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Medicine and Public Policy |

High and Rising Health Care Costs. Part 1: Seeking an Explanation FREE

Thomas Bodenheimer, MD
[+] Article and Author Information

From the University of California, San Francisco, San Francisco, California.


Potential Financial Conflicts of Interest: None disclosed.

Requests for Single Reprints: Thomas Bodenheimer, MD, Department of Family and Community Medicine, University of California, San Francisco, Building 80-83, San Francisco General Hospital, 1001 Potrero Avenue, San Francisco, CA 94110; e-mail, Tbodenheimer@medsch.ucsf.edu.


Ann Intern Med. 2005;142(10):847-854. doi:10.7326/0003-4819-142-10-200505170-00010
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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.

“Rising-health-care-costs” has become a household word—and worry—for the general public, governments, and employers who purchase health care for their employees. In 2002, the United States spent $5267 per person for health care. Switzerland, the second most expensive health system, posted a per capita figure of $3445, two thirds of the U.S. amount. The third, fourth, and fifth most costly health systems, those of Norway, Canada, and Germany, reported 2002 health expenditures per capita less than 60% that of the United States. The United Kingdom, a frugal system, spent $2160 per person in 2002, 41% of the U.S. amount (1).

Not only does the United States outspend other nations in health care, but U.S. health care costs are growing rapidly. From 1988 to 1993, U.S. health expenditures rose by 9.7% per year. Following a slowdown from 1993 to 2000, costs jumped by 8.5% in 2001, 9.3% in 2002, and 7.7% in 2003 (23). The health care sectors with the most rapid growth in cost are prescription drugs and administrative costs of private health insurance (each increasing at 11% to 16% over the past 3 years). Hospital and physician expenditures have been growing at annual rates closer to 7% to 8% over the past 3 years (3).

The federal government projected an average annual growth rate of 7.2% through 2013, with health expenditures (Table) rising from $1.6 trillion in 2002 (14.9% of gross domestic product, the value of all goods and services produced in a nation) to $3.6 trillion by 2013 (18.4% of gross domestic product) (47). It is undisputed that U.S. health expenditures are high and rising, but the mechanisms behind these phenomena are a topic of debate.

Table Jump PlaceholderTable.  How Are Health Care Costs Measured?

This article begins a 4-part series on health care costs. The series presents a variety of perspectives on costs and cost-control strategies. An overview of a complex topic, written by a noneconomist for noneconomists, the series addresses the following questions:

  1. Are high and rising health care expenditures a serious problem, or is the national preoccupation with health care costs excessive?

  2. Why are health care expenditures higher in the United States than in other countries?

  3. Why are health care expenditures growing so fast?

  4. What strategies are available to slow the rate of growth of health expenditures?

  5. Do any strategies exist that enable physicians to reduce costs while improving or protecting quality?

Articles 1, 2, and 3 address the first 4 questions through discussions of 7 different perspectives on health care costs. The final article searches for health policy's Holy Grail: cost-containment strategies that protect or improve health care quality.

Four major actors occupy the health care stage: purchasers, insurers, providers, and suppliers (8). Purchasers, including employers, governments, and individuals (some of whom are patients), supply the funds. Insurers receive money from purchasers and reimburse providers. The government can be viewed as an insurer or a purchaser in the Medicare and Medicaid programs. The term “payer” refers to both purchasers and insurers.

Providers include physicians and other health professionals, hospitals, nursing homes, home care agencies, and pharmacies. Suppliers—the pharmaceutical, medical supply, and computer industries—manufacture equipment, supplies, and medications used by providers.

Each dollar spent on health services represents an expense to payers and revenue to providers and suppliers. Payers generally wish to reduce the dollars flowing into health care, while providers and suppliers want to increase those dollars. Payers want to contain costs; providers and suppliers resist cost containment. That conflict is the fundamental battle in the health care economy.

Secondary skirmishes complicate this battle. Although insurance companies are payers and try to reduce reimbursements to providers and suppliers, they want more money from purchasers. Providers and suppliers may engage in ferocious conflicts; for example, hospitals purchasing pharmaceuticals negotiate for a low price while pharmaceutical manufacturers demand a high price. Providers may face off against one another. If a physician group receives a capitation payment from an insurer, primary care physicians and specialists may fight over how much of the capitation check goes to each group.

Health care costs represent a battleground among competing interests (Figures 1 and 2).

Grahic Jump Location
Figure 1.
Where the health care dollar comes from, 2002.

Adapted with permission from Levit et al. (2). Copyright 2004, Project HOPE—The People-to-People Health Foundation, Inc.

Grahic Jump Location
Grahic Jump Location
Figure 2.
Where the health care dollar goes, 2002.

Adapted with permission from Levit et al. (2). Copyright 2004, Project HOPE—The People-to-People Health Foundation, Inc.

Grahic Jump Location

The literature—scientific, commercial, and popular—on health care costs contains a variety of perspectives on why costs are high and how to control their growth. While few analysts adhere to only 1 of these views, the perspectives can be grouped into 7 categories.

  1. High and rising costs are not such a serious problem.

  2. High and rising costs are a problem, but they are created by factors external to the health care system.

  3. 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.

  4. High and rising costs result from medical technologies creating innovation in the diagnosis and treatment of illness.

  5. High and rising costs are in part the result of excessive costs of administering the health care system.

  6. High and rising costs are explained by the absence of strong cost-containment measures.

  7. High and rising costs are the result of the market power of health care providers.

I take each of these perspectives in turn and examine some arguments pro and con, linking differing cost-control strategies to some of these perspectives. In this article I cover the first 3 perspectives. In a few cases, agreement among analysts is substantial. In other cases, disagreements are profound.

Perspective 1: Costs Are Not a Serious Problem

Some articles have argued that high and rising health expenditures present some difficulties but are not a serious problem. These writings point out that health care improves health outcomes, provides jobs and income, and delivers services that people desire; thus, increased health expenditures may be a good rather than a bad thing. Moreover, if the general economy is expanding, increases in health spending may not reduce spending on sectors outside the health care economy (911).

Organizations and individuals touched by the reality of costly health care do not share this opinion. Most employers, for whom the purchase of employee health insurance is an expense rather than a revenue, are anxious to reduce insurance premiums (1214). If premiums were lower, employers could augment employee wages, reduce consumer prices, or increase profits (1516). Expanding government health expenditures create budget deficits and crowd out spending for education, police, fire, and other services (15). Rising costs increase the number of uninsured people through 3 mechanisms: Employers stop offering insurance to their employees (14, 1718), employees decline employer-offered health insurance because they cannot afford the employee share of the premium (19), and people are dropped from Medicaid as state governments respond to increased costs with eligibility reductions (2021). For the large proportion of the population that is uninsured or underinsured, higher costs make physician visits, preventive services, and prescription drugs less affordable, particularly for poor persons, elderly patients, and those in ill health (2226). When costs rise and governments reduce reimbursements, institutions serving as the safety net for the uninsured may close their doors (27). These effects of rising costs demonstrate that increased cost often means decreased access.

In summary, while rising costs may not create major problems for the economy as a whole, they do negatively affect employers, employees, governments, and patients.

Perspective 2: High Costs Are Due to Factors External to the Health Care System

High health care costs might derive from factors outside the health sector rather than from characteristics of the health care system itself. One such external cause is the state of the overall economy. International comparisons of health spending consistently show that the level of health expenditures per capita is closely associated with total GDP per capita. In other words, richer nations spend more per capita on health care than poorer nations (28).

Although no one disputes this association, one key fact stands out: The United States is a striking outlier (Figure 3). For example, the U.S. GDP per capita is 150% that of Sweden, but U.S. health spending per capita is 240% that of Sweden (28). The same relationship is found between the United States and almost all other developed nations (29). The U.S. outlier status suggests that high and rising costs in the United States cannot be explained simply by invoking GDP per capita.

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Figure 3.
Health expenditures and gross domestic product (GDP) per capita, 1998.

Values are U.S. dollars (purchasing power parity international dollars). Data obtained from the Organization for Economic Cooperation and Development (1).

Grahic Jump Location

Another possible external cause for rising health case costs is the aging of the populations of developed nations. Given that people older than 75 years of age incur per capita health expenditures 5 times higher than those of people age 25 to 34 years (30), it is logical to assume that nations with a higher proportion of elderly people would have higher per capita health expenditures than nations with younger age distributions.

Research, however, consistently shows that this demographic trend explains only 6% to 7% of health expenditure growth (3032). A cross-national regression analysis of the effects of aging on health spending found no significant relationship between the percentage of elderly persons in a nation's population and national health spending (28, 30, 32).

Several factors explain this finding. The fraction of the population age 65 years and older is rising relatively slowly (30), and per capita health spending for the elderly is increasing more slowly than per capita spending for nonelderly persons (33), diminishing the cost impact of an aging population. While end-of-life costs are high, they are not increasing faster than health expenditures as a whole (31). While life expectancy is increasing, the number of years of disability is lessening, which is a cost-saving trend (3435). One caveat is that persons with multiple risk factors for serious illness have twice the rate of disability of those with no risk factors (36); the epidemic of obesity is a cloud on the cost horizon (37). In summary, rising health care costs are not strongly associated with the aging population and are therefore not an inevitable consequence of this demographic reality.

Perspective 3: The Absence of a Free Market Creates High and Rising Costs

Some policy experts argue that costs could be reduced by introducing an unfettered free market in health care (3840).

A market is a place where buyers and sellers make transactions. In a free, competitive market, the price of a product or service is determined by the forces of supply and demand; there are many buyers and sellers such that no single buyer or seller is able to set the price of a product or service; and each buyer has sufficient information to make rational purchasing decisions.

The health care sector of the economy consists of multiple markets. These markets include patients obtaining physician and hospital services, health insurance plans making contracts with hospitals, and employers choosing which health plans they will use to insure their employees.

At the level of patients seeking physician and hospital services, a free market means that patients, responsible for some or all of their costs, have sufficient information on the costs of different providers and seek low-priced physicians and hospitals. Physicians and hospitals would lower their fees to attract patients. In reality, patients do not purchase physician and hospital services in a free market, as shown by the following.

  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.

  2. 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.

  3. 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.

At the level of health insurance plans choosing which hospitals their enrollees could use, a free market requires that a sufficient number of hospitals, competing on the basis of price, exists in each geographic region. At the level of employers choosing health insurance plans, a free market means that each geographic region contains an adequate number of competitive health plans; employers would seek out plans with lower premiums, and insurers would reduce their premiums to compete for employer contracts.

In reality, these transactions do not take place in competitive free markets. Hospitals and insurance plans have consolidated in most geographic regions (4142), and entry of new hospitals or health plans into a market is difficult, thereby undermining the price competition that is a necessary component of a free market.

Cost-containment strategies based on the free market perspective include increased patient cost sharing and competition among health care providers and insurers.

Patient Cost Sharing

An influential school of thought advocates that consumers should be responsible for a greater share of their health care costs. Employers are requiring employees to pay more for health insurance premiums, deductibles, and copayments (17). A deductible is the sum of money patients must pay to physicians or hospitals each year before the insurance company begins to pay for those services. A copayment is a small fee (often $5 or $10) that patients must pay for each health service received. Co-insurance is similar to a copayment but is the percentage (rather than a specific amount) of the cost of a service that the patient is responsible to pay. Taking the place of health maintenance organization (HMO) plans with no deductible and minimal copayments are products with $2500 deductibles and 25% co-insurance. Medical savings account plans may have deductibles reaching $10 000 (4344).

Advocates of the patient cost-sharing strategy cite as evidence the 1970s RAND Health Insurance Experiment, which compared health expenditures of patients receiving free care with those of similar patients paying for 25%, 50%, or 95% of their care out-of-pocket. Cost-sharing patients had an upper limit on their costs. The study found that patients receiving free care utilized more services and had higher expenditures than cost-sharing patients (4546). For example, people responsible for 50% of their costs up to $1000 had total health care expenditures about 10% below those receiving free care. Of note, expenditures for HMO patients receiving free care were 38% lower than those for patients in the free-care, fee-for-service group, suggesting that the replacement of fee-for-service insurance with capitated systems is more effective than patient cost sharing in reducing expenditures (46).

The effectiveness of patient cost sharing as a cost control mechanism has been challenged by other analysts (42, 47) and by the RAND investigators themselves (31, 46). From 1950 to 1984, the spread of health insurance coverage (that is, the reduction in patient responsibility for health care costs) explains only 5% to 10% of spending growth (3132, 46). Moreover, the United States has one of the highest levels of patient cost sharing among developed nations yet has the highest expenditures per capita.

Another fact buttresses the argument that patient cost sharing is marginally effective in containing costs: Seventy percent of health care expenditures are incurred by 10% of the population (48). It is likely that patients in the high-cost 10% (that is, those who suffer an acute catastrophe or prolonged chronic illness) are far too sick to impose limits on their care because they must pay for part of that care. Thus, 70% of health expenditures may be unaffected by shifting costs to patients. The RAND experiment did not study high-cost patients because the study excluded elderly persons, and study participants were not responsible for costs above $1000 per year (46). The RAND study found that patient cost sharing reduced the likelihood of seeing a physician but had little effect on the costliness of an illness once care was sought (49). Compared to the micro-world of one not-very-sick patient deciding whether to spend some money on a physician visit, patient cost sharing in the macro-world may remove only a thin slice from a large, expanding pie.

Competition

Controlling costs through free-market competition is an idea gaining currency in the United States. The barriers to a free market (discussed earlier in this section) make competition almost impossible at the level of patients paying out-of-pocket for medical services. However, competition is a realistic option for health insurance plans contracting with hospitals and purchasers choosing health plans.

Health Plans Contracting with Providers. Before the 1980s, hospitals competed for patients by competing for admitting physicians. To attract physicians, many hospitals constructed state-of-the-art radiology and surgical facilities. As a result of this “medical arms race,” an oversupply of facilities existed in many metropolitan areas. This form of competition caused costs to rise rather than fall (5052).

This situation reversed as health insurance plans—which formerly paid any hospital that cared for its enrollees—began to contract selectively with hospitals agreeing to lower prices. Hospitals became less concerned with competing for physicians and more concerned with competing for patients by contracting with insurance plans. From 1980 to 1990, especially in California (where selective contracting was well developed), competitive markets were associated with lower hospital costs (50, 5354). In a competitive market, many firms (in this case, hospitals) exist and no firm has a major share of the market (55).

In response to insurers' success in cutting payments to hospitals that were competing for insurance contracts, the hospital industry consolidated, reducing the number of hospital entities and thereby reducing the amount of competition. From 1995 to 2000, the proportion of private hospitals in multihospital systems increased markedly; in some areas, 60% to 80% of acute private admissions went to hospitals in multihospital systems (56). Insurers could no longer force hospitals to accept low reimbursement rates because insurers needed contracts with the 2 or 3 hospital systems in each geographic market to guarantee accessible medical services to their enrollees (57).

Market power is the ability of a seller to raise prices without losing customers (58). Hospitals have market power if they can raise rates without losing insurance contracts. As hospitals consolidated and competition waned, hospitals gained market power and prices of hospital care shot back up (5961). In 1 study, the merger of 2 competing hospitals led to price increases of 20% to 40% (62).

To summarize, there is a fundamental difference between the pre- and postselective contracting eras. In the former era, hospital competition led to higher costs; in the latter, competition has been associated with lower costs and lower hospital revenues, leading hospitals to respond in an anticompetitive manner through consolidation.

Purchasers Choosing Health Plans. Competition can also take place in the market of purchasers—employers or government—buying health insurance. An example is provided by the experience of Medicare HMOs, which are insurance plans that accept a fixed payment from Medicare for enrolled Medicare beneficiaries. Medicare hoped that a system in which HMOs competed to enroll Medicare beneficiaries would reduce costs. The result was the opposite: Costs went up for the Medicare program. To reduce their own costs, Medicare HMOs attracted healthier beneficiaries; HMOs had only half of fee-for-service Medicare's proportion of people in poor health (63). Medicare was paying several thousand dollars a year per patient for the 58% of HMO patients in good health (63), patients who would cost few dollars under traditional Medicare. As a result, Medicare paid HMOs between 13% and 21% more per beneficiary than traditional Medicare (6465). This particular form of competition was not successful as a cost reduction measure.

Another variety of competition in the purchaser–insurer market is “managed competition.” Employers would provide employees a set amount of money for health insurance, perhaps $400 per month for a family. If the employee elected a health plan costing $600 per month, the employee would pay the extra $200 per month. To attract employees, health plans would compete to provide the lowest premiums, thereby reducing health expenditure growth (39). The competition was supposed to be “managed” (government-regulated) to prevent health plans from selectively enrolling healthy people, as in the Medicare HMO program.

Managed competition was never implemented because the consolidation of health insurance plans and hospitals undermined the potential for competition. In all but 14 states, 3 insurers control over 65% of the market; their market clout enables them to negotiate high premiums from employers with scant risk for losing customers (42). Higher concentrations of market share among a few HMOs are associated with higher HMO profits (55). Because managed competition has never been implemented, it is not known whether it can control costs (6667).

In summary, competition can reduce health care costs under favorable conditions. These conditions existed for a brief period in the 1990s. With many competing health insurance plans, employers were able to reduce insurance premium growth; as long as there were a multiplicity of competing hospitals, health plans could control payments to hospitals. The consolidation of health plans and hospitals may have put an end to that brief competitive era.

In seeking an explanation for high and rising health expenditures, the economics and health policy literature offers several perspectives. The aging of the population is not an adequate explanation, nor is the post-1950s' spread of health insurance, which reduced patients' responsibility for the costs of care. The lack of well-developed competitive markets in health care may be partially responsible for high health expenditures. The next article in this series will explore a more plausible explanation for high and rising health expenditures: technological innovation.

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Zwanziger J, Melnick GA, Bamezai A.  Costs and price competition in California hospitals, 1980-1990. Health Aff (Millwood). 1994; 13:118-26. PubMed
 
Robinson JC.  HMO market penetration and hospital cost inflation in California. JAMA. 1991; 266:2719-23. PubMed
 
Pauly MV, Hillman AL, Kim MS, Brown DR.  Competitive behavior in the HMO marketplace. Health Aff (Millwood). 2002; 21:194-202. PubMed
 
Cuellar AE, Gertler PJ.  Trends in hospital consolidation: the formation of local systems. Health Aff (Millwood). 2003; 22:77-87. PubMed
 
Devers KJ, Casalino LP, Rudell LS, Stoddard JJ, Brewster LR, Lake TK.  Hospitals' negotiating leverage with health plans: how and why has it changed? Health Serv Res. 2003; 38:419-46. PubMed
 
Ginsburg PB.  Can hospitals and physicians shift the effects of cuts in Medicare reimbursement to private payers? Health Aff (Milwood). Web Exclusive. 8 October 2003. 10.1377/hlthaff.w3.472. Accessed athttp://content.healthaffairs.org/cgi/content/full/hlthaff.w3.472v1/DC1on 25 March 2005.
 
Town R, Vistnes G.  Hospital competition in HMO networks. J Health Econ. 2001; 20:733-53. PubMed
 
Krishnan R.  Market restructuring and pricing in the hospital industry. J Health Econ. 2001; 20:213-37. PubMed
 
Melnick G, Keeler E, Zwanziger J.  Market power and hospital pricing: are nonprofits different? Health Aff (Millwood). 1999; 18:167-73. PubMed
 
Goetghebeur MM, Forrest S, Hay JW.  Understanding the underlying drivers of inpatient cost growth: a literature review. Am J Manag Care. 2003;9 Spec No 1:SP3-12. [PMID: 12817611]
 
Current Medicare Current Beneficiary Survey, 2000. Washington, DC: Center for Medicare & Medicaid Services; 2001. Accessed athttp://www.cms.hhs.gov/MCBS/PubCNP00.aspon 7 December 2004.
 
Berenson RA.  Medicare + Choice: doubling or disappearing? Health Aff (Milwood). Web Exclusive. 28 November 2001. 10.1377/hlthaff.w1.65. Accessed athttp://content.healthaffairs.org/cgi/content/full/hlthaff.w1.65v1/DC1on 25 March 2005.
 
Medicare: Fewer and Lower-Cost Beneficiaries with Chronic Conditions Enroll in HMOs. Washington, DC: U.S. General Accounting Office; August 1997.
 
Rice T, Brown R, Wyn R.  Holes in the Jackson Hole approach to health care reform. JAMA. 1993; 270:1357-62. PubMed
 
Luft HS, Grumbach K.  Global budgets and the competitive market. Ginzberg E Critical Issues in U.S. Health Reform. Boulder, CO: Westview Pr; 1994; 303-22.
 

Figures

Grahic Jump Location
Figure 1.
Where the health care dollar comes from, 2002.

Adapted with permission from Levit et al. (2). Copyright 2004, Project HOPE—The People-to-People Health Foundation, Inc.

Grahic Jump Location
Grahic Jump Location
Figure 2.
Where the health care dollar goes, 2002.

Adapted with permission from Levit et al. (2). Copyright 2004, Project HOPE—The People-to-People Health Foundation, Inc.

Grahic Jump Location
Grahic Jump Location
Figure 3.
Health expenditures and gross domestic product (GDP) per capita, 1998.

Values are U.S. dollars (purchasing power parity international dollars). Data obtained from the Organization for Economic Cooperation and Development (1).

Grahic Jump Location

Tables

Table Jump PlaceholderTable.  How Are Health Care Costs Measured?

References

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CrossRef
 
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Rice TH.  Measuring health care costs and trends. Andersen RM, Rice TH, Kominski GF Changing the U.S. Health Care System. San Francisco: Jossey–Bass; 1996; 62-80.
 
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Bodenheimer T, Grumbach K.  Conflict and change in US health care. In: Understanding Health Policy: A Clinical Approach. New York: McGraw-Hill; 2005; 167-75.
 
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Reinhardt UE.  Does the aging of the population really drive the demand for health care? Health Aff (Millwood). 2003; 22:27-39. PubMed
 
Newhouse JP.  An iconoclastic view of health cost containment. Health Aff (Millwood). 1993; 12:Suppl152-71. PubMed
 
Aaron HJ.  Serious and Unstable Condition. Washington, DC: The Brookings Institution; 1991.
 
Meara E, White C, Cutler DM.  Trends in medical spending by age, 1963-2000. Health Aff (Millwood). 2004; 23:176-83. PubMed
 
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Vita AJ, Terry RB, Hubert HB, Fries JF.  Aging, health risks, and cumulative disability. N Engl J Med. 1998; 338:1035-41. PubMed
 
Sturm R, Ringel JS, Andreyeva T.  Increasing obesity rates and disability trends. Health Aff (Millwood). 2004; 23:199-205. PubMed
 
Herzlinger R.  Market Driven Health Care. Reading, MA: Addison-Wesley; 1997.
 
Enthoven AC.  Employment-based health insurance is failing: now what? Health Aff (Milwood). Web Exclusive. 28 May 2003. 10.1377/hlthaff.w3.237. Accessed athttp://content.healthaffairs.org/cgi/content/full/hlthaff.w3.237v1/DC1on 25 March 2005.
 
Liebowitz S.  Why Health Care Costs Too Much. Cato Policy Analysis No. 211. Washington, DC: Cato Institute; 23 June 1994. Accessed athttp://www.cato.org/pub_display.php?pub_id=1070on 15 January 2004.
 
Keeler EB, Melnick G, Zwanziger J.  The changing effects of competition on non-profit and for-profit hospital pricing behavior. J Health Econ. 1999; 18:69-86. PubMed
 
Robinson JC.  Consolidation and the transformation of competition in health insurance. Health Aff (Millwood). 2004; 23:11-24. PubMed
 
Robinson JC.  Renewed emphasis on consumer cost sharing in health insurance benefit design. Health Aff (Milwood). Web Exclusive. 20 March 2002. 10.1377/hlthaff.w2.139. Accessed athttp://content.healthaffairs.org/cgi/content/full/hlthaff.w2.139v1/DC1on 25 March 2005..
 
Christianson JB, Parente ST, Taylor R.  Defined-contribution health insurance products: development and prospects. Health Aff (Millwood). 2002; 21:49-64. PubMed
 
Newhouse JP, Manning WG, Morris CN, Orr LL, Duan N, Keeler EB. et al.  Some interim results from a controlled trial of cost sharing in health insurance. N Engl J Med. 1981; 305:1501-7. PubMed
 
Manning WG, Newhouse JP, Duan N, Keeler EB, Leibowitz A, Marquis MS.  Health insurance and the demand for medical care: evidence from a randomized experiment. Am Econ Rev. 1987; 77:251-77. PubMed
 
Rice T.  Who gets what and how much? Ginzberg E Critical Issues in U.S. Health Reform. Boulder, CO: Westview Pr; 1994; 57-72.
 
Berk ML, Monheit AC.  The concentration of health care expenditures, revisited. Health Aff (Millwood). 2001; 20:9-18. PubMed
 
Newhouse JP.  Consumer-directed health plans and the RAND Health Insurance Experiment. Health Aff (Millwood). 2004; 23:107-13. PubMed
 
Melnick G.  Hospital price competition and the growth of managed care. Andersen RM, Rice TH, Kominski GF Changing the U.S. Health Care System. San Francisco: Jossey–Bass; 1996; 302-16.
 
Luft HS, Robinson JC, Garnick DW, Hughes RG, McPhee SJ, Hunt SS. et al.  Hospital behavior in a local market context. Med Care Rev. 1986; 43:217-51. PubMed
 
Devers KJ, Brewster LR, Casalino LP.  Changes in hospital competitive strategy: a new medical arms race? Health Serv Res. 2003; 38:447-69. PubMed
 
Zwanziger J, Melnick GA, Bamezai A.  Costs and price competition in California hospitals, 1980-1990. Health Aff (Millwood). 1994; 13:118-26. PubMed
 
Robinson JC.  HMO market penetration and hospital cost inflation in California. JAMA. 1991; 266:2719-23. PubMed
 
Pauly MV, Hillman AL, Kim MS, Brown DR.  Competitive behavior in the HMO marketplace. Health Aff (Millwood). 2002; 21:194-202. PubMed
 
Cuellar AE, Gertler PJ.  Trends in hospital consolidation: the formation of local systems. Health Aff (Millwood). 2003; 22:77-87. PubMed
 
Devers KJ, Casalino LP, Rudell LS, Stoddard JJ, Brewster LR, Lake TK.  Hospitals' negotiating leverage with health plans: how and why has it changed? Health Serv Res. 2003; 38:419-46. PubMed
 
Ginsburg PB.  Can hospitals and physicians shift the effects of cuts in Medicare reimbursement to private payers? Health Aff (Milwood). Web Exclusive. 8 October 2003. 10.1377/hlthaff.w3.472. Accessed athttp://content.healthaffairs.org/cgi/content/full/hlthaff.w3.472v1/DC1on 25 March 2005.
 
Town R, Vistnes G.  Hospital competition in HMO networks. J Health Econ. 2001; 20:733-53. PubMed
 
Krishnan R.  Market restructuring and pricing in the hospital industry. J Health Econ. 2001; 20:213-37. PubMed
 
Melnick G, Keeler E, Zwanziger J.  Market power and hospital pricing: are nonprofits different? Health Aff (Millwood). 1999; 18:167-73. PubMed
 
Goetghebeur MM, Forrest S, Hay JW.  Understanding the underlying drivers of inpatient cost growth: a literature review. Am J Manag Care. 2003;9 Spec No 1:SP3-12. [PMID: 12817611]
 
Current Medicare Current Beneficiary Survey, 2000. Washington, DC: Center for Medicare & Medicaid Services; 2001. Accessed athttp://www.cms.hhs.gov/MCBS/PubCNP00.aspon 7 December 2004.
 
Berenson RA.  Medicare + Choice: doubling or disappearing? Health Aff (Milwood). Web Exclusive. 28 November 2001. 10.1377/hlthaff.w1.65. Accessed athttp://content.healthaffairs.org/cgi/content/full/hlthaff.w1.65v1/DC1on 25 March 2005.
 
Medicare: Fewer and Lower-Cost Beneficiaries with Chronic Conditions Enroll in HMOs. Washington, DC: U.S. General Accounting Office; August 1997.
 
Rice T, Brown R, Wyn R.  Holes in the Jackson Hole approach to health care reform. JAMA. 1993; 270:1357-62. PubMed
 
Luft HS, Grumbach K.  Global budgets and the competitive market. Ginzberg E Critical Issues in U.S. Health Reform. Boulder, CO: Westview Pr; 1994; 303-22.
 

Letters

NOTE:
Citing articles are presented as examples only. In non-demo SCM6 implementation, integration with CrossRef’s "Cited By" API will populate this tab (http://www.crossref.org/citedby.html).

Comments

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Outlier Status of U.S. Health Care Costs
Posted on May 26, 2005
Michael J. Keberlein
No Affiliation
Conflict of Interest: None Declared

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

References

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.

Conflict of Interest:

None declared

Another Perspective on Healthcare Cost Inflation
Posted on May 26, 2005
Steven D. Hanks
Central Connecticut Health Alliance
Conflict of Interest: None Declared

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

Conflict of Interest:

None declared

Professional Caregiver Insurance Risk and the rising costs of health care
Posted on June 9, 2005
Thomas Cox
Seton Hall University - College of Nursing
Conflict of Interest: None Declared

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.

Conflict of Interest:

None declared

Author's response
Posted on July 7, 2005
Thomas Bodenheimer
UCSF
Conflict of Interest: None Declared

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 [5].

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.

Conflict of Interest:

None declared

Values driving healthcare costs
Posted on August 24, 2005
William Berger
Medical College of Wisconsin
Conflict of Interest: None Declared

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 wberger@mcw.edu Medical College of Wisconsin

Conflict of Interest:

None declared

IT Tools needed for value in Healthcare
Posted on August 26, 2005
paul H Grundy
IBM
Conflict of Interest: None Declared

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

Conflict of Interest:

None declared

IT Tools needed for value in Healthcare
Posted on August 26, 2005
paul H Grundy
IBM
Conflict of Interest: None Declared

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

Conflict of Interest:

None declared

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