Adding Up the Reasons For Expensive Health Care

[Guest guest]

Adding Up the Reasons For Expensive Health Care

By Pearlstein

Wednesday, February 14, 2007; Page D01

It's hardly an original point, but now that health-care reform is back

on the political agenda, it's worth emphasizing: The reason the system

has been so resistant to change is that lots of powerful interests do

very nicely with things just the way they are.

Or, put another way: Although doctors, hospitals, insurers and drug

companies say they, too, want things to change, any comprehensive

reform would reduce their incomes and their profits.

All this becomes quite clear from a new study on the U.S. health-care

system released without fanfare last month by McKinsey Global

Institute, the independent research arm of the giant consulting firm,

which counts many health-industry giants among it clients.

The study aimed to determine why the United States spends nearly

double the average of other industrialized countries on health care --

with no better, and in some cases inferior, medical outcomes. Even

after adjusting for wealth, population mix and higher levels of some

diseases, McKinsey calculated that we spend $477 billion a year more

on health care than would be expected if the United States fit the

spending pattern of 13 other advanced countries. That staggering waste

of money works out to 3.6 percent of the nation's entire economic

output, or $1,645 per person, every year.

In laying out with remarkable clarity how and where we overpay, the

McKinsey report punctures myths, exposes common misconceptions and

highlights realities long ignored in the health-care debate.

Let's start with one the American Medical Association hopes no one

will notice, which is that American doctors make a lot more money than

doctors elsewhere -- roughly twice as much. The average incomes of

$274,000 for specialists and $173,000 for general practitioners are,

respectively, 6.6 and 4.2 times those of the average patient. The rate

in the other countries is 4 and 3.2.

According to McKinsey, the difference works out to $58 billion a year.

What drives it is not how much doctors charge per procedure, but how

many procedures they perform and how many patients they see -- a

volume of business 60 percent higher here than elsewhere.

Included in the income figures is $8 billion physicians earn as

investors in diagnostic labs and outpatient surgical clinics. The good

news is that those private facilities charge 20 to 30 percent less

than hospitals for what they do. But McKinsey found that they don't

save the system any money because the doctors who invest in them wind

up ordering more tests and surgeries than doctors who don't -- in the

case of tests, two to eight times more.

What we have here is pretty good circumstantial evidence of

Pearlstein's First Law of Health Economics, which holds that if you

pay doctors on the basis of how many procedures they do, and you leave

it to doctors and their insured patients to decide how much health

care they get, consumption of health services will rise to whatever

level is necessary for doctors to earn as much as the lawyers who sue

them.

Don't be distracted by arguments that American doctors need to make

more because they have to pay $20 billion a year in malpractice

insurance premiums forced on them by a hostile legal system, or an

equal amount for all the paperwork required by our private insurance

system. The $58 billion in what the study defines as excess physician

income is calculated after those expenses are paid.

And McKinsey gives the back of its hand to the argument that American

doctors deserve to earn more because of all the loans they take out

while going through medical school and residency. Comparing median

lifetime annual salary to median educational debt at graduation,

McKinsey found that doctors do better than those in other professions

requiring advanced degrees.

While higher volume is the story behind higher physician costs in the

United States, the culprit for spending on hospitals and drugs is

higher prices.

While Americans spend fewer days in the hospital than people

elsewhere, that efficiency is more than offset by a higher average

cost per day -- $1,666, four times the industrial-country average.

There are multiple causes for this $224 billion in annual overspending

on hospital services -- everything from more serious illnesses to more

nurses per bed to extraordinary overhead and capital costs. The

hospitals will whine about all their free care for the uninsured.

McKinsey concludes that is a relatively minor factor in an industry

that has managed to rack up hefty operating profits in recent years,

even at supposedly nonprofit hospitals.

Despite all that annoying drug advertising on TV, Americans pop fewer

pills than people elsewhere. But, according to McKinsey, we still

manage to spend $57 billion a year more for drugs than other developed

countries. Some of that is because the newest and most expensive drugs

are typically available here 18 months before most other places. But

the much bigger reason, McKinsey found, is that drug companies are

able to charge, on average, 60 to 70 percent more for branded

prescription drugs.

We can debate whether drug companies really need the extraordinary

returns they get to sustain the level of innovation they produce; one

can certainly point to other innovative high-tech industries that

manage to thrive on more reasonable returns. But the industry's vast

lobbying apparatus has yet to come up with a credible reason for why

such a disproportionate share of that return has to come from Americans.

Proponents of a government-run " single-payer " system will certainly

home in on the $84 billion a year that McKinsey found that Americans

spend to administer the private sector portion of its health system --

a cost that national health plans largely avoid. But as long as

Americans continue to reject a government-run health system, a private

system will require something close to the $30 billion a year in

after-tax profits earned by health insurance companies. What may not

be necessary, McKinsey suggests, is the $32 billion that the industry

spends each year on marketing and figuring out the premium for each

individual or group customer in each state. Insurance-market reform

could eliminate much of that expense.

Of course, any effort to reduce these excess costs faces determined

opposition from well-financed lobbies, which is why many reformers

prefer to focus on the goal of extending coverage to the 47 million

Americans who don't have health insurance. But doing the one without

the other, the McKinsey researchers warn, would be economic folly.

Offering universal coverage without reining in costs would add another

$77 billion each year in unnecessary and unproductive health spending.

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