Top Ten Reasons for U.S. Healthcare Spending

by Deane on April 29, 2011

Everyone complains that U.S. healthcare is too expensive. It certainly is! Where is all that money going: well over $2 trillion/year? There are ten reasons why we spend money on healthcare.

Ten Reasons For U.S. Healthcare Spending

We want to spend $ on:
1. New Value
2. More people living longer

We don’t want to spend $ on:
3. Action without evidence
4. Bureaucracy
5. Disconnection
6. Perverse incentives
7. Defensive medicine
8. Adverse outcomes and errors
9. Money taken out of healthcare
10. Fraud and embezzlement.

We actually want to spend money on the first two. The other eight are expenditures we would like to minimize – elimination is desirable but improbable in the extreme.

The 19th century doctor’s black bag was virtually empty: strict bed rest, amputation, home remedies, and medicines made from garden plants. Today, doctors operate on the heart without opening the chest; replace failing organs with new ones; and prescribe pills to target specific organs or functions within the body. Whooping cough, rabies, diphtheria, and polio have become the purview of medical historians rather than practitioners.

Modern capabilities – inconceivable in the 19th century – provide 21st century people with new value. They come with a price, sometimes astronomical. You can buy an expensive pill, say Flomax at $2 for one pill, and avoid a $20, 000 surgery. You can have a quarter of a million dollar heart transplant and live, or take the cheaper route and die. We get new value and we gladly pay for it, if we want to live.

There are more people today and we are all living longer. When you add new value to more people, two of the ten reasons for increased healthcare spending become apparent. This is spending we like. We are getting something we want for the money we expend.

Thirty per cent of all healthcare dollars goes to providers of all kinds. Thirty per cent reimburses institutions: hospitals, pharmaceutical companies, wheelchair manufacturers and the like. The remainder (40%! or roughly $920 billion in 2008 in the USA) just…disappears. It goes to activities and services that provide no health care for patients.

If Congress makes laws without proof in advance of what the law will actually do (reason #3), bad things happen. The Public gets two undesired outcomes: laws that hurt us and huge costs, invariably much, much more than Congress projects when they pass legislation. In 1990, the GAO showed that Medicare had already cost 845% more than estimated in 1965 and will go broke by 2017.

Two good examples of how Congressional action-without-evidence harms us (reason #3) are HIPAA (Health Insurance Portability and Accountability Act) and CPSIA (Consumer Product Safety Improvement Act). The first – HIPAA – was a draconian and expensive solution for which Congress never proved there was a problem. CPSIA was supposed to protect consumers from lead poisoning. By its requirements, CPSIA unintentionally killed several cottage industries, such as children’s clothing.

The Federal bureaucracy consumes so much money because a) it performs too many tasks, and b) it has no incentive to be efficient. In addition to administering the flow of dollars, people and papers, the bureaucracy engages in quality control, enforces regulatory compliance, is constantly trying to reconcile, and is engaged in a never-ending battle to root out fraud and abuse. However, cost/benefit analysis – a requirement in all other activities that involve money – is not part of how the Federal bureaucracy operates.

In all free markets, supply and demand achieve balance by the choices of consumers and suppliers. In the U.S., the government does not determine that balance: consumers and suppliers do. But in U.S. healthcare, supply and demand are “disconnected” (reason #5). Therefore, they cannot balance. The consumer does not pay the supplier. A third party does that. Neither consumer nor supplier has any reason to economize. The result is a system that cannot achieve balance. No wonder the cost spiral keeps rising without surcease. There is nothing to stop it.

Healthcare expends money whenever we-the-patients are sick. The sicker we are, the more it expends. This is called a perverse incentive: rewarding what you don’t want rather than what you do. Incentives are perverse not only for dollars but also behaviors. Doctors fear they will be blamed for bad outcomes even when they did nothing wrong. Therefore, they increase the costs of healthcare by practicing defensively: every head injury gets a CAT scan and every murmur gets an echocardiogram.

Adverse outcomes and errors (they are not synonymous) cost money by direct payments to providers, by lost productivity, and through the legal process. Most of these costs (reason #8) are avoidable.

The commercial side of healthcare takes money out of the system and gives it as dividends or equity growth to shareholders. Thereby, for-profit enterprises such as insurance and pharmaceutical companies remove dollars from healthcare (reason #9). Whether we wish them to do so or not is an open question.

Finally, there is the most obviously undesirable expenditure (reason #10): overcharging (accidental), fraud, and embezzlement. This is also the smallest of the costs of healthcare.

Do we want to spend less? Do we want to spend more effectively? Of course we do! Then we need to reduce reasons three through ten by identifying the root cause of each and then treating it, not the symptom.

System MD

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