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"It's Time to Get Serious about Costs" by Jon Kingsdale

Accusations aside, the Sunday Globe’s spotlight piece lets readers in on a secret that most industry “insiders” and policy wonks already know. In the words of Gerard Anderson, Uwe Reinhardt et al from the title of their 2003 Health Affairs article on why we spend so much more on medical care than other OECD countries—“It’s the Prices, Stupid…” Since then, the authors have annually updated their analysis and come to the same conclusion. We actually see doctors less frequently, swallow fewer pills, and use about half the hospital days of most other advanced economies; Americans just pay far more per unit of service consumed than they do.

A comprehensive comparison by the McKinsey Global Institute in January 2007 came to essentially the same conclusion. McKinsey actually breaks down our over-spending by healthcare sector—47% of U.S. “excess spending” (compared to the OECD average) is for hospital care, even though we use less than half the number of days per thousand; 12% of the excess spending is for drugs, even though we fill 20% fewer scripts per person; and 21% of the excess spending is for administration.

Most of this blog’s readers will also be familiar with our nation’s relatively dismal ranking on health status. So, we’re paying more, despite using less and doing worse.

That we pay far more to one hospital than to another may seem unfair,but the real problem is what it says about our healthcare marketplace.

The problem is not the venality of any players. The folks who run Partners, Children's, Sturdy, etc. are very good people, doing what they are paid to do-run their institutions successfully. And their institutions do good work, diagnosing and curing people in trouble. They are simply responding to incentives, taking advantage of market weaknesses and--let us be candid here--regulatory failure.

Clearly, a market in which some competitors can negotiate far higher prices for similar quality is not working. Indeed, that is the very definition of market failure. Of course, the problem of non-functioning markets is rampant in medical care. Just read the latest issue of Health Affairs for a comprehensive description of why prudent, price-conscious buying is missing from the way hospitals purchase medical devices. Or read the prior two issues of Health Affairs for examples of how some hospitals and clinics in India are using doctors trained in the U.S to deliver high-quality cataract, cardiac and orthopedic surgery for 5% of what we typically pay for these same services in the U.S.

For all the sympathy generated in the Globe piece for less powerful hospitals, the real problem revealed there is not that some hospitals are unfairly disadvantaged, but that we are all paying far too much for health insurance and hospital services. There are multiple causes, but foremost among them is that we lack well-functioning price-setting mechanisms in medical care. This is a national problem, with huge ramifications. Sure medical care is great stuff, but so is mass transit, education, even public safety and bridge repair. Resources available to other worthy pursuits are being disproportionately absorbed by one sector because we will not curb its appetite.

One of the main reasons that American workers have seen so little increase in take-home pay is that most of the average worker’s increase in compensation never even reaches their pay checks—it goes to the relentlessly increasing premiums for health benefits. For a family of median income, health insurance premiums have risen from just over 7% of income in 1987 to 20%--ONE FIFTH!—of average family income twenty years later. This represents a 13% potential increase in take-home pay that families never see.

The problem is especially acute here in Massachusetts. And not only because we spend more on medical care than any other state--in a country that spends about twice what other OECD countries spend for medical care. But because Massachusetts has made the moral commitment to cover virtually everyone. We are penalizing our citizens if they refuse to buy health insurance. That is a moral stance, but it comes with obligations. It obligates those of us who support the effort to cover everyone to control the costs of that coverage.

Addressing over-use, misuse and under-use of medical care are worthy efforts. But not until we address inflated pricing and the waste that it allows, will we get serious about cost containment. At one level, the solution to run-away health care spending is surprisingly simple—put our providers of medical care on a BUDGET for covering a set of services and patients. The good news is that virtually everyone in health care acknowledges the failures of fee-for-service reimbursement and the need to move toward global budgeting.

We are also fortunate to have an incredibly inventive, dedicated set of non-profit health insurers and hospital executives in the Commonwealth, but we have asked too little of them. By putting them on a budget, we would be asking these very bright, dedicated people to show the rest of us how they can deliver good quality care for only 25% or 50% more than their peers in Canada, Europe and Asia, rather than 100% more.

Fortunately, Senate President Murray and Chairman Richard Moore led the way this summer in promoting state legislation to address access and costs, and House Speaker DiMasi and Governor Patrick supported it. It takes a first, baby step in the direction of changing the incentives, by calling for a study commission on provider reimbursement. This is key because reimbursement is the nub of the issue, the foundation of meaningful reform. It should be the starting point for a really serious dialogue about how to put medical care in Massachusetts on a sustainable budget.

Cost containment does not stir the spirit the way universal coverage does. Yet cost control is perhaps the single greatest moral challenge in medicine today, because continued runaway spending will kill access. We cannot sustain our landmark health reforms of 2006 without controlling medical spending. If we fail to do so, we will be signing a DNR for universal coverage.

Jon Kingsdale is executive director of the Commonwealth Health Insurance Connector Authority

This program aired on November 16, 2008. The audio for this program is not available.

Martha Bebinger Twitter Reporter
Martha Bebinger covers health care and other general assignments for WBUR.

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