With sign-up for the national low-cost health insurance program — so-called “Obamacare” — in full swing under the Patient Protection and Affordable Care Act (ACA), hope that medical costs will finally come under control in the United States is being expressed from nearly every corner of the nation. According to the McKinsey Global Institute, the average American spends more than twice on health care expenses than on food and spends more on health care alone than the average Chinese citizen spends on all goods and services combined.
To put this in another way, when adjusted for relative wealth, the United States spends significantly more on healthcare compared to its gross domestic product than Switzerland, Iceland, Austria, Canada, Denmark, France, Germany, Finland, Spain, South Korea, Czech Republic, Portugal or Poland. Not only does the United States spend more on healthcare in actual dollars — $2.6 trillion in 2010, per the Centers for Disease Control and Prevention — it spends more per capita and more per GDP dollar — with the U.S. spending, as of 2010, 17.9 percent of its GDP on healthcare, compared to a 9.5 percent average among Organization of Economic Co-operation and Development (OECD) member nations.
For example, an angiogram in the United States, according to the International Federation of Health Plans’ 2012 Comparative Price Report, averages at $914, with costs reaching as high as $2,430. One can get the same procedure for $35 in Canada. A magnetic resonance imaging (MRI) scan in the U.S. costs $1,121. In the Netherlands, it costs $319. A year’s prescription of Lipitor in the U.S. costs $124; it costs $6 in New Zealand. A hip replacement costs $40,364 in the U.S., with prices topping out at $87,987; one can get the procedure done in Spain for less than a fifth of that, at $7,731. As reported by the Commonwealth Fund, hospital stays cost about triple those in other developed countries, despite the fact that hospital stays are not longer in the U.S.
What is interesting, however, is that physician fees have little to do with these high costs. The average physician fee for a hip replacement in the U.S.is $2,888, for example; only $5 more than Australia and on par with Chile. For the most part, most of the healthcare dollars spent in the United States is not spent on direct care, but for hospital fees and medical device manufacturers. In 2012, Medicare paid, on average, $18,000 for a total hip arthroplasty, for example. Of this, the surgeon was only paid $1,446.
The cost of healthcare in America
“The U.S. spends far more on healthcare than any other country,” read the Commonwealth Fund report, “Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality.”
“However this high spending cannot be attributed to higher income, an older population, or greater supply or utilization of hospitals and doctors. Instead, the findings suggest the higher spending is more likely due to higher prices and perhaps more readily accessible technology and greater obesity. Health care quality in the U.S. varies and is not notably superior to the far less expensive systems in the other study countries.
“Such an expensive health system creates an enormous financial strain and can pose a barrier to accessing care,” the report continued. “For many U.S. households, health care has become increasingly unaffordable. In 2010, four of 10 adults went without care because of costs and the number of either uninsured or ‘underinsured’ (i.e., people with health coverage that does not adequately protect them from high medical expenses) increased to more than 80 million. A 2007 survey in five states found that difficulty paying medical bills contributed to 62 percent of all bankruptcies, up 50 percent from 2001. For the average worker with employer-based health insurance, growth in premiums and cost-sharing has largely erased wage gains over the past decade.”
The practical implications of this are daunting. The ACA was intended to help lower health care costs and to provide affordable health care coverage for the uninsured, the realities of the program leaves much to be desired. While ACA addresses both the problem of excessive medical device fees by attaching a tax that pays into the ACA system and of problems with physicians’ payments by bundling and reclassifying reimbursements, the law does little to actually reduce costs.
Paying doctors
Looking at Medicare, the government compensates physicians on a set fee schedule. For Part A services — which include hospital and nursing home care — the government reimburses health care providers based on a prospective payment system, in which the provider is given a set amount of money based on the episode of care a patient is given, regardless of the amount or actual type of care given to the patient. In this situation, if the care offered is less than the amount provided for in the fee schedule, the provider keeps the difference. Otherwise, the provider must pay the difference itself.
For Part B services, the Medicare Fee Schedule is checked by the Sustainable Growth Rate, which sets yearly and culmative spending targets per provider. Payments in excess of the SGR are not paid. To avoid a situation in which physicians are underpaid for Medicare services — which would drive many to leave the program — Congress has regularly instituted “Doc Fixes,” which temporarily lifted the SGR. However, due to the MFS’s low conversion rate, many physicians find themselves underpaid.
To get around this, many providers use less-than-ethical tactics to compensate. Some “upcode,” or classify a diagnosis as something more serious to hedge against reimbursement losses. The addition of more tests, more screening time and additional follow-up visits help to protect the provider from taking a financial loss from an underfunded procedure. Others engage in partnerships with medical device manufacturers toward promoting and utilizing their products. As reported in the Europe PubMed Central, according to a 2007 U.S. Department of Justice settlement, implant manufacturers made 568 payments to 526 orthopedic surgeons totalling more than $228 million — which included a one-time royalty payment of $109 million to a single firm.
What all of this amounts to is simple. Congress cuts Medicare reimbursements to providers. Providers, desperate to receive fair pay for services rendered, “upcode” patients to costlier procedures or to procedures requiring medical devices that the provider receives a “consulting fee” for. The cost of this procedure is passed on to the unsuspecting patient. So, in order to save $390 in government-reimbursed physician fees, Congress inadvertently encourages a $18,000 procedure.
“Hospitals, drug companies, device makers, physicians and other providers can benefit by charging inflated prices, favoring the most costly treatment options and curbing competition that could give patients more, and cheaper, choices,” the New York Times reported. “And almost every interaction can be an opportunity to send multiple, often opaque bills with long lists of charges: $100 for the ice pack applied for 10 minutes after a physical therapy session, or $30,000 for the artificial joint implanted in surgery.”
A bloated system
Physician’s fees, by themselves, do not adequately explain the expense of the American healthcare system. Technology costs — including the cost to install and maintain electronic health records, which is estimated to be as much as $25,000 per doctor plus monthly subscription costs — the cost to meet administrative regulations and hospital fees — including coverage charges for uninsured patients — as well as the additional cost of maintaining the health expenses of an increasingly overweight population all add to the tally.
However, the single largest source of glut in the American system is administrative fees, which the McKinsey report attributes for being responsible for as much as 21 percent of the nation’s excess health care spending. The amount of money spent on administrative fees is so great (it was projected to be at $150 billion in 2008) that it would have been enough to pay for a single-payer universal healthcare program in this country.
Of this, according to McKinsey, 85 percent of the excessive administrative overhead comes from the private insurance system in America, with two-thirds of that 85 percent going to product design, underwriting and marketing.
While the ACA offers some relief to the uninsured — without leadership addressing the problems with physician’s pay, overpriced medical devices and excessive private insurers’ administrative charges — the nation’s poor is still underserved in regards to medical coverage, even with the ACA’s affordable health care plans.
For example, a 32-year-old Minnesota mother of two making $25,000 per year, under the ACA could have a Silver plan, that has an actuarial value of 94 percent (she would have to pay six percent of her medical expenses out-of-pocket) and an annual premium of $4,294 — of which the federal government would subsidize $3,794, per the Kaiser Family Foundation. For $3,209 a year ($0 after subsidies), she could also opt for a Bronze plan, which has 60 percent actuarial value.
While this sounds great, the fact that the woman would have to pay out-of-pocket for a percentage of her and her family’s medical care presents a true hurdle. At an average of $8,233 per patient per year for healthcare in this nation, the Silver plan represents an out-of-pocket cost of $493.98 and $3,293.20 for a Bronze plan. For families and individuals on tight budgets, this could mean a world of difference.
The United States is unique in the industrialized world in that the federal government does not intervene in medical pricing beyond setting the reimbursement schedule for Medicare and Medicaid. This has created a system in which there is no price control and where the consumer is mostly or completely blind to cost. Even with the ACA — which has been touted as a cost-saving exercise — evidence now suggests that recent cost-savings previously attributed to the ACA came, instead, from the improving economy.
“Once the economy improves substantially we would expect health spending to respond in kind,” Gigi Cuckler, an economist who tracks actuarial information at the Centers for Medicare and Medicaid Services, told reporters, suggesting that a recovering economy is directly responsible for and linked to decreasing healthcare costs. “We’re not convinced that that relationship has been broken in the past couple of years.”
Until the government has an honest conversation on its role in controlling medical care costs, there will be no health care cost relief for the average American. “In the U.S., we like to consider health care a free market,” said Dr. David Blumenthal, president of the Commonwealth Fund and a former adviser to President Obama. ”But it is a very weird market, riddled with market failures.”