The High Cost of Staying Well

The U.S. gets poor bang for its medical buck.

The EarlySense system makes it easier for caregivers to monitor patients remotely.
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Meantime, Medicare spends billions on patients who have been harmed or not fully healed in hospitals. Readmissions alone cost over $25 billion a year. Some 20 percent of Medicare patients are now readmitted to the hospital within 30 days of discharge.

Add prescription drug prices to this inflationary brew. As Brill noted, research by McKinsey & Company estimates that "overall prescription drug prices in the U.S. are 50 percent higher for comparable products than in other developed countries." If we had the same prices, it's estimated we could save close to $100 billion a year. Amazingly, the law "restricts the biggest single buyer – Medicare – from even trying to negotiate drug prices."

Obamacare contributes to the cost problem. True, it will restrict the use of hospital bill collecting and force insurance companies to be clearer in explaining their policies. This will be of benefit to the 30 million more Americans who can get insurance protection (supported by taxpayers), but the benefit certainly does not bend the health care cost curve or do much to change prices.

We have forever underestimated the cost of staying well. When President Lyndon Johnson signed Medicare into law in 1965, Brill reported, the estimate was that it would cost $12 billion in 1990. The actual cost: $110 billion. This year, it may well hit $600 billion. We could reduce these costs by insisting on payments from people with higher incomes or asset levels and by raising the age of eligibility for Medicare.

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The fundamental fact is that providers deal in a life or death product, which cannot be left to its own pricing devices. By definition, this is not a free market.

Reformers have consistently sought to change how doctors and hospitals are paid, with the idea of rewarding them for quality and efficiency. Very little progress has been made. According to a March analysis by Kaiser Health News and USA Today, "only 10.9 percent of health care spending last year by employer-sponsored plans was based on 'value' as opposed to 'volume,' or the number of services performed." That's according to a study by Catalyst for Payment Reform, a nonprofit group representing 21 of the country's employers. The analysis quoted the head of the group: "Nine of every 10 dollars is paid into the health care system with no attention to whether the care provided was performed well or poorly, or whether it was appropriate in the first place."

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The traditional fee-for-service model, which accounts for the other 89 percent, pays providers a fixed price for every service they deliver, the article noted, "with no limits on those services and without regard for results." Thus the current unsustainable growth in spending.

Value-based care would change the payment system "to remove the incentive for redundant and inappropriate care, now estimated to account for as much as a quarter of the nation's $2.8 trillion in annual health spending, according to the Institute of Medicine." The core idea is to maximize value for patients by moving away from a supply-driven system organized around what physicians do toward a patient-centered system organized around what patients need.

As Harvard Business School Prof. Michael Porter and Thomas Lee, chief medical officer at health care research and consulting firm Press Ganey, wrote recently in the Harvard Business Review, "we must shift the focus from the volume and profitability" of medical services "to the patient outcomes achieved." This will require restructuring how health care delivery is organized, measured and reimbursed. This transformation is happening, they say. Witness the Cleveland Clinic, where changes have already yielded "striking improvements in outcomes and efficiency."

Naturally, hospitals have resisted the value-based approach, which would pay them less to deliver better care. Sooner or later, though, there will be such a popular uprising over costs that change will be inevitable. Progressive hospitals will adopt the ideas and others will copy. Otherwise, the prognosis is grim.