are routinely in the top tier of profitable companies in the nation, and the trend is not slowing down. They are easily the biggest industry in the economy, and their prices are constantly going up. See the previous point as to why.

    – Again, its not a free market decision. Just ask any of the 500,000 people per year who file bankruptcy for medical bills how much of a free market they were exposed to. Lets find out, did they invest unwisely in services? Were they tricked by a stockbroker? Did some nurse sell them on a more expensive oncologist they really didn’t need by promising to throw in free floor mats?

    – Fee for service is ineffecient. And not representative of what hospitals are actually doing for you, they have HUGE overhead. However, we used to get this right, back before the mid 90’s. What happened then I wonder to change things so dramatically?

    – Insurance companies need to be regulated for the same reason all massive corporations that impact the general population do. So they don’t screw us all over in the name of profit. If we don’t, they will simply take peoples money, then deny them services when its their turn to pay as they contracted to do. They spend huge amounts of money right now protecting their rights to do exactly that. Regulation doesn’t mean inefficient, in fact internal company policies and procedures have a far greater impact on that than regulations do. Regulation is not a bad thing all the time. Sure, if you have a health inspector trying to shut your restaurant down unless he gets a bribe it is, but that’s not regulation, its corruption. Regulation is making sure that big corporations don’t socialize costs on the rest of us so they can improve their bottom line.

  • dduck

    slam, insurance companies are regulated by the states and in NY they are regulated up the wausu, to imply that they are not is missing the point. Yes, sometimes they are under regulated and like a lot of businesses, the few abuse the system and force regulations on top of regulations and end up eating up dollars which in turn raises premiums and so on. The point is a “good” regulator like the insurance department in NY and many other states do their best to protect the consumer and at the same time let the companies earn a buck. One can argue that they earn too many bucks, but again that is also regulated.

  • Dr. J

    Slam, maybe you spend more time in emergency rooms, but the vast majority of the health care I consume is scheduled. And perhaps you can explain the ads St. Mary’s Hospital here in San Francisco runs extolling their short emergency room waits? They seem convinced people choose providers, even for urgent care.

    Do you have a reference to those profitability statistics? The public insurers I’ve looked up report profits of 5 or 6 percent, well below, say, Apple’s 22%. The OP hypothesizes that the 20% hike in premiums is going to insurers’ profits; that’s demonstrably false. And if it were true, the country would be flocking to non-profit insurers like Kaiser, and non-profits like Medicare wouldn’t be in such financial trouble. The theory that private insurance is the disease and government insurance the cure is so starkly at odds with the facts it’s difficult to understand how you came to believe it.

  • sheknows

    Well said Slam. It’s just not in the nature of our free enterprise system to curtail or “regulate” the medical industry. When they are allowed to spin out of control in raising costs, it screws up everything down the line. Medicare part D is a good example.
    A profit can be smelled so fast by those who would benefit, they put sharks to shame. It’s all about money, and that’s where it becomes a problem. This is healthcare for our people…not an investment opportunity. This is not a luxury industry where yacht builders and Mazzaratti makers can raise prices anytime. This is an industry which literally holds the lives of our people in it’s hands and should be regulated.
    At some point in the history of this country, we have to say we love people more than money.

  • Willwright

    I agree with the comments. We don’t have a market based system and not sure it really would work with healthcare anyway. We have a asymetrical relationship with the providers, they tell us what we need and don’t have enough knowledge to evaluate what we are told, nor are we told that the provider may have financial interest in the treatment plan. I’m reminded of the reporter with a sore shoulder, actually happened. He went first to a doctor in France who recommended physical therapy, second to doctor in the UK who told him to take a couple of aspirin and suck it up, in the US the doctor recommended an $85k joint replacement.

    If people were serious about a free market system we could take a few steps that would lower costs dramatically overnight.

    1. Issue 100,000 H1 visas to foreign trained doctors and let them practice. This should reduce medical fees significantly.

    2. Remove restrictions on drug importations and allow Americans to have the same lower prices as people in the rest of the world.

    3. Hospitas should be required to provide cost and outcomes data. There are huge differences in outcomes and costs between hospitals for identical treatments.. People should be directed to hospitals that provide good results at the lowest cost. Poorly performing hospitals will have to do better or go out of business.

    4. Insurance companies can remain private but should be non-profit and judged by how low they keep administrative costs.

  • You might also consider that the US has one of the unhealthiest nations in the world, in terms of chronic disease, in no small part because of our pathetic diet. The book “In Defense of Food” covers a lot of how that has come to be.

  • KP

    “He went first to a doctor in France who recommended physical therapy, second to doctor in the UK who told him to take a couple of aspirin and suck it up, in the US the doctor recommended an $85k joint replacement.”

    The implication is that the US doc is irresponsible. I tend to see it the other way. Total shoulder arthroplasty is incredibly successful for 95% of patients who get it done. Think of it this way, $85k isn’t much if we can get the patient out of chronic pain, extend his work life that requires his upper extremity for another twenty years and in doing so saves his house, the kids education and keeps him off social security disability.

  • dduck

    Meantime there are more baby boomers going on Medicare, fewer primary care physicians in the pipeline (they can’t make the living they desire) and fewer doctors accepting Medicare patients and the ones that do accept Medicare patients have offices jammed packed with patients waiting sometimes hours for a quickie consultation. Ask your doctor if he would recommend that his kids go into medicine, many don’t because it has become a sausage factory.
    Programs for the education of doctors have been trimmed and some hospitals are getting less money.
    All in all a dysfunctional mess with people blaming greedy insurance and pharmaceutical companies and of course the government.

  • Willwright

    KP in the article there was no implication the person was close to disability. The implication is the US doctor wanted to do what was best for his pocket, not much money in prescribing aspirin or PT, doesn’t make him irresponsible as there was no implication his solution wouldn’t work, it was just astronomically more expensive.

  • slamfu

    I think I might have gotten a bit off topic if anyone thinks I’ve got a beef with health insurance companies. I do, but the main healthcare problem I see is the healthcare industry itself. Insurance companies are just ways to pay for that. There are so many players there its hard to pin them all down, but the worst are the AMA, Big Pharma, Medical Device makers, and HMO’s. We had a big change in healthcare in the 90’s moving to privatize things and put this nations healthcare in the hands of for profit industries. Essentially, we just decided to add a massive layer of profit taking to the whole endeavor. I don’t even think doctors are to blame, they are essentially bit players in the whole thing. It’s a mess. Other countries do it better. If we aren’t seriously looking at how they do things and trying to use that information to improve things here, we are nuts.

  • Dr. J

    Slam, what privatization are you talking about? To my knowledge the government was never in the business of developing drugs or manufacturing medical devices, and doctors by and large have always been private practitioners.

  • KP

    Willwright, to be clear, I don’t mean to speak for you or lay blame at your feet.

    I understand the implication of the article and that is what bothers me. It used to be funny, but it is not anymore. If I could question him I would ask the aurthor who else in the US would he question about their integrity. How about attorneys? Local politicians? Homebuilders? Plumbers? Dentist? Auto repair shops? Walmart? Congress? Financial advisors? Welfare recipients?

    There are bad apples in every field but it gets old hearing the recent bashing of physicians; starting with the President in his effort to pass Obamacare.

    Most physicians make a fraction of what they did in relative dollars in the 80s. This is a group of professionals who are too few in number while supply and demand is getting worse. They are being paid less and asked to do more. And it seems they continue to be one of the first groups blamed for high healthcare costs. It’s unfair and it is untrue. The vast majority of men and women I have worked with over the last 30 years are of high integrity and are not over paid.

  • Willwright

    Kp nobody is questioning anybodies personal integrity. Doctors in the U.S. make at least 2 to 3 what their colleagues in other advanced western countries. Are they overpaid? There are arguments both ways. However if we are going discuss reducing or containing costs then this disparity in physician earnings have to be part of the discussion.

  • I’m a physician who practices in a very medically sophisticated area. Yet I have seen multiple examples of unnecessary surgery and unnecessary tests and procedures done by physicians. There are plenty of bad apples in medicine as there are in law, finance, corporate America, and every other field. Some good physicians also may be biased to choose treatments or diagnostic studies that will benefit them when several options are available, not even thinking about what they are doing. The incentives for unnecessary tests and procedures need to be eliminated to reduce unnecessary care and save vast amounts of health care dollars.

  • sheknows

    Thank you Dr. Levine. I have been a Medical Technologist for over 35 years and to say that Americans are the most over tested people in the world is a gross understatement. Multiple Cat scans,pints of blood work, MRI’s over and over again.
    I won’t say Docs are trying to deliberately jack up costs to patients, they just have no concern for the costs. “someone will pay it”. They are just not “cost conscious” to be more polite.

    We need to completely overhaul our healthcare system and bring in a more socialized approach to caring for our people.

  • KP

    I agree with you Dr Levine. Your excellent article touches on many of the issues I have already commented on here on TMV. Specifically, the benefits of the salaried physician as opposed to fee for service.

    None of the following is directed at you:

    That observation doesn’t chip away at my dislike of the increasingly popular characterization that physicians are some how ripping off patients and America. As you know, they often don’t earn a physicians salary well into their thirties. I am hard pressed to think of another career where more people will work extraordinary hours, and often for free, than physicians. Damn, can we here so love?!

  • Doctor salaries are only a small part of the problem, and there are quite a few factors involved. The AMA has tended to favor specialists and were instrumental in getting higher fees for them over family doctors. But the real problem is still with a lack of patient control. Medicaid patients don’t deal with being overtested (at least not as much as the rest of us) simply because there’s no money in it.

    People can’t control costs when they can’t even find out what they are. I know because I’ve tried in several cases to find out what some procedures would cost my family, and no one could give answers, or even good estimates. However, when operations aren’t covered by insurance (dentistry, abortions and Lasik) costs are given up front (I found $1295 for lasik advertised on the search page, just because I wanted to make sure it was a real word) and are far cheaper.

  • Dr. J

    You got it, Professor. When I was on a high-deductible plan, I found myself shopping around for medical care. On a conventional plan, I don’t. Not like I have any love for insurance companies, so why spend my time trying to save them money?

    I don’t understand why people think health care is somehow different from every other industry, so far beyond the ken of consumers that they can’t make informed choices about it. Consumers already make the vast majority of choices about their own health; why would they get less competent to do so when a doctor is in the room?

    Granted consumers rarely try to evaluate providers on cost today, so providers aren’t set up to make that convenient. But given the right reforms, consumers could be motivated to care, and they would pressure the providers to become more transparent about costs.

    Liberals’ position on this topic strikes me as a failure of imagination.

  • Jim Satterfield

    Dr. J,

    Conservatives refuse to admit markets cannot work for health care. We certainly do, and our government-dominated system is not a counterexample.

    Really? I have yet to see one conservative admit that the standard neo-classical assumptions about markets and the rational actor model don’t work when it comes to health care. Not one.

  • Dr. J

    Sorry, Jim, I phrased that badly. I certainly do refuse to admit that, because there’s no evidence. Our current system does not give market forces a fighting chance to work. And the theories that they cannot work because most health care is chosen in an emergency, or that it’s too complicated for people to be trusted to decide, make no sense.

  • There can never be a free market working model for health care because of the asymmetry of knowledge between the patient and physician. The most sophisticated patient who does his or her homework can not come up with the information that various specialists have in their area of expertise. If your physician, whom you trust, tells you to get a certain test, or have a procedure, you generally do it. If it’s something risky, you may get a second or third opinion beforehand from other experts, but that’s the point. The knowledge comes from other experts.

  • Willwright

    Very good points Dr. Levine. We don’t have a free market in healthcare and though we could do some things to make it more so I don’t this would solve all the problems. In 1980 the country spent $280 billion on healthcare, in 2010 the total had ballooned to $2.6 trillion. Many of our most profitable industries and professions are not unsurprisingly healthcare related. It seems we have only nibbled around the edges of the problem, much more reasoned debate and discussion are needed.

  • The internet is changing that also, since more people are figuring out ways to take care of themselves, and avoid the system altogether, or at least navigate the system and it’s pitfalls better.

  • Dr. J

    Yes, Dr. Levine, there’s an asymmetry of knowledge. The same is true for a roofer or a car mechanic or a lawyer. You need to find one you can trust, ask questions, and possibly seek other opinions.

    Cost is generally a part of our conversations with those other professionals. Why not for doctors?

  • slamfu

    Exactly how much shopping around is someone going to do when they have a heart attack, pulmonary embolism, broken leg, stroke, etc..? Shopping around is all well and good when you are talking about routine checkups and maybe dealing with the flu, but a lot of the most expensive services are not planned for and emergency in nature. And you don’t really have the option to not get them done and wait, like say for a roofer. Diagnosed with a particularly aggressive case of Lymphoma? No thanks for that chemo just yet doc, I’d like to check around.

    Many of the elders of my family have been hit with medical problems in the last 5 years. Heart attacks, strokes, aneurysms. A lot of us have gotten far more informed about the deficiencies of the medical system and costs of services, and some of the stunts pulled by insurance companies who fight tooth and nail. My fathers secondary insurance at Blue Cross was cancelled because he missed two premium payments. Because he was in a coma. That apparently is not a mitigating circumstance. Cost his estate over $40,000 because they had that as an out. Nor due to the nature of his stroke did we have a say in what hospital he was treated at. The one he was taken to refused to let us move him to his primary care facility, and short of getting a lawyer and taking them to court for a few months and lord only knows how much more money could we get them to do so. If that even. I’m sure all of us here can go on and on with stories of having to deal with very serious emergency issues of loved ones, but myself and many family members can attest that the assumption you get to pick services, compare pricing, and make decisions that are all part of a normal free market buying decision do in fact not apply to these situations.

  • dduck

    I personally don’t know off anyone that has “shopped” medical care, but Im sure some folks do for elective surgery and such. Most of us just go with the flow and follow recommendations from our primary physician and subsequently from those recommendations.

    Slam, I’m sorry for the crises in your family. I would recommend that everyone have in addition to a will, a Health care Proxy ( a person(s) that can speak for you regarding medical decisions), a Lving Will (A living will is a legal document that a person uses to make known his or her wishes regarding life prolonging medical treatment). Also, some insurances like LTCI allow you do designate an alternate payee for premiums. Another good thing to have is a Durable Power of Attorney (In estate planning, a durable power of attorney is often chosen as a way to plan for those times when you are incapacitated) so that bills can be paid and other financial strategies can be employed where an ordinary POA will not work.

  • “No thanks for that chemo just yet doc, I’d like to check around.”
    Yeah, that’s exactly what should happen. Most of the money isn’t spent for emergency treatment, but for chronic diseases like cancer, obesity, and diabetes. There’s plenty of time to shop around for treatment options and providers in these cases. It isn’t strange that people should want to check out their options — it’s strange that they don’t.

  • Dr. J

    Slam, you’re right that you can’t shop for every transaction, but that misses the point. People don’t need to shop for every or even most transactions to drive cost consciousness and price transparency into providers. For example, I never shop for gas; when I need to fill the tank, I do it at the closest station and try not to look at the prices. Because I know some minority of consumers actually does pay attention, and that’s enough to keep everyone’s prices transparent and pretty close to each other.

    I’m sorry about your father’s experience. It sounds like it goes to my point that the industry is too eager to rob you of decisions that should properly be yours. I do not accept Dr. Levine’s claim that a knowledge asymmetry between doctors and patients means consumers must accept a second-class role in health care decisions. That situation exists today because he who pays the piper calls the tune, and big insurers (public and private) usually pay the piper. If consumers controlled more of the money spent on their health care, they’d get treated a lot better.

  • dduck

    Meantime, you are in the hospital, which you may or may not have picked depending on where the ambulance took you or if you even could reach your doctor where he said to go.
    So now the big expense, end of life care, which consumes a big chunk of the medical dollar. And, to top things off, even if you wanted to NOT have certain life “lengthening:” measures, you may not have your wishes granted because you had no living will. You suffer needlessly, the family spends more of their inheritance and maybe the government pays some of the costs which means we all do.

  • sheknows

    Well, we may be getting ahead of ourselves here. The disparity of knowledge between physician and patient will never change. Most patients when seriously ill and have to be treated just check their mind at the door and immediately do what they are told. I do not believe they are being taken advantage of.
    I am sure we can all pull up horrendous stories of medical care, but the main issue is making that care better and more affordable. If we don’t find a way to do that, and soon, than not only our elderly will suffer, but our future generations. We simply cannot afford to have healthcare listed as a standard monthly expense in our family budget.

  • Jim Satterfield

    The rational choice theory of human behavior that Prof and Dr. J think should rule doesn’t and probably won’t for the foreseeable future. Much more relevant in most cases is behavioral economics. The idea that people will shop for a doctor like an oncologist is a purely ideological position taken based on an emotional basis that then promptly denies that psychological and social considerations enter into most financial decisions made by individuals to varying degrees. Much like objectivism, communism and libertarianism it’s a believe system that just ignores reality, IMO.

  • KP

    “The idea that people will shop for a doctor like an oncologist is a purely ideological position taken based on an emotional basis that then promptly denies that psychological and social considerations enter into most financial decisions made by individuals to varying degrees. Much like objectivism, communism and libertarianism it’s a believe system that just ignores reality,”

    This comment is surprising to me. Having had a 14 y/o daughter diagnosed with a stage four, aggressive cancer, you can bet your last dollar I shopped. The first doc told me we needed to amputate. The second doc said she wouldn’t amputate because we can beat this; all within the three days. That was the start of a multi year process that built lasting relationships within the medical community.

    There are _great_ physicians out there. Learn a bit more and get invloved so that you can communicate effectively. It is essential you be able to meet Medicare and secondary coverages like Blue Cross/ Blue Shield head on and navigate the system.

    On another note, to slam and others, I have been there. Best wishes. Fighting with Medicare did not end well for my family, and I appealed to the highest court in the state of California. Anybody who thinks we don’t have pre-fab formulas for treating the elderly that force specific care on patients is wildly mistaken.

    My mothers neurologist and surgeon fought hard for her alongside me. Do you know who ended her care? A physical therapist who refused to consider anything outside the Medicare box. That is the current extent of cost control: refuse treatment.

  • I’m well aware of the concepts, Jim. Believing that there are objective politicians not concerned only with their own gain flies in the face of reality also. I’d rather have a choice that to trust that someone will make better choices than I would. It’s not abilities that I doubt, but motives.

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