Thomas Bodenheimer, MD
Bodenheimer T. High and Rising Health Care Costs. Part 1: Seeking an Explanation. Ann Intern Med. 2005;142:847-854. doi: 10.7326/0003-4819-142-10-200505170-00010
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Published: Ann Intern Med. 2005;142(10):847-854.
The United States has the most expensive health care system in the world, with per capita health expenditures far above those of any other nation. For many years, U.S. health care expenditures have been growing above the overall rate of inflation in the economy. A few experts have argued that high and rising costs are not such a serious problem. Most observers disagree with this view, pointing to the negative impact of employee health care costs on employers, the government budgetary problems caused by rising health care expenditures, and an association between high health care costs and reduced access for individuals needing health services.
Several explanations have been offered for high and rising health care costs. These include the perspectives that high and rising costs are created by forces external to the health system, by the weakness of a competitive free market within the health system, by the rapid diffusion of new technologies, by excessive costs of administering the health system, by the absence of strong cost-containment measures, and by undue market power of health care providers.
This article, the first in a 4-part series, discusses 3 perspectives on health care: 1) Are high and rising health care costs a serious problem? 2) Are rising costs explained by factors outside the health care system? 3) Does the absence of a free market in health care explain why costs are high and rising? The remaining 3 articles in this series address other perspectives on health care costs.
Are high and rising health care expenditures a serious problem, or is the national preoccupation with health care costs excessive?
Why are health care expenditures higher in the United States than in other countries?
Why are health care expenditures growing so fast?
What strategies are available to slow the rate of growth of health expenditures?
Do any strategies exist that enable physicians to reduce costs while improving or protecting quality?
Adapted with permission from Levit et al. (2). Copyright 2004, Project HOPE—The People-to-People Health Foundation, Inc.
High and rising costs are not such a serious problem.
High and rising costs are a problem, but they are created by factors external to the health care system.
High and rising costs are caused by the absence of a free market; the remedy is to give patients more responsibility for costs of care and to encourage competition among health insurers and providers.
High and rising costs result from medical technologies creating innovation in the diagnosis and treatment of illness.
High and rising costs are in part the result of excessive costs of administering the health care system.
High and rising costs are explained by the absence of strong cost-containment measures.
High and rising costs are the result of the market power of health care providers.
Values are U.S. dollars (purchasing power parity international dollars). Data obtained from the Organization for Economic Cooperation and Development (1).
Patients cannot compare the cost of medical services because different health conditions lead to widely differing costs. A patient with a headache does not know whether the cost of care will be a $50 physician visit plus a bottle of aspirin or $60 000 neurosurgery for a brain neoplasm.
Because most health care is a necessity rather than a luxury, private and government insurance has evolved to shield patients from the financial disaster of serious illness, obviating the need for patients to shop for lower-cost services.
A free market might lead to patients becoming more cost conscious, but low-income and sick people who are responsible for all or part of their health care costs may incur unaffordable expenditures and be priced out of receiving needed services.
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Steven D. Hanks
Central Connecticut Health Alliance
May 26, 2005
Another Perspective on Healthcare Cost Inflation
In the first of his four part series on healthcare costs (Ann Intern Med. 2005;142:847-854), Dr. Thomas Bodenheimer lists eight varying perspectives on why health care costs are high and what should be done about it.
There is a ninth perspective that he does not mention, but one that economists have discussed for almost forty years, and that is that healthcare costs have risen relative to the price of other goods as a result of differing levels of productivity growth in healthcare as opposed to other industries. This phenomenon of unbalanced productivity growth was first described by NYU economist William Baumol in 1967 , and has been dubbed "Baumol's Cost Disease."
Baumol noted that changes in productivity were uneven across industries. Over the past few decades, service industry productivity, such as we have in healthcare and education, has grown more slowly than productivity in the manufacturing sector . One of the reasons is that many service sector activities are highly labor intensive, and quality in many of these is either actually or perceptually related to the quantity of labor. Parents prefer lower teacher: student ratios, and hospital inpatients prefer more nursing staff.
The problem that results is that low productivity growth industries, such as healthcare, must keep pace with wage growth driven by productivity gains in other industries in order to effectively compete for workers. This observation led Baumol to go so far as to suggest that rising health care costs are "an inevitable and ineradicable part of a developed economy and the attempt to do anything about it may be as foolhardy as it is impossible."
More recently, the service sector has begun to see productivity gains on par with that of manufacturing. There is consensus among economists that effective deployment of ever-cheaper information technology has been one of the principle drivers of this growth. But some of the service industries, including healthcare, continue to lag.
As with other industries, I believe healthcare will eventually reap the benefits of information technologies and experience associated productivity gains. This should ease the portion of health care cost inflation that is fueled by our lower productivity. But Americans will never want us to turn off the spigot of innovation, so it remains unlikely in the foreseeable future that healthcare cost inflation will fall to the level of the general consumer price index.
1 Baumol, William J., "Macroeconomics of Unbalanced Growth," American Economic Review 62 (1967):415-426
2 Bureau of Labor Statistics
3 Baumol, William J., "Anatomy of an Illusion. Do Health Care Costs Matter?" The New Republic Nov 22, (1993):16-18
4 Triplett, Jack E. and Bosworth, Barry P., "Productivity Measurement Issues in Service Industries: "˜Baumol's Disease' has been Cured," Federal Reserve Bank of New York Economic Policy Review Sept 2003:23-30
Michael J. Keberlein
Outlier Status of U.S. Health Care Costs
Addressing the perspective that high and rapidly rising health care costs might be attributable to factors external to the health care system, Dr. Bodenheimer noted only GDP per capita and demographic trends related to our aging population. No explicit consideration was given to the U.S. legal system, which is unique when compared to the legal externalities affecting the medical care of other nations.
Under the American Rule, unsuccessful plaintiffs are not by default obligated to cover defense costs. (In Japan, similar legal rules have very different consequences, due to cultural attitudes regarding litigation.) The American rule favors the vigorous enforcement of high standards for performance. Concentrated capital, needed for technology development, provides a target for those who demand compensation for failures.
Diligence itself is a good thing, but it has a cost. Meanwhile, any unfunded demand cannot directly improve supply. Demand can generate supply only when it is connected with a willingness to pay required costs. We may be free to set standards which we cannot afford, but when the mechanism for setting standards operates without consideration of aggregate costs, we should not be surprised to see the system fall short. Indeed, the diversion of resources to provider risk management (as opposed to patient safety per se) may exacerbate the cost problem.
Other developed nations having less aggressive civil litigation provide medical services of reasonable quality, increasing in their costs over time, perhaps, but not doing so at the same rate seen in the U.S. Unique features of the U.S. legal system clearly contribute to the outlier status of our health care expenditures in the international context.
If Dr. Bodenheimer was planning to address this issue in subsequent articles, such intention was not apparent in the description of his rubric of seven perspectives. Consideration of all relevant incentives is important to economic explanations, even those directed to non-economists. While it seems reasonable for physicians to focus on those problem-causes within our domain of control, we need not ignore the elephant in the room.
Michael J. Keberlein, M.D. Flagstaff, AZ 86001
1. Bodenheimer, T. High and Rising Health Care Costs. Part 1: Seeking an Explanation Ann Intern Med. 2005;142:847-854
2. American College of Physicians. Reforming the Medical Professional Liability Insurance System. Philadelphia: American College of Physicians; 2003: Position Paper.
Seton Hall University - College of Nursing
June 9, 2005
Professional Caregiver Insurance Risk and the rising costs of health care
To understand the rising costs of health care delivery in the US consider that we may be buying less with health insurance dollars in systematic, avoidable ways. Prospective payment systems, DRGs, and capitation contracts all involve "risk/profit" sharing for providers (Professional Caregiver Insurance Risk). At first this seems benign, encouraging efficient health services production. Another view is these mechanisms place providers in the role of predictably inefficient "˜mini- insurance companies.'
Using the normal distribution, we can see that health care providers variability in costs when assuming 1/10th (1/1000th) of a "˜real' insurers full portfolio of risks, greatly exceed the variability in costs for a larger, more efficient, insurer. The variability in costs (standard error) for providers qua insurers vs larger, more efficient, insurers, ceteris paribus, is approximately 3.17 (31.7) times greater. To continuously assure profitability and solvency from contract inception to final accounting resolution, health care providers must target service delivery levels below the insurer's average loss cost provision simply because providers manage risk far less efficiently than insurers based on portfolio size alone.
While it is true that the higher and lower costs balance out from the insurer's perspective, the potential for substantial uncompensated losses is far greater for small providers and there is no way to efficiently compensate risk-assuming providers for the insurance risks they assume. Nor can providers efficiently purchase reinsurance since reinsurers want to be paid for their assumption of risks. Obviously there are many other ways in which providers are less efficient insurers but the size differential alone is serious enough to warrant far more attention than it currently receives.
Clearly providers ought not be in the insurance business, cannot perform as efficiently as insurers, and every health insurance dollar is inefficiently consumed when health care providers serve dual roles as providers and as insurers. Eliminating providers' point of service insurance risk management functions would eliminate a costly and unnecessary inefficiency in financing health care services.
July 7, 2005
To the Editor:
Dr. Keberlein argues that costs related to malpractice litigation are "the elephant in the room" of high and rising health care costs in the United States. Indeed, there are major differences between the malpractice systems of the US compared with those of other nations. However, the problem can better be described as a "big dog in the room" rather than an elephant. Studies of the costs of malpractice litigation and "defensive medicine" practiced to protect against litigation estimate the costs to be 5-9% of health expenditures [1,2], a large sum but not quite an elephant. Does the malpractice system need reform? Drastically. Could such reform solve the problem of high and rising costs? Probably not.
Dr. Hanks raises the point that most healthcare costs are personnel costs. In one sense, personnel costs are a good thing because these funds distribute jobs and income throughout society. If, however, as some research shows [3,4], part of the problem of high and rising health care costs is related to excessive hospital days, emergency department visits, and overdiffusion of new technologies that do not improve health outcomes, then the personnel needed to provide these services is also excessive, and costs could be reduced by eliminating these services. It is also not proven that modern information technology will improve productivity and reduce costs; overall, new technologies tend to increase expenditures .
Thomas Bodenheimer MD
1. Kessler D, McClellan M. Do doctors practice defensive medicine? Quarterly J Economics 1996;111:353-390. 2. Office of Technology Assessment. US Congress. Defensive Medicine and Medical Malpractice. Washington DC: US Government Printing Office, 1994. 3. Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 2: health outcomes and satisfaction with care. Ann Intern Med 2003;138:288-298. 4. Fisher ES. Medical care - is more always better? N Engl J Med 2003;349:1665-1667. 5. Aaron HJ. The Unsurprising Surprise Of Renewed Health Care Cost Inflation. Health Affairs. Web Exclusive, January 23, 2002.
Medical College of Wisconsin
August 24, 2005
Values driving healthcare costs
To the Editor,
"Doc, if you cant do a little better on that price, we ll just have to let Mama go." Doesn't sound familiar, does it? It would if medicine were a one-dimensional, market-driven enterprise such as Dr. Bodenheimer presents (1). Clearly, there is a second dimension influencing healthcare decisions and utilization, which is neither "market-driven" nor rational.
Anyone sorting through the estate of a loved one has encountered a two-dimensional value system. Certainly, every item has a market value - that is why we have eBay. But many items also have a sentimental value that cannot be expressed in dollars. This second dimension of value is independent of, additive to, and often greater than the item s market value. This and other human values, such as the need to feel that the world is fair, safe, connected, and in control, define a dimension of non-market value I broadly term spiritual. Unlike the market value of traded commodities, spiritual value cannot be bought, transferred, or even quantified, yet it still heavily influences decisions. As physicians, we are at times counselor, comforter, and conduit of hope. These are spiritual dimensions of our work.
Medicine is a profession precisely because we operate, in part, within the dimension of spiritual values. Except in extreme cases, our function and responsibilities within the spiritual dimension are both unregulated and beyond the influence of market forces. Instead, our actions within this domain are bounded by a public oath [usually Hippocratic], which defines unique and sacred responsibilities to our patients and peers. Publicly professing our common responsibility is what defines us as professionals, and acting in accordance with this professed obligation is professionalism. That physicians have professed this oath for 3000 years reflects the centrality of this non-market value system to our work. In fact, the unique honor it is to be a physician derives from medicine s spiritual dimension.
American society routinely confuses profession with something you do for money (e.g. professional golfer ) so we naturally have trouble understanding the role of spiritual values in medicine, including how such factors can drive healthcare costs beyond all bounds of economic reason. Although spirituality is fundamentally personal, is not economically or politically insignificant. Opponents exploited this second dimension to doom the Clinton healthcare plan.
If we do not acknowledge and seek to better understand this spiritual dimension of medicine, we will never fully comprehend medicine, much less the drivers of healthcare costs.
William L. Berger, MD email@example.com Medical College of Wisconsin
paul H Grundy
August 26, 2005
IT Tools needed for value in Healthcare
I read the papers in the Ann of internal med and I could not agree with you more.
It expressed what I have seen in the medical literature in places like New Zealand, Denmark and Singapore.
Strengthen Primary care and provide them the tools to do real care and "¦real value will result. In New Zealand without any performance bonus (p4p) plan the quality of care in diabetics improved markedly. The a1c rates and diabetic hospital rates are better in the primary care practices in New Zealand that are connected to the internet tools than P4p practices in the USA. Why? In New Zealand the provider has clinical data, in real time, in a format that clearly allows the doctor to see the medical issues and supports making the right clinical decisions. In New Zealand a person can get in to see a GP the same day they are sick and not end up in an emergency room. New Zealand uses information technology (IT) to drive its Integrated Care strategy. IT enables the sharing of relevant health information between care providers. This information sharing is critical to closing the gaps between fragmented areas of the health system. As with other industries, I believe healthcare will eventually reap the benefits of information technologies and experience associated value, quality and productivity gains.
We need to focus like a laser pin point on a solution to healthcares value quality productivity issues that will make a real difference. That solution in healthcare like in every other industry in the past 30 years is information technology. This is not just a theory, in place that have gone down the IT route like New Zealand, Denmark, and Singapore -- guess what - IT works.
As well meaning as it may seem the p4p programs like the Bridges to Excellence diabetic care program hurt forward motion when it asks a primary care practice to spend 120 man hours pulling paper charts. It becomes just one more misguided cry of wolf. First, put in place electronic health records, eRX, interoperability, clinical decision support tool to make it possible for the primary care provider to provide quality and value.
Medical care has reached the point where it is no longer safe, effective or perhaps even possible to practice with out the assistance of connected, interoperable, information technology. I would no more want a doctor to be caring for my diabetes in a total paper chart environment that I would want to be sitting on top a rocket ready to be launched in a total paper environment.
Information Technology systems in general practice medicine in New Zealand Rebecca Didham, Isobel Martin, Richelle Wood, Ken Harrison The New Zealand Medical Journal 23-Jul-2004 - Vol 117 No 1198
Integrated care information technology Ian Rowe, Phil Brimacombe The New Zealand Medical Journal 21-Feb-2003 - Vol 116 No 1169
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