Why healthcare in the US is expensive

Health care in the United States is too expensive since hospitals, physicians and pharmaceutical companies charge too much money for their services and goods.  For instance, a recent McKinsey study compared the U.S. to 13 other developed countries and found that in every other country, patients have more frequent hospitalizations, see physicians more often, and use more pharmaceuticals than we do.  But our costs are are much higher than theirs because our hospitals charge more, our specialists earn more, and our drugs cost more.

Since Massachusetts, at last check, is still part of the United States, it should come as no surprise to anyone that Massachusetts is failing to deliver inexpensive/high quality care even though it is being held up by Democrats as an exemplar of sound government thinking in the face of untenable medical costs.  You can have transparent care, you can have ACOs, you can have forced enrollments or financial penalties (ne: "mandate"), but if the underlying costs are too high, it doesn't really matter what kind of enrollment, reporting or penalty structures you superimpose on an overpriced portrait.  Which means, by extension, the Affordable Care Act will fail, since the "ACA" is an extension of the Massachusetts model.  The only difference here is that all 50 states will get to suffer under the same misdirection as Massachusetts has over the past five years, sans "mandate" given its new "unconstitutional" status.

Before getting into the impending Federal debacle, let's look a little more closely at what is going down in Massachusetts.  As you probably already know, Massachusetts went to universal health care coverage 2006, using the now infamous mandate to require individuals to buy health insurance or be penalized.  But what you may not know is that Massachusetts passed more legislation in 2008 in an attempt to promote cost containment primarily by increasing transparency.  The thinking was that hospitals, insurance companies, and physician groups would all be able to negotiate more effectively if cost and quality data were made available to all interested parties.  The theory behind this muddled thinking was that transparency would convey value, allowing smaller groups to gain more favorable "economy of scale" cost structures.  In addition, standardized reporting of costs, prices, and quality would stimulate Massachusetts consumers to make “value-based purchasing decisions.”

Anyone with even a little business sense would realize the Massachusetts model is flawed.  First of all, you can't achieve economies of scale if you don't have scale (i.e., size) to begin with.  If you are a smaller group, you will pay more per head.  It doesn't matter if you are buying health care, fish or apples, the more you buy, the better the deal you'll get.  If you've seen people pushing shopping carts containing mouthwash containers the size of babies out of Costco so they could save a few bucks on a per gargling session, then you understand economy of scale and the lengths that people will go to in order to attain it.  Secondly, putting all the costs in the same format and making them clear to everyone won't necessarily have any impact on costs.  That assumes that consumers heretofore were impeded by cost obfuscation attributable to non-uniform formatting and price inavailability.  Even if this is true, how much impact did the alleged lack of this information have on consumer spending on health care?  It appears that the Massachusetts Attorney General, who happens to be a Democrat (at last check) has the answer to this question.  In fact, she concludes that the strategy is not working as well as was hoped.  The reason is that in Massachusetts, as in the rest of the U.S. – and unlike the rest of the world – government does not hold down prices.  The most striking finding in the Massachusetts report is the wide variation in payments made by insurers to providers.  Such variations are not justified by differences in quality.  All six major insurers in the state negotiated very different reimbursements for the physician groups and hospitals with which they established contracts.  Each insurer reimbursed its highest paid physician group between 1.5 and 2.3 times what it gave its lowest paid physician group.  Insurers’ payments to the highest price hospitals were 1.7 to 3 times their payments to the lowest priced hospitals.  Even when a global budget was used, as in the Blue Cross Blue Shield of Massachusetts “Alternative Quality Contract” (its version of an accountable care organization), total medical spending rose by an average of 10% in one year.  At the same time, the average total medical expenditures rose only 1.7% among BCBS providers that did not participate in the Alternative Quality Contract.  The discrepancy was largely due to higher payments made by BCBS to AQC providers.  The Attorney General's report correctly concludes that global budgeting alone will not solve the cost problem.  Encouraging physician groups, hospitals, nursing homes, and other health care providers to risk share and to operate within a fixed budget is a potentially good idea, but it won’t work if the budget is too high to begin with.  In this case, the physicians have little incentive to change utilization patterns.

Furthermore, health care purchasing is not subject to normal market forces, something health care policy "experts" continue to overlook.  For example, the Massachusetts Attorney General's report advocates a “competitive market-based approach balanced with limited government intervention” that will be in effect until “the corrective effects of tiered and limited network products can improve market function.”  What are these new health insurance products that Massachusetts is hoping will solve the cost problem?  Tiered products give purchasers of health insurance the option to select a plan with lower copays for choosing “efficient” physicians or hospitals.  Does "efficient" mean a physician 50 miles away that will only see new patients on the 3rd Thursday of every other month?  Obviously, you can motivate people to join these plans through lower premiums and copays, but you better hope the people who join them are young and healthy individuals who never need health care.  Because if they do, they'll be doing it on a wing and a prayer.

The tiers are based on crude definitions of physician and hospital “efficiency” and fail to recognize that a large factor in the high cost of medical care is due to across-the-board over-utilization of expensive technology.  But what is clear is that the place to start is by restraining hospital and physician charges.  What is also becoming obvious is that government involvement in the health care issue, first at the state level, and now at the Federal level, needs to change from foisting ineffective, window-dressing programs on the public to actually setting prices for all health care, not just those reimbursed through Federal programs like Medicare and Medicaid.  It's too late to close the gate, the cows are out and spread out all over the field.  With a rapidly aging population migrating into a bankrupt Medicare program, the time is right for either provider pricing across the board, or the elimination of set prices/reimbursements on Federal programs (e.g., DRGs) so we can go to a full-scale market where price setting and health care consumer purchasing power are playing on the same field.  By giving the ultimate power to the consumer, the word "efficiency" will actually have meaning.  Rather than a term spun by a state, and soon, a Federal government, it will be a word with meaning, a word that will be used by health care consumers to justify the spending of their dollars on care they need, and, if a little common sense finds its way into this debate, on care they can afford.