The Goal: cut the cost of US healthcare in half while achieving universal coverage and excellent quality of care without the heavy hand of big-time taxes, regulations, and bureaucracy. Hah! Yeah, I know. But gotta try.

The Situation: As a percentage of GDP, the US spends about twice as much on healthcare as other developed countries. This is a problem. See Part I of this series for details. For those who say healthcare is not a basic right, that means some people should be denied treatment, even if they die as a result.  That’s fine. This post is not for you.

In the spirit of “you can’t fix a problem without understanding it”, I’m going to start with what’s driving the high cost of US healthcare.  As noted in the prior post, outpatient care, pharmaceuticals and administration costs stand out as major problem areas in US healthcare spending. In this post, I’m going to focus on outpatient services, which are medical procedures or tests that can be done in a medical center without an overnight stay.

Consider appendectomies, which count as an outpatient procedure since most don't require overnight hospital stays.  Check it out:

2018 Appendectomy Cross Country Costs.png

Wow - the US is in the stratosphere here! What's going on? It's not physician fees, which average just $1000 per operation. It's other stuff, as the following $55,000 appendectomy bill so well documents:

2018 Appendectomy Operation Bill.png

It's important to remember, though, that salaries and physician fees aren't the only way US doctors make money. Many receive additional compensation through profit-sharing arrangements. Thus, if you want to understand why these procedures cost so much, follow the reimbursement rates. For instance, in 1997 Medicare raised reimbursement rates in certain parts of the country. On average, areas with a 2 percent increase in payment rates experienced a 3 percent increase in care provision. Physicians charge what they can, and then some. Per Clemens and Gottlieb (2014):

"Physicians disproportionately adjust their provision of relatively intensive and elective treatments as reimbursements rise, and they appear to invest in new technologies in order to do so."

In addition to fee-for-service reimbursements, premiums are another important source of profits for some healthcare providers. Take Kaiser Permanente, officially a "not-for-profit" health plan trust, but whose physicians belong to for-profit Medical Groups. Kaiser doctors make good money, thanks to profit-sharing: their average total pay is $260,000 a year. But a lot of doctors leave Kaiser because they can make more money elsewhere. As one put it, who wants to “be stuck making 300k a year for the rest of your days?

Next: Drugs.

Reference:

Clemens J, Gottlieb JD. Do Physicians’ Financial Incentives Affect Medical Treatment and Patient Health? The American economic review. 2014;104(4):1320-1349. doi:10.1257/aer.104.4.1320.