Segment 5 – Why Is U.S. Healthcare So Expensive?

Segment 5 – Why Is U.S. Healthcare So Expensive?

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This segment reviews the “Perfect Storm” of reasons for unrestrained increase of healthcare spending in the U.S.

In Episode 4, we zeroed in on what I call the Real Problem with healthcare — relentlessly rising costs.

In this Episode, we will look at why the US spends so much on healthcare. As you can imagine, there are many reasons, not just one. In fact, it’s a perfect storm of bad reasons. We will also look whether we are getting our money’s worth.

Here’s the list. Part 1 & Part 2.

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We will go through each one.

Natural Spending Drivers

Let’s start with some natural drivers of health spending, which are understandable and expected. First, as the population grows, so will health spending. Likewise, as the proportion of older people increases, so will spending. We also expect health spending to increase slowly with inflation. New technologies and medicines increase cost, but we hope will give dramatic benefits. For example, during my 40-year practice lifetime I have seen the introduction of new drugs for diabetes, blood pressure, and virus infections including HIV and flu. I have seen new ultrasound, CT and MRI diagnostics. I have seen cardiac caths, by-passes and joint replacements. These new things are expensive but well worth the cost.

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But health spending grows from 1-1/2 to 4 times the rate of inflation, much more than would be explained by natural drivers, as we saw previously.

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Fee for Service Payments

So, let’s look at the other reasons. First and foremost, to my way of thinking, is fee-for-service. Doctors in the US – unlike other countries where they are salaried – get paid for piecework. If a surgeon doesn’t operate, he doesn’t get paid. If a specialist doesn’t have a patient scheduled, HE doesn’t get paid. Money is a powerful incentive. So we should not be surprised if doctors increase their own volume of services, many times unconsciously.

Health Insurance Hides Cost

The next big reason is our health insurance. Until recently premiums were paid by the employer and out-of-pocket copays were minimal. Healthcare felt free to most of us. Most of us had no idea what our care was costing the system, and cared little. Talk about a perfect storm!

Imperfect Market 

Why didn’t market forces keep down costs and spending. Many politicians and reformers think competition as the simple solution to the healthcare cost problem. But economists will tell you that healthcare is not a pure market;  they refer to it as “imperfect.” The reasons are first that no one knows the true price of anything. Have you ever tried to sort out a hospital bill? Ridiculous!

Second, markets rely on buyer and seller having equal footing to negotiate, but most patients dare not quibble with their doctor. Doctors get their feathers ruffled when patients challenge their advice. Third, to make matters worse, patients are a “captive market” – they are often suffering, frightened for their life, and desperate for immediate relief, not exactly a strong bargaining position. Fourth, doctors can control demand. There’s an old joke about the level of eyesight loss that needs a cataract operation – if there’s one doctor in town it’s 20/100, if two doctors it’s 20/80 and if three doctors in town it’s only 20/60.

Administrative Costs

Next is administrative costs. Some economists estimate that up to ¼ of all health spending is for administration, not actual care. This is not surprising knowing how complicated we make our delivery system and financing system. Other countries have one delivery system and one payment system. US has 600,000 separate doctors, 5,500 separate hospitals, and 35 different insurance companies, not counting Medicare and Medicaid. Doctors used to drown in papers; now we spend up to 2 hours doing computer work for every hour of patient care. Don’t you love it?

For comparison, Medicare reports only 2% administrative costs (but some other costs are hidden elsewhere in government).

Inefficiency & Waste

Some other spending drivers include inefficiency. I include in this category unnecessary tests and treatments, as well as wasted effort due to incompatible computerized record systems – there are 632 separate electronics vendors in the US. If airports ran this way, each airline at each airport would have its own unique air traffic control computer that did not connect with each other. All in the name of free market.

Regards unnecessary treatments and procedures, a doctor at Dartmouth named John Wennberg pioneered using Big Data in the 1980s to look at numbers of prostate operations in each individual ZIP code, and found that surgeons in some regions were operating 13 times for often in highest areas than the lowest. Since prostate disease is relatively constant everywhere, this can only mean that doctors practice varies widely – the highest utilizers are doing too many operations.

Monopolies

Next is monopolies. Many small- and medium-sized towns and rural areas can only support one hospital. This creates monopolies with no market forces whatsoever to hold down charges.

Cost Shifting

Cost-shifting means that uninsured patients come to the ER for care. Since the ER doesn’t get paid, the ER shifts the Uninsured cost into the bill for INSURED and Medicare patients. The cost-shifting itself doesn’t increase the costs, but getting care in an ER instead of doctor’s office is the most expensive possible place for care.

New-Technology Policy

The FDA new-technology policy means that FDA rules say that it will approve any new drug or treatment if it shows even the slightest statistical benefit, no matter how small. Some cancer drugs are approved that extend life by only a few weeks. Some medicines are approved, even if the number needed to treat is 100. For example, for some new cholesterol medications, 100 patients need to be treated for 5 years before we see even 1 heart attack prevented. That’s a lot of patients, and a lot of doses, and a lot of dollars. By comparison, since half of appendicitis patients die without treatment, and almost all with appendectomy surgery survive and live happily ever after, the calculated number-needed-to-treat is only 2. So appendectomies are a good valued, but cholesterol medication (for otherwise healthy people) is questionable value.

Non-Costworthy Marginal Benefit

Here is another way of looking at value. As we go from left to right in this graph, we are spending more and more on health care. The more we spend, the higher the cumulative health benefit, at least to start. The first section (Roman number I) are very high value interventions like public health, sanitation, immunizations. The next section (Roman number II) are good value routine health treatments, including kidney dialysis and first-line chemotherapy for treatable cancers. But when we reach the third section (Roman number III), the benefits level off. Bypass surgery is less effective for older patients (and more risky); dying patients don’t survive in intensive care units and are miserable with tubes and futile breathing machines. If we spend even more we reach section Roman numeral IV in which no additional benefit is gained, just a lot of extra testing, treatments or drugs – these are wasted dollars. And if we keep spending more yet, we actually do more harm than good, and can even have deaths on the operating table or reactions to too many drugs. The US is well into section IV and in some cases section V. A lot of other richer countries think that they have already reached the point where spending more will give no benefit or possibly do more harm than good, even though they spend less than the US.

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In the next episode we will look at the ramifications of so much health spending on the US economy, politics and society. We will look at some potential threats if we do not start to control costs better.

I’ll see your then.

 

Up To A Third Of Knee Replacements Pack Pain And Regret

https://www.thelundreport.org/content/third-knee-replacements-pack-pain-and-regret?mc_cid=87537ae734&mc_eid=1d14ffb322

Danette Lake thought surgery would relieve the pain in her knees.

The arthritis pain began as a dull ache in her early 40s, brought on largely by the pressure of unwanted weight. Lake managed to lose 200 pounds through dieting and exercise, but the pain in her knees persisted.

A sexual assault two years ago left Lake with physical and psychological trauma. She damaged her knees while fighting off her attacker, who had broken into her home. Although she managed to escape, her knees never recovered. At times, the sharp pain drove her to the emergency room. Lake’s job, which involved loading luggage onto airplanes, often left her in misery.

When a doctor said that knee replacement would reduce her arthritis pain by 75 percent, Lake was overjoyed.

“I thought the knee replacement was going to be a cure,” said Lake, now 52 and living in rural Iowa. “I got all excited, thinking, ‘Finally, the pain is going to end and I will have some quality of life.’”

But one year after surgery on her right knee, Lake said she’s still suffering.

“I’m in constant pain, 24/7,” said Lake, who is too disabled to work. “There are times when I can’t even sleep.”

Most knee replacements are considered successful, and the procedure is known for being safe and cost-effective. Rates of the surgery doubled from 1999 to 2008, with 3.5 million procedures a year expected by 2030.

But Lake’s ordeal illustrates the surgery’s risks and limitations. Doctors are increasingly concerned that the procedure is overused and that its benefits have been oversold.

Research suggests that up to one-third of those who have knees replaced continue to experience chronic pain, while 1 in 5 are dissatisfied with the results. A study published last year in the BMJ found that knee replacement had “minimal effects on quality of life,” especially for patients with less severe arthritis.

One-third of patients who undergo knee replacement may not even be appropriate candidates for the procedure, because their arthritis symptoms aren’t severe enough to merit aggressive intervention, according to a 2014 study in Arthritis & Rheumatology.

“We do too many knee replacements,” said Dr. James Rickert, president of the Society for Patient Centered Orthopedics, which advocates for affordable health care, in an interview. “People will argue about the exact amount. But hardly anyone would argue that we don’t do too many.”

Although Americans are aging and getting heavier, those factors alone don’t explain the explosive growth in knee replacement. The increase may be fueled by a higher rate of injuries among younger patients and doctors’ greater willingness to operate on younger people, such as those in their 50s and early 60s, said Rickert, an orthopedic surgeon in Bedford, Ind. That shift has occurred because new implants can last longer — perhaps 20 years — before wearing out.

Yet even the newest models don’t last forever. Over time, implants can loosen and detach from the bone, causing pain. Plastic components of the artificial knee slowly wear out, creating debris that can cause inflammation. The wear and tear can cause the knee to break. Patients who remain obese after surgery can put extra pressure on implants, further shortening their lifespan.

The younger patients are, the more likely they are to “outlive” their knee implants and require a second surgery. Such “revision” procedures are more difficult to perform for many reasons, including the presence of scar tissue from the original surgery. Bone cement used in the first surgery also can be difficult to extract, and bones can fracture as the older artificial knee is removed, Rickert said.

Revisions are also more likely to cause complications. Among patients younger than 60, about 35 percent of men need a revision surgery, along with 20 percent of women, according to a November article in the Lancet.

Yet hospitals and surgery centers market knee replacements heavily, with ads that show patients running, bicycling, even playing basketball after the procedure, said Dr. Nicholas DiNubile, a Havertown, Pa., orthopedic surgeon specializing in sports medicine. While many people with artificial knees can return to moderate exercise — such as doubles tennis — it’s unrealistic to imagine them playing full-court basketball again, he said.

“Hospitals are all competing with each other,” DiNubile said. Marketing can mislead younger patients into thinking, “‘I’ll get a new joint and go back to doing everything I did before,’” he said. To Rickert, “medical advertising is a big part of the problem. Its purpose is to sell patients on the procedures.”

Rickert said that some patients are offered surgery they don’t need and that money can be a factor.

Knee replacements, which cost $31,000 on average, are “really crucial to the financial health of hospitals and doctors’ practices,” he said. “The doctor earns a lot more if they do the surgery.”

Ignoring Alternatives

Yet surgery isn’t the only way to treat arthritis.

Patients with early disease often benefit from over-the-counter pain relievers, dietary advice, physical therapy and education about their condition, said Daniel Riddle, a physical therapy researcher and professor at Virginia Commonwealth University in Richmond.

Studies show that these approaches can even help people with more severe arthritis.

In a study published in Osteoarthritis and Cartilage in April, researchers compared surgical and non-surgical treatments in 100 older patients eligible for knee replacement.

Over two years, all of the patients improved, whether they were offered surgery or a combination of non-surgical therapies. Patients randomly assigned to undergo immediate knee replacement did better, improving twice as much as those given combination therapy, as measured on standard medical tests of pain and functioning.

But surgery also carried risks. Surgical patients developed four times as many complications, including infections, blood clots or knee stiffness severe enough to require another medical procedure under anesthesia. In general, 1 in every 100 to 200 patients who undergo a knee replacement die within 90 days of surgery.

Significantly, most of those treated with non-surgical therapies were satisfied with their progress. Although all were eligible to have knee replacement later, two-thirds chose not to do it.

Tia Floyd Williams suffered from painful arthritis for 15 years before having a knee replaced in September 2017. Although the procedure seemed to go smoothly, her pain returned after about four months, spreading to her hips and lower back.

She was told she needed a second, more extensive surgery to put a rod in her lower leg, said Williams, 52, of Nashville.

“At this point, I thought I would be getting a second knee done, not redoing the first one,” Williams said.

Other patients, such as Ellen Stutts, are happy with their results. Stutts, in Durham, N.C., had one knee replaced in 2016 and the other replaced this year. “It’s definitely better than before the surgery,” Stutts said.

Making Informed Decisions

Doctors and economists are increasingly concerned about inappropriate joint surgery of all types, not just knees.

Inappropriate treatment doesn’t harm only patients; it harms the health care system by raising costs for everyone, said Dr. John Mafi, an assistant professor of medicine at the David Geffen School of Medicine at UCLA.

The 723,000 knee replacements performed in 2014 cost patients, insurers and taxpayers more than $40 billion. Those costs are projected to surge as the nation ages and grapples with the effects of the obesity epidemic, and an aging population.

To avoid inappropriate joint replacements, some health systems are developing “decision aids,” easy-to-understand written materials and videos about the risks, benefits and limits of surgery to help patients make more informed choices.

In 2009, Group Health introduced decision aids for patients considering joint replacement for hips and knees.

Blue Shield of California implemented a similar “shared decision-making” initiative.

Executives at the health plan have been especially concerned about the big increase in younger patients undergoing knee replacement surgery, said Henry Garlich, director of health care value solutions and enhanced clinical programs.

The percentage of knee replacements performed on people 45 to 64 increased from 30 percent in 2000 to 40 percent in 2015, according to the Agency for Healthcare Research and Quality.

Because the devices can wear out in as little as a few years, a younger person could outlive their knees and require a replacement, Garlich said. But “revision” surgeries are much more complicated procedures, with a higher risk of complications and failure.

“Patients think after they have a knee replacement, they will be competing in the Olympics,” Garlich said.

Danette Lake once planned to undergo knee replacement surgery on her other knee. Today, she’s not sure what to do. She is afraid of being disappointed by a second surgery.

Sometimes, she said, “I think, ‘I might as well just stay in pain.’

 

 

 

Outlook is negative for nonprofit hospital sector, Moody’s says

https://www.beckershospitalreview.com/finance/outlook-is-negative-for-nonprofit-hospital-sector-moody-s-says.html

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Moody’s Investors Service has issued a negative outlook on the nonprofit healthcare and hospital sector for 2019. The outlook reflects Moody’s expectation that operating cash flow in the sector will be flat or decline and bad debt will rise next year.

Moody’s said operating cash flow will either remain flat or decline by up to 1 percent in 2019. Performance will largely depend on how well hospitals manage expense growth, according to the credit rating agency.

Moody’s expects cost-cutting measures and lower increases in drug prices to cause expense growth to slow next year. However, the credit rating agency said expenses will still outpace revenues due to several factors, including the ongoing need for temporary nurses and continued recruitment of employed physicians.

Hospital bad debt is expected to grow 8 to 9 percent next year as health plans place greater financial burden on patients. An aging population will increase hospital reliance on Medicare, which will also constrain revenue growth, Moody’s said.

 

HEALTH PLAN COSTS ROSE SIGNIFICANTLY FOR SMALL EMPLOYERS IN 2017

https://www.healthleadersmedia.com/finance/health-plan-costs-rose-significantly-small-employers-2017

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Employers across the board saw health plan costs rise for a variety of reasons, but employers with less than 500 workers were especially vulnerable to cost effects, according to a national survey from last year.

Most small employers have faced increasing costs associated with their health plans, while suffering from a lack of leverage and resources to manage the costs.

Though health benefit cost growth has remained steady at 3% annually, a survey of employer-sponsored health plans conducted by Mercer, a healthcare consulting firm, found that employers of varying sizes faced a wide range of health plan cost increases during 2017.

EMPLOYERS WITH 10-499 EMPLOYEES:

  • 34% saw costs increase by more than 10%
  • 29% saw no change
  • 19% saw costs increase 5% or less
  • 18% saw costs increase 6 to 10%

EMPLOYERS WITH MORE THAN 500 EMPLOYEES:

  • 31% saw no change
  • 28% saw costs increase 5% or less
  • 22% saw costs increase 6 to 10%
  • 19% saw costs increase more than 10%

EMPLOYERS WITH MORE THAN 20,000 EMPLOYEES:

  • 50% saw costs increase 5% or less
  • 36% saw no change
  • 14% saw costs increase 6 to 10%
  • 11% saw costs increase more than 10%

The survey attributed the cost increases to a number of factors, namely expensive new treatment options and a rapidly aging population. A new cost driver is the slow rise of uninsured patients, which ticked up in 2017 and is likely to lead to providers shifting the costs of uncompensated care onto employer health plans, according to Mercer. The firm highlighted the importance of maintaining a vibrant workforce in order to counter the effects of rising costs associated with uninsured populations.

“Employers need to manage benefit cost and help employees thrive,” the study read. “These two goals may sound as if they are in opposition – but they don’t have to be.  Employers can slow cost growth while helping their employees to receive better care and a better patient experience.”

 

Healthcare Still Driving Jobs Growth

http://www.healthleadersmedia.com/hr/healthcare-still-driving-jobs-growth?utm_source=edit&utm_medium=ENL&utm_campaign=HLM-Daily-SilverPop_04092018&spMailingID=13278339&spUserID=MTY3ODg4NTg1MzQ4S0&spJobID=1380763774&spReportId=MTM4MDc2Mzc3NAS2

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Ambulatory healthcare and hospitals saw biggest March gains in within the sector.

The latest employment numbers released by the federal government indicate that healthcare remains among the major industry sectors driving jobs growth.

More than 22,000 healthcare jobs were added in March, keeping roughly in line with the average number of healthcare jobs added for each of the past 12 months, according to data released Friday by the Bureau of Labor Statistics (BLS).

 


Within healthcare, the largest gains were among ambulatory healthcare services (16,000 jobs) and hospitals (10,000 jobs). Nursing and residential care facilities, meanwhile, lost nearly 4,000 jobs in March.

These overall numbers are not surprising. Healthcare occupations were projected to grow by 18%, or 2.4 million jobs, from 2016 to 2026, according to BLS analysis. The strength of the healthcare sector is attributed largely to the aging U.S. population, which drives demand for services.

But this rising demand coincides also with rising healthcare spending, which is projected to grow by 5.5% each year through 2026, outpacing American spending in other sectors.

 

 

Healthcare Triage: Why Does the U.S. Spend So Much on Healthcare? High, High Prices.

https://theincidentaleconomist.com/wordpress/healthcare-triage-why-does-the-u-s-spend-so-much-on-healthcare-high-high-prices/

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American healthcare spending is still WAY higher than pretty much all other industrialized countries. But not that long ago, things were different. The US didn’t spend nearly as much in this realm. What changed? Demographics? More sickness? Nah. Spoiler alert, prices have risen much, much faster than the rate of inflation. We’ve got a few suggestions for getting it under control.

 

Why the U.S. Spends So Much More Than Other Nations on Health Care

https://theincidentaleconomist.com/wordpress/why-the-u-s-spends-so-much-more-than-other-nations-on-health-care/

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The United States spends almost twice as much on health care, as a percentage of its economy, as other advanced industrialized countries — totaling $3.3 trillion, or 17.9 percent of gross domestic product in 2016.

But a few decades ago American health care spending was much closer to that of peer nations.

What happened?

A large part of the answer can be found in the title of a 2003 paper in Health Affairs by the Princeton University health economist Uwe Reinhardt: “It’s the prices, stupid.

The study, also written by Gerard Anderson, Peter Hussey and Varduhi Petrosyan, found that people in the United States typically use about the same amount of health care as people in other wealthy countries do, but pay a lot more for it.

Ashish Jha, a physician with the Harvard T.H. Chan School of Public Health and the director of the Harvard Global Health Institute, studies how health systems from various countries compare in terms of prices and health care use. “What was true in 2003 remains so today,” he said. “The U.S. just isn’t that different from other developed countries in how much health care we use. It is very different in how much we pay for it.”

A recent study in JAMA by scholars from the Institute for Health Metrics and Evaluation in Seattle and the U.C.L.A. David Geffen School of Medicine also points to prices as a likely culprit. Their study spanned 1996 to 2013 and analyzed U.S. personal health spending by the size of the population; its age; and the amount of disease present in it.

They also examined how much health care we use in terms of such things as doctor visits, days in the hospital and prescriptions. They looked at what happens during those visits and hospital stays (called care intensity), combined with the price of that care.

The researchers looked at the breakdown for 155 different health conditions separately. Since their data included only personal health care spending, it did not account for spending in the health sector not directly attributed to care of patients, like hospital construction and administrative costs connected to running Medicaid and Medicaid.

Over all, the researchers found that American personal health spending grew by about $930 billion between 1996 and 2013, from $1.2 trillion to $2.1 trillion (amounts adjusted for inflation). This was a huge increase, far outpacing overall economic growth. The health sector grew at a 4 percent annual rate, while the overall economy grew at a 2.4 percent rate.

You’d expect some growth in health care spending over this span from the increase in population size and the aging of the population. But that explains less than half of the spending growth. After accounting for those kinds of demographic factors, which we can do very little about, health spending still grew by about $574 billion from 1996 to 2013.

Did the increasing sickness in the American population explain much of the rest of the growth in spending? Nope. Measured by how much we spend, we’ve actually gotten a bit healthier. Change in health status was associated with a decrease in health spending — 2.4 percent — not an increase. A great deal of this decrease can be attributed to factors related to cardiovascular diseases, which were associated with about a 20 percent reduction in spending.

This could be a result of greater use of statins for cholesterol or reduced smoking rates, though the study didn’t point to specific causes. On the other hand, increases in diabetes and low back and neck pain were associated with spending growth, but not enough to offset the decrease from cardiovascular and other diseases.

Did we spend more time in the hospital? No, though we did have more doctor visits and used more prescription drugs. These tend to be less costly than hospital stays, so, on balance, changes in health care use were associated with a minor reduction (2.5 percent) in health care spending.

That leaves what happens during health care visits and hospital stays (care intensity) and the price of those services and procedures.

Did we do more for patients in each health visit or inpatient stay? Did we charge more? The JAMA study found that, together, these accounted for 63 percent of the increase in spending from 1996 to 2013. In other words, most of the explanation for American health spending growth — and why it has pulled away from health spending in other countries — is that more is done for patients during hospital stays and doctor visits, they’re charged more per service, or both.

Though the JAMA study could not separate care intensity and price, other research blames prices more. For example, one study found that the spending growth for treating patients between 2003 and 2007 is almost entirely because of a growth in prices, with little contribution from growth in the quantity of treatment services provided. Another study found that U.S. hospital prices are 60 percent higher than those in Europe. Other studiesalso point to prices as a major factor in American health care spending growth.

There are ways to combat high health care prices. One is an all-payer system, like that seen in Maryland. This regulates prices so that all insurers and public programs pay the same amount. A single-payer system could also regulate prices. If attempted nationally, or even in a state, either of these would be met with resistance from all those who directly benefit from high prices, including physicians, hospitals, pharmaceutical companies — and pretty much every other provider of health care in the United States.

Higher prices aren’t all bad for consumers. They probably lead to some increased innovation, which confers benefits to patients globally. Though it’s reasonable to push back on high health care prices, there may be a limit to how far we should.

 

Here’s What’s Really Driving Healthcare Costs

https://www.medpagetoday.com/publichealthpolicy/healthpolicy/69102?pop=0&ba=1&xid=fb-md-pcp

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The market economy fails when applied to healthcare.

That healthcare expenditures in the US are high and rising rapidly is nothing new, but this study appearing in the Journal of the American Medical Association identifies the exact components of healthcare that are driving those soaring costs. As F. Perry Wilson, MD points out in this 150 Second Analysis, the data suggest traditional economic forces break down in the US healthcare market.

Transcript:

It’s no secret that healthcare costs in the United States are exceedingly high, and rising.

The US spends the most of any country in the world on healthcare in terms of percent of GDP, sitting around 18% as of the most recent data.

But to address the issue, we need to understand what is driving this increase, and a new study appearing in the Journal of the American Medical Association does the best job yet in decomposing the factors behind the rising costs.

The researchers used data from the US Disease Expenditure Project, which utilizes 183 data sources and 2.9 billion patient records to quantify where each healthcare dollar is being spent in this country.

Here’s the top level overview. After accounting for inflation, healthcare expenditures increased by $933.5 billion between 1996 and 2013. To put that into perspective, that’s enough money to create 9 additional interstate highway systems. We could fully fund 3 NASAs every year.

Or we could provide 400 malaria nets to every man, woman, and child in Africa. We could even do something crazy like pay down the debt.

But to save money in the future, we have to know why we keep spending more. Here’s the breakdown.

Some of the increase in spending comes from the aging of the US population and population growth. Not much we can do about that. But 50% of the increase was simply due to higher prices.

This is distinct from healthcare utilization. In fact, healthcare utilization was decreased a bit over this time period. This is shown most dramatically in the data for inpatient care. Take a look at this bar chart.

Use of inpatient care (that’s service utilization – in purple) went down substantially from 1996 – 2013 as we moved to more outpatient treatment. But this may have been a Faustian bargain. The price of the inpatient care that remained went up much more – increasing overall inpatient spending by around 250 billion dollars.

Let’s take a moment to realize how weird this is, economically. Demand for healthcare decreased over time. Prices increased. That is not an efficient market.

Different chronic diseases had different patterns of price increases. The biggest increase was seen in diabetes care, as you can see here, driven largely by rising costs of pharmaceuticals.

Regardless of the disease, though, it is clear that it is the price of what we’re buying – whether a drug, an ED visit, or a hospital stay – not the amount of what we’re buying that is the major driver of cost increases. Efforts to reduce the consumption of healthcare, therefore, may not bend the cost curve as much as efforts to reduce its price. That’s just my 2 cents.

Why Major Hospitals Are Losing Money By The Millions

https://www.forbes.com/sites/robertpearl/2017/11/07/hospitals-losing-millions/#67f501c67b50

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A strange thing happened last year in some the nation’s most established hospitals and health systems. Hundreds of millions of dollars in income suddenly disappeared.

This article, part two of a series that began with a look at primary care disruption, examines the economic struggles of inpatient facilities, the even harsher realities in front of them, and why hospitals are likely to aggravate, not address, healthcare’s rising cost issues.

According to the Harvard Business Review, several big-name hospitals reported significant declines and, in some cases, net losses to their FY 2016 operating margins. Among them, Partners HealthCare, New England’s largest hospital network, lost $108 million; the Cleveland Clinic witnessed a 71% decline in operating income; and MD Anderson, the nation’s largest cancer center, dropped $266 million.

How did some of the biggest brands in care delivery lose this much money? The problem isn’t declining revenue. Since 2009, hospitals have accounted for half of the $240 billion spending increase among private U.S. insurers. It’s not that increased competition is driving price wars, either. On the contrary, 1,412 hospitals have merged since 1998, primarily to increase their clout with insurers and raise prices. Nor is it a consequence of people needing less medical care. The prevalence of chronic illness continues to escalate, accounting for 75% of U.S. healthcare costs, according to the CDC.

Part Of The Problem Is Rooted In The Past

From the late 19th century to the early 20th, hospitals were places the sick went to die. For practically everyone else, healthcare was delivered by house call. With the introduction of general anesthesia and the discovery of powerful antibiotics, medical care began moving from people’s homes to inpatient facilities. And by the 1950s, some 6,000 hospitals had sprouted throughout the country. For all that expansion, hospital costs remained relatively low. By the time Medicare rolled out in 1965, healthcare consumed just 5% of the Gross Domestic Product (GDP). Today, that number is 18%.

Hospitals have contributed to the cost hike in recent decades by: (1) purchasing redundant, expensive medical equipment and generating excess demand, (2) hiring highly paid specialists to perform ever-more complex procedures with diminishing value, rather than right-sizing their work forces, and (3) tolerating massive inefficiencies in care delivery (see “the weekend effect”).

How Hospital CEOs See It

Most hospital leaders acknowledge the need to course correct, but very few have been able to deliver care that’s significantly more efficient or cost-effective than before. Instead, hospitals in most communities have focused on reducing and eliminating competition. As a result, a recent study found that 90% of large U.S. cities were “highly concentrated for hospitals,” allowing those that remain to increase their market power and prices.

Historically, such consolidation (and price escalation) has enabled hospitals to offset higher expenses. As of late, however, this strategy is proving difficult. Here’s how some leaders explain their recent financial struggles:

“Our expenses continue to rise, while constraints by government and payers are keeping our revenues flat.”

Brigham Health president Dr. Betsy Nabel offered this explanation in a letter to employees this May, adding that the hospital will “need to work differently in order to sustain our mission for the future.”

A founding member of Partners HealthCare in Boston, Brigham & Women’s Hospital (BWH) is the second-largest research hospital in the nation, with over $640 million in funding. Its storied history dates back more than a century. But after a difficult FY 2016, BWH offered retirement buyouts to 1,600 employees, nearly 10% of its workforce.

Three factors contributed to the need for layoffs: (1) reduced reimbursements from payers, including the Massachusetts government, which limits annual growth in healthcare spending to 3.6%, a number that will drop to 3.1% next year, (2) high capital costs, both for new buildings and for the hospital’s electronic health record (EHR) system, and (3) high labor expenses among its largely unionized workforce.

“The patients are older, they’re sicker … and it’s more expensive to look after them.”

That, along with higher labor and drug costs, explained the Cleveland Clinic’s economic headwinds, according to outgoing CEO Dr. Toby Cosgrove. And though he did not specifically reference Medicare, years of flat reimbursement levels have resulted in the program paying only 90% of hospital costs for the “older,” “sicker” and “more expensive” patients.

Of note, these operating losses occurred despite the Clinic’s increase in year-over-year revenue. Operating income is on the upswing in 2017, but it remains to be seen whether the health system’s new CEO can continue to make the same assurances to employees as his predecessor that, “We have no plans for workforce reduction.”

“Salaries and wages and … and increased consulting expenses primarily related to the Epic EHR project.”

Leaders at MD Anderson, the largest of three comprehensive cancer centers in the United States, blamed these three factors for the institution’s operational losses. In a statement, executives attributed a 77% drop in adjusted income last August to “a decrease in patient revenues as a result of the implementation of the new Epic Electronic Health Record system.”

Following a reduction of nearly 1,000 jobs (5% of its workforce) in January 2017, and the resignation of MD Anderson’s president this March, a glimmer of hope emerged. The institution’s operating margins were in the black in the first quarter of 2017, according to the Houston Chronicle.

Making Sense Of Hospital Struggles

The challenges confronting these hospital giants mirror the difficulties nearly all community hospitals face. Relatively flat Medicare payments are constraining revenues. The payer mix is shifting to lower-priced patients, including those on Medicaid. Many once-profitable services are moving to outpatient venues, including physician-owned “surgicenters” and diagnostic facilities. And as one of the most unionized industries, hospitals continue to increase wages while drug companies continue raising prices – at three times the rate of healthcare inflation.

Though these factors should inspire hospital leaders to exercise caution when investing, many are spending millions in capital to expand their buildings and infrastructure with hopes of attracting more business from competitors. And despite a $44,000 federal nudge to install EHRs, hospitals are finding it difficult to justify the investment. Digital records are proven to improve patient outcomes, but they also slow down doctors and nurses. According to the annual Deloitte “Survey of US Physicians,” 7 out of 10 physicians report that EHRs reduce productivity, thereby raising costs.

Harsh Realities Ahead For Hospitals

Although nearly every hospital talks about becoming leaner and more efficient, few are fulfilling that vision. Given the opportunity to start over, our nation would build fewer hospitals, eliminate the redundancy of high-priced machines, and consolidate operating volume to achieve superior quality and lower costs.

Instead, hospitals are pursuing strategies of market concentration. As part of that approach, they’re purchasing physician practices at record rates, hoping to ensure continued referral volume, regardless of the cost.

Today, commercial payers bear the financial brunt of hospital inefficiencies and high costs but, at some point, large purchasers will say “no more.” These insurers may soon get help from the nation’s largest purchaser, the federal government. Last month, President Donald Trump issued an executive order with language suggesting the administration and federal agencies may seek to limit provider consolidation, lower barriers to entry and prevent “abuses of market power.”

With pressure mounting, hospital administrators find themselves wedged deeper between a rock and a hard place. They know doctors, nurses, and staff will fight the changes required to boost efficiency, especially those that involve increasing productivity or lowering headcount. But at the same time, their bargaining power is diminishing as health-plan consolidation continues. The four largest insurance companies now own 83% of the national market.

What’s more, the Centers for Medicare & Medicaid Services (CMS) announced last week a $1.6 billion cut to certain Medicare Part B drug payments along with reduced reimbursements for off-campus hospital outpatient departments in 2018. CMS said these moves will “provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment.”

The American healthcare system is stuck with investments that made sense decades ago but that now result in hundreds of billions of dollars wasted each year. Hospitals are a prime example. That’s why we shouldn’t count on hospital administrators to solve America’s cost challenges.

Change will need to come from outside the traditional healthcare system. The final part of this series explores three potential solutions and highlights the innovative companies leading the effort.