This subject has been around a long time. It has been a "front burner" item at least since the Obama Administration started trying to pass Obamacare. The proximate cause of this post is the publication of a long article in Time Magazine by Steven Brill. At the time I am writing this post it is available on the web at http://healthland.time.com/2013/02/20/bitter-pill-why-medical-bills-are-killing-us/. I don't know if Time intends to keep it up permanently. Mr. Brill makes a positive and useful contribution to the discussion. But it was neither the opening shot nor the final word.
Back in the olden days when I was born things were different. When my mother decided she was pregnant she sought out an OB/GYN she trusted. He charged a flat fee that covered everything: visits, hospital fees, drugs, the works. In those days few people had insurance and the Great Depression was not that far in the past. People expected to pay medical costs out of pocket and most medical procedures were fairly inexpensive. A "hospital bed" was just a bed that was not very different than a normal bed and the hospital was a building that was not very different than other buildings. There were few drugs and medical devices and both tended to be inexpensive.
After that medicine started getting much more expensive, complex, and specialized. And more and more people started getting medical insurance through their employers. For a good long time this insurance was pretty cheap because medicine in general was pretty cheap. So companies used medical plans as an inexpensive lure to attract employees. But medical costs started a long term trend of increasing at a rate much faster than other costs. And after a while company paid medical plans started getting expensive.
Back in the period when medical insurance started to become popular my parents signed us up for an HMO called Group Health. At the time Group Health was slightly more expensive than a traditional insurance plan, perhaps 10% - 20% more expensive. But many people thought the extra expense was worth it because they perceived the GHC product to be better than a standard medical plan. And at this time the competition was between nothing and GHC as most people were not covered by an employer funded insurance plan. And GHC was very successful during this period.
Eventually company insurance became quite common. Some companies offered an HMO option for a little more money but many did not. But then a law was passed that said employers had to offer an "HMO option". This did not work out as supporters expected. The insurance companies just started offering a slightly modified version of their standard insurance which they called an HMO option. Most people's experience with HMOs is with one of these phony HMO insurance option rather than a real HMO. So why am I going into all this?
Because the HMO model is a wellness approach. The idea is that you pay one standard fee. If the HMO can keep you healthy then they make money on you. Otherwise, they don't. The alternative approach is the one we all get now called "fee for service". The insurance company pays for some or all of the cost of whatever services you end up using. There is an argument you hear all the time now that if we only did wellness rather than fee for service medicine would be cheaper. GHC and other HMOs in those early years worked hard and worked smart in their wellness efforts. But they always ended up costing more than the insurance plans. Now it is possible that when you counted up all the costs the HMO approach was cheaper. But the premiums said it was more expensive. And what this tells us is that if the wellness approach is cheaper it's not cheaper by a lot. If it was a lot cheaper then HMOs would have been able to get their premiums below those of the insurance plans. I think the wellness approach is the better way to go. But I don't think it is going to save a lot of money. It might even slightly increase health care costs.
Mr. Brill does not seriously address the wellness versus fee for service debate. So let me move on to an area where he does spend a lot of time and effort. Who's the villain that is driving up health care costs. Mr. Brill says it is NOT doctors. But here some context is missing because the key events happened many years ago.
When people first started noticing that health care costs were climbing the dominant component was doctor fees. At this time hospitals were still relatively cheap as were drugs and medical devices. So people went after doctors. They essentially drove the fees doctors charged down relative to other medical costs. Before doctors could make a good living by charging fees that they thought were appropriate. And many of them would bundle in a lot of extras as did the OB/GYN my mother went to when I was in the process of coming along. But this bundled approach started being a bad idea from the doctor's point of view. One doctor might bundle in a lot of stuff and charge a higher rate compared to another doctor who bundled less in. Surveys were done as to how much each doctor was charging and standard rates were developed. So doctors did the sensible thing. They unbundled. Patients now got billed separately for everything so that the only thing that was included in the doctor charge was for the time the doctor spent.
This trend continued and intensified. This drove the hourly rate the doctor could charge down. And great amounts of creativity were applied to increasing the cost and number of things that were charged separately. Mr. Brill goes into the ridiculous lengths that are now employed to pad the bill by adding individual charges for individual items. One of his examples involves a single tablet of a Tylenol generic that is separately charged. Another example is a charge for the smock the doctor wears when he examines you. This ever finer slicing and dicing of medical charges have added greatly to the costs of medicine.
And by now this fierce pressure on the hourly rates doctors charged has proceeded long enough so that Mr. Brill now considers doctor rates to not be a major part of the problem. But there is another phenomenon related to the income of doctors that Mr. Brill does rightly spend a lot of time on. While the hourly rate doctors charge is now relatively low the amount of income doctors receive is now quite high. This is because doctors now get a lot of their income from other medical sources. They form group practices and the group practice creates subsidiaries that perform medical services like lab work, pharmaceutical services, CAT scans, MRI scans, X-Rays, etc. These services are ordered by the doctors in the practice and provided by the wholly owned subsidiary which charges high fees for the service. So doctors make large profits on the medical goods and services they order. In some cases doctors get a direct or indirect kickback from medical device makers for the device (e.g. replacement knee) that the doctor specifies. All these alternate sources of income are medical related but they don't show up as an increased hourly rate. They also encourage doctors to prescribe extra procedures. More procedures means more money for the doctor.
Mr. Brill spends most of his time dissecting actual medical bills received by patients. His point is that hospitals and other medical facilities jack prices way up. This results in a lot of profit for the hospital. The fact that many of these hospitals are considered non-profits by the IRS makes no difference at all. That just leaves more money for new buildings, new expensive medical devices like MRI scanners, and especially higher salaries for senior hospital executives. He singles out the salaries of a number of these executives. One case among several involves Yale University. The executive who oversees a hospital affiliated with the Yale Medical School makes several times as much as the president of Yale. (Actually, this sort of thing is not that unusual. In my state the highest paid state government employee is the football coach. He makes far more than the president of the university he nominally coaches for or the governor of the entire state.)
Mr. Brill spends a lot of time on something he calls the chargemaster. I have never heard of such a thing. What he describes sounds like what is usually called a price list. It is a list of all the goods and services a hospital provides and the nominal price for each. Calling it "chargemaster" rather than "price list" makes it sound more exotic I suppose. "Look at me! I have discovered this secret thing you have never heard of before. And its very bad." Whatever you call it, it is very bad. But not because it is some kind of exotic secret thing. Its bad because of how it is used and abused. Companies have been abusing price lists since time immemorial. "This widget is on sale at 50%, 70%, 90% off it's suggested retail price". We have all seen zillions of examples of this sort of thing going on all over the place. Anyone who doesn't think that the "list price" has been pumped up as much as the retailer thinks he can get away with should have his head examined.
Mr. Brill makes three general points. First, hospitals do this kind of inflation to an even more extreme extent that even the sleaziest retailer. He cites examples of prices that are thousands of percent too high. Second, hospitals provide no justification for the price they list. This item is no mystery to me. I will talk about it later. And finally, hospitals actually charge full list price to some of their customers. Insurance companies usually get a discount off this list price. A common amount is 30% off. But it may be 50% off or more. It is not unusual for Medicare to get 90% or more off. But if you are a walk in customer (i.e. no insurance or Medicare) they will usually initially charge you full list. If they give you a discount it is usually considerably less than the amount of the discount they give to insurance companies. Medicare charges are based on actual costs and not list price. And actual costs, even after a "Medicare markup" is added in, will frequently amount to a discount of 90% or more off the list price.
Mr. Brill never did get a straight answer as to how list prices are set. I can tell you how it works. The list price is whatever the hospital thinks the traffic will bear. They don't want to admit this so they give Mr. Brill a nonsense answer or no answer at all.
Partly what's going on here is the old balloon analogy. If you squeeze the balloon in at one place it just bulges out at another place. If doctors can't get enough income from charging higher rates they will find another way. They will have their practice buy a CAT scanner then order up a lot of CAT scans, as an example. If a hospital can't get a high enough room rate they will start charging by the pill for Tylenol or assess a fee for changing the sheets or jack up the price for X-Rays, etc.
We have seen where some part of the medical establishment decides they are not making enough so they game the system. And if the rules are changed to deal with one revenue enhancing technique people will adapt and find a new technique. One contemporary example of this that Mr. Brill discusses is drugs. Back in the olden days my HMO was known for pushing pills. Why? Because at that time drugs were usually cheaper than alternatives and studies showed they were effective. But times have changed. Drugs, as a general category, are no longer cheap. Some drugs can cost tens of thousands of dollars per month for a standard dose. Why? Because drugs used to be cheap. So there was little attention paid to what they cost. Some smart executive in the pharmaceutical industry figured this out and started rolling out extremely expensive drugs. It didn't take long for other pharmaceutical companies to start doing the same thing. The system has yet to come up with a counter for this strategy. So every year we see a number of extremely expensive new drugs hitting the market.
I think Mr. Brill does a good job of working us through why medicine is so expensive in the U.S. Since he doesn't go into any history he does a poorer job of explaining how we got where we are now. And I think his prescriptions for fixing things are extremely weak. So what do I think we should do? Let me first discuss what we should not do.
The first thing we need to do is understand the whole balloon thing where if you squeeze costs here you often end up just pushing costs to over there. I think in retrospect this clamping down hard on the hourly rate of doctors was a mistake. It just pushed the costs to other parts of the system. A piecemeal approach that just looks at part of the system (hospital charges and, to a lesser extent prescription drug prices), as Mr. Brill did will just cause the medical establishment to push costs somewhere else.
Mr. Brill also makes a common observation that is worth repeating. The medical industry is NOT a market as we commonly understand markets. It is an interlocking set of monopolies that have successfully organized themselves so that they have pricing power. They use that power in a variety of ways to raise prices. We should not be surprised that in this environment prices are high. Mr. Brill says he set out to do an apolitical analysis. But he also says he believes in the free market. That's fine if you can find a way to restructure things so that market forces are introduced into the medical industry. Mr. Brill never comes up with a method for doing this.
Mr. Brill suggests getting rid of the chargemaster. As I said, it's just a price list. The problem with the price list is not that it exists. It's that the prices in the list are too high. And generally speaking they are a secret. In general the price list is one of numerous areas where sunlight would help. It would be nice if these price lists were published so that comparison shopping would at least theoretically be possible. One of the good parts of Obamacare is that health care providers are required to spend 80% (in some situations) or 85% (in other situations) on medical care. Some companies have had trouble hitting these targets, which gives you an idea of how bloated they have become. If there is some sensible way to fix the problems with current price lists, I'm all for it. But I'm not sure that is possible. Now let me finally move on to what I think should be done.
The first thing I want to suggest is not a specific fix but a general approach to finding fixes that work. We as a country should do what successful companies often do: go to school on the competition. Here I am not talking about looking at one insurance company versus another, or one hospital versus another. There is benefit to doing that. But there is even greater benefit in studying how other countries do health care. General Motors studies Toyota. Why can't the U.S. study the Japanese health care system? There are many countries out there. They have all come up with different ways to do health care. Why not study each system carefully and figure out how it works. Then try to figure out what works well and what does not in that system. Actually a start has already been made. T.R. Reid, a writer for the Washington Post has written a book called "The Healing of America". In it he takes a look at the health care systems of not only Japan but the U.K. (Britain), Germany, Taiwan, and Switzerland. What he found was that each system is quite differently from the others. But all of them deliver health care of equivalent or better quality to the U.S.. All of these systems are much more popular in their native country than the U.S. system is in the U.S., and all of the systems are cheaper than the U.S. system. The Swiss system is considered the "Cadillac option" and even it is substantially cheaper. In many cases these systems have been operating for decades so you can really see how well they work over the long term.
I think it is impossible to effectively apply actual market forces to the health care system. If you want details of why it is likely impossible I refer you to Mr. Brill's story. Beyond that, there is the balloon issue I have been talking about.
Finally, let me deliver the short term good news and long term bad news. If we look at what other countries are doing it is obvious that health care costs can be drastically cut and health care quality improved (but probably only by a little). That means that if I could wave a magic wand and instantly make all the changes that should be made then costs would drop drastically and quality would go up. But as far as I can tell no country has solved the problem of the high rate of health care cost increase. This is a long established trend that is going on everywhere. It's nice that costs in Taiwan are much lower than they are in the U.S. But costs are increasing faster than inflation in Taiwan. The inexorable law of compound interest says that, while it may take a little longer for costs in Taiwan to go through the roof it will eventually happen. So, while I am optimistic that something can be done about costs in the short run I am pessimistic that anything can be done in the long run.
And that leads me inexorably to "death panels". Death panels are a bugaboo of conservatives as in "Obamacare equals government death panels." What this line of thinking ignores is that we currently have and have always had death panels. In days of yore the death panels were located in the family. Dad would decide that the family couldn't afford the medicine (or operation) that was necessary to keep aunt Edith alive. So aunt Edith would quietly be laid to rest. Current death panels are run by insurance companies. They decide what to cover and what not to. Mr. Brill has several examples of the effect of coverage limits. A policy would have a limit on how much it would cover for a particular year or for the lifetime of an individual. If the limit got exceeded then you were on your own. There used to be an exclusion for "experimental procedures" like heart transplants. After insurance companies lost enough law suits ("that nice person is so sick and the insurance company has so much money") they gave up on that sort of thing. Mr. Brill points our that 60% of all individual bankruptcies are caused by medical bills. Obamacare is phasing out the limits but it will raise rates. And nowhere in the Obamacare legislation is there anything that creates a government death panel. The closest thing is a very modest effort to study how to make things more efficient.
The medical industry is very good at making decisions into life and death decisions. "This $10,000 drug is cheap if it saves a life." You can easily plug "this operation" or "this medical device" into the previous sentence. Ultimately either medical costs will expand forever (impossible) or we will be confronted with a life and death decision. How much is aunt Edith's life worth? If we don't decide that the cost of saving aunt Edith is too high in some cases then ultimately we will be unsuccessful in containing health care costs.
One question no one asks is "how much is health care worth"? The answer is "it depends". Let's say that I invent a magical device. You spend 30 minutes in it twice per year. That's it! No doctor's visits. No more drugs or exercise. None of that. You just do your 30 minutes twice per year. What you get is the body of a healthy 30 year old. And not only is it healthy, it's fit and trim. You can stop exercising. You can smoke and drink. If you drink and crash your car, you're still dead but you are now immune from standard medical maladies. Now if you stick with your "30 minutes, twice a year" regime you live to be 150 years old. Then you die quietly in your sleep. How about that?
That's the setup. Now pretend you're Bill Gates and the magic machine treatment costs a billion dollars per person. If I were Bill Gates I would pay $5 billion and sign up myself, my wife, and my three children. The real Bill Gates would probably also sign up some other people like his father. But you get the idea. For Bill Gates this would be a good deal. Neither you nor I are Bill Gates so let's get a little more real.
Let's pretend you are Charlie Rose. Mr. Rose has a nightly talk show on PBS and does an hour in the morning on CBS. I don't know what his income or net worth is. But I think I can accurately characterize it as "very comfortable but not in the billionaire range". Now the deal for Mr. Rose is that the magic machine will cost him half his income. Mr. Rose is one of those lucky people who has enough money and knows it. He does things he likes to do like his two TV gigs but he doesn't own a bunch of homes scattered over the planet or his own private jet or any of those other super-rich trappings. And maybe Mr. Rose could cut his effective income in half and it would make no difference. But let's assume this in not true. I picked Mr. Rose for a specific purpose. His PBS show is supported by a number of blue chip corporate sponsors. If Mr. Rose needed to up his income he could just go to his current sponsors and ask for more money or rope in additional sponsors. Like most of us Mr. Rose doesn't like to hustle for money. So when he has lined up enough sponsorship money he quits. He is one of those few people who controls his income. So this "half your income" deal would be a good deal for Mr. Rose. At least it would be if I were Mr. Rose.
Now let's take another step down the income curve. Consider John and Jane Smith and their two children Bob and Mary. John and Jane both work full time and each pulls down $40,000 per year, close to the median income in this country. So the family income is $80,000 as Bob and Mary are too young to work. Now offer this same deal to the Smith family. They put half their income into health care. This is only $40,000 per year. It would take thousands of years to add up to the $5 billion we have asked from Mr. Gates. I'm sure half of Mr. Rose's income is far greater than $40,000. So it's a steal of a deal, right? No! Bargain though it may be, the Smith family can't afford to spend $40,000 per year on health care, even for the magically wonderful health care I have invented.
In my made up example I have made up a health care that is truly miraculous. The actual health care that is on offer falls far short of what I have made up. It is far less effective. The longest anyone has ever lived is 122 years. And our health is not perfect even at thirty. And it goes down hill steadily after that even if we have great health care and we live an exemplary life from a health standpoint. Almost none of us that live to be a hundred are able to live a full active life at that point. The best most of us can do is be reasonably vigorous into our eighties. And many of us don't even last that long without significant degradation. So actual health care is far short of my invented ideal.
Judging by the decisions people actually make most people believe that extreme measures should be taken for people they love as long as someone else is paying for it. But as a society we are paying for it. And most people are unwilling to admit that health care is a very inexact science. There is a common statistic to the effect that half of all lifetime health costs are incurred in the last six months of life. Assuming that is so, and it probably is, what are we supposed to do about it? The problem is that in many cases we don't know that it's the last six months. That happened to me recently. I had Christmas dinner with an acquaintance, an older gentleman. To my eye he looked like he had many years ahead of him. But less than three months later he is gone. He took sick unexpectedly and died. At no time did his illness look life threatening.
I don't know how much money is spent on people who don't pull through after it is obvious that they will not make it. This would seem like the area where the most and the most obvious cost savings exist. But people find it very hard to let people go under even these circumstances. Saying "it's just too expensive" in other areas of health care is even harder. But if we don't find a way to do just that then clever people will find a way to turn ever more expensive devices or drugs or procedures into "life and death" and medical expenses will continue to go up and up and up.
