BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

October 16 2014
by Todd Hixon

Rebutting The Premise That Doctors Help Drive High Health Care Costs

[This post first appeared at blogs.forbes.com/toddhixon on March 24, 2012.]

Two of my recent posts* have addressed the drivers of high health care costs in the U.S. I’ve received a lot of comments, for which I’m grateful, as this is meant to be a conversation. Many of the comments have come from the medical community: doctors, heads of medical practice groups, the AMA, and service providers to doctors. Two themes recur in these comments [paraphrased here]:

1.  It’s not useful to compare medical fees (or doctor pay) in the U.S. with other advanced countries because too much is different, e.g., the high cost of medical education and the lack of state-funded retirement plans for U.S. doctors justify higher salaries.

2.  Total compensation of U.S. doctors is only 9% of U.S. health care costs. Even if doctors were paid half as much, or worked for free, it would not solve the big problem.

In my past life as a BCG consultant I performed many benchmarking analyses: comparisons of cost and performance between businesses. These analyses are always imperfect and there are always justifications for the differences. You have to chase the sources of difference down, understand them, and put the red herrings aside. Cost of medical education, for example is a red herring: the extra earnings needed to pay for it are a small fraction of the earnings differential between U.S. and European doctors**.

The result of benchmarking is typically a call to action that combines aggressive but realistic improvement goals, based on what others have achieved, and a new approach built on our best ideas and our peers’ best ideas. Benchmarking is a powerful tool for initiating constructive change. And the rate of growth of U.S. health care cost has to change (downwards).

My posts compared spending on medical services in the U.S. to peer countries. The data shows that fees (i.e., prices) for similar services are 2x-3x peer countries (i.e., the average of France and Germany), and volume for advanced care and diagnostic services is generally higher, leading to total spending that is 4x-5x greater for advanced care and diagnostic services. Various commentators rebutted this point by observing that only 8%-10% of U.S. health care spending is doctors’ compensation.

That looks about right. Most U.S. doctors earn between $150,000 and $500,000 per year, and there are 700,000 active doctors in the U.S. Nine percent of the $2.5 trillion the U.S. spend on health care in 2010 is $225 billion, which is $321,000 per doctor.

I am troubled, however, by the implied message here that doctors are not a major factor in the high cost of health care. Doctors’ fees are about 25% of U.S. health care cost***. And, doctors drive total cost in other ways. The research I have read points to three major ways that doctors directly influence the cost of health care; these three factors add up to 30%-50% (depending on source and methodology of data****) of the cost gap between the U.S. and peer countries:

  • Doctor compensation, which is well above the level of peer countries
  • Volume of utilization of advanced care and diagnostic procedures
  • High fixed costs of the U.S. health care system, driven to a significant extent by the way doctors organize their practices, particularly the growth of free-standing care and diagnostic centers.

There are other major drivers of the U.S. health care cost gap that are not controlled by doctors: labor costs for other health care workers, high prices for drugs and medical supplies, profits earned by private health care providers, and administration costs****. The money spent by private insurance companies on health care administration accounts for about 20% of the spending gap versus peer countries, which typically have government-paid health care. There’s probably a similar amount of administrative cost embedded in medical practices and hospital overheads driven by the need to work with the insurance companies. This helps explain the gap between physician fees (25% of U.S. health care cost) and doctor earnings (8%-10%) and the high level of fixed cost for U.S. hospitals compared to peer countries.

Sources: American Association of Family Practitioners, American Association of Medical Colleges

Compelling evidence has emerged that greater investment in the early intervention and case management that general practitioners and nurse practitioners provide can result in major savings in the cost of heath care, and, incidentally, much better outcomes for patients (more). Yet, as a group U.S. doctors have moved dramatically away from general practice towards specialties over the past 20 years: see the chart, which shows the decline in medical school graduates electing family practice, the largest category of general practitioners. This is a move towards higher-tech, higher-paid, more reactive medicine. On the one hand, it’s the understandable result of individual medical school graduates typically burdened with $150,000+ of debt choosing specialist career paths that pay twice as much and offer better life styles and work conditions. On the other hand, it’s the work of key U.S. medical institutions (medical colleges, hospitals, the federal government’s Relative Value Committee that sets federal fee payments for different medical specialties) that are influenced or dominated by established doctors; these institutions shape the economic and the status hierarchy of U.S. medicine.

Doctors are the most influential players in the U.S. medical system. Simple common sense tells you that they are a major part of the problem with U.S health care costs, and potentially a major part of the solution, too.

Sources:

*”Why Are U.S. Health Care Costs So High?” & “ More Evidence That Doctor Fees Are A Big Reason Medicine Costs More In The U.S.

**Laugesen & Gleid, “Higher Fees Paid To US Physicians Drive Higher Spending For Physician Services Compared To Other Countries”, HealthAffairs, September 2011.

***U.S. Department of Health and Human Services, Center for Medicare and Medicaid Services, “National Health Expenditure Accounts: 2010”, Exhibit 1. These data show that 20% of spending is for Physician Services. However, various sources estimate that about 25% of physicians are employed by hospitals and hence included in the hospital expenditure account. Adjusting for this, the percent of spending on Physician Services rises to about 25%.

****McKinsey Global Institute, “Accounting for the Cost of Health Care In The United States”, January 2007.

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