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What If We Could Reduce Health Care Spending?

We’ve said it before, and we’ll say it again: Any healthcare reform initiative introduced by the President cannot focus solely on increasing insurance coverage.

The total cost of our healthcare system is spiraling out of control, and concrete steps must be taken to reduce health expenditures.

We’ve looked at some of the factors leading to our high growth rate in the past.

In “Where Do U.S. Health Dollars Go?” we showed that technology, private insurance administrative costs and obesity are three reasons why we spend an ever larger percentage of our gross domestic product (GDP) on healthcare.

Our use of technology is especially important.

We don’t mean to imply that advances in technology are always a bad thing. In many ways, new procedures have the potential to cut costs by saving time and preventing errors.

The problem lies in:

  1. Our overuse of (newer) technology, and
  2. The habit of medical professionals (and patients) to use and demand new procedures even when older, cheaper technologies are shown to be just as effective.

To address the second point first: President Obama included $1 billion in the American Recovery and Reinvestment Act for comparative-effectiveness research to compare procedures and medications side-by-side.

The hope is that the research will guide coverage decisions made by the Centers for Medicare and Medicaid (CMS) so that the most effective care is given at a (more) reasonable cost to the taxpayers.

And having unbiased, comparative-effectiveness research readily available will also help providers and insurers generally to say “no” to newer medications and tests that are being pushed by manufacturers.

Read more about comparative-effectiveness research here.

As for our overuse of medical technology, there are two main culprits.

The oversupply of hospitals, medical beds, imaging centers and specialists in certain geographic areas actually leads doctors to prescribe and recommend a greater number of hospital stays, diagnostic tests and other medical care than in areas without such a large supply.

To put it simply, if you build it, they will come. The more CT scanners you build, the more patients will receive CT scans, for example.

Researchers at the Dartmouth Atlas Project have documented this phenomenon over the last twenty years by recording regional variations in Medicare spending.

Take the Atlas data from 2006: Medicare spent much more per enrollee in New York ($9,564), than in Hawaii ($5,311).

  • These findings hold steady even after taking into account regional price variations and the size of the elderly and/or ill populations.
  • The differences in spending can be explained by the differences in the volume of health care services received by similar patients.
  • The larger supply of medical goods in New York led to patients there receiving more tests and procedures than their peers in Hawaii.

Studies have repeatedly shown that greater spending does not equal better health care (and too many tests and procedures can sometimes have a negative effect). Spending more on patients is fine if health outcomes and quality of care improve as a result.

Unfortunately that is not what is happening.

According to several indicators, care is actually worse in high-volume, high-cost areas. See below.

SIDEBAR: Relationship Between Regional Differences in Spending and the Content, Quality and Outcomes of Care (2009)

Higher-Spending Regions Compared to Lower-Spending Ones
Health Care Resources
  • Per capita supply of hospital beds 32% higher.
  • Per capita supply of physicians 31% higher overall: 65% more medical specialists.
Technical Quality
  • Adherence to evidence-based care guidelines worse.
Health Outcomes
  • Mortality higher following acute myocardial infarction, hip fracture, and colorectal cancer diagnosis
Physician Perceptions of Quality
  • More likely to report poor communication among physicians and inadequate continuity with patients.
  • Greater difficulty obtaining inpatient admissions or high-quality specialist referrals.
Patient-Reported Quality of Care
  • Worse access to care and greater waiting times.
  • No difference in patient-reported satisfaction with ambulatory care.
  • Worse inpatient experiences.

Source: Fisher et. al. “Health Care Spending, Quality and Outcomes: More Isn’t Always Better” A Dartmouth Atlas Project Topic Brief. 2009

We overuse technology because we have a fee-for-service reimbursement system that rewards physicians for ordering extra tests and for scheduling non-essential procedures.

As the fee reimbursement rates have stagnated under Medicare, physicians tend to maximize the volume of billable services that they deliver so that they can cover their expenses and keep their total earnings steady.

When you combine our payment system with an (over) abundance of hospital beds, CT scanners and other technology, it’s no wonder that physicians in high-spending areas tend to recommend more care, even if it will not lead to better outcomes for the patient.

Afterall, it is in their economic interest to do so.

Unfortunately, it is not in our economic interest as taxpayers and healthcare consumers to allow the overuse of (new) technology to continue unchecked.

For one, these practices drive up insurance premiums for everyone, especially in high-volume areas.

  • Take Massachusetts, for example. Residents there receive an average of $10,000 worth of care per year, compared with the national average of $7,500.
  • This is one reason why insurance premiums there continue to grow at a rate of 10% per year, despite the state’s efforts to regulate the plans and control their growth.
  • As a result, employer-sponsored insurance premiums are increasingly unaffordable for both small businesses and middle-income enrollees.
  • For more on this problem, click here.

Government insurance programs are also faltering as a result of high spending: The Medicare program is facing serious financial woes as it continues to grow faster than the rest of the economy.

  • Recent reports from the Medicare Trustees estimate that Medicare expenditures will consume 11% of GDP in 75 years if changes are not made.
  • Parts of the program are expected to be financially insolvent by 2019.

Continue to Page 2 for some solutions…

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