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This no-holds-barred book includes a new chapter presenting a comprehensive, politically achievable, private-public solution to the health care dilemma-one that preserves the best of the present system, eliminates the worst current problems, and represents our nation's last best chance to contain costs without a government takeover of medicine.
The Enemy Is Us
Why Medical Care Costs So Much
and What We Can Do About It
Some time ago a colleague and I chatted about the high costs of medical care. Now retired from active practice, my friend recalled how remarkably inexpensive things were when he was young. He told of a childhood friend's appendectomy in the late 1930s. The boy presented his symptoms—nausea, vomiting, and abdominal pain—to the town's lone general practitioner. After taking the history and conducting a physical examination, the doctor admitted the patient to the town's small community hospital and prepared to operate.
He was assisted by two nurses, one of whom handled the ether mask; the doctor opened the boy's abdomen, resected the infected appendix, and closed. Sulfa drugs were used to fight infection, and the boy was moved to a hospital bed, where he was infused with intravenous fluids for one day. He remained in the hospital for another five days before being released. The hospital charges were less than $10 per day, and the total cost of the operation probably was something like $100, including hospitalization and the physician's fee.
Today an appendectomy would cost more than $9,000. Of course, the operation is now safer, but factors other than increased safety and inflation account for the fantastic increase in cost—a little bit of greed, expertise overload, and lots of unneeded administrative costs.
To control runaway medical costs, I would begin by banning all direct-to-consumer medical advertising. Advertising clearlywastesprecious health care dollars and, in some cases, such as in drug advertising, inappropriately pushes for utilization that promotes commerce while undermining professionalism. It also pumps up costs. In 1990, before drug ads to consumers began appearing, drug costs accounted for about 6 percent of total health care costs in the United States. Ten years later they accounted for 11 percent. Without intervention, this percentage will soon skyrocket.
Then I would attack overpriced diagnostic tests and medical equipment charges. About 80 percent of lab tests now ordered are not needed by anyone other than laboratory directors, hospital administrators, and often physicians, and many are priced at scandalously high levels. These are the scattershot tests encouraged by lab ordering forms and by physicians accustomed to asking for any and all test results. I also would insist that charges moderate for new technologies as they become commonplace and less costly to deliver. The savings should diminish consumer costs rather than fatten provider wallets.
But there's a lot of work to be done if we wish to contain the monstrous costs of medical care in this country, now totaling some $1.2 trillion per year. That figure would have been unimaginable when I was working as a hospital orderly in Mobile, Alabama, in the early 1950s. Care cost about $12 billion per year in those days. How did we get from there to here?
There are potential villains everywhere in this macabre story, including greedy doctors, self-indulgent and demanding patients, self-centered hospital administrators, uncaring third-party payers, and self-absorbed employers. Each group not only contributed to this wild skyrocket ride but often did so with the best intentions.
Everyone involved played a role in creating incentives that were bound to drive costs upward and out of control. The bottom line is that no one has been accountable for managing the costs of care. Physicians were encouraged to try new therapies, order more tests, and offer more services, always without regard to cost. Patients, who wanted free care, were the first to press for "first dollar" insurance coverage---that is, total insurance coverage from the first office visit to the most expensive procedure, a system that removes any barrier to immediate care on demand. Through support for capital expenditures, hospitals were rewarded for adding new wings, buying expensive new equipment, and developing new programs. Third-party payers were appreciated for shuffling papers, paying bills without question, and generally staying out of the way, while employers paid for it all with tax-exempt dollars, writing off health benefit premiums as a cost of doing business. It's a wonder we kept it down to $1.2 trillion.
The United States began measuring the costs of health care in 1929; from that year until 1955 there was little real change. As a percentage of gross domestic product, costs barely inched up and stayed confined to a range of 3.5 to 4.5 percent during that twenty-six-year period before shooting up to today's 14 percent of GDP. Yet even in the 1930s, when costs were low, national commissions were created to study the excess costs of medical care. People were tearing out their hair because health care was so expensive. Looking back, it's clear that they were reacting to a change in the environment of medical care: a charitable activity had been transformed into a professional activity.
I was reminded of this a few years ago when I gave a presentation at Harvard on the escalation of health care costs. Conventional wisdom has blamed Medicare, with its generous coverage of elderly patients, for the dramatic increase in the costs of care. I said that Medicare was one culprit but pointed out that, though I didn't understand why, the real increases began in 1955, ten years before the enactment of Medicare. Then I heard from a gentleman in the back of the room, John Dunlop, who was a Harvard professor of economics.
He explained that until 1955 the medical workforce was woefully underpaid because health care was seen as a charitable effort. The Sisters of Mercy or the Sisters of Charity staffed many hospitals. They expected to have a decent place to live, but they did not expect much in the way of salary. That expectation about the delivery of health care changed in the mid-1950s, Dunlop said, as a result of federal law that required better standards of pay for hospital workers.
That was too late for me at my first hospital job in 1951, when I earned about $100 per month, roughly half of the minimum wage at that time. I went to work for the City Hospital of Mobile, a racially segregated (by law) charity hospital owned by the city and run by the Sisters of Charity. I was hired to mop the floors of operating rooms between operations and to clean everything up before the next patient was wheeled in. By then I was in my third year of premed studies and terribly excited about medicine, eager to learn every aspect of it. Mopping up floors was just fine for a start.
After a few weeks pushing a mop, I was asked by one of the nuns whether I would like to be promoted to orderly. Of course, I agreed, and soon I was out on the wards, working with nurses, student nurses, and nurses' aides and doing a lot of the tasks they performed for patients. I also worked with interns—the medical school graduates completing their first year of postgraduate training. (One of them was James H. Sammons, later to become the executive vice president of the AMA.) They received room, board, uniforms, and a few dollars per month. This was a care-intensive but inexpensive system of health care delivery.
All this began to change in the mid-1950s as the value of medical services became more apparent. Not only were health care workers paid a little more, but hospital services became more sophisticated and expensive. More and more laboratory tests were performed, more X rays taken, and more services added. So began the steep climb in health care costs.
When we look at the total, a 100 percent increase, we have to acknowledge that 40 percent of it is accounted for by general inflation. That is, if health care expenses increased 6 percent in any given year, 2.4 percent of that increase is accounted for by across-the-board inflation.
That leaves 60 percent of the increase unaccounted for. About 10 percent of the increase is related to the increased number of elderly in our population. We've been very successful at extending our lives. In fact, demographically those over the age of one hundred constitute the most rapidly expanding segment of our population. This wonderful development is expensive, but nowhere near as costly as some critics complain. Care for the elderly amounts to only 10 percent of the total cost inflation. That figure is not all that great, but it certainly is not all that bad either. I'll talk more about the downside of costs for terminal illness in chapter 8.
A more serious cost problem is the 16 percent economic inflation on health-related goods: ambulances, hospital mattresses, and the pharmaceutical products, surgical knives, bandages, and other supplies bought by hospitals. The markups are outrageous. Why is a hospital mattress different from any other? What is so special about the truck base of an ambulance? Why do they all cost so much more than comparable products sold outside of hospitals? There is only one reason: the manufacturers have charged more because they can get away with it. In the cost-plus environment created by Medicare and Blue Cross, third-party payers promptly paid for Whatever the provider billed. There were no negotiations. A bandage for $16? Why not—the insurer will pay. With patients as a captive market, pharmacies have also been able to charge whatever they want. Physicians prescribe heavily marketed drugs even when less expensive drugs that work as well are readily available. Again, insurance will cover the cost, so why be concerned?
Unlike the 40 percent representing general inflation or the 10 percent reflecting the increase in the number of elderly, the 16 percent inflation for health-related goods offers a promising area for cost containment. We can start by refusing to pay those exorbitant prices and making suppliers bid for our business. Then we need to establish hospital formularies—centralized drug-purchasing and -dispensing departments that would provide cheaper drugs. Managed care has already instituted some of these controls.
The remaining 34 percent of health care inflation is accounted for by the volume and intensity of services offered by providers responding to everything from the AIDS epidemic and gunshot wounds to open-heart surgery and organ transplantation. One liver transplant, for example, requires that one hundred transfusion units be available. These procedures are expensive, and they need to be addressed in turn. Indeed, an important goal of this book is to examine the problems associated with this area of inflated health care costs.
Let's start with laboratory tests, something with which I'm familiar as a pathologist. Studies and observations demonstrate that more than half of all lab tests done and paid for by Medicare are unnecessary. In fact, I would say that about 80 percent of the tests carried out in the laboratories I oversaw in academic medical centers did not need to be done. Moreover, because they are keyed to whatever the market will bear, lab tests often are overpriced. A famous pathologist in Sacramento, California, used to call test charges "excess profit for a good cause."
I well remember setting up a chemistry lab at the Druid City Hospital, a brand-new, federally financed Hill-Burton facility, in Tuscaloosa, Alabama, shortly before entering medical school in 1953. I had just completed biochemistry studies in graduate school and felt privileged to be the first chemistry technician in that laboratory. A lot of the work then was manual, and there were no automated instruments at first; in my job I would introduce the first Flame photometer in the western part of Alabama. By allowing us to analyze for serum potassium, sodium, and serum chloride, this instrument offered a huge advance in the care of diabetics in coma. Until then coma and other electrolyte problems had been extremely difficult to handle, and the new lab tests represented true lifesaving technology.
But this technology was labor-intensive. I had to do one test at a time by hand, and the cost was passed on at a fairly high rate for those days. The hospital charged five dollars for one blood sugar analysis. Then automation entered the laboratories in the late 1950s and early 1960s. The first major instrument was the Autoanalyzer, produced by Technicon, a firm then located in Tarrytown, New York. This instrument revolutionized the chemical lab business by making it possible to load multiple serum samples from patients into the machine and to run through one after another without any handling by humans. So what happened to the price? It stayed the same. The hospital continued to charge five dollars per test even though one person, running the machine, could do fifty in the time it used to take to do one. Why did the hospital continue to charge five dollars? Because it could get it.
Standard practice now may require blood sample analysis every hour, and sometimes instantaneously. I knew many pathologists who received a percentage of all the income coming into hospital labs. This percentage contract model (I never had one) was initiated by Catholic hospitals as a way to generate income to build modern labs. With the hospitals and the pathologists splitting the profits, the latter had an incentive to develop labs in which multiple tests could be conducted. The clinical laboratory thus became a major profit center for hospitals.
Many other medical procedures have a similar pricing history. Charges are initially high because of the labor-intensive nature of developing new procedures. The coronary artery bypass operation provides a perfect example. The surgeons who pioneered the procedure spent a lot of time and money on research and development. They spent many hours in laboratories, working with animal models, to perfect the technique. The time they spent with their first patients also was intensive. Everything was new, and it all required close monitoring and attention. The total cost for the new procedure exceeded $60,000—a reasonable price considering the investment that had gone into it.
But then more and more surgeons learned the procedure, often in the course of their regular residency training. They had no research and development costs, and their patients did not need to be so intensively monitored. In fact, the bypass operation now is the most common in hospitals, but the charges haven't moderated in many places. Most hospitals still charge in the $50,000 to $60,000 range. Some hospitals, like the Cleveland Clinic, have been able to offer lower prices, around $30,000, in part because of the large volume of operations they perform.
Over and over again in the medical marketplace, a new commodity is introduced, high prices are charged because the commodity is rare, but the high prices are maintained even when the commodity becomes commonplace. Why does this happen? Because the patients do not know any better, the insurance companies let it happen, and the purchasers do not care or are hoodwinked. That is how the costs of care in this country have gotten out of control.
Insurance is the key. It provides funny money. We have never had anything approaching real Adam Smith economics in the United States when it comes to health care. Even in the turbulent managed care arena of today the purchasers and providers have never played real economic hardball in a marketplace of oversupply.
The Insurance Scam, or
How Providers Rigged the Market
First it should be noted that "health" insurance is a misnomer. What we call health insurance is really "sickness" insurance, but with such a label it couldn't be sold on the open market. Healthy people have little incentive to buy sickness insurance. The only ones interested are those who are either sick or concerned enough about their health to make periodic visits to physicians. In insurance terms, that defines "adverse risk."
What we now call health insurance began in 1929 when the Baylor University Hospital offered hospital insurance to teachers in Dallas, Texas. For six dollars per year, the teachers would be insured for up to twenty-one days of inpatient care at Baylor, and soon 1,356 subscribers had signed on. The American Hospital Association immediately noticed the program and showed interest. Like Baylor, other hospitals across the country were having financial difficulties, and prepaid insurance, which would provide a steady stream of income, offered a solution. So began the Blue Cross plans.
These insurance plans were not begun as commercial ventures. Rather, the plans were seen as part of a social movement, and many of the early plans, as Emily Friedman observed in a 1998 JAMA article on Blue Cross, were chartered as hospital service organizations or charities and given tax-exempt status. Their mission was to prepay for hospital services rather than to provide cash benefits for subscribers. Although the plans benefited patients who needed hospitalization, they were created to keep hospitals solvent with a steady income.
Blue Cross plans opened throughout the country in the 1930s as agents sold insurance to employer groups. Family coverage sold for about $1.30 per month, paid for by employees with after-tax dollars but usually deducted from their paychecks by employers. Most workers saw such insurance as a good deal. It didn't cost much, and if serious illness struck, they wouldn't have to worry about hospital bills.
The system began to change as a result of the crisis created by World War II. High on the list of government concerns was inflation. Officials worried that a wartime shortage of consumer goods, plus a shortage in the labor supply, with so many workers now in uniform, could send prices spiraling skyward. So they came up with price and wage controls, set by the Office of Price Administration. Labor union leaders, who were particularly frustrated by wage freezes, petitioned government for a ruling that would exempt fringe benefits from controls. In 1942 labor won when the government ruled that benefit increases up to 5 percent would not be considered inflationary.
The new rule had an immediate and long-lasting impact on the costs of health care. First, it transferred premium payment responsibility from workers to employers. Second, it provided a government subsidy to health care insurance: employer payments were exempt from taxation because they were considered a cost of doing business. As a result, neither workers nor employers had to pay for health insurance with after-tax dollars. (By contrast, individuals pay for auto or home insurance out of take-home earnings.) By creating the illusion that health care services for the insured came apparently free of charge, the new arrangement changed everyone's thinking about costs. So what if costs went up? The money didn't come out of the worker's pocket, and the employer simply wrote off the cost. This mentality was the genesis of funny money.
Physicians compounded the problem by enthusiastically accepting third-party health insurance payments when they became available, even though organized medicine—as represented by the American Medical Association and state and county medical societies—was critical of the practice. An older colleague of mine, a family physician from Oregon, has pointed out that at first physicians continued to bill patients, who then filed claims with their insurers and paid their doctors after receiving the insurance check. When it became apparent that many patients were not forwarding insurance payments but instead pocketing the checks, physicians worked out agreements with insurers for direct payment. When physicians began to bill insurance companies instead of patients, the perception was reinforced that care was free of charge.
"If physicians hadn't done that, they would have kept third-party payers out of the patient-physician relationship," my friend added, with a wry smile. But that would have been too much work, for doctors and patients alike. When physicians accepted direct payment, they were freed from the disagreeable need to dun patients, who were freed up in turn from the bother of paperwork. Physicians didn't have to worry about reimbursement anymore; it came directly from the insurer. Physicians made it even easier for patients by waiving the 20 percent co-payment that insurance policies required, a quasi-illegal practice that no one complained about. But, as my friend pointed out, every step taken intruded the third-party payer more deeply into the patient-physician relationship. Moreover, the cost of care increased, since patients had no incentive to resist higher physician charges. Patients often didn't even bother to look at the charges. Twenty-five dollars for a lab test that cost fifty cents to perform? No skin off my nose.
When, for all intents and purposes, health care services seemed to come at no cost to patients, not only were patients' anxieties relieved, but physicians were encouraged to order and perform more services. For physicians the new mantra was, when in doubt, do it, and for patients, when in doubt, see the doctor. This was another change that resulted from World War II, as Eli Ginzberg, a Columbia University health policy expert, told me some time ago. Use of services increased dramatically because many returning veterans had been favorably exposed to medicine for the first time in their lives in the military, he said. These were men (and a few women) who had grown up during the Depression, when doctor visits were largely reserved for the well-off. The armed forces made medicine more commonly available, and the servicemen were impressed.
Health care services intensified because physicians had access to better medical technology. Antibiotics alone made the difference between life and death for countless patients. For most adults pneumonia was no longer a life-threatening disease, and the major venereal diseases no longer required years of therapy. They were dispatched with a shot.
Medicine was good. Everyone liked it. For employers it was a modest, tax-deductible expense; for workers and their families it offered sophisticated new services free of charge; and for physicians it offered hassle-free higher incomes. The insurers didn't complain because they saw themselves (most were Blue Cross Blue Shield plans) as quasi-charitable institutions with a strong social ethic. They were doing well by doing good.
|Introduction: A Medical Memoir||1|
|1||The Enemy Is Us: Why Medical Care Costs So Much and What We Can Do About It||17|
|2||The Question of Queues: Why We Have to Ration Care||49|
|3||The Coverage Circus: Why What You Need Is Not Always What You Get||77|
|4||There Is No Alternative to Medicine: Why People Buy Care Wherever They Find It||105|
|5||Mouse Calls for House Calls: The Benefits, Deficits, and Promotion of Internet Care||127|
|6||A Terminal Profession: Why Medicine Is Under Attack||155|
|7||Uninformed Consent: When Disclosure Is Incomplete, Misleading, or Nonexistent||185|
|8||Disclosures on Death: Why Doctors Should Help Patients Die||217|
|9||The Search for Quality: It All Begins on the Autopsy Table||245|
|10||The Way to Reform: Thinking About a Better System||271|
|Epilogue: International Health Care Reform||295|