A New IOM Report Reveals Why Medicare Costs So Much (Hint–It’s Not Just the Prices)

George W.  Bush is 67. Chances are Medicare paid for the stent operation that I describe in the post above.  For years, medical researchers have been telling us that this procedure will provide no lasting benefit for a patient who fits Bush’s medical profile.   Nevertheless, in some hospitals, and in some parts of the country, stenting has become as commonplace as tonsillectomies were in the 1950s.

Location matters. Last month, a new report from the Institute of Medicine confirmed what Dartmouth’s researchers have been telling us for more than three decades: health care spending varies  across regions. More recently, as Dartmouth’s investigators have drilled down into othe data,, they have shown that even within a region, Medicare spends far more per beneficiary in some hospitals than in others.

In a recent Bloomberg column, former CBO director Peter Orszag notes that “Because this variation doesn’t appear to be reliably correlated with differences in quality, the value [that we are getting for our health care dollars] seems to be much higher in some settings than in others.” He asks the logical question: “What is causing this and what might we do about it?”

Some health care analysts claim that as a nation, we spend far more on health care than any other developed country because we over-pay for everything—from statins to surgery. (A landmark article that appeared in Health Affairs in 2003 put it this way “It’s the Prices Stupid!” )

Others put more emphasis on overtreatment. Up to one-third of Medicare dollars are squandered, physicians like Dartmouth’s  Dr.  Elliott Fisher, Boston surgeon Atul Gawade and former Medicare director Dr. Don Berwick argue.  As Fisher puts it, “hospital stays in the U.S. may not be as long as in some other countries, but more happens to you while you’re there.” (Note: the authors of “It’s the Price’s Stupid” also point out that care in the U.S. is “more intensive.”)

I agree that both theories are true: We have managed to devise a health care system where we both over-pay AND are over-treated. The  Institute of Medicine report that came out at the end of July supports this thesis.

              The Difference between Medicare and Commercial Insurers

The IOM report reveals that both Medicare and commercial insurers are spending about 40 percent more per patient in some areas and in some hospitals than in others. “This has persisted over decades;” Orszag observes.  “Regions that spent the most in 1992 tended to remain big spenders in 2010.”

But, he adds, “There is one important difference between Medicare and commercial insurance, the Institute found, and that is in the causes of spending variation. With commercial insurance, spending is higher in some areas because of markups — that is, the difference between the charge for a service and the cost of providing that service.

“Seventy percent of the variation in commercial spending was attributed to differences in markups, which in turn probably reflect local differences in market power among hospitals and other providers relative to insurance companies and beneficiaries.”


Exactly. When one medical center charges a private insurer far more than another –even for very simple procedures—we are looking at a hospital that is using its brand-name reputation to leverage prices. Most private insurers have little choice but to pay up.

“The story for Medicare is much different,” Oszag notes. “The variation” in Medicare spending “is driven by use. In some regions and at some hospitals within a region, Medicare spends more because beneficiaries there use more services.”

This makes sense. Even our most prestigious medical centers are not able to shake down  the Centers for Medicare and Medicaid (CMS). CMS has the market clout to stand up to marquee hospitals: it is the nation’s largest purchaser of health care services.  No hospital could keep its doors open without Medicare’s business.

Of course, many hospitals grouse that CMS underpays, but evidence from the Medicare Payment Advisory Committee  suggests that, by and large, this is not the case. When hospitals are under financial pressure and reduce waste they turn a profit on Medicare payments. (A memorable 2009 HealthBeat guest-post by Dr. Pat S. offers in-depth analysis of  how, why, and when hospitals make a profit on Medicare patients.)

Nevertheless, the CEOs of many, if not most, non-profit hospitals  believe that it is their job to grow revenues, year after year—just as if they were at the helm of a for-profit corporation reporting to Wall Street’s investors.

Yet by keeping their operating rooms busy– even when medical evidnece does not jusitfy the surgeries– they are not adding to the wealth of the nation. By looking the other way when rainmaker surgeon operate in several ORs simultaneously, they are simply helping to drive the nation’s health care bill to unaffordable heights .

Yet hospital CEOs know that higher revenues enhance a hospital’s “reputation” making it more likely that it will make U.S. News & World Report’s list of the nation’s “100 Best Hospitals.”  (In the U.S. News rankings “reputation” currently counts for 32% of a hospital’s score. )  This, in turn, is likely to lead to a raise for the CEO.

Thus, from a hospital administrator’s point of view, if he cannot insist that Medicare pay more per procedure, there is only one solution: do more tests, more scans and more surgeries.

Indeed, as Dr. Atul Gwande explains in a New Yorker essay titled “The Cost Conundrum”:

“In recent years, we doctors have markedly increased the
number of operations we do. In 2006, doctors performed at least sixty million surgical procedures, one for every five Americans. No other country does anything like as many operations on its citizens. Are we better off for it?” he asks. “No one knows for sure, but it seems highly unlikely.”

Since 2006 “Things haven’t changed very much,”  says Lucian Leape a former surgeon and renowned patient safety expert.  “It’s a very serious issue, (and) there really hasn’t been a movement to address it.” 

By some estimates unnecessary surgeries may account for 10% to 20% of all operations in some specialties, including a wide range of cardiac procedures — not only stents, but also angioplasty and pacemaker implants — as well as many spinal surgeries. Knee replacements, hysterectomies, and cesarean sections

Neverthless, the problem remains hidden. “The system doesn’t want us to know about it,” says Rosemary Gibson, author of The Treatment Trap. Even the victims rarely know that they didn’t need the operation. For example, someone has an unnecessary knee replacement, that person might never know that the pain  could have been relieved just as effectively with physical therapy or a less invasive procedure. The symptoms are gone, so the patient suspects nothing.

Hospitals frequently claim that they are merely responding to patients’ demands.  And without question, in the places where Medicare spends so much more per beneficiary (Manhattan, Miami and Los Angeles, to name a few) most physicians and most patients firmly believe that more care –and more expensive care–is better care. This mindset defines the medical culture in these places, and helps explain why “location” is so important to health care spending.

                How Much Does Inpatient Care Add to Medicare Spending?

The IOM report emphasizes variations in spending on post-acute care after a patient leaves the hospital, including nursing homes and rehab facilities

But the report also shows that differences in acute care while the patient is in the hospital account for fully 27% of the variation in spending, with extra testing explaining 14% of the difference in costs, more procedures explaining another 14%, and increased use of prescription medicine accounting for 7%.

Other research underlines how much futile inpatient care boosts Medicare’s bills.  In March, the Journal of the National Cancer Institute published a report revealing that when it comes to spending on advanced cancer, Medicare’s outlays vary by up to 41 percent across regions, with spending linked to longer and more frequent hospital stays.   At the same time, the researchers found no direct link between higher regional spending and improved patient survival

The article pointed out that cancer care accounts for approximately 10% of Medicare spending.

The authors concluded: “The identification of inpatient hospitalization as a key driver of regional variation in advanced cancer spending is an important finding at a time when much attention on the cost of cancer care has been focused on the cost of chemotherapy.

 “Our findings suggest that health-care providers should be incentivized to develop strategies aimed at reducing potentially avoidable hospitalizations and increasing timely access to palliative care for patients with advanced cancer—goals that are consistent with patient centered care.”

                       More Profitable Procedures Become More Popular                                                 

The truth is that many hospitals are tempted to over-treat particularly when it comes to the more lucrative procedures.  Stenting shows up near the top the list.

In 2007 Business Week told the story of how stents “rescued” New York’s Mt. Sinai hospital:

“The 2,000-doctor hospital was struggling in March, 2003, when Dr. Kenneth L. Davis took over as chief executive. During the previous six months, Sinai had lost $50 million, partly as the result of tougher caps on Medicare reimbursement rates.  . . . While trimming costs, Davis also decided to build up practices in high-margin specialties. ‘Interventional cardiology was one of myriad areas where we were eager to facilitate growth,’ Davis explains. Dr. Samin Sharma, Mt. Sinai’s “King of Stents,” ran a cath lab which was central to this campaign, performing procedures that typically brought in as much as $20,000 a piece for the hospital.

“Sharma convinced his bosses that to capitalize fully on the stent boom, Mount Sinai should turn his cath lab into a 24/7 operation. At a cost of $400,000 a year, he figured, the hospital could put enough doctors and nurses on call to do emergency angioplasties late at night and on weekends. Soon the lab was averaging 15 off-hours patients a month. Interventional cardiology became a key revenue source for Sinai. By the end of 2006 the hospital’s total patient revenues had grown 41%, to $1.2 billion. Cardiology services, excluding surgeries such as heart bypass, contribute 15% of that, most of which comes from Sharma’s cath lab.”

This is just one of many such stories.

Let me be clear: I don’t think that most doctors who recommend these procedures are motivated by greed. As Dr. Nortin Hadler points out, there are many ways for physicians to rationalize their use. Professional pride plays a role: most doctors who implant stents firmly believe that they are helping their patients.

                                     Changing Our Medical Culture

I am convinced that at this point in time, the greatest challenge health care reform faces is our medical culture. What we are attempting to reform and transform is how millions of patients and providers think about medical care.

Inevitably, this will take time. And, just as with civil rights, while legislation can kick-start change, in the end a revolution will have to come from within.

Legislation can provide access to healthcare (a.k.a. health insurance.”) Recognizing that comprehensive healthcare is something that a civilized nation should make available to all of its citizens was a moral imperative. We have come close to doing that. I applaud the legislators and Congressional leaders who, against all odds, succeeded.

But legislation cannot improve the quality of health care unless and until both providers and patients are willing to embrace a radically new—and ultimately more conservative– way of looking at medicine. 

In the final decades of the 20th century we created a medical culture that values autonomy over team-work, competition over collaboration, cure over care, aggressive interventions over prevention, and certainty over humility.

Discussing stents, Dr. Thomas Graboys, a professor of medicine at Harvard Medical School, warned: “The public is looking for a magic bullet.

“Go to a non-hospital-based doctor in the community,” he advised patients suffering from angina.. “A well-trained internist can take care of the lion’s share of people with coronary heart disease. The vast majority of people do well on medication—cholesterol-lowering drugs, anti-hypertensives, low-dose aspirin”

We like to think of medicine as a heroic endeavor. Patents find it reassuring to think of their doctors as omnipotent and omniscient super-heroes. (If you will, “action figures.”)

We want them to Act –do something now.

But going forward, patients will have to come to a new understanding of what high-quality care means.These days, more physicians are beginning to counsel patients that cutting-edge hi-tech medicine carries risks as well as benefits. Trimming some of the waste from the system means sharing information with patients, acknowledging the pros and cons of various tests and treatments, and admitting that, for many illnesses, we have no definitive answers.

Medicine is, and will remain, an uncertain science.

In future posts, I plan to write more about how we can change our medical culture, and my belief that financial carrots and sticks may prop open the door, there are limits to what they can do. People change only if they see a reason to change. .

I would be interested in hearing from readers about how both doctors and patients are–or are not–changing.

12 thoughts on “A New IOM Report Reveals Why Medicare Costs So Much (Hint–It’s Not Just the Prices)

  1. You kind of rambled a bit but putting the first and a few of the last paragraphs together I guess your point is that Bush should have just taken an aspirin… statistically speaking.

    But since they tell us all to do that, don’t you think he probably already is. And given that he is one of only four former presidents of the United States still alive, don’t you think he probably has doctors good enough to know into which category he fits (stent vs. aspirin)? [And of course he really probably does not depend just on Medicare. Only about 4% of seniors do.]

    As for the rest of us, I guess you are saying, since we can’t afford doctors as good as Bush’s and we’re on Medicare (for which we paid for 45-50 years and are still paying), we should take one for the team, roll the dice on the aspirin even though we can get the stent via our Medicare/supplement and they’re as easy to get as having our tonsils out was 60 years ago (which I found traumatizing actually)

  2. Dennis–

    Thanks for your comment, and welcome to HealthBEat.
    You are right– I do tend to ramble
    But if you click on the links in my post, and look at the medical research, you find that there is no question: patients with stable angina (who have not had heart attacks) are better off taking medication. Stenting will not reduce their risk of heart attacks and death.. It will relieve their angina, but only temporarily.
    And the stenting procedures expose them to serious side effects–including death as a result of the procedure..

    Dennis, I realize that many people assume that if something is more expensive, it must be better. In some areas, this is true. (Food, for instance–where I live, more expensive grocery stores often have fresher vegetables, fresher fish, erc.)
    But much medcial reserach shows that tjhis does not hold true with health care.
    The most expensive doctors are not necessarily the best doctors.
    The Mayo Clinic in Rochester Minnesota is widely recognized as providing some of the very best medical care available in this country. Outcomes are excellent.
    But the final bill at Mayo is significantly lower than the bill for a very similar patient (same degree of illness, age, demographics) who was treated at our most expensive medical centers. (We have over two decades of reserach showing this: see http://www.dartmouthatlas.org)

    Meanwhile, outcomes are better at Mayo.

    For instance, for years, I had a Park Avenue doctor in Manhattan who was very expensive and didn’t take insurance. New York Magazine listed him as one of the “10 best Doctors in New York”
    I went to him because he had told me that I had glaucoma, and needed to see him 3 or 4 times a year.
    I did that–for many years. (My eyes are very important to me. )
    I then finally went to another doctor who told me “I don’t think you have glaucoma, but that’s not my specialty.
    I then went to someone who specializes in glaucoma.
    She gradually took me off the eye-drops and had me come back in every three months for testing.
    I didnt’ need the (very expensive) eye-drops.
    It turns out that I don’t have glaucoma.
    That was a few years ago. I see her annually, and still no signs of glaucoma. (See my post “Guess Who Has Been Overtreated For . . . . ”
    I know quite a few people in Manhattan who have had similar experiences.
    If you check out some of the worst health care overtreatment scandals int he nation, you will find that . often they involve brand-name docs and hospitals.
    My sister-in-law graduated first in her med school class at Yale. She practices family medicine in the rural Northwest, with her huband. Their fees are modest. She is a brilliant doctor.
    Sometimes, the doctors who charge the most are more interested in the $$$ than in the patients


  3. P. S. Dennis–

    Yes, 96% of seniors rely only on Medciare. Most have Medigap or Medicare Advantage policies.

    They tend to cover co-pays (especially for medium-term hospital stay,) drugs, etc.

    But in the case of a Bush’s one-day hospitalization and stent procedure, Medicare would have covered virtually all of the cost.

  4. Thanks Maggie for an excellent post.

    1. On the commercial insurer side, we are starting to see more reference pricing, that aimed straight at the financial heart of the prestigious hospitals. Once a few people get Balance Bill Shock, whole groups will stop using those hospitals when they can.

    Also on the commercial side, many new plans on the ACA exchanges are excluding prestigious hospitals from their networks.

    Every single country has some tension between providers and payors. This is perpetual, and I do not mind it.

    2. On the Medicare side, there is a simple solution.

    Fees for cardiology should have been reduced as utilization increased.

    That is exactly how Japan and Germany and to some extent France deal with medical inflation.

    But in the USA, this simple solution is politically near- impossible, because Congress controls the Medicare fee schedule. We cannot even get competitive bidding for wheelchairs and scooters much less cardiology.

    • Bob–

      Thank you.

      I agree that people are becoming concerned about how much more “brand name” hospitals charge.

      But in some places (for instance New York City) most people genuinely believe that our most prestigious physicians (Park AVenue etc.)
      and medical centers are better.

      A large company would probably have a hard time leaving most of them out of its network. They might well lose some of their best employees. (Upper-middle class people in Manhattan feel very strongly about their doctors.You can see this reflected in the New York Times constant defense of Manhattan’s hospitals, arguing that they don’t overtreat or over-charge.) Also, the top executives in the company want those marquee hospitals and doctors for themselves and their families. By law, they cannot cut one deal for themsleves and another deal for

      In California, both the city of Los Angeles and the Exchanges can exclude Cedars-Sina because they have Kaiser Permanente.
      Kaiser’s insurance and hospitals are far and away the most popular in California– and their quality ratings back up that perception.

      In NYC, unfortuantely, we do not have a high quality non-profit insurer/provider. . .

      So in some places, it will be easier for insurers (and employers) to limit networks than in others.

      On Medicare fees for doctors–Congress doesn’t set the fees. A little known commitee, made up mainly of specialists, sets those fees. They operate behind closed doors. Medicare almost always accepts their recommendations.
      There are efforts underway to change the system, but specialists, and the AMA will fight tooth and nail.

      Once people are earning a certain amount of money, it is very, very difficult to persuade them to accept less.

      But what we can (and will ) do under the Affordable Care ACt is to begin to trim reimbursement for specific treatments for patients who fit a particular medical profile, based on what we know about the Effectiveness of the procedure. My guess is that fees for stenting procedures on patients with either “stable angina” (or no real symptoms– like President Bush) will be gut sharply. This is just one example.

      As I read the law, HHS and Medicare can do this without going through Congress, They have already cut fees for in-office testing where doctors use their own equipment (and make the profit) on the tests. (When they buy the equipment, the evidence shows that they tend to do many more tests. That’s how they pay for the equipment.)

      Finally, under the ACA Medicare will have competitive bidding for durable equipment. See http://www.prweb.com/releases/2013/8/prweb10929340.htm and http://www.crainsdetroit.com/article/20130804/NEWS/130819884/blues-to-expand-medical-equipment-network-end-pacts-with-2-local

      Bob, quite often your comments repeat things that you must have read in fear-mongering or anti-reform blogs. I wish you would just Google those facts before repeating them. Otherwise, you wind up spreading misinformation. In the past, you have said that you think you can tell when a conservative blogger is blowing smoke. But that’s hard to do when people outright lie. Even articulate, seemingly respectable libertarians and conservatives do this. They believe they must because they feel so strongly that Obamacare will be bad for the country (or at least for their constitutents).

  5. Maggie,
    I don’t see rambling. You make good points throughout. The dialectic gets very interesting when considering ways to reduce provider avarice, in general. Simple, inductive logic always leads to the money. In this regard, every doctor needs to take a hard look in the mirror and ask:”Am I part of the problem, or the solution?” (Who will admit it?).
    With regard to the industry (insurers, drug companies, etc.), how can their shareholder-oriented behavior (by definition) ever be changed? Perhaps the biggest problem is embedded in this pseudo-tautology, i.e., that patient’s interests are not actually first and foremost, but are simply substrates for profit. The latter is possibly a bigger problem than anyone in the business cares to admit (or even consciously recognize). Unrest from within is remarkably suppressed. If true, we can then predict that eventual volatility will be outsized.


    • Thanks Ruth.

      In terms of changing the health care industry– as long as it’s a for-profit industry, the needs of shareholders (for profits) come first. BY LAW U.S. corporations are supposed to put their shareholders first. They are not supposed to lie
      to their customers, but customers are told “caveat emptor”–buyer beware. The corporation is supposed to charge as much as it possibly can, to enhance profits for shareholders.

      In the case of health care, it’s selling a necessity. The buyer doesn’t have much leverage. 80% of our healthcare dollars are spent when we are very sick. We are not in a position to say “That’s too much. I’ll wait until prices come down.”

      This is why health care should be a regulated industry– like the industries that provide electricity and gas (also necessities).

      Government needs to set prices, and protect the healthcare consumer (i.e. patient).

  6. Thanks for your thoughtful comment, Maggie, I do need to double check my sources.

    Ironically, my source for generalizations on the weakness of Medicare cost controls is Uwe Reinhardt, who I think we both admire greatly.

    When Medicare was passed in 1965, the govt worried that doctors and hospitals might not accept it. That led them to approve more or less any billed amount for about 15-20 years.

    In the 1980’s, the DRG schedules were supposed to starch the inflation out of Part A.

    Instead hospitals learned which DRG’s were profitable, and have focused on doing more and more of them for the past 20 years. (largely heart and cancer cases)

    The persons who run Medicare have very little to gain by trying to cut down overpayments, and as Donald Berwick found out they have something to lose at least bureaucratically.

    You have done a great job of finding things in the ACA that many of us did not know were in there.

    My impression (without reading the bill, I admit) was that the IPAB had no teeth and could only suggest fee reductions to Congress. I would be delighted if I were wrong.

    • Bob–

      Thanks for replying, but I doubt Uwe Rheinhardt said that Medicare gave up on competitive bidding for wheelchairs, etc.
      Reinhardt checks his fact. The program has expanded.

      You write: “The persons who run Medicare have very little to gain by trying to cut down overpayments, and as Donald Berwick found out they have something to lose at least bureaucratically.”

      I have talked to Don Berwick about his experience at Medicare. You are mistaken. He very successfully inspired change.
      And Medicare has been cracking down in terms of what it does and doesn’t pay for. (The conservatives would like to believed that Berwick failed. He didn’t. )

      Finally IPAB does have teeth. If Medicare spending begins to rise too quickly, IPAB will recommend changes. (IPAB Is not allowed to reduce benefits or shift costs to seniors. The changes will involve paying less for certain things.)
      If Congress doesn’t like IPAB’S recommendation it has a short period of time (maybe 45 days?) to come up with an alternative suggestion that will save an equal amount of money–without rationing care, cutting benefits or shifting costs to seniors.
      If it doesn’t manage to do this (and probably Congress wouldn’t be able to agree on an alternative) IPAB’s recommendation automatically becomes law. That’s teeth.

  7. Pingback: Angry Bear » A New IOM Report Reveals Why Medicare Costs So Much (Hint–It’s Not Just the Prices)

  8. Maggie,

    Excellent post! And no, I don’t see any rambling either. You’ve made some excellent points, and you’ve supported them with evidence. This line in particular struck, because it is very true right now-
    “autonomy over team-work, competition over collaboration, cure over care, aggressive interventions over prevention, and certainty over humility.”
    Where does the patient feature exactly? Everything seems to be all about the people working in the healthcare sector, not the ones they’re supposed to be caring for.

    • Matthew–


      I’m afraid that for a long time, our health care system has been “doctor-centered” and “hospital-centered” rather than patient-centered.

      But these days there are more and more physicians who are becoming aware of the need for more “patient-centered” care.

      Don Berwick wrote a great essay about what that means here http://content.healthaffairs.org/content/28/4/w555.full