Where Does the Money Go?

“We have met the enemy, and he is us.”

-Pogo (Walt Kelley)

The whole country seems to be intensely concerned about just how to lower the cost of health care. It’s a little uncertain exactly why that should be so. After all, few people want to lower the cost of, say, the auto industry. Or the electronics industry. Folks want to grow those, don’t they? But the health care industry ... 18% of the US economy, most of the new jobs, largest employer in America’s small towns, one of the fastest-growing economic segments.

What’s not to like? Wanting to cut it back seems counterproductive. Of course, what people really want is to lower the cost of their health care. Health insurance for a family of four is now well up into five figures, which gets the attention of nearly everyone. Many people just don’t make enough to pay for that, or have it paid by their employers. Then too, despite Medicare for the old and Medicaid for the poor, a whole lot of Americans can’t get insurance, and can’t pay for their care. They still get care, but unreliably. Even then, hospitals and docs have to soak up the cost.

You know, putting it this way makes it look as if we don’t have a problem with health care costs. We have a problem with health care economics. Or to put it more simply, we have not been smart enough to figure out how to pay for our collective health care. It’s very refreshing to see a recent piece in the Journal of the American Medical Association (JAMA) by a group of researchers from Seattle^1,2, who have actually looked at health care spending over the last 15–20 years.

From 1996 through 2013, total spending increased from $1.2 to $2.1 trillion. The authors analyzed five fundamental factors which contribute to the increase. About 23% of the increase was due to simple population growth. Another 12% was due to aging of the population. So, about a third was due to inherent population factors. Changes in disease prevalence overall were associated with a small spending reduction of around 2.4%. Naturally, some diseases increased (diabetes) and some decreased (cardiovascular disease), but the overall effect was close to nil. Changes in service utilization, interestingly, did not cause increased spending. But changes in service price and intensity accounted for 50% of the increase.

No, they don’t add up to 100%. There are other factors, and the analysis was not designed to explain everything.

What was the money spent on? The biggest increase was in ambulatory care, with hospital care second, and pharmaceuticals third. We’ve been trying to shift more care from hospitals to the ambulatory setting, but it seems that we’ve succeeded in increasing both. Other contributors, nursing facility care, emergency departments, and dental care, also showed increases, the amounts were smaller. Although, percentage-wise, emergency departments increased the most of any of the six sites of care. This supports the general perception that emergency department use is increasing dramatically. ED spending rose 6.4% per year over the entire period, the highest of any component. Over the study period, spending rose 3.5% per year, over and above inflation.

Starting sometime before the passage of the Affordable Care Act, most of the Big Thinkers in health care began talking about “bending the cost curve.” I should define the group. Big Thinkers are located in major universities, usually have PhDs in economics, are never practicing physicians, and (most importantly) are politically well-connected. Few of them know anything about health care delivery to actual patients. Why we should pay attention to these amateurs is beyond me, but we do. It’s sort of like picking Army generals from a group of conscientious objectors. But I digress.

“Bending the cost curve” is one of those phrases which seems to mean something, but is sufficiently vague as to mean pretty much anything. The generally accepted meaning is slowing the rise in health care spending. Given that a third of the rise in health spending is due to population growth and aging, and is pretty much unavoidable, slowing the increase is pretty much all we should be able to hope for.

If we look at the five fundamental factors, we can’t do much about disease incidence. Or more accurately, we’re already doing as much as we can. Surprisingly, service utilization didn’t factor in to the spending increases. Price and intensity appear to be the major areas in which spending might be cut. But this introduces some uncomfortable questions. Just how do we go about doing that? What are our options?

Rationing? Perhaps each hospital should have a cap on ICU days. Or hospitals should have a fixed budget for expensive items, like artificial joints or pacemakers. “Sorry, Mr. Baker, we’ve used up our quota. You’ll just have limp for a while. We’ll see about a new hip joint next January.” Actually, hospitals in Canada and Great Britain do have these kinds of limits. It’s doubtful whether Americans would support such a system. Canadians, at least, can always head south.

What about incentives? Let’s pay doctors less, and they’ll order fewer tests, and do fewer procedures. Well, we’ve tried that. It didn’t work. Partly as a result, more and more doctors now work for health systems. And surprise! Health systems aren’t getting paid less. They’re being paid more. Even Medicaid is fairly decent reimbursement for hospitals. Health systems and hospitals have been more effective in lobbying Congress than physicians.

Centralization? We’re fairly far along that road, and it hasn’t lowered health care spending. If anything, forming larger and larger health care systems over the last 20 years has been associated with increased costs. Things like steel, and automobiles, and computers all have economies of scale. Unit costs get less as organizations get bigger. That’s not true in health care. Taking out someone’s gall bladder requires a surgeon, an anesthesiologist, nurses, an operating room, and an hour or so of time. That doesn’t change for a health system which does a thousand cholecystectomies per day. But the health system puts layers of management and bureaucracy on top of the surgeon and the operating room, so that costs may actually be higher in a large system. That’s a very politically incorrect thing to say, but political correctness and truth have a very uneasy relationship with one another. Especially in health care.

What about Medicaid? It’s a very important program, but it has major problems. Another politically incorrect truth is that poor people are more expensive to care for than most other people. They have more diseases, are more often disabled, and have fewer resources to care for themselves. If we were to recognize that caring for the poor is an expensive thing to do, perhaps we could design our systems, including Medicaid, to do a better job of it. But we are committed to the proposition that the poor are like everyone else, just with less money and no insurance.

Competition? We have a very competitive medical market place, but it doesn’t seem to have lowered expenditures. Of course, that’s because much of the competition is in the form of new buildings, or shiny new treatment programs. “Come to our heart center!” “Look at our cancer center!” “Our stroke center is the best in the state.” And so on. Folks, all of these things cost money. That’s exactly what is meant by “service intensity.” And all of those buildings, and new programs, tend to produce a rise in price in order to pay off the bond issues and pay the salaries of the new clinical workers.

Maybe we could close more hospitals. There actually have been a fair number of hospital closures over the years, as hospitals become unable to attract patients and go out of business. But each one has produced great public distress. Certainly, closing non-productive facilities is a legitimate and effective way to cut costs. But the reason hospitals close is that patients are already going somewhere else. And that means that the spending is simply happening somewhere else.

What about limiting the supply of physicians? We did that 20 years ago, when Congress capped the number of resident shots. The result? We have a physician shortage right now, and people are trying to find advanced practice nurses and physician assistants to stretch the existing physician supply, and otherwise fill the gap. We’re actively trying to increase the number of physicians. In truth, we have several thousand more physicians than we have training positions, if you count US citizens who are trained in other countries. Rather than cutting the supply, we actually need to increase it. In particular, we need to increase the number of residency positions.

Better organization? Accountable Care Organizations are the current cure-all being pushed by the Big Thinkers. Previous ones included managed care, group practice, managed competition, and capitated payment schemes. While all of these things had at least a few virtues, none of them succeeded in lowering costs. Do we think that ACOs will succeed where managed care failed? Sure, we do. We always prefer hope to experience. The reason history repeats itself, as someone once said, is that nobody listens the first time. Big Thinkers rarely look back.

Pharmaceutical costs? Well, yes. These affect hospital care, ambulatory care, and pretty much all other aspects of the health system. There seems to be a consensus that drug prices are out of control. For example, doxycycline has been around for decades. It’s off-patent and generic. But the current price has been raised from $0.03 to $5.00 per dose over the last few years. Wholesale prices rose 8,000%. The polite term for this sort of thing is “market failure.” The less polite is “price gouging.” Getting drug prices under better control would seem to be an effective way to control spending. Just how to do that is another question. Controlling drug prices is currently being debated in Congress. Anything may happen.

Speaking of Congress, it’s clear by now that the Affordable Care Act has not really made health care more affordable. Not only has spending continued to rise, its rate hasn’t slowed since, briefly, during the so-called Great Recession. Some fine tuning is in order. Improving Medicaid would be an obvious first step. But with one party wanting to repeal the whole thing, and the other party defending every line of it, “fine tuning” is not going to happen.

While the study by Dieleman, et al,¹ ended in 2013, total annual spending has since risen to $3.2 trillion, 18% of the economy, in 2015.³ Note that this figure includes some things which were not included in the study. In any case, there has actually been a modest acceleration in the rise in spending.

Paradoxically, as we wring our collective hands about health care spending, an increasingly large number of us actually make our living in the system. It will probably reach 20% of the US economy sometime in the next decade. It’s futile to ask whether health care “should” be that large a part of the economy. The real question to ask is, why is it not more affordable for the average citizen? As the food industry has centralized and grown, food has become less expensive. The computer and electronics industries are the same. Health care, like education, professional sports, and other people-intensive industries, has become more expensive.

One major factor, oversimplified though it may be, is that we require a large number of well-educated people to run the health care system. Such people are very expensive. Including, I should point out, doctors. Yes, indeed, we are part of the problem. Will it be hard for us to be part of the solution? Perhaps so. But if we are not heard on this issue, we won’t like the results.

Biography

Charles W. Van Way, III, MD, FACS, FCCP, FCCM, MSMA member since 1989, Missouri/AMA Delegate, and Missouri Medicine Contributing Editor, is Director of the UMKC Shock Trauma Research Center.

Contact: cvanway@kc.rr.com

Reprinted with permission, Kansas City Medicine.