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Health check (Part 2): Why health care costs so much

This article first appeared in the St. Louis Beacon, Oct. 8, 2009 - In an average year, inflation nibbles away a bit more than 3 percent of our buying power. But for health care, inflation takes a big bite -- about 6 percent a year, year in and year out.

What makes this inflationary afterburner kick in? Why does American health care cost so much?

The answer is long and complicated. But here's a short and simplified stab at explaining why the doctor's bill keeps going up.High Tech, High Cost

To help reporters keep their stories straight, the Alliance for Health Reform has put out a thick booklet titled "Covering Health Issues." The chapter on costs offers four main reasons for inflation:

New technology and new drugs. We have access to high-tech medicine undreamed of in our grandparents' day -- CAT scans, for example, and heart pacemakers, and MRIs, and miracle medications.

But high tech comes at a high cost. The outlay for research and development on high tech works its way down to the bills from hospitals and doctors.

Third-party payments. The doctor (or hospital) is Party No. 1. The patient is Party No. 2. But Party No. 2 rarely writes a check to Party No. 1. Instead, the tab gets picked up by that third party -- the insurance company or Medicare or Medicaid.

So what? The total's the same, right?

Wrong, says medical sociologist Paul Starr, who has written, "As third parties, both private insurers and government programs effectively insulate patients and providers from the true cost of treatment decisions and so reduce the incentive to weigh costs carefully against benefits."

In other words: Even if there's no such thing as a free lunch, health care is a lunch at which the waitress hands our tab to somebody else. So we dig in.

Increased income, and thus increased demand. Before the Great Recession, anyway, many Americans felt flusher each year. As their income rose, so did their appetite for medical care. Rather than living with aches and pains, Americans have sought to spend them away.

The result is a multimillion-dollar market for drugs like Viagra and procedures like breast enhancements -- the kind of health care that would have been unthinkable in a leaner era.

Worsening public health. Take obesity. Most Americans are at least vaguely aware that fat people run a high risk for diabetes. Even so, about one in three American adults tips the scale as obese.

Part of it is diet -- all those Big Macs with large fries. Part of it is too much time on the couch and too little time on the treadmill. Whatever, as of 2007, 23 million Americans had diabetes -- a jump of 13.5 percent in just two years, says the American Diabetes Association.

Jumps like that leave big footprints all over the bill for health care.

Low productivity among providers. When a Frenchman goes to the doctor, he hands over a wallet card with a computer chip imbedded. The doctor then "reads" the card, which holds the patient's medical history.

When the doctor decides on treatment, he creates a record and downloads it onto the chip. Before the doctor hands the card back, he uses it to send billing information to the insurer.

But this kind of electronic efficiency (it's called information technology, or IT) has barely scratched the surface of American medicine. Hospitals, doctors' offices and insurance agencies are awash in paper work.

This lack of productivity slows down the system -- and pushes up the cost.

'A Business, After All'

Other sources add other reasons for health-care inflation. Among them:

Fee-for-service billing. In medical jargon, "fee for service" means that instead of drawing a salary, most doctors get paid for their services -- for what they do. A visit to the doctor counts as a service. So does an X-ray. And a vaccination. And a referral to a specialist, and an admission to a hospital, and on and on.

The fee-for-service system rewards doctors who do more and more, even when that "more" turns out to be useless and wasteful. To a doctor, more medicine means more money. To the rest of us, more medicine means higher bills.

Sociologist Starr calls third-party, fee-for-service payment "the central mechanism of medical inflation."

Commercialization. When network news anchors pause for breaks, they give way to commercials touting pills that take aim at insomnia, incontinence, impotence and something called restless leg syndrome. The pill-makers pay big bucks for those ads -- and then pass that big-buck cost along to consumers.

In Europe, private health insurance is a nonprofit business. In America, shareholders and Wall Street put profit pressure on insurance companies. The same thing goes for those big commercial hospital chains.

In his musings on medicine, Dr. Atul Gawande writes, "Then there are the physicians who see their practice primarily as a revenue stream." Rather than take a follow-up phone call from a patient, these doctors schedule another appointment. The reason: Insurers pay for office visits but not for phone calls.

Gawande says, "They figure out ways to increase their high-margin work and decrease their low-margin work. This is a business, after all."

The predominance of specialists. Before World War II, most medical students chose to become family doctors. Only one in four opted to become a specialist. Today, that ratio is just about reversed.

And the ratio rings up still more costs. The reason: Specialists charge more money and earn higher incomes than family doctors. Their top-scale fees go to the bottom line.

Cost-shifting. In 1986, Congress ordered doctors and hospitals to treat any emergency patient, even those without insurance. To cover the cost of caring for these who can't pay, health-care providers simply bump up the bills for those who can pay.

The term for this ploy is "cost-shifting." Hospitals shift the cost to patients with insurance. Their insurers shift the cost to employers by charging more for premiums for workers. Employers shift the cost, or at least part of it, to their workers by jacking up the workers' share of the premium and tacking on co-payments and deductibles.

Stress on treatment. Doctors spend most of their time treating illnesses -- and very little time preventing illness. The financial incentives in the American system prod providers toward treating sick people and away from keeping people well.

The system pays for treatments that work -- and treatments that don't work. As Harvard health economist David Cutler puts it, "The reason we do all the wasteful stuff is because we pay for what's done, not what's accomplished."

You'd think that the employers who pay those high health-care premiums would try to turn the incentives around. But wellness is a long-term goal, and employers tend to think in the short term.

They figure that most workers will spend only seven or eight young and healthy years on the payroll before moving on to another job, another health insurer. As for the handful of long-haul employees, they'll retire into Medicare.

Lack of "best-practice" guidelines. Most doctors operate as free agents. To treat ailments, they draw on what they learned in med school and what they've seen over the years in their own patients.

Few have the time or energy to keep up with new ways to treat old ailments. They'll use their time-tested methods. If one doesn't work, another one will -- and the doctor gets paid for both.

But at five-star operations like the Mayo Clinic, doctors draw on guidelines that say what works and what doesn't. It's called "evidence-based medicine." By steering doctors away from what doesn't work, evidence-based medicine holds costs down.

The Lone Rangers

Lack of collaboration. In California's Kaiser Permanente system, a great big HMO network, doctors practice teamwork. Specialists pass along tips to doctors in other areas -- and in turn pick up tips from the others.

But, like the Mayo Clinic, Kaiser Permanente is the exception. The rule is doctors who go their own way or hand their patients off to a costly specialist -- sometimes to the wrong sort of specialist.

Aging population and chronic illnesses. Half of all Americans are past their 37th birthday. The Baby Boomers are homing in on their 65th, starting little more than a year from now.

Chronic diseases -- heart problems, cancers and so on -- hit the elderly especially hard. Those same chronic diseases hit budgets just as hard. The Dartmouth Institute for Health Policy says chronic disease "accounts for more than 75 percent of all health-care spending."

Malpractice. Many doctors and hospitals blame lawyers for much of the high cost of health care. The providers say they order costly tests and the like just to cover themselves in case they're sued. They call it "defensive medicine."

Critics call it overblown. Estimates of how much of health-care spending goes to malpractice range from 0.46 percent (physician-politician Howard Dean) to 3 percent (Harvard economist Amitabh Chandra). That high-end figure is about $60 billion a year -- a lot of money, but little more than a needle in a $2.2 trillion haystack.

Many states have clamped limits on malpractice suits. Among them is Missouri -- and a headline last month in the Kansas City Star said, "Missouri Medical Malpractice Claims Reach Record Low."

Harry Levins is a freelance writer in St. Louis.