Controlling health-care costs

The cost of health care in the United States has been a major talking point in the 2012 presidential campaign, but it reached a new level earlier this month with the release of a study detailing hundreds of billions of dollars in unnecessary expense.

Sept. 6, the Institute of Medicine (IOM) reported that the United States wasted more than $750 billion providing health care in 2009. The report attributed about a quarter of that total to excessive administrative costs, with a majority tied to unnecessary and inefficiently delivered treatment.

“Health care in America presents a fundamental paradox,” stated the IOM report, titled “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America.”

“The past 50 years have seen an explosion in biomedical knowledge, dramatic innovation in therapies and surgical procedures, and management of conditions that previously were fatal … Yet, American health care is falling short on basic dimensions of quality, outcomes, costs and equity.”

California HealthCare Foundation president Mark Smith, chair of the 18-member committee that prepared the IOM report, told California Healthline that “Americans should expect to get and should demand to get better value for their health-care dollar.”

That move is already afoot. The IOM report came out a month to the day after Massachusetts governor Deval Patrick signed into law a state bill aiming to control health-care expenses.

For the next five years, the cost of providing health care in Massachusetts can grow no faster than the state economy. Starting in 2017, for the following five years, costs can increase no more than half a percent over the economy’s growth rate.

That formula, along with other provisions in the law, has state officials anticipating a $200 billion savings over 15 years.

“Massachusetts has been a model for the nation for access to health care,” Patrick told the media before signing the bill. “Today we become the first to crack the code on costs.”

But did it really? And would such a bill work in other places, like California?

Mike Wiltermood, CEO of Enloe Medical Center, isn’t so sure.

“On its face, the proposal of regulating cost like a utility, I understand,” he said in a recent phone interview. “What we’ve typically found, though, is that artificial cost controls will lead to shortages.

“I could accept a national concept for cost control rather than one just based in the state,” Wiltermood continued, “because what we’d see, and what we may see in Massachusetts, is if the cost controls are unreasonable, you’ll see insurance companies and providers leaving the states where those are implemented.

“If you try to implement cost control without the reality check of cost of living in a certain area, then the natural result would be shortages. So I’m really concerned that California is going to carve itself out from the rest of the country and say, ‘We’re not going to pay as much as everybody else,’ and then hope we still keep our doctors, our nurses and our infrastructure for health care.”

California already pays less than practically every other state when it comes to Medi-Cal, the state’s version of Medicaid, the federal-matching program for low-income families. And, indeed, California has a growing physician shortage and weathers periodic nursing shortages.

Competition with other states for medical professionals who have invested tens of thousands—if not hundreds of thousands—of dollars in their education and training represents a major challenge currently, and potentially a larger challenge for states that tackle cost control unilaterally. That’s why Wiltermood favors a national plan.

“There are a lot of ways of reducing costs,” he said. “Unless we address the supply side of health care, we’re going to have a hard time doing that.”

The IOM study looks at other costs—ones its panel deemed excessive and unnecessary after evaluating expenditures from 2009. It broke down the costs as follows:

• $210 billion in unnecessary services;

• $130 billion in services delivered inefficiently;

• $190 billion in excess administrative expenses;

• $105 billion in excessive prices;

• $75 billion in fraud;

• $55 billion in missed opportunities for prevention.

“If banking were like health care,” the report said, “automated teller machine (ATM) transactions would not take seconds but perhaps days or longer, as a result of unavailable or misplaced records.” Furthermore: “The sheer volume of new discoveries stresses the capabilities of the system to effectively generate and manage knowledge and apply it to regular care.

“Given such real-world impediments, initiatives that focus merely on incremental improvements and add to a clinician’s daily workload are unlikely to succeed.”

Daniel Braunstein, a professor emeritus from Michigan’s Oakland University who serves on the state board of California nonprofit organization Health Care for All, zeroed in on the administrative cost.

“I need to point out that much of those unnecessary costs uncovered by IOM are the layers of bureaucracy required to run the various for-profit health insurance programs,” Braunstein wrote in an email. “These costs are considerably escalated by the additional requirement of all independent physician offices, as well as all hospital billing offices, to have insurance specialists sort out the policy benefit practices of the insurance programs, plus deal with the inevitable denials of patient claims by the insurers.

“According to the Washington Post’s T.R. Reid (The Healing of America), the non-profit sickness funds of Germany have about one-third the administrative expenses that are normal in American health insurance. No wonder that Germany spends considerably less than what we spend, per capita, for health care!”

Wiltermood, Enloe’s CEO, targeted efficiency, which is where he sees the federal government focusing its attention. The Patient Protection and Affordable Care Act (aka Obamacare) “is directly trying to encourage consolidation and collaboration of health-care providers,” he offered, “organizations predicated on the idea that if you’re larger, you’re going to provide better care at a more affordable price.”

“So, what do we [smaller organizations] do? Rationally, we try to consolidate. But we’ll have government agencies try in some cases to encourage collaboration and another agency will come along and say, ‘You’re creating a cartel.’

“Government is not looking at the fundamental issues driving costs in health care,” said Wiltermood. “They continue to regulate and regulate, which leads to more and more costs.”

It’s not that Wiltermood thinks the health-care industry shouldn’t be regulated—quite the contrary. “The problem is,” he said, “there are all these tentacles to this that in various and sundry ways create inefficiencies and contrary incentives in health care. If all you want to do is put a lid on it and say, ‘Don’t pay any more,’ it’s going to implode.”