American Medicine: An Affordability Nightmare
Of all the reverses America has suffered in recent decades, one of the most costly has been the rise of an inefficient and overpriced medical sector. Every nation is at risk from upward price spirals in medicine. Others take serious action. America does not. No other industrial society tolerates American-style bloat and profiteering.
Price levels here are stunningly high. Insurance coverage is cripplingly expensive – individuals cannot afford it, employers cannot afford it, and taxpayers cannot afford it. Everyone loses. American business competes globally at a serious cost disadvantage driven by the medical sector. Taxpayers pay more than they should to support Medicare. Medical costs play a role in driving the Debt-to-GDP Ratio still higher. Hospitals subsidize the indigent and overcharge the affluent. Yet no one takes effective action; both parties live in fear of the medical industry. Will the new health care act bring costs down to global levels? Of course not; to gain the votes it needed for passage, it had to make its own peace with today's overpriced industry.
If America is to have affordable government, if American industries are to produce affordable products, if American families are to have affordable medical care, the rules of the game for American medicine must be overhauled. As a nation we should aim for medical excellence at the same affordable prices other nations enjoy.
Let’s begin by revisiting our worldview.
Rethinking Our Worldview
The medical industry doesn’t live within normal private market rules. Its services are highly differentiated; each customer expects to be treated as a unique patient. Suppliers don’t compete on price and buyers don’t buy on price. Nor do buyers shop with their own money. If they’re insured, they’re shopping with someone else’s money. If they’re indigent, they’re also served with someone else’s money. Cost-shifting is the rule. “Someone else pays.” Not much price discipline to be found in such a system.
These observations are a commonplace. We are less aware of the demands imposed upon American medicine by the worldview of Gated Capitalism. Everyone at the top expects high returns and extraordinary annual growth rates. If exceptional wealth for the nation’s elites is to be the America’s norm, why shouldn’t executives from the insurance, hospital, medical technology, and pharmaceutical sectors take full advantage of the executive entitlement ethos?
Let’s acknowledge the obvious. If the American medical industry were set up as a formal price-fixing cartel, its pricing behaviors would be little different from those we see today. In a formal sense, the industry is not a cartel; its executives don’t conspire to set prices. Instead they collaborate politically to block the imposition of price controls, which in the end achieves almost the same result.
Given the unique structure of medicine, cost discipline cannot come from within. Cost discipline inherently must come from without. Other nations understand this. They write rules that eliminate inefficiencies; America permits endless inefficiency. They write rules that allow them to define fees for every conceivable procedure. America allows considerable fee-setting latitude. Other nations have affordable medicine. Today’s America spends roughly a trillion dollars more than it must. Free markets principles are excellent in markets that are subject to nonstop price competition. In medicine, free market principles are a one-way ticket to insolvency.
If there is one lesson to be drawn from the affordability successes of other countries, it is this. If a nation is to have affordable prices in medicine, it must create an external regulatory authority that will enforce vigorous price discipline on all the players.
The medical sector is the elephant in the room, the tomato plant that ate Chicago. Its cartel-like pricing behaviors are too damaging to tolerate any longer. Non-medical industries need relief, families need relief, the government’s Medicare system needs relief. The current arrangement is strategically and ethically indefensible.
Imagining a More Cost-Effective Medical Industry
If we are to redesign American medicine, we must first rethink our directional worldview. Do we require a single payer system? If not, how should the existing system be restructured to eliminate unnecessary costs and limit prices? Are there gains to be made from limiting the volume of service patients consume?
In the medical care debates of 2009 and 2010, there were Democrats who argued on behalf of a Single Payer option. Single Payer was the silver bullet by which medical costs might be controlled, or so they believed. They were beaten back and Single Payer was dropped. Were they right? Would that have been the cure America needs?
Not necessarily. By itself, that sort of structural change is not the key to affordability. T.R. Reid’s excellent book, The Healing of America, recounts his country-by-country tour of health care systems – Canada, England, France, Germany, India, Taiwan, Switzerland, Japan. For each nation, Reid recounts the response to a pair of questions. The Provider Question – Who is to provide medical care? The Payer Question – Who is to pay? England long ago committed itself to a public provider, public payer model. Canada adopted a private provider, public payer model – the inspiration for the Single Payer model proposed here. Taiwan has picked an approach similar to Canada’s. Most other countries have gone with what Reid calls the Bismarck model, private providers and private payers, within a policy framework shaped by the government. Each solution delivers medical care far more affordably than here.[i]
Reid’s discussion illuminates the importance of asking deeper and deeper questions of each part of the medical system. Why is for profit medical insurance so costly? Why is medical technology so costly? Why are hospitals so costly? Why are specialists so costly? Why are pharmaceuticals so costly? Why do patients pay so little attention to price?
These are template design questions. Affordability depends on finding powerful design solutions for every part of the overall system.
Rethinking Medical Insurance. America long ago accepted an insurance template that produces terrible inefficiencies and unnecessarily high costs. We accept the idea that the nation’s core medical insurance system should be run by for-profit insurance companies. And we accept the idea that customers should have dozens and even hundreds of different options to choose from. As a result, we have married Medicine to Insurance and we have placed Insurance in charge. Every doctor’s visit generates a list of claims; every hospital visit does the same; armies of claim filers submit claims to insurance companies; armies of reviewers scrutinize those claims, and fee by fee by fee, decisions are made about which claims to honor and which claims to reject. The overhead costs are stupendous, for the insurance industry, for doctor’s offices, for medical laboratories, and for hospitals. There’s not an aspirin’s worth of medical value-added in the whole entire process.
Imagine doing the same thing with public transit. Imagine having a system in which every subway ride was covered by Subway Riders insurance. In this hypothetical system, TransitCare Insurance sells Subway Riders policies to all subway riders. The subway company bills its customers $10 for each ride they take. At the same time, the subway company also files a $10 claim with TransitCare Insurance. In the end, TransitCare Insurance disallows $4, pays $3, and allows the subway company to bill the rider $3 as his copay.
We recoil at the inefficiency of such an idea, don’t we? And yet this is precisely the inefficiency that America’s medical insurance industry thrives on every single day. No wonder American medicine is so much more expensive than the global norm.
The better template establishes a standardized base policy, and requires that it be offered on a non-profit basis. Employees can choose among dozens of carriers, but every carrier offers identical base coverage. Doctor’s offices still have nurses but they no longer require billing clerks. Hospitals, too, can operate without legions of billing clerks. Claim filing is an automated process and all claims are settled within days. Other nations do this, and their overhead costs are a tiny fraction of ours.
Not every insurance company ends up with an inexpensive pool of insured customers. A company with an older pool is likely to lose money; a company with a younger pool is likely to make money. In a non-profit system, those who make a surplus compensate those who have taken a loss. The aim is to have the overall system run on a breakeven basis.
Premium policies are available to those who wish to buy add-on coverage. Interested in coverage for cosmetic surgery? That’s a separate policy, and is sold by the for-profit arm of each medical insurer. Insurance companies compete for non-profit customers, in hopes that they can attract them to their for-profit insurance products, not only in specialty medical areas such as cosmetic surgery, but for life insurance, or disability insurance, or the like. Cross-selling becomes a source of customers and profits.
The United States doesn’t need Single Payer insurance along Canadian lines in order to have affordable medicine. But the United States does need a standardized base plan in which manual claim processing is completely unnecessary. And it needs to house that plan in a non-profit framework in which all insurance companies end up breaking even on the service they offer.
Technology Costs. So much of medicine these days involves high-powered technology. Here in America, we boys love our toys; high tech medicine is not only useful but understandably addictive. Patients want the best, our doctors want the best, and companies that have invented and patented new technologies hope to command the highest possible prices and realize high returns on investment. The more fat one can pack into the standard bill for an hour of lab time, the greater everyone’s profit.
Are these cost behaviors matters of holy writ? Hardly. In non-medical markets, price competition works its natural magic. Technology costs and prices decline over time. Consumers reap the benefit. As other critics of the system have already observed, there is no reason to think that medical technology is any different.[ii] Its cost curves should decline over time as well. When fees are strictly regulated for every conceivable procedure, as in Japan, beneficial results follow. T.R. Reid tells the story: “Because the permitted fee for an MRI scan is so low, for example, Japanese doctors went to the MRI manufacturers – Hitachi, Toshiba, etc. – and demanded a new line of compact, inexpensive MRI machines. The industry responded. Today, Japanese doctors and clinics can buy MRI scanners for around $150,000 – about one-tenth the price of the bigger machines used in the United States. … And the new line of cheap, simple MRI machines has been an export boon for the Japanese manufacturers, giving them a lock on the MRI market in poorer countries.”[iii] In other words, fee-setting is an excellent surrogate for price competition.
Drug Costs. Prescription drugs represent $200 to $300 billion of America’s total medical spend. Here, too, the nation endures daily sticker shock. Here, too, cartel-like pricing takes a king-sized bite out of the nation’s pocketbook. Pharmaceutical companies want us to imagine that they require every penny of what we pay them; without high prices, it is claimed, they couldn’t possibly support so much Research & Development.
Nor could their executives enrich themselves personally to the exorbitant norms of today’s Gated Capitalist template.
Let’s anchor the discussion in a bit of data. Do pharmaceutical companies really spend as much on R&D as we are asked to believe? Is there really no leeway? The table below pulls revenue totals and R&D totals out of the annual reports of five leading American companies. From revenues of $111 billion in 2008, they devoted 17% to R&D.
Seventeen percent is a respectable number but nearly as impressive as the nation’s pharmaceuticals would have us believe. Their budgets have plenty of give. Manufacturing costs are particularly low. As a new consultant at Bain in the mid-1980s, one of my first consulting projects landed me inside a pharmaceutical company. Its manufacturing costs were but ten percent of total revenue. Marketing and promotion costs soak up the largest share of total revenue, on the order of thirty percent.
Ceilings on pharmaceutical prices work elsewhere; they can work here. A nation can keep medical costs to twelve percent of GDP or even eight percent of GDP and still maintain a modern pharmaceutical industry.
Doctor Fees and Salaries. Annual earnings for doctors vary greatly by specialty. Pediatric and geriatric doctors earn relatively modest annual incomes. In some practices, incomes as low as $100,000 might be the mark of a good year. In other practices, advantageously placed specialists command as much as $500,000 to $1 million a year. A surgeon, for example, sits in a favored position. She diagnoses, she prescribes, she treats. Since a surgeon’s largest fees are made in the operating room, not in the office visits, the more surgeries she performs, the higher her earnings. Many specialists are in a similar position. Perhaps a proper ratio for borderline cases is a surgery rate of fifteen percent. What is to deter a specialist from recommending surgery in twenty or twenty-five percent of the borderline cases that present themselves instead of fifteen percent?
The larger issue is that we accept fee schedules that make the work of specialists far more rewarding than the work of primary care physicians, and, not surprisingly, two-thirds of our medical school graduates end up being specialists. We build on this error by creating expectations among patients that they haven’t had the best possible care if they haven’t been seen by a number of specialists.
So how do we begin to tilt the system of physician care in a more effective and affordable direction?
The place to begin a restructuring is surely with subsidies for medical school. No one should graduate from medical school carrying a heavy burden of debt. Graduates who practice medicine for at least five years should have the tab for medical school picked up in full by the government. Those doctors who practice in poorly served rural areas should also have their undergraduate costs forgiven. It is in the nation’s interest to have young people entering the field of medicine primarily for service motives.
Then we want to promote a culture of wellness. There are many avenues toward wellness, having to do with cooking skills and eating habits, lifestyle choices, a more responsible set of behaviors from the nation’s food industry, and, of course, more opportunities for primary care physicians to provide wellness counseling.
Many critics of contemporary American medicine have explored these themes. Any number of promising approaches are available. We should look with some optimism toward a future in which the work of primary care physicians is better compensated and their numbers higher, while the work of specialists is no longer so exorbitantly compensated and specialists on the whole are not quite such a large part of the entire profession.
Hospital Costs. Spending on hospital care runs about $700 billion a year.[i] Technology costs are a driving factor. The liberal use of surgery is another. Prescription drugs sold through hospitals add to the bill. Administrative overhead is a third – every procedure generates a fee, every fee generates a bill, and every bill generates more claim processing work. A fourth cost driver is the practice of operating hospitals as for-profit corporations designed to earn significant rates of return for investors.
If the nation’s hospitals are to do their part for medical affordability, two practices will have to be reversed, right at the outset. The claims processing nightmare has to end, as discussed earlier. And the nation will have to let go of the idea that hospitals are meant to be profit generators for investors.
Beyond that, we will want to rethink several other strategic decisions that affect the operation of the nation’s hospital sector.
Should hospitals be the service providers of last resort for the nation’s indigent? With the losses they incur passed along to their more affluent patients? It’s not a good model. If American medicine were genuinely affordable, as it must become, no one would be medically indigent. Poor people too would have medical insurance, and they would go to doctors just like everyone else.
We would also ask the larger business question of each hospital. “What businesses are you in? Does your current business mix make sense?” Perhaps a rational medical system combines general purpose hospitals, special purpose hospitals, and specialty clinics. Perhaps one of the keys to medical success is what one might call the Lifestyle Clinic. It’s one thing to go to a doctor for a diagnosis and a prescription. It’s another thing to go to a hospital for surgery or intense nursing care. And it’s still another to learn how to alter one’s behaviors, to wean oneself from addictions to alcohol or drugs or bad eating habits, to train oneself to exercise more effectively. It’s still another thing to pull corn syrup and other sugars out of the American diet, as one of the imperatives of a diabetes prevention campaign. If we are to have affordable hospitals and clinics, we must be flexible enough to reinvent the overall business mix of health promotion activities and medical care activities.
Many other steps will go into the process of business model reinvention. Hospital staffing ratios vary widely. Some hospitals have exceptionally high Staff-Patient Ratios; others are well within reason. Good organizational health is like good physical health. First the system must be detoxified. The diseases caused by old mental models must be shed. Good physical health requires a new mental model for one’s lifestyle; good organizational health requires much the same.
Lawyer-Driven Costs. Concerns about defensive medicine arise in any wide-ranging look at medical costs in America. Something goes wrong in childbirth. The obstetrician is blamed. The patient’s lawyer sues the obstetrician. A jury finds for the plaintiff. A substantial damage award is made. Medical insurers raise the premiums to all obstetricians. Doctors in general order more tests than they should. “Defensive medicine,” we all murmur. “What a costly shame!” And that’s as far as it goes.
There are some good ideas bouncing around on this issue. If doctors are to be sued, shouldn’t those lawsuits be heard by juries that consist of other doctors? Shouldn’t damages be capped? Shouldn’t the medical profession identify genuinely incompetent doctors more swiftly? Shouldn’t inept doctors be stripped of their license to practice at the earliest possible opportunities?
There’s a larger discussion, though, which has yet to receive the airing it needs. Today’s for-profit insurance model plays a very damaging role in the conduct of American medicine, and one of the unavoidable consequences is that the whole medical system flies blind just when it shouldn’t.
In a for-profit insurance system, companies maximize profit by insuring the healthy and refusing coverage to the chronically ill. In a country that’s not good at insuring everyone, anyone who has suffered from chronic illness has a vested interest in keeping part of his medical history hidden from his insurance company. (Possibly this will change for the better with The Patient Protection and Affordable Care Act, President Obama's health initiative. Possibly.)
If the goal is health, the method of choice is full openness. Everyone’s medical records should be open to all the doctors they might ever meet. Doctors who treat patients need full knowledge; patients need to have knowledgeable doctors.
If the insurer’s goal is profit, and the customer’s goal is coverage, the method of choice for the customer is secrecy and the method of choice for the insurer is detection.
We can’t do both at the same time. We can’t have a full openness culture between patients and doctors, on the one hand, and a secrecy-detection culture on the insurance side, on the other. It is a toggle switch decision. Either the whole nation goes with a culture of openness, in the interest of promoting personal health, or the whole nation goes with secrecy and detection, as the byproducts of for-profit insurance.
A culture of openness is one in which the problems of defensive medicine can in time be reduced. A culture of secrecy and detection is one in which the problems of defensive medicine will never go away. Doctors who have full visibility won’t need to order so many tests. Doctors who lack visibility will always order relatively more tests. Defensive medicine is expensive not just because doctors fear lawsuits; defensive medicine is expensive because the “Gotcha” culture of for-profit insurance throws so many obstacles in the way of openness.
How Providers Sell, How Customers Buy. Americans are not in the habit of shopping for the best price on medical care, nor are doctors and laboratories and hospitals in the practice of competing on price. If we move, as we must, to a national framework for medicine that tightly controls fees, there will be little natural tendency for that to change.
But price competition is still a good idea. Let’s look at it this way. We use the reforms proposed above to trim medical spending from 17% of GDP to no more than 12%. Then we introduce price competition and strive to shrink our spending by another percentage point.
David Goldhill wrote an article for the Atlantic Monthly, “How American Medicine Killed My Father,” that delivers an eloquent appeal for price competition in medicine. [ii] Goldhill observes that that prices in consumer electronics always go down and that prices in medical technology always go up. This disparity reflects the level of price competition one finds in the two markets, Goldhill argues; if we had as much price competition in medicine as we have in consumer electronics, medicine would also experience declining prices. Goldhill wants customers to buy on price as well as service, and he wants providers to compete for their business with attractive prices as well as good service.
Goldhill advocates Medical Savings Accounts (MSA’s) for everyone. Many options exist for funding MSA’s; Goldhill’s central goal is to create a medical funding system in which customers have an incentive to exercise spending restraint and pay attention to price. In an MSA system, a buyer begins the year with a fixed pot of money that’s dedicated to certain kinds of medical spending – doctor visits, lab tests, prescriptions drugs, over the counter drugs, and so on. At the end of the year, if the buyer hasn’t used up her entire pot of MSA funds, what remains is hers.
In my cab driving days, back in the 1970s, Denver Yellow Cab offered a Safe Driving Bonus for each driver who went an entire year without a chargeable accident. Conversely, if a driver was involved in a chargeable accident, he was to pay a per-shift penalty for the next six or twelve months. Safe Driving Awards were paid out in December, just in time for Christmas shopping season. Yellow Cab paid out four times as much in Safe Driving Awards as it collected in Accident Penalties, and thought the entire program an excellent investment. Its per cab accident insurance costs were quite low by industry standards. Cash incentives work, and when the incentive payment lands in a driver’s bank account three weeks before Christmas, it works even better. Goldhill’s proposal is based on similar principles. It deserves a serious trial somewhere, and if it works well, it merits a national rollout.
In Goldhill’s mind, it should be second nature for clinics and laboratories to publish their prices and second nature for consumers to know at all times precisely how much money their MSA’s contain. Goldhill’s reform isn’t a magic bullet – America can’t cut a trillion dollars out of its annual medical bill solely by publishing prices and creating MSA’s – but America will benefit significantly from adding the Goldhill formula to its larger medical affordability paradigm.
Elite Enrichment Is Not An Entitlement. With Gated Capitalism holding sway, it has become nearly impossible for America to set reasonable boundaries around its medical industry. Nothing is more sacred to the nation’s elites than their own enrichment. It isn’t much of a stretch to observe that elite enrichment is the only entitlement that really matters in Washington. From this entitled spirit come a series of damaging business templates – for the insurance industry, the hospital industry, the pharmaceutical industry, the medical technology industry, the compensation arrangements for physicians, and even the decisions that stimulate lawsuits and liability insurance rates.
It is time for all of us as Americans to ask ourselves if this makes sense. Does the worldview of elite enrichment serve the nation well? Or does it burden us with one major handicap after another, especially the handicap of laboring to support the world’s most overpriced medical industry?
The nation’s heavily enriched elites will ask us to believe that they know what they’re doing. They do not. The rules they have imposed on this nation undercut the American economy, the American people as a whole, and the national interest. America can be a perfectly competent capitalist nation without binding itself to the ball and chain of a vastly overpriced medical industry.
A Competent Public, a Competent Medical Industry
America faces a crisis of competence. We cannot be a competent self-governing nation until we as a people figure out how to turn modern society into our friend. And we cannot achieve this until we decide, in our own hearts, that we function better as citizens when we take integrity as our standard.
Think of it this way. As a people, we embrace integrity. We ask ourselves the right questions. We invest our energies in the right purposes. And in the end, even our largest industries and institutions operate by principles of integrity and America proves its competence to itself and to the world.
Integrity, for the nation’s medical industry, isn’t that hard to define. Meet international benchmarks – health benchmarks and affordability benchmarks. In other words, deliver excellent healthcare and keep the overall cost down to $4,000 a person.
We have been asked to accept corruption at scale as a way of life for so long we have almost forgotten that it isn’t the only way to do business. It isn’t. Let’s start by reminding ourselves of two simple facts. One: We’re the buyers. Two: They’re the sellers.
As the buyers, we have every right to insist on a medical system that does everything we need inside the $4,000 per person cost envelop.
As sellers, the medical industry has its own job to do. It has to collaborate in figuring out a solid $4,000 per person system for getting the job done. They won’t comply, of course, the first time they get pushed. Or the second. Or the third. But in time, they will. Other nations have done it. In fact, almost every industrial power meets that standard.
If we stick together – we, the American people – we will prevail. We will achieve medical affordability for our nation. And that success will help the United States take an important step forward into a more competent future.
Steven Howard Johnson, 16.1 Version 2011-06-27.
[i] Calculated from Maggie Mahar. Money-Driven Medicine: The Real Reason Health Care Costs So Much. Collins. 2006. p xii. The hospital share of spending is shown as 31%. Apply this percentage to $2.4 trillion. The result is roughly $700 billion a year.
[ii] David Goldhill. op cit.
[i] T.R. Reid. The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care. Penguin Press. 2009.
[ii] David Goldhill. “How American Health Care Killed My Father.” The Atlantic. September 2009. All references to Goldhill are drawn from this article.
[iii] T.R. Reid, op cit. P 93.
