Two months ago, I summarizing the main drivers of the health care costs in the United States, which make health progressively less affordable. I promised to write a subsequent post with some suggested changes to reduce costs or, at least, slow the rate of health care inflation. This is an enormously complicated and arcane subject about which volumes have been written, so my “solutions” will necessarily be simplified. My goal is to give the reader a sense of what might be necessary to slow the runaway costs that now consume 17.5 percent of our GDP.
History: To briefly set the stage, it is important to understand the traditions of medical practice. Until the early 1940s, medical care was delivered overwhelmingly by solo practitioners or small groups of two and three physicians. There was no health insurance to speak of, and the government programs of Medicare and Medicaid didn’t exist. The technology of medicine was very limited and was largely what a doctor could do in his or her office. Doctors were closely tied to a community, and payment was negotiated between the doctor and patient, largely through the exchange of cash or “in-kind” services. There were few insurance payments, group practices, few specialists, and hospitals were largely for dying patients. The good things about this model were the strong personal relationship between doctor and patient and also doctor’s freedom to determine how he wanted to run his practice. It is what many seniors remember about the good old days of personalized attention from the family doctor.
The disadvantages were that there were no limits to physician hours, no oversight of quality, and no ability to scale up to the advanced technologic world of medical and hospital care. The entry of insurance into both the private and government worlds brought more reliable payment but also greater complexity and administrative costs to doctors’ offices. While physicians complained about the changes in medical practice, they began to slowly gravitate toward larger group practices often with others of the same specialty and sometimes in very large multispecialty practices. The other segments of the health delivery industry also had to scale up. Hospitals began to supply more than nursing care; they have become purveyors of vast technologic resources, sites of highly specialized care, and, in many instances, became owners of physician practices. The pharmaceutical industry had dramatically expanded with an array of drugs that were unimaginable in 1940. And so on with the rest of the health care establishment, the surgical centers, the device manufactures, the nursing care providers, the laboratories, the insurance industry, etc..
One of the problems with this growth is that it has been in silos, each segment independent of the others, each jealously guarding its prerogatives and income. It has resulted in inefficient practices, duplication of effort, incentives to do more or sell more even if it has no benefit to patients’ survival or well-being. I believe that most people in health care are ethical and well motivated, but they are imbedded in separate systems that have no incentives to organize, to be efficient, to do only what is proven by evidence to provide benefit or to be guardians of limited resources.
Absence of an organized system of care: It is difficult to contemplate solving other problems without solving this first. Integrating doctors practices into a system that includes hospital care, diagnostic testing, pharmaceuticals and the various types of needed ancillary care is, I think, the path is to develop systems that are not competing for the patient’s dollar and have incentives to work together to find efficiencies. The oldest, but not the only, integrated care system of care is Kaiser Permanente health system. The Kaiser Permanente Foundation owns the facilities within which the doctors practice. They control the hospitals, the technology, the insurance products, the information systems and most of the back-office administration. They negotiate a contract for services with Permanente Medical Group, the doctors who deliver the care. The two entities work closely together. Customers pay Kaiser a specified each month, and Kaiser must provide all of the needed services for that fee (prepayment). Freed from fee-for-service, they can plan their services any way that they deem most advantageous to the patient and the institution. They are a system of care that can design strategies to avoid overlapping and unnecessary services. For example, they can utilize nurse practitioners and other ancillary personal to perform tasks for which they are qualified without worrying about whether they will be denied payment. Kaiser physicians are paid a salary competitive with what they could earn in their own office, so that there is no reason to churn out extra visits to generate more income. Patient education is encouraged to avoid unnecessary illness and hospitalization.
Other medical groups are organized differently. There are administrative entities that contract with many medical groups in many different locations, giving doctors more freedom to design their practice. However, they generally share an information system and are still held to standards for quality and service. The Sutter Health System in California operates in this fashion. Whatever the mechanism, the goal is to assemble all of the resources (hospital, laboratory, radiologic, outpatient care) under one financial roof to encourage sharing of information and to design more efficient processes.
Most young doctors finishing their training are not interested in opening an office on their own. They desire a more reasonable life style, readily available resources, the stimulation of colleagues to and be freed from administrative hassles. The trend is obvious. Most medical care is going to be provided large entities, which, at least in theory, can deliver comprehensive, efficient care of high quality. There is a cost to this. Care will be far less personalized and will require the patient to learn how to work within what can be a bureaucratic system.
The current system incentivizes overuse: I have already written about the perverse incentives of the fee-for-service system. It encourages churning, the overuse of procedures, and it stifles innovation. Doctors have little incentive to spend time developing new streamlined methods, which may reduce the number of visits and services if they are being paid fee-for-service. That could, in fact, reduce their income.
Medicare is experimenting with the creation of Accountable Care Organizations (ACOs), entities made up of groups of physicians and hospitals that are responsible for providing all needed care for a for a fixed monthly payment. These are HMOs by another name, but with the difference that patients can choose any physician in the insurer’s network and that there are strict quality controls on the care delivered. HMOs in the 1990s got a bad reputation because of overly restrictive limitations on physician networks and, in some instances, skimping on care. The downside to prepayment is that it reverses the incentives, potentially incentivizing underuse. Quality and satisfaction must be closely monitored.
Expansion of the use of technology: The technologies that have been introduced in the last 50 to 60 years are truly amazing. Technology companies have been booming, and it is clear that there is a lot more to come. In some instances, new technology can save resources, for example doing a CT or MRI scan of the abdomen rather than exploratory surgery. The difficulty is the temptation to overuse these wonderful, but very expensive technologies rather than older but reliable technologies combined with clinical judgment and the passage of time. In many instances, the new technology is used before it is proven to be better. New products should be studied to show when they are clinically effective and cost effective. Currently insurers have the unenviable task of deciding when a new technology is ready for prime time and should be covered.
Patient demand for services: As I noted in my earlier post, this factor is often cited as a cause of the riding cost of health care. It is unclear to me how much of the rising costs can be attributed to this. Because the payment for service is usually done by an insurer (private or government), out of sight of the patient, it is easy for some to abuse the system and demand excessive services. There is some evidence from a study from the Rand Corporation many years ago that people who had zero financial responsibility for their medical bills used services more readily than those who pay a co-payment and have a deductible. This seems less relevant now when most policies are sold with substantial patient co-pays as employers offload costs to their employees through greater co-payments and deductibles.
Patients’ demands can be increased by the introduction of marketing and advertising. The pharmaceutical companies in particular have perfected so called “direct to consumer” advertising. There was a time when pharmaceutical companies were prohibited from advertising drugs on public media. That restriction no longer exists, and pharmaceutical companies spend untold amounts touting the benefits of their product on television.
I won’t discuss aging of the population, but it is very real and only going to accelerate in the future. We have visions of life spans getting to be 90 to 100 for the Millennials rather than 70 to 80 as it is now. We have dreams of curing cancer and developing custom drugs and therapies for each patient. That could make health care an impossible burden to carry unless we can figure out ways of making a more efficient and cost-effective system.