Jan 8, 2016

Dr. Jones: The United States spends, by far, the most money of any nation in the world on health care costs. And they're only going up. So why is that? I'm Dr. Kyle Bradford Jones, a family physician at the University Of Utah School Of Medicine. And we're talking about that on The Scope.

Announcer: Medical news and research from University of Utah physicians and specialists you can use for a happier and healthier life. You're listening to The Scope.

Dr. Jones: I'm joined today by Dr. Norm Waitzman who's a professor of economics and co-director of the University of Utah's Health Society and Policy program. Dr. Waitzman, we have now gone over $3 trillion a year on health care costs. It's over $10,000 per individual on average. Why do we have such high health care costs?

Dr. Waitzman: It's multi-faceted. We have high health care costs, first of all, because we are rich country. Health care is a normal good that is that we enjoy the benefits that it confers. And so, therefore, we have higher health care costs just because we have a higher GDP.

But we have a higher level of spending than most of the rest, than, in fact, the entire rest of the industrialized world. Some of this has to do with what is produced, that is what has generated, the real stuff. Others have to do with very high prices for what we pay. So those are two elements and they're not totally divorced from each other.

But there was a larger report from the Institute of Medicine, which indicated that out of the $3 trillion, as much as one-third reflects waste on one level or another or overspending either because of overtreatment, because we provide the wrong treatments, distorted incentives or because of these high prices. So every element here is very significant. And the reconfiguration of health care under various policies is partially an attempt to rein in that trajectory.

Dr. Jones: And you mentioned poor incentive as part of the reason why we have all of this waste. What do you mean by that?

Dr. Waitzman: That's multifaceted too, but part of that has to do with the way that we reimburse, traditionally under fee for service system where the reimbursement is a greater payment for everything that's done. We often times will tend to over treat and so that is part of the incentive framework. When you have insurance, which is a valuable thing, people say, "Well, people are shielded from the consequences of their decisions because there's this mediation of insurance." That's true, but insurance in and of itself is a valuable commodity. And so getting rid of insurance is not the way to go. Every industrialized nation the world has as much if not more extensive insurance than we do. But when you're shielded, oftentimes providers and patients from the consequences through this mediation of insurance then there's going to be distortions as well with respect to incentive. So the challenge is to align incentives to provide value and care.

Dr. Jones: So obviously, health care costs continue to rise. But they typically rise higher than the inflation rate. Why is that?

Dr. Waitzman: Part of that has to do with the expansion of the care set. The set of medical care that can be provided is nearly unlimited. And so the expansion, to some extent, is associated with the trajectory of technology and cost increasing technologies in particular in the incentives in that part of the system to generate cost increasing rather than cost-reducing technologies.

Another factor, of course, is the aging of the population and the degree to which these sets that can be provided in terms of, for example, pharmacological innovations can be fit to the chronic care problems that generally are prevalent as people age. They sort of conspire with each other, the aging of the population, the vast set of things that can be done, the structure of insurance payment. These all conspire in a way that helped to increase the trajectory of cost.

Now, I should caution that actually some economists would say that we don't measure productivity correctly in health care. What that means is that a lot of what we get in terms of real value in our care in the real care, for example, if somebody survives another ten years after having care in the hospital rather than five years, that oftentimes that doesn't make it into the productivity assessment. And therefore, it looks like there's been a doubling of price. So if we're not measuring it correctly, then it's going to look like a lot of what's growing in terms of health care expenditure has to do with price growth rather than expansion of real care.

Dr. Jones: The increase in health care costs slowed for a bit about five or six years ago and now seems to be picking up again. Do we have a sense of why there's been that change?

Dr. Waitzman: Last time we really had a massive slowdown in health care cost growth was during the so-called managed care revolution or the period of HMOs and what several people would characterize as a backlash against them. So this is sort of early to mid or actually late '90s when basically it was an expansion of managed care. There were rules placed on the supplier side and the provider side that reigned in the provision of care. And some of this had to do with the modification of payment.

So when you get a revolution, basically in our health care system you often see that there's immediately a reduction in the trajectory of health care cost growth. And then, through adaptation, there's sort of a resurgence of this health care cost trajectory. It's been typical in terms of the last several decades. And this is partly what I think we've seen, although there were certain factors that were particularly important in the last five years.

First of all, we talked about the US being a rich country and growing economy. You know that we had this massive recession in 2009 and there's a reduction in income growth associated with that recession. And therefore, the health care costs were going to moderate in any case because of the recession. And on top of that, you had the massive restructuring that came with the introduction of the Affordable Care Act and its implementation. And there are several aspects of that law that were targeted, both hard and soft, with respect to reigning in health care costs. And many people are tending to this in terms of analyzing it.

And there's been some success within that program that has rationalized the nature of markets and has provided new incentives to rein in the cost of care. Now, whether the system is adapting in a way there's consolidation, there are growing mergers and some would say monopolization that's occurring within the insurance market that we're seeing that could be sort of an adaptation of the era and maybe resurgence now in health care costs.

But many people feel that there's been some permanent bending of the cost curve with the creation of these integrated systems that change incentives, modification in payment for value, for performance that is going to be sustained in terms of a lower trajectory of cost. One part of this system that really is more likely to take off is the pharmaceutical sector because the nature of cost controls in that sector is low. It's 10% of the health care spending, which is not trivial. We're talking about $300 billion. There's massive investment in terms of the generation of new biologics and very expensive drugs that are of variable value, some a very high value.

And so part of the pickup in the trajectory of health care costs is associated with this sector that has not really reined in their costs and that's part of the reason why you're seeing resurgence.

Dr. Jones: We are a technologically advanced and wealthy country. There are other countries that also fit that definition whose health care costs are lower than ours. So what's the difference? What are we doing that they're not or vice versa?

Dr. Waitzman: Perhaps the next highest cost country is Switzerland. And they, per capita, spend about a third less than we do. And the range within their . . . when you look at Canada. Britain is probably the lowest, about a half per capita. And France, of course, is in between. But if you look at these countries, they have full, single-payer systems that are universal. Basically, there are controls on costs in those countries, but very high satisfaction nearly uniformly across the board with respect to the health care that's received.

I'm not saying there's not issues and problems in each one of these countries. Many people sort of think, "Oh, there's the United States and then there's everyone else." But in fact, when you start to delve into these the details of these countries, they all have very specific characteristics with the way that they finance and deliver health care. But there's nearly universal satisfaction. In the United States, we have pockets of satisfaction. We have a very fragmented health care system. Still, even with the growing integration and some semblance of uniformity that's grown under the Affordable Care Act, but the fragmentation itself poses issues with respect to pressures on costs.

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