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US Health Care Costs: Why So High? Part 3

by Elliott R. Morss, Ph.D.
US health care costs are too high for the service delivered. I agree with the following sentiments expressed in a recent lead NYT Editorial:
The best way to lower health care spending is to reform the dysfunctional health care system whose costs seem unrelated to the quality of care delivered. The reform law makes a good start, sponsoring research to determine which treatments are effective and which are not, starting pilot projects to change the way care is delivered and paid for, and setting up new organizations to rush successful approaches into wide use in Medicare and ultimately the private sector.
In earlier parts of my study, I developed a list of reasons for poor performance. In my most recent article, I examined two of the reasons in some detail:
·                     supply-driven care, and
·                     back-office paperwork resulting from so many insurance providers;
Here, I will focus on the remaining reasons for such a poor health care delivery system:
  • keeping old people alive too long in hospitals;
  • the US overweight/obesity epidemic;
  • too many initial patient visits with doctors;
  • hospital price fixing;
  • medical malpractice, and
  • uninformed patients.
Keeping Old People Alive Too Long in Hospitals
One “benefit” of new health technologies is ability to keep people alive almost indefinitely in hospitals. An unintended consequence of this is that relatives or friends have to decide when to “pull the plug”. And these last years are expensive:
  • Persons 65 and up made up 12.4% of the US population in 2004 and they “consumed” 34% of all medical expenditures;
  • Persons 85 and older were 1.7% of the population and “consumed” 8.1% of medical outlays.
Wennberg and his partners at the Dartmouth Atlas point out that patients with chronic illness in their last two years of life account for about 32% of total Medicare spending, or approximately $150 billion annually. Wennberg et al have found tremendous differences in the health care services provided in the last two years and argue that reforms are needed. Some of these differences might be attributed to how older people are treated. And at the personal level, consider the plight of an indigent person with no relatives in a hospital on Medicaid. Who decides when to end that person’s life?
I have one suggestion that might help:
To qualify for any form of insurance, people should be required to have a living will that has been reviewed by a doctor and a power of attorney for its execution.
The US Overweight/Obesity Epidemic
As I have written earlier, the US figures are stark: two-thirds of Americans are overweight and one-third are obese. No other developed nation has anything like this problem. For the world, 15% of the population is overweight; 5% is obese. The US problem will get worse before getting better.
And it is an expensive epidemic: The Trust for America’s Health 2009 report: F as in Fat: How Obesity Policies Are Failing in America points out being overweight makes most health problems worse: 
  • Heart disease is the leading cause of death in the US and strokes are the third leading cause. Being overweight increases the risk of both;
  • Cancer is the second leading cause of death in the US. 20% of cancer in women and 15% of cancer in men is attributable to obesity;
  • Diabetes kills almost 4 million people annually and accounts for 11% of US health care costs. There is a direct link between diabetes and being overweight: 80% of people with the primary type of diabetes are overweight;
  • Obese people are 83% more likely to develop kidney disease than those not overweight.
What are the health costs associated with being overweight/obese? According to an analysis done by the Congressional Budget Office:
In 2007, US health care spending per adult was:
·                     normal weight $4,030;
·                     overweight - $4,260;
·                     obese - $5,560.
Using data on how many of each there are, we can determine that the extra health costs for persons overweight are $14.1 billion and for persons obese are $93.7 billion. This means we spend $107.8 billion, or 4.7% of all health costs/ for people who are overweight and obese.
 Too Many Initial Patient Visits With Doctors
Doctors are expensive: doctors’ meetings and resulting clinical work constituted 21% of all US health care expenses in 2008. And general practitioners make 3.7 times the average US wage while specialists make nearly 6 times the average wage[1]. A more efficient system would be based on neighborhood clinics manned by nurses or nurse practitioners. With access to the Internet, these nurses could decide if patients needed to see doctors.
Hospital Price Fixing
Hospitals are expensive – 31% of the US health bill in 2008. And like all private businesses, hospitals look for ways to reduce competition so they can increase prices. A study done by the Urban Institute found that:
hospital prices are, at a minimum, 5% higher [in less concentrated markets] than in less concentrated markets…. When consolidation occurs among hospitals geographically close to one another, price increases have been substantially larger, as much as 40% or more.”[2]
Such oligopolistic pricing is not surprising, and the Feds are aware of it. However, since 1994, the Federal Trade Commission and the Justice Department have loss seven consecutive litigated cases. As a result, consolidations and even more price fixings are taking place.
Medical Malpractice
It has been estimated that between 44,000 and 98,000 people die in hospitals annually due to preventable medical errors[3]. Another estimate: 119,000 deaths annually: 12,000 from unnecessary surgery, 7,000 from medication errors, 20,000 from various other errors in hospitals, and 80,000 from nosocomial infections acquired in hospitals[4].
The top five diseases that receive monetary awards for malpractice, in terms of dollar value, are breast cancer, lung cancer, colon and rectal cancer, rectal cancer, heart attacks, and appendicitis. The main allegation is a form of misdiagnosis, either delayed diagnosis or mismanagement of diagnostic testing[5].
It is clear that medical malpractice is a real problem and safeguards are needed. One estimate is that the medical liability system costs $6.7 billion annually[6]. That is peanuts relative to the problem. Probably the greatest cost to society of malpractice is doctors’ fear of malpractice suits and as a consequence, doctors prescribe an excessive amount of health services.
Uninformed Patients
20 years back, only doctors knew how to treat the human body. We took their advice. Today, with all the medical information available on the Internet, there is no excuse for a literate person not being their own best doctor. You can read about symptoms on the Web, and decide which fit your circumstance. And yet, most of us still treat doctors with reverence. In fact, why are we patients (someone willing to wait)? Whenever I see a doctor, I think of myself as a customer or client, and I want good service for my payment.
But still, most “customers” believe more medicines and medical service is always better. I repeat a story from a doctor friend:
Some years ago I participated in a study of otitis media (swelling of middle ear) where it was found that only one third of the patients had the bacterial form (and hence could benefit from antibiotics).
 It was further found that those given antibiotic treatment returned to normal in about ten days. It was also found that those not treated returned to normal in about ten days.
Conclusion: There is no way to explain this to Mother. Give her a prescription for her child's antibiotic.
I quote a recommendation from the National Institutes of Health:
Regular exercise is a critical part of staying healthy. People who are active live longer and feel better. Exercise can help you maintain a healthy weight. It can delay or prevent diabetes, some cancers and heart problems.
Sounds pretty simple, but two thirds of Americans are overweight and one third is obese. Where is the disconnect?
Potential Cost Savings
In this section, I will take a shot at the potential savings the US could realize by doing something about the 8 topics I have discussed. In Part 4 of this series (the final piece), I will examine the feasibility of realizing these savings. Wennberg believes inefficiencies resulting from supply-driven care approximate 30% of health expenditures. He bases this on the practice variations he observed in doing his end-of-life study. This number is probably too high. When the variations he observed are closely examined, my guess is that one third of the variations would turn out to be legitimate. That would leave a 20% cost savings.
In my most recent article, I suggested that we might save $100 billion annually on back office paperwork. Jo Anne Magee, an expert on this subject pointed out politely that my reasoning was flawed in making that estimate. So I will instead go with an estimate suggested by another expert I interviewed. Dr. Henry Tulgan estimated we could eliminate one million back office jobs if we streamlined back office activities. At $50,000/job, that would save $50 billion annually. Old people are kept alive too long in hospitals. Persons 85 and older constitute 1.7% of the population and consume 8.1% of medical outlays. By requiring everyone to have a living will as a precondition for insurance, we should be able to cut spending on this group by 15% or $28 billion.
I see no way to stem the costs associated with the overweight/obese segment of the population. All indications are that this segment of the population will at best remain the same. Doctors are expensive – 21% of health outlays go to doctors and related clinical work they prescribe. If we could get patients to first meet with a nurse or nurse practitioner in mini-clinic settings, we should be able to save 5% on doctors.
Hospitals are also expensive - 31% of all health outlays, and price fixing is a serious problem. With more aggressive anti-trust enforcement, the government should be able to make hospitals more competitive. We should be able to save another 5% on hospital prices.
I do not see medical malpractice lawsuits as a serious problem, given how much medical malpractice occurs. Given that the fear of a lawsuit might cause doctors to over-test, over-prescribe, etc., it should be caught in practice variations, so I will not add another figure for savings here.
Perhaps the greatest potential savings of all could come from better-informed patients/consumers. Why don’t we “shop” for medical services with the same intensity we spend deciding what car to buy?
I have summarized potential cost savings in the following table. It does not include anything for better-informed patients.
Potential US Health Care Cost Savings
(bil. US$)
Total Expenditures - 2008
Supply Driven Care
Back Office Paperwork
Old People
Doctor Delegation
Hospital Pricing
Total Potential Savings
The potential cost savings amounts to 26%. Even with these savings, the US would still spend more on health per capita than any other nation.  

[1] OECD Health Care Database
[2] John Holahan and Linda Blumberg, “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?, The Urban Institute Health Policy Center, 2008.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.