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Cliff’s Notes For Health Care

[This post first appeared at blogs.forbes.com/toddhixon on November 20, 2013.]

JAMA | The Anatomy of Health Care in the United States.

Last week the Journal of the American Medical Association (JAMA) published a remarkable article that lays out the economics and industry structure of the US health care system (linked above). It is comprehensive, concise, and well-researched. The authors write from an economist’s perspective, and they stay above the politics. Anyone who wants to understand better why US health care costs so much, why the various actors in the system behave as they do, and where current health care reform initiatives may take us with find this article very useful. It also illuminates important facts and fallacies of popular thinking that I, for one, did not appreciate. There has been significant media coverage (eg, 1, 2), but the natural brevity of popular media does not do justice.

What follows is a “Cliff’s Notes” treatment, designed to summarize the most interesting facts/conclusions and whet appetites to read the whole thing. I’ve intentionally left out much useful material that covers familiar topics, except where needed for continuity of logic. Most of what follows is summarized/paraphrased. Comments in ” ” are quotations, sometimes edited for brevity (…), and those in [ ] are editorial(1).

The Economic Anatomy of US Health Care:

Components of the annual increase in US per capita health care expenditure. Data via JAMA article cited above.

Components of the annual increase in US per capita health care expenditure. Data via JAMA article cited above.

  • Health care creates 15.7% of U.S. employment [and 18% of GDP]. Between 2000 and 2010, health care grew faster than any other US industry.
  • Health care expenditure (“HCE”) in the U.S., as a percent of GDP, is 4.2% higher than the average for developed countries. [This rather dry statistic translates to an excess cost burden of $2,200 per year for each American.]
  • In the last decade price increases for medical services and products have been the largest driver of growth in HCE per capita. Increasing usage and intensity of health care has diminished as a spending driver. [Many think this deceleration of use/intensity reflects consumer caution following the 2008 recession, which has more than offset the use/intensity-increasing effect of population aging.]
  • Contrary to general perception, the share of HCE paid directly by consumers has declined by half since 1980, from 23% to 11%. Government and employers have taken a larger part of the burden.
  • This shift in “who pays the bill” – from consumer to third party – has changed the relationship between consumers and physicians and spurred consolidation of the health care industry. [Physicians owe more allegiance to increasingly powerful payers. “Golden rule: s/he who has the gold makes the rule.”]
  • Private insurance … in response to employers’ desire to reduce costs … has driven consumers to products [that] channel them to lower-cost physicians and hospitals. This has the effect of reducing consumer choice, creating the paradox that choice is greatest for consumers covered by the main federal health care programs: Medicare and Medicaid.
  • However, as the Accountable Care Organizations (“ACOs”) [created by the ACA(2) to lower Medicare costs] increase in number and size … consumer choice will probably be restricted by the imposition of disincentives [penalties] for seeking services out of network.

Who Receives Care and What Does It Cost?

  • Contrary to the meme, older people do not drive the cost of health care. Under-65s account for 80% of U.S. spending.
  • Chronic illness drives medical costs overwhelmingly at every age. Chronic illness accounts for over 80% of total health care expenditure. Chronic illness among under-65s accounts for 67% of total HCE.

Who Provides Care and Who Employs Them?

  • MDs are only 4% of health care workers.
  • Today only 23% of MDs are independent of a hospital; in 2000 53% were independent.
  • Many MDs see their incomes diminishing, and new medical school graduates have high debt loads relative to income.
  • Despite the consolidation of MD employment, location of care delivery is highly fragmented and becoming more so: the number of health care facilities in the U.S. increased from 766k in 2000 to 936k in 2011, driven by growth in profitable and popular care venues such as retail clinics, urgent care, surgicenters, home care, and imaging centers. And MD-extenders (advanced practice nurses, etc.) play a larger role, making coordination of care (enabling providers to know the details of all aspects of a customer’s care) a big and growing need.
  • Primary care MDs are in short supply in the US, but there is no shortage of MDs overall. MDs per capita in the US is comparable to peer nations, but the distribution is skewed to specialists, especially those who perform high-value procedures. Hence, graduating more MDs without changing the incentives for choice of specialty does little to remedy the shortage of primary care MDs.

What Value Is Created by the U.S. Health Care System?

  • “The US system has performed relatively poorly, despite the extraordinary economic success of many of its participants.” [And despite a very high level of spending.]
  • Since the 1960s US polls have consistently shown high levels of patient satisfaction with experiences with individual physicians and nurses, whereas insurers, hospitals, and Medicare fare less well, and the trend is negative for insurers and Medicare. Other OECD countries that have very different health systems exhibit similarly high satisfaction levels. [Congress gets similar reviews: polls indicate that voters generally have high regard for their individual elected representative, but very low regard for Congress as an institution.]
  • The performance of the US health system lags most OECD countries on multiple key metrics: mortality from common conditions is higher, and the trend in mortality is also unfavorable. Longevity from birth in the US is growing more slowly. And, the US has higher rates of disease prevalence, adjusted for demographics, except for cancer.
  • The authors conclude that the US pays a penalty in health system performance for the fragmentation of its delivery system and financial incentives that favor procedures over comprehensive longitudinal care.

Changes Occurring:

Market share of top providers by health care industry segment. Data via JAMA article cited above.

National market share of top providers by health care industry segment. Data via JAMA article cited above.

  • Most parts of the health care delivery system are consolidating in ownership [but not in location]. [While hospitals appear to have avoided concentration, the national data is misleading, as hospitals are a regional business. There is a strong trend to hospital concentration at regional levels.]
  • To date, consolidation has largely been “horizontal”: mergers of institutions providing similar services. Cost savings from economies of scale and pricing leverage motivate these horizontal mergers. At the regional level, both insurers and hospitals have attained high levels of market share to gain leverage in pricing negotiations: “Big Pay” versus “Big Med”.
  • Vertical consolidation (mergers between companies that operate at different stages of the supply chain) began about 2010: eg, insurers are providing care and hospital systems providing insurance. The ACA sanctioned and encouraged this explicitly: eg, the incentives for creation of ACOs.
  • Data via JAMA article cited above.

    Data via JAMA article cited above.

    Consolidation of health care service providers has increased the need for administration: managers and information technology. Administrative costs have risen from 3% of total expenditures in 1980 to 7% in 2011. These costs compare unfavorably to almost every other health system in the world: eg, US billing and insurance costs are twice Canada’s.

  • Large investments in health care IT have been made and continue. 95% of hospitals have some form of Electronic Medical Record (EMR). Most physician offices are on their way to capturing information digitally. However, “despite remarkable progress in building IT infrastructure … value has yet to accrue at the expected rates”. [The state of business IT in the 1990s.]

Consumer-Driven Health Care

  • Consumer driven health care faces strong headwinds.
  • Consumers have little, if any direct role in oversight of US health care. Eg, the two key Medicare/Medicaid advisory bodies lack any consumer advocate: the 17-member Medicare Payment Advisory Commission (makes recommendations regarding administration of Medicare) and the 31-member Relative Value Committee (recommends how much Medicare reimburses for various medical services, more).
  • “Some policy makers have … questioned the utility of asking consumers about their experiences, despite compelling evidence that patient perception is an accurate reflection of technical quality, risk of surgical complication, and likelihood of hospital readmission.” [I really don’t want to wake up in a hospital with that doc standing over me.]
  • Patients expect [desire?] convenience, and this has driven the fragmentation of health care venues. The next horizon is in-home care.

Implications

  • Our health care juggernaut rumbles forward without a firm hand on the tiller. In Washington, partisan dogma takes precedence over serious health care policy making. Key needs of individuals and of society (ie, the government and other payers which act for large groups) are opposed, and physicians are caught in the middle.
  • Payers, including government [which directly or indirectly funds over 50% of HCE], want to restrict choice, steering patients to cost/effective providers [and reducing the difficulty of care coordination]. Moreover, government [and also private insurers] see their mission to be achievement of quality care at affordable cost for large groups of people [not necessarily for each individual].
  • Consumers want choice of providers with low out-of pocket costs. [And, they want the best care and technology available, individual attention, and in-depth, comprehensible information to help make choices.] Part of what has characterized the US health care system for decades is the focus on the individual. “It’s not clear that patients will be willing … to shift trust to a health system or insurer rather than a clinician … [and] an important concern is that patient engagement [which is vital to control of chronic diseases] may be compromised.”
  • “Physicians’ historical autonomy and professionalism are at odds with … Big Med, Big Pay, Big Data, and consolidation … physicians and patients will be driven apart, when they should be allies.”
  • “The path the nation seems to be embarking on … has been pursued without an overall strategy. Not even CMS(3) can command the pieces of a system so complex. The biggest driver of change is organizational consolidation. Although some [results of consolidation] may be favorably aligned to improving US health outcomes and reducing costs … others are not.”

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Footnotes:

  1. “MD” and “physician” are used with the same meaning, as are “patient” (a term I try to avoid) and “consumer”.
  2. The Patient Protection and Affordable Care Act of 2010, commonly called the “ACA”, “PPACA”, or “ObamaCare”.
  3. The Center for Medicare and Medicaid services, within the Department of Health and Human Services, which administers the Medicare program, has great influence on health care policy and economics nationally, and has also been responsible for implementation of the “healthcare.gov” federal insurance exchange.

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