The conventional wisdom about skyrocketing healthcare costs tends to blame someone: patients who demand too much care; doctors who practice defensive medicine because they fear being sued; aging boomers, and finally, everyone’s favorite, “the insurance companies.”

In fact, none of the above is the driving force behind the nation’s spiraling health care bill, according to a brand new report from the Center for Studying Health System Change (HSC) titled “High and Rising Health Care Costs: Demystifying Health Care Spending.” (Many thanks to Robert Laszewski at Healthcare Policy and Marketplace Review for calling my attention to this report).

The culprit behind long-term health care inflation, the study reveals, is not a “who” but a what: “advancing medical technologies” combined with low productivity.  Yes, that’s right: while improved technology has boosted efficiency in other sectors of the economy, when it comes to healthcare, technological advances are associated with lower productivity.  There is no one group to be blamed for runaway healthcare inflation; the problem is systemic.

The HSC report is part of the Robert Wood Johnson Foundation’s “Synthesis Project” and it is indeed, synthetic. Paul Ginsburg, the report’s author, bases his study on an in-depth review of an “extensive literature that examines which drivers are most important in explaining increases in health spending over time.”  The conclusions “have been very consistent,” he observes. “Technological change (which in the world of medicine includes innovations in equipment, devices, drugs, tests, and surgical procedures) is the most important factor.”

But one thinks of ongoing technological advances as one of the great virtues of U.S. healthcare: how can we regret the high cost of that technology?

The answer: some of the treatments are valuable, some are not. As
Ginsburg notes, “Advancing technology may have a particularly large
impact on spending in the United States because of few requirements
that effectiveness be demonstrated before technologies are used
broadly.” 

Moreover, much of our technology is overpriced. The U.S. pays
significantly more than other nations for precisely the same products
and services. Finally, and most importantly, we often use the
technology on a broad swathe of patients when only a few, who fit a
very specific profile, actually benefit from it.

Excess Capacity and Low Productivity                   

But the technology itself is not the only problem; low productivity
also contributes mightily to runaway health care inflation. In other
industries, technology has boosted productivity. Not so in healthcare,
Ginsburg explains, in large part because “healthcare delivers these new
technologies relatively inefficiently.” For example, the report notes
that “too many small facilities” that invest in bleeding edge
technologies run "well below capacity.”

The problem is this: rather than collaborating to share new technology,
hospitals and outpatient centers all invest in the same equipment as
they vie for well-insured patients. As a result, “costs in outpatient
settings are higher” than they need be, and higher than in many
hospitals “because of subscale operation of facilities.”  Ginsburg
explains: “In contrast to a hospital where CT equipment is being used
for 20–30 scans per day, freestanding outpatient facilities,” which
charge “very high prices” and enjoy “lower overhead” can “earn a profit
at 4–8 scans per day.”

In Escape Fire, Dr. Donald Berwick, president and co-founder of
the Institute for Healthcare Improvement, expands on how competition
leads to redundancy and lower productivity: “Duplication of services
results in higher costs, higher usage rates and inefficient use of
capital…Most metropolitan areas in the United States,” he argues,
“should reduce the number of centers engaging in cardiac surgery,
high-risk obstetrics, neonatal intensive care, organ transplantation,
tertiary cancer care, high-level trauma care and high-level imaging.”

Berwick acknowledges that “this is not an easy change for physicians to
accept. Some physicians in high-technology specialties will lose income
and job opportunities as a result. For-profit entrepreneurial providers
of medical imaging, renal dialysis and outpatient surgery, for example,
may find their business opportunities constrained.

“It will be necessary for other physicians, who see the benefits of
consolidation of services, to insist on sensible regionalization
nonetheless, even at the risk of internal professional conflicts,”
Berwick continues. “Courage in medicine now includes the courage
not to demand the highest level of technology ‘right here, on site,’
but to seek instead the more challenging form of integrated,
interinstitutional relationship that, in the long run, achieve more for
less.”

Ultimately, Berwick points out that “Much of the waste and delay in
health care comes from mismatches between supply and demand; in
particular, we tend to maintain high capacities in order to meet
sporadic demands.”  In medical school, he recalls, we used to talk
about how “doctors were sitting in emergency rooms waiting for the
busload of hemophiliacs to hit the tree”—a perfect metaphor for
overcapacity. “In the privacy of their homes,” Berwick adds, “each
[hospital] CEO says the same thing: “This is silly. We could do a lot
better if we worked together, but it’s impossible…” 

Impossible?  Berwick would say
that this is just another example of the “deficiency of will and
ambition in the major centers of power” that stands in the way of
delivering more efficient, affordable, higher quality healthcare in
America.

How Excess Capacity Affects the Patient

Patients as well as doctors may object if they don’t find all of the
diagnostic equipment they might possibly need, on site, at a hospital
within twenty minutes of home. Going to a second medical center located
25 minutes in the other direction might be inconvenient. But not as
inconvenient as finding that you cannot afford the technology you need
five years from now because we as a society chose to let healthcare
inflation race ahead, unchecked.

Moreover, as always, when we waste healthcare dollars, there is a real
danger that patients will be harmed.  In the current situation,
“extensive investments in inefficiently used capacity” leads to
overtreatment—especially, Ginsburg observes, when physicians are
referring patients to facilities in which they have a financial
interest. Too often, physician- investors send patients to these
facilities for a test or a treatment on the theory that “it can’t do any
harm”—even while there is no medical evidence that they will benefit.

As we have argued in past posts, in the healthcare market, it is the
seller, not the consumer, who decides how much care a patient needs.
And this, Ginsburg explains, is one reason economists believe that we
are spending too much and patients are undergoing “too many” cutting
edge procedures:

“Nobody asks whether spending on computers or automobiles is too high
because only private purchasing decisions are involved. Consumers
decide what they want to buy, based on their preferences and their
budgets. If spending on computers increased sharply, most would label
this a success story, meaning that improvements in the products were so
meaningful to consumers that they have decided to sacrifice other goods
and services to spend more on computers.”

By contrast, “when it comes to medicine, consumers here are dependent
on physicians…Although service providers outside of health care also
have incentives to convince consumers to spend more, health care
professionals are likely to have more influence because of consumers’
limited technical knowledge and the urgency, fear and pain involved in
many medical episodes.” Patients don’t “decide to sacrifice
other goods and services to spend more on healthcare”; they feel they
have no choice.  Given these circumstances, some economists are
unwilling to accept the current proportion of GDP spent on health care
as optimal.”

As I have indicated before, in the vast majority of cases the health
care provider sincerely believes that the product or service he
recommends will help the patient—after all, it has helped other
patients. Even when physicians are aware of evidence-based guidelines
that would limit the use of a technology to patients in a particular
group, research shows that doctors tend to ignore the evidence. U.S.
physicians don’t like to follow “rules.”

Moreover, they, like their patients, tend to believe that more
healthcare is always better—forgetting that, as Dr. Gilbert Welch
recently argued in the New York Times,
all medical products and procedures –even “screening for heart disease,
problems in major blood vessels and a variety of cancers”—carry some
risks. “These interventions do prevent advanced illness in some
patients,” Gilbert adds, “but relatively few.” (Gilbert’s point is that
while some patients benefit from some tests, other tests are likely to
do more harm than good. For his full argument, see this post on preventive care.)

What about Obesity and Fear of Malpractice?

Frequently,  when commenting on our $2.3 trillion health care bill,
observers point to the epidemic of obesity in this country: “A
well-known analysis
by Kevin Thorpe attributes 27 percent of increased inflation-adjusted
spending from 1987 to 2001” to rising rates of obesity” writes
Ginsburg. But he goes on to note that a closer look
by the Congressional Budget Office reveals that obesity itself accounts
for only 12 percentage points of the 27 percent; “the remaining [15
percent] increase results from changing treatment patterns…which
would be more appropriately be classified as the contribution of
technology.”

According to the CBO’s 2008 report “In 1987, spending on treatments
per morbidly obese person was about 18 percent higher than spending per
person of normal weight, but by 2001 it was 70 percent higher.” Yet
sadly, outlays for medical technologies to help obese patients have
proven largely ineffective. New medications have added greatly to the
jump in the cost of treating these patients, but as the Internal Medicine World Report notes:
“New data presented at the annual meeting of the Endocrine Society in
2007 demonstrated that currently available medications for weight loss
produce only marginal benefits in the long-term.” It turns out the
effectiveness of these medications attenuates after 4 months of
continued use. This is not “because of a lack of compliance,
researchers found, but rather due to leptin resistance, which persists
even in the face of pharmacotherapy.” 

This helps explain why, even when obese patients are under a doctor’s
care, and do their best to follow his instructions, only 5 percent
mange to lose weight and keep it off.  This has nothing to do with will
power, physicians explain. “It’s a very complex disease.” [Note to
HealthBeat readers: I plan to write about the mysteries of obesity in a
later post, so keep your powder dry—you’ll have a chance to comment on
this then.]

Bariatric surgery is another new technology that helps account for the
more than three-fold increase in spending on obese patients. But while
it works for some, the risks of mortality and long-term health problems
rule it out as effective solution for most patients.

Moreover, Ginsburg points out,  “analyses” that claim that obesity is a
major factor behind soaring health care costs  “do not factor in life
expectancy.”  If we did manage to reduce obesity, he points out,  “this
would  reduce spending in the short run but increase spending in the
long run”  because once-obese patients would live longer and “be
exposed to other, expensive illnesses” like Alzheimer’s. (This, of
course, is not a reason to suspend research on obesity. It merely
explains why we shouldn’t blame the obese for health care inflation—or
charge them more for insurance.  In the long run, they cost society
less than many trimmer patients.)

HSC’s report also pokes holes in the notion that lawyers who bring
malpractice suits are responsible for a large portion of health care
inflation. First, consider malpractice premiums: without question,
premiums are exorbitant for some specialties in certain states, but research
shows that “over the thirty years from 1970 to 2000 total malpractice
premiums rose from 5.5 percent to just 7.5 percent of total physician
practice expenses—so premiums cannot be an important cost driver.”

Research on how much the practice of “defensive medicine” affects
spending is “challenging” Ginsburg notes, “because liability risk
pushes physicians in the same direction as fee-for-service payment
incentives—providing more services.” How do you untangle the two
motives?

“The best research,” he observes, “has focused on comparisons of states with tort reforms with other states.” This study published in the Quarterly Journal of Economics
analyzed Medicare data for beneficiaries with serious heart disease and
found that "reforms that directly reduce liability pressure (such as
limits on noneconomic damages) lead to reductions of  5 percent to 9
percent in medical expenditures…Studies of obstetrics find smaller
impacts. Only this study,
which focused on cesarean delivery rates, found evidence of defensive
medicine, concluding that a total cap on damages would reduce cesarean
deliveries by 3 percent and total obstetrical charges by 0.27 percent.”

Ginsburg sums up other reviews of tort reform: “A 2006 synthesis of
this literature concluded that caps on noneconomic damages do reduce
award size substantially, but the reductions in medical malpractice
premiums are modest and other tort reforms did not have significant
impacts. A 2006 report by the Congressional Budget Office finds the
evidence of impact of tort reforms to be inconsistent…”

He concludes: “These results confirm that the shortcomings of the
liability system are not an important driver of cost trends or even a
large factor behind costs being high. Indeed,” he adds, “the literature
emphasizes that the larger potential for true reform is in the area of
better quality of care and more equitable compensation of those
suffering large losses.”  (For further discussion of myths and facts
about malpractice see this HealthBeat post: “Malpractice Reform: Fiction, Facts and the Future.”)

We Pay More for Everything (Except Nurses)

Our inefficient use of ever-more expensive medical technologies stands
as the major explanation for unaffordable healthcare. But a question
remains: why are these new technologies so expensive?

The answer is that the U.S. is the only nation in the developed world
that has decided to let healthcare become a largely unregulated,
for-profit enterprise. As a result, in the U.S., those who produce new
medical technologies set prices without much push-back. The producer is
the “price-maker;” we are the “price-takers.”  In other nations, the
government protects taxpayers and consumers by negotiating with
drug-makers, device-makers, hospitals and doctors, setting limits on
how high prices can go.

Our government doesn’t do this, so we shell out more for every pill and
procedure.  The HSC report cites a McKinsey Global Institute (MGI)
study which estimates that drug prices are 70 percent higher in the
United States compared with OECD countries. When it comes to devices,
The United States spends 54 percent more than OECD countries for the
top-five inpatient medical devices (e.g. implants, stents).” 

Here the report observes that “many studies show that other healthcare
systems effectively exercise monopsony power in setting payment rates
for providers, which fragmented U.S. payers cannot muster.”

This however, is not the whole truth. In the U.S., the government (i.e.
taxpayers) picks up  more than half of our national  healthcare tab by
paying for Medicare, Medicaid, care for government employees, the
Veterans administration and other government health programs. As a
purchaser, the government does have the size and the clout needed to
insist on discounts.

The problem is that Congress does not have the spine to stand up to the
lobbyists and let Medicare begin negotiating for lower prices. Though I
suspect that, in the recession ahead, this will change.

Ginsburg also notes that physician pay in the U.S. is more
generous—particularly if they are using those bleeding edge medical
technologies that we so admire. Physician compensation in the United
States is 6.6 times per capita GDP for specialists and 4.2 times for
primary care physicians. By contrast, in the average OECD country,
specialists 4 percent of GDP per capita, while primary care doctors
take home 3 .2 percent. 

Only the “salaries of [U.S.] nurses are in line with OECD countries.”
Although they have campaigned for—and won—higher compensation, nurses
just don’t have the political power that manufacturers or the best-paid
physicians possess. Yet they are the life-blood of our hospital system.
One can only wonder how many fewer errors there would be in our
hospitals if  they had fewer MRI units, and all of the openings in the
their nursing staff were filled.

As for physicians, our doctors must be paid more in part because they
graduate from medical school with enormous loans. Other countries
subsidize the cost of medical education. As I have suggested before, if
we followed that model, covering medical school tuition and expenses
would cost all of us far less than paying specialists 6.6 percent of
GDP per capita over the course of a 35-year-career. 

Of course in the context of a culture that pays mediocre CEOs millions,
we would have to continue to pay physicians a much larger share of GDP
than in other countries. By allowing CEO compensation to rise to such
absurd levels, we have  distorted pay for everyone on the top step of
our income ladder—a problem that I suspect we will have to address as
we trim some of the excesses from an economy in distress.

In Part 2 of this post, I plan to examine Congressional  Budget Office
Director Peter Orszag’s warning that, going forward, it will "be crucial to address the nation’s looming fiscal gap — which is driven primarily by rising health care costs.: Otherwise, he warns, other nations will stop buying our Treasuries—which would be disastrous for our economy.

I’ll go on to consider what this implies for health care reforms, how rising insurance premiums reflect rising health care costs, how much a single-payer system could or couldn’t save; how negotiating for lower prices might lead producers to set new priorities when developing medical technologies, and whether universal coverage would make healthcare cheaper—or more expensive.