Nicholas Fogelson, MD, is a practicing surgeon who blogs at Academic OB/GYN. In a series of short blog essays he has outlined four items that he sees as key contributors to the rise of healthcare costs. He demonstrates how perverse incentives are operating to increase expenditures at every level, from the patient, to the doctor, to the insurance company, to industrial suppliers:
Our government is flailing around trying to figure how to pay for the Healthcare system we have, when the system is fundamentally rigged in a way to make it incredibly expensive. The problem isn’t how we pay the cost. The problem is that the cost is too high.
1. Medical Equipment
Fogelson explains how hospitals acquire expensive medical devices that provide only minor additional convenience for the surgeon and little or no extra benefit to the patient. The hospital has no reason to utilize cheaper alternatives because the cost is being passed on anyway. Moreover, with hospitals receiving payment on a cost-plus-profit-margin basis, increasing the costs also increases the institution’s profit margin. Fogelson’s suggestions for improvement include educating doctors to employ cheaper alternatives.
2. The Insurance System
Most of us assume that the insurance company will want to reduce its expenses and therefore has a vested interest in negotiating the lowest possible prices from providers. Fogelson argues that this is not the case. The insurance company primarily makes money by reinvesting the unused portion of premiums, the money that has been paid by the consumer but has not yet been, or perhaps never will be, paid out for the consumer’s healthcare. This is called the float. When the insurance company’s expenses are high it simply passes these on to its customers by assessing higher premiums. When premiums are higher, the portion of the premiums that constitutes the float is correspondingly greater, meaning that the insurance company has more money to invest and can make bigger profits:
“nothing makes an insurance executive more excited than a new expensive technology or new expensive medicine that the healthcare system decides is absolutely necessary, because they will get to roll it into premiums and make MORE FLOAT.”
Fogelson suggests that a non-profit insurance system like Medicaid or Medicare would relieve this problem. He prefers a “hybrid” system where individuals can also supplement the non-profit system by purchasing additional private insurance.
3. Privacy Regulations
To Fogelson, the privacy regulations created by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), although well-intentioned, have not only been unjustifiably expensive but have also had a detrimental effect upon the quality of patient care. He states that prior to the Act, the medical profession’s voluntary culture of privacy was already extremely effective in limiting violations of patient confidentiality. HIPPA’s solution to the comparatively rare problem of confidentiality breeches led to a landslide of new reporting and procedural requirements that quickly necessitated the purchase of information technology, along with training in how to use it, and the creation of very expensive and previously unnecessary compliance departments. Worse still, HIPPA led to a reduction in quality of patient care as physicians and staff were deprived of the aid of traditional bedside notes, prevented from having important conversations about patient care while on the wards, and forced to spend more time on computers:
“We used to go to patient’s bedside all the time, because the chart was outside their door and you had to visit there often to write down what you were doing. But once HIPAA pushed the charts out of the doors and into the computers, physician life changed. Now you visited the patient rarely, and spent a tremendous amount of time at a central bank of computers documenting what you were doing.”
4. Drug Prices
Drugs are unique products because people depend upon them for their well being, even their lives, yet the US system mostly allows companies to treat them as if they were no different from any other commodity. This enables unscrupulous players to corner the market on specific drugs and then raise the prices exponentially: “There is no regulation at all in pricing, which leads business people to treat drugs like stocks to be bought and sold, shorted and optioned.” This is predatory pricing. Because the insurance companies don’t mind the high prices (see 2 above) and because the government has, since 2003, largely banned itself from negotiating lower drug prices, there is very little that can be done about it. Moreover, drugs are often not priced based upon the cost of their production but upon the amount of money they save when compared with the costs of treating whatever conditions they prevent. This means that drug companies can charge a high price for a drug that is cheap to produce if it prevents the patient from developing an expensive condition, thus much of the financial benefit that the drug would otherwise provide is lost.
I encourage you to read Dr. Fogelson’s blog posts in full (linked above).
Obviously, these are not the only items that are driving up healthcare prices in the United States. A large part of the increase is attributable to genuine medical advances that have been made in the past several decades. Other factors that should be taken into consideration include: 1) our obsession with prolonging life regardless of cost; 2) unnecessary tests; 3) our bizarre billing system; 4) litigation fears; 5) the impact of lobbying; 6) mergers; 7) the tendency for the participation of third-party payers, whether government or private, to reduce price sensitivity; and 8) poor lifestyle choices by consumers.