Summary: A report from the Congressional Budget Office (CBO) that came out last week spurred a flurry of headlines suggesting that fat people are responsible for the high cost of health care in America. “CBO– Obesity Will Decimate Future Health Costs and Care,” blared one headline. The story began: “While our nation’s obesity problem has trashed health care and insurance rates, the worst is yet to come.” In other words: forget about reform. Folks who eat too much will wipe out any savings.
It is true that obesity has become epidemic. As the CBO study points out, “From 1987 to 2007 the share of adult Americans who are obese has more than doubled –from 13 percent to 28 percent.” Over the same span, the amount that we spend on health problems associated with obesity has soared: “health care spending per adult grew substantially in all weight categories between 1987 and 2007,” the researchers write, but “the rate of growth was much more rapid among the obese. Spending per capita for obese adults exceeded spending for adults of normal weight by about 8 percent in 1987 and by about 38% in 2007.”
It is easy to assume this means that the rise in the percentage of Americans who sport a body-mass index (BMI) equal to or greater than 30, accounts for roughly one-third of the rise in health care spending. But that is not what the report says.
The CBO study explains that for more than two decades the cost of care has been spiraling for Americans of all sizes. Rising obesity is not a major force pushing health care costs higher. As I have discussed in past posts, research shows that advances in medical technology is the most powerful factor behind health care inflation.
Each and every year, our health care industry invents new drugs, devices, tests and treatments. As a result, virtually each year, we pop more pills and undergo more tests and procedures. Sometimes the “new, new thing” is more effective. Sometimes it isn’t. But it is always more expensive.
Because new technology accounts for so much of the rise in health care spending, “Even if there is no growth in the prevalence of obesity between now and 2020” last week’s CBO report observes “per capita spending on health care for adults would rise by 65 percent—from $4,550 in 2007 to $7,500 in 2020 . . . largely as a result of the continuation of underlying trends in health care that have led to rapidly increasing spending for all adults regardless of weight.”[These numbers are adjusted for inflation; all are in 2009 dollars.]
We are investing more in treatments for obesity and diseases aggravated by obesity, just as we are laying out more dollars for cancer patients, because in each case, we have many more potential cures than we had in 1987.
Obesity itself is not driving medical spending.. Indeed, even if, by some miracle, we suddenly understood the multiple causes of obesity, and as a result, the share of adults who are seriously overweight plummeted from 28 percent to 20 percent over the next decade , CBO researchers calculate that per capita spending still “would increase to $7,230 in 2020—[only] about 4 percent less than spending in the first scenario”– which assumes that the percentage of American who are obese remains at 28 percent.
Finally, it is worth noting that the obese don’t live as long as the rest of us, another reason not to blame them for the cost of medical care. A 2008 study, published in the Public Library of Science Journal, shows that slim and healthy adults consume $417,000 worth of heath care over the course of a lifetime, while the bill for obese adults averages $371,000.
Who or what is responsible for health care inflation—Insurers? Medicare? Doctors? Patients? Everyone would like to know, and last week the Congressional Budget Office (CBO) released a report that led some pundits to conclude that the answer can be summed up in just two words: “Fat Americans.” Today, roughly 28 percent of the adult population is obese. If the trend continues, and “obesity rates rise to 37 percent by 2020, per capita health care spending for adults will rise to $7,760, up from $4,550 in 2007,” the Boston Globe reported in an article titled “Obesity’s Punch to the Gut.”
Except that’s not what the CBO report said. The Boston Globe lopped off the final four words of the sentence. Here is the quote, verbatim, and in context: “if recent trends in adults’ body weight continue, by 2020, the share of obese adults would reach 37 percent. Projected spending per capita would be $7,760—about 3 percent higher” than it would be if obesity rates remain where they are today.
In other words if the percent of Americans reporting a body-mass index (BMI) of 30 or higher climbs from 28 percent to a startling 37 percent over the next decade, this would add just 3 percent to the cost of medical care in the U.S. To save 3 percent over ten years would be nice, but it’s hardly the answer to a national health care bill that, in recent years, has been rising by 6 percent to 7 percent annually.
Why Does the U.S. Outspend Other Countries?
Obese Americans are easy scapegoats, but they are not the reason U.S. health care bills are levitating, says the McKinsey Global Institute (MGI). In a report titled, “Accounting for the Cost of Health Care in the United States,” McKinsey observes that many studies have tried to explain why the U.S. lays out so much more for medical care than other developed nations, but in the past, , researchers have tended to hone in on just one part of the system: administrative costs, obesity, the high cost of drugs in the U.S. . . . Few take a “holistic” view, using “analysts who have direct experience working across all parts of the U.S. health system.” That is precisely what MGI does. (Hat tip to Aaron Carroll who highlighted this study in a post on The Incidental Economist.)
McKinsey’s researchers began with the common-sense proposition that there are two likely explanations for this nation’s astronomical health care bill: Either the U.S. population is less healthy that the citizens of other nations–or the U.S. system is intrinsically more expensive, independent of the relative health of the population. Researchers then compared the prevalence of some 130 diseases in the U.S., including the most common disease groups, with their prevalence in Japan, Germany, France, Italy, Spain and the United Kingdom.)
What they discovered will surprise many: While Americans are fatter than their counterparts in many other countries, they are not significantly sicker. “The differential impact of the 130 diseases studied is less than $130 billion in treatment costs,” the researchers observe. Obesity was one of the diseases studied, along with conditions related to obesity such as congestive heart failure, diabetes, anxiety and various types of cancer. [One caveat: it seems to me possible that, overall, Americans are, in fact, sicker than adults in Western Europe and Japan. But in the U.S., chronically ill adults also tend to be poorer, and research shows that they don’t receive as much care as other Americans. This could be why a less healthy population is not costing us more. Other developed countries offer universal access to care. Nevertheless, this post is about cost, and the McKinsey study makes it clear that neither obesity nor other diseases are responsible for the huge differential in how much we lay out for medical care when compared to other nations.)
Aaron Carroll, writing on the Incidental Economist, turns McKinsey’s data into a brilliantly clear graphic.
“Yes, obesity is more prevalent in the US, and yes, caring for it costs real money,” says Carroll. “But even if we get obesity down to the levels in other countries, it’s not going to magically erase the problem. There is no simple fix here.
Breaking Down “Additional” Spending in the U.S.
When McKinsey’s researchers analyzed health care spending in different countries they adjusted for the fact that more prosperous countries will invariably spend more on medical care. But even after taking higher per-capita income in the U.S. into account, they found “additional” (or excess) spending in the U.S. concentrated in five areas: hospital inpatient care; outpatient care, drugs, administration, and insurance (in that order), with inpatient care and outpatient care accounting for 80 percent of additional spending. (Keep in mind that the pricey drugs administered in a hospital or outpatient setting, along with any devices used during inpatient or outpatient surgery, show up on hospital bills, so drugs and devices should remain high on the list of factors responsible for climbing medical costs).
Taking a close look at the major components of our health care system, MGI analysts found the main sources of higher spending: “Input costs—including doctors’ and nurses’ salaries, drugs, devices, and other supplies, the profits of participants in the system–explain the highest proportion of additional spending –or $281 billion.” (Note, these are 2005 numbers.) “Inefficiencies and complexities in the system’s operational processes” add another $147 billion. Finally, administration, regulation and intermediation cost another $98 billion of excess spending.”
The report goes on to note that our fee-for-service payments to physicians encourage them to do more and see more patients. U.S. doctors see, on average, 1.6 times more patients than physicians in other countries. They also are paid more: in other developed countries specialists earn an average of 4 times GDP per capita, while generalists earn 3.2 times GDP; in the U.S. these numbers rise to 6.6 and 4.2 respectively. (Of course most U.S. doctors also pay for their own medical education. As I have suggested in the past, we would be better off subsidizing the education, as other countries do, rather than paying some specialists exorbitant salaries for 35 or 40 years.)
In addition, McKinsey observes, in our for-profit system, “physicians frequently co-own facilities, such as ambulatory surgical centers, diagnostic imaging centers and diagnostic testing and procedure laboratories, and receive a share of their profits. The profit sharing counts for another . . . $8 billion of higher spending.”
In our hospitals, the cost per day is 2.6 times higher than the OECD average, largely because we emphasize “acute care,” and “complex surgeries.” Many U.S. patients receive far more aggressive, intensive care than their counterparts abroad: One in five is likely to die in an intensive care unit (even though 90 percent say they would prefer to die at home.) Yet, McKinsey confirms what we know: on average, the quality of care is no better, and we don’t live as long as the citizens of many other nations.
Outpatient centers “have grown rapidly by capturing high-margin procedures from hospitals,” the report adds. “The high profitability of these centers has driven physicians and investors to fund a rapid expansion in the number of these facilities, which has resulted in sub-standard operations and redundancy. For example, in a hospital a CT scanner will perform approximately 20 or 30 scans a day. In an outpatient diagnostic imaging center, “this same equipment will complete many less, since they tend to be open for fewer hours each day, and the breakeven number of scans can be as low as six to eight scans per day. Yet these scanners still require largely the same staff and maintenance as in a hospital setting.” Finally, physician ownership encourages doctors to self-refer; when they own the equipment, they refer “two to eight times more tests than their peers without equity interest.” (Under reform, Medicare is beginning to address these issues, paying less when doctors use diagnostic equipment that they own or lease for their offices, and discouraging physician ownership of surgical centers.)
Ultimately, MGI concludes that “the overriding cause of high U.S. health care costs is the failure of the . . . system . . . to regulate the necessary incentives to promote rational use by providers and suppliers.” By “rational use,” McKinsey doesn’t mean rationing. But it does mean stemming the waste—and this is what reform legislation sets out to do.
How Technology Propels Health Care Inflation
The McKinsey Report’s emphasis on inpatient and outpatient medical care, acute care and physician ownership of surgical centers and imaging centers where our doctors “do more,” reminds me of CBO Director Peter Orszag’s central insight into health care inflation: “the single most important factor driving the long-term increase in health care costs involves medical technology.”
Orszag also took on the false claim that obesity was driving health care inflation: Spending per capita on Americans of all sizes rose by 34.6 percent from 1987 to 2001, Orszag reported in 2008. Over the same span, he noted, the rise in the share of Americans who are obese accounted for only “4 percent” of all spending growth.
The most recent CBO report confirms Orzag’s statement, pointing out that even if we suddenly won the war on obesity, and the share of U.S. adults with a body-mass index (BMI) of 30 or more shrank from 28 percent to 20 percent over the next ten years, per capita spending still “would increase to $7,230 in 2020—[only] about 4 percent less than the projected bill if 28 percent remain obese. Winning the war against obesity would shave just a few points off per capita health care spending over the course of a decade or more. (There are other, urgent reasons to try to win the battle, but reducing the deficit is not one of them.)
Yes, we are spending more on obese patients—just as we’re spending more on cancer patients. But this is because we have many more treatments for obesity than we had twenty years ago, ranging from widely advertised weight-loss supplements to bariatric surgery. We also have more cancer drugs. And each year, the proliferation of new “technology” (which in the world of medicine refers not just to equipment, but to “breakthrough” drugs, new diagnostic tests and innovations in surgical procedures) means that Americans are taking more pills and signing up for more tests and surgeries. Physicians have more weapons in their arsenal, and they’re using them.
But, here’s the rub: “While technological advances on average have brought major health improvements,” Orszag observed, “they often then get applied in settings where their benefits seem much less obvious."
Many of those brave new inventions will help some people, but once they become popular, often they are over-used on patients who will not benefit. And some new entries to the marketplace provide little or no benefit to anyone. They are no more effective than older products and treatments, though often they are riskier, because we know less about them. And, almost always, what is new flaunts a higher price tag, often much higher.
In other industries, the price of innovative technologies comes down over time. But this is not true in the healthcare market. Competition does not reduce prices. This is because the patient has far less leverage than consumers in other markets. We spend the bulk of our health care dollars on serious, chronic illnesses. Unlike someone who is thinking about buying a flat-screen TV, a very sick patient does not have the luxury of deciding to postpone the purchase until prices fall. Moreover, when you are in pain—or afraid of dying—you are not hunting for a bargain. You are looking for first-class care. Most Americans believe that the costliest care is probably better care.
And while consumers can assess the quality of the picture on a flat-screen TV, they’re not in a position to judge which health care product or service is superior. They haven’t gone to medical school—and comparing the effectiveness of two treatments is extraordinarily complicated, even for medical researchers. There are many variables to take into account. How sick were the patients? How many failed to follow the doctor’s instructions? How many were suffering from more than one illness? Did age or genetic differences play a role in how they responded to the procedure? The majority of laymen don’t have the time or the training to wade through the risk adjustment data, and figure out what might be the best treatment for someone who fits his or her medical profile. This is why we ask doctors to explain the pros and cons of various options, and how they might apply to our situation.
Meanwhile, drug manufacturers, device manufactures, and medical equipment companies –along with the hospitals that buy their products–know that most patients, and even a great many doctors, will simply assume that higher prices signal top-drawer medicine. Thus, when it comes to the big-ticket items that drive the nation’s health care bill, particularly “ground-breaking” technologies, sellers rarely compete on price. They just keep on adding more bells and whistles—which sometimes means innovation simply for the sake of innovation. The newest imaging equipment gives you a sharper image, but does it really lead to more life-savings diagnoses and treatments? Often, no one knows. The FDA doesn’t require that the manufacturer show that their new product is better than older rivals.
In other developed countries, governments regulate prices in various ways, and more questions are asked before exposing unsuspecting patients to new technologies. In the U.S. we are quicker to embrace what Michael Lewis once dubbed the “New, new thing.” We love innovation. We also pay more for virtually every product and service, and each year, there are more new things to pay for.
In Part 2 of this post, I’ll explain why thinner Americans cost the health care system more than their overweight brethren—even on an annual basis. (In other words, it’s not just because they live longer.) One can’t help but wonder: doesn’t anyone blame the skinny people for health care inflation?
I’ll also discuss how much of the money that third-party payers and patients themselves lay out to fight obesity is squandered on “medications that produce only marginal benefits in the long-term.” Bariatric surgery remains the one extreme, but effective answer—for the truly obese. Yet the side effects can be cruel. And we can’t perform bariatric surgery on one-third of the population. The procedure is a stopgap, not a final solution
I’ll also report what physicians studying obesity say about this terribly complex disease. Simply eating less and exercising is not the answer. Even when obese patients are completely compliant, and work hard under a physician’s supervision, more than 95% put back on any pounds that they shed. One can only imagine how discouraging this must be.
I’ll also discuss what some of the latest research on prevention suggests could have a real impact on the population’s health. If we are committed to tackling the obesity epidemic, we should stop blaming the victims, expose the snake-oil cures, and invest that money into serious research on the causes of the disease, while subsidizing bariatric surgery where truly needed. Finally, and perhaps most importantly, we need to take close look at the U.S. food industry. One way to make unhealthy food less attractive is to make it more expensive. But then we have to make sure that affordable, nutritious food is available.