As regular readers know, over the past few months, I’ve been investigating how much we spend on various sectors of health care, and where we might be able to save.
As the chart below shows, 4.5 percent of the $2.1 trillion that we, as a nation, spend on health care goes to private insurers to cover their administrative costs—which include advertising, marketing, underwriting, lobbying, profits for shareholders and executive salaries that look like telephone numbers. As I discussed in December, that $94.5 billion (4.5 percent of $2.1 trillion) equals the difference between what we pay insurers in premiums, and what they pay out in reimbursements.
The government then takes a sliver of the pie to cover the paperwork involved in funding programs like Medicare, Medicaid and SCHIP. Note that while the government picks up nearly half of our $2.1 trillion health care tab, and private insurers pay just one-third, the government needs only $52.5 billion (2.5 percent of $2.1 trillion) to cover its administrative costs—significantly less than the $94.5 billion that private insurers require to cover their profits and overhead.
In January I took a close look at spending on physicians’ services. Not surprisingly, doctors fees account for a large chunk of the pie—22 percent. Healthcare, after all, is a labor-intensive business; it is not at all clear how much we can save in this sector.
Without doubt, some specialists’ fees should be pared. As I explained in January a
Medicare advisory committee which is dominated by specialists sets the
prices for Medicare’s fee-for-service payment schedule, a price-list
that has become the basis for most private insurers’ payments as well.
As a result, many specialists are overpaid for certain services, which
in turn, encourages some to over-treat.
Indeed, as a whole, our fee-for-service payment system creates incentives for doctors to focus on volume. As I discussed in a second post
on how much doctors are paid, we might much better reward doctors for
the “quality” rather then “quantity” of the care they provide. And
doctors themselves would be much happier if they didn’t feel they had
to rush from patient to patient.
But paying for quality also would mean paying family doctors and other
primary care providers significantly more to co-ordinate care, provide
preventive care, create medical homes for patients and oversee chronic
disease management. Today, internists, pediatricians and other doctors
who practice “thinking medicine”—talking to and listening to
patients—are by and large, underpaid. That is why there is such a
shortage of family doctors, and an abundance—indeed an embarrassment—of
specialists in many parts of the country. I’m not convinced that we can
trim the nation’s total doctors’ bill by much , but we could greatly
improve the quality of care, and in the long run, cap healthcare
inflation, by redistributing some of the dollars.
This week, I would like to turn to spending on hospitals. In 2006,
hospital bills accounted for nearly one-third of the $2.1 trillion pie,
or $648.2 billion dollars—up 7 percent from 2005. Use of hospital
services didn’t grow much in 2006, but hospital prices did, rising by
4.1 percent. The uptick in total hospital spending was part of a
trend: since 2000, spending on hospitals has risen anywhere from 5.2
percent (2000) to 8 percent (2003) each and every year.
What is driving hospital prices higher? Begin with the cost of new
construction; then consider how much hospitals pay for medical devices,
drugs and medical equipment—much of it duplicating equipment already
available at a hospital down the road.
In the past two years the U.S. hospital industry has embarked on a
building boom, the likes of which we haven’t seen since 1969. Back
then, with the passage of the Medicare/Medicaid bill, millions of
elderly and low-income Americans were lining up for hospital care.
Clearly more beds were needed.
But what has fueled today’s surge in construction? As the chart below
reveals, spending has been climbing since 1999—and in just the past two
years it has jumped by more than a third to $30.6 billion.
One might guess that the aging of the boomers has created a surge
in demand for hospital services. But, as readers of HealthBeat know,
the impact that graying boomers are having—or will have—on our health
care system has been greatly exaggerated.
For one, the Pepsi Generation won’t grow old all at once. Princeton
economist Uwe Reinhardt made the point at a recent health care
conference, using the chart below to show that boomers will grow old
just as they were born—over a period of many years. Moreover, the folks
who introduced us to good bread, yogurt and granola will age much more
gradually than previous generations.
Indeed, projections of U.S. spending on health care in the years ahead
show the aging of the population as only a minor factor driving health
What, then, will be the biggest factor pushing our national health
care bill higher? “Innovation,” says Reinhardt. “The health care
industry will continue developing new stuff for every age group,” he
explains. Will that “new stuff”—in the form of new drugs, devices,
tests and procedures—be worth it? In some cases, yes; in some cases, no.
Returning to the hospital building boom, it turns out that it’s the
desire to “innovate”—not the need for more beds—that has been inspiring
hospital expansion. As Paul Ginsburg, President of the Center for
Studying Health Systems Change, explained in the January/February issue
of Health Affairs: “hospitals have been increasing capacity, not
predominantly by adding new beds but by expanding specialized
facilities (such as operating rooms and imaging facilities) needed to
serve patients with the latest technology.”
Consider, for example, what may be the world’s most expensive medical
device: a particle accelerator with a total price tag well over $100
million. The machine, which employs protons to bombard cancerous
tumors, can deliver higher and more precise doses of radiation, and we
have evidence that it is effective in treating certain rare cancers.
But we don’t know whether it offers any benefits when it comes to
treating common cancers.”That’s far from established, and there’s a
good deal of controversy about it,” said J. Frank Wilson, a professor
of radiation oncology at the Medical College of Wisconsin recently told
the Milwaukee Journal Sentinel.
Nevertheless, roughly a dozen proton therapy centers have been proposed
throughout the country, including northern Illinois,” the paper
reported. “Central DuPage Hospital in Winfield, Ill., about 100 miles
from Milwaukee, is seeking state approval to build a center at a
projected cost of $140 million. And more centers are likely to be
announced in the coming year.”
ProCure Treatment Centers, a privately held company founded in 2005 by
a particle therapy physicist, plans to partner with hospitals and
doctors throughout the country to build proton therapy centers. Tommy
Thompson, the former governor of Wisconsin and former secretary of the
U.S. Department of Health and Human Services, is a director of the
The pending boom was set off in part when Medicare and commercial
health plans began paying for the treatment. Reimbursement for proton
therapy is 30 percent to 50 percent higher than for current treatments.
ProCURE believes that the big market will be in treating prostate
cancer. But so far, no clinical studies have been done that prove
proton therapy is more effective than existing and less costly
treatments. Yet hospitals are installing the equipiment as if this were
a done deal.
“There isn’t any question that it is technology that should be
explored,” David Vanness, a health care economist and professor at the
University of Wisconsin-Madison told the Milwaukee Sentinel. “But there
isn’t any evidence yet it performs better for common cases.”
What is clear is the cost of the equipment—and the treatment. The
particle accelerator, which fills a building as big as two football
fields, requires major construction just to be installed. At
Massachusetts General Hospital, 110-ton, three-story-high cranes reach
up from the contraption and aim the radiation at patients lying on
robotic beds. Each treatment then costs $50,0000. According to a
recent report in Congressional Quarterly Weekly,
Medicare reimbursements to hospitals for this service have soared by a
factor of 50 in the past four years, from $208,000 in 2004 to $10.5
million in 2007.
“If the technology is not much better than what you have, is that a
wise use of resources?” asks Vanness, whose research includes assessing
In the meantime, CQ Weekly reports: “many members of Congress have
pressed to build more centers. . . Barack Obama, the Illinois senator
and leading Democratic presidential candidate, has backed the
construction of a proton therapy facility at Northern Illinois
University in DeKalb, even though a second facility is also being
planned nearby, on Chicago’s west side. The Illinois Health Facilities
Planning Board is weighing whether both are necessary.”
These are not decisions for politicians. Public health experts and
medical researchers should make the judgment, based on community needs
and medical evidence as to the benefits of the new technology.
But hospitals are eager to invest in big-ticket items that promise
lucrative returns. Indeed, as Paul Ginsburg observed recently in
Health Affairs: “Interviews with hospital executives suggest that the
profitability of the services is the key to developing a service line,
with cardiac procedures often topping the list. As one hospital chief
executive officer (CEO) told me in response to a question about capital
spending priorities: ‘We just list the specialty lines by profitability
and go down the list.’
“We found no hospitals developing a mental health service line,”
Ginsburg added, “such admissions generally are considered money losers.”
In other words, decisions about what to build, and where to build, are
driven not by a community’s needs, but by a hospital’s desire to
compete for the most affluent patients seeking the most profitable
services (whether or not those patients actually need those services.)
In February, CQ Weekly confirmed what both Reinhardt and Ginsburg are
saying: “Experts are increasingly adopting the view that the biggest
cause of rising costs is not the aging population, which has so often
been blamed in the past, but the insatiable appetite doctors and their
patients have developed for the latest devices and medicines: high-tech
equipment such as particle accelerators, magnetic resonance imaging
(MRI) and positron emission tomography (PET) machines, artificial
joints, specialized stents, and the ever-expanding array of
pharmaceuticals for treating hypertension, heart failure, HIV,
depression and other chronic illnesses.
“The director of the Congressional Budget Office, Peter R. Orszag, is
among the most influential people in Washington holding this opinion,”
the report continued. “There’s been an overemphasis on aging and
demographics,” says Orzag. “In his estimate, overuse of health care and
technologyis the main driver of medical inflation.”
Next week, in Part II of this post, I’ll take a look at the places
where hospitals are adding more beds—in the suburbs—and consider some
of the special services that these hospitals provide. I’ll also ask
this question: what will hospitals do if Medicare refuses to pay for
improvements that don’t increase a hospital’s efficiency — by
improving outcomes and lowering cost? The answer, I’m afraid, is that
hospitals will charge private insurers more, which means that we can
all look forward to insurance premiums soaring even higher.