Why Both Canada and United States have a Health Care Emergency

February 17, 2010

Bending the Curve

By John Lilly

Over the last several years, numerous politicians including President Obama have used the phrase "we need to bend the curve" when talking about health care expenditures. What is this "curve" they keep wanting to "bend"? The following chart is from the 2009 Medicare Trustees Report (page 51).

The dark line labeled Expenditures is that "curve." The idea is to bend the curve so that it becomes flatter rather than continuing its upward trend. So just how are we going to "bend the curve"?

To answer that question, we must look at the history of how health care has been paid for in the United States. Numerous books have been written on this subject, including Patient Power by John C. Goodman and Gerald L. Musgrave. From the end of World War II through the mid-1980s, Americans paid for hospital care primarily through a cost-plus system of health care finance. Health insurance literally ensured that hospitals had enough income to cover their costs, and health insurers acted as agents for the suppliers of medical services, not the policyholders. Because the only way the suppliers could increase their income was to increase costs, the cost-plus system invariably lead to rising health care costs. Patients had no reason to show restraint since they were spending someone else's money, not their own. Treatments were also much simpler. If you had a heart attack, they admitted you to the hospital, and you either survived or died. Now the goal is to get you to the cardiac catheterization lab as fast as possible. Today's interventions are more advanced and more expensive.

Because there is a limit to how much any society will pay for health care, the cost-plus system was ultimately forced to limit the decisions of suppliers of medical care. The limitations took the form of rules and restrictions written by impersonal bureaucracies, far removed from the doctor-patient relationships they sought to regulate. During the 1980s, the health care system evolved from a pure cost-plus system into a cost-control phase in which third-party paying institutions, both public and private, attempted to reduce their share of the total cost. This system fast becomes bureaucratic warfare over how to shift costs. Every year, Medicare restrictions become tighter.

All free-market competitive systems have two characteristics in common: increasing quality and decreasing prices. However, the difference between a normal marketplace and the medical marketplace is striking. In a normal marketplace, consumers spend their own money, producers search for ways to reduce costs, individuals choose from diverse products, technological change is good for consumers, and producers advertise price discounts and quality differences. In the medical marketplace, consumers are usually spending someone else's money, physicians and hospitals increase costs and perform more procedures to increase their income, most people who have health insurance are covered under an employer or government plan, third-party payers are increasingly hostile to new technology, patients cannot find out the costs prior to admission and cannot read the hospital bill upon discharge, and patients rarely can obtain information about the quality of physicians or hospitals. In a normal marketplace, quality increases and prices decrease with time. In the medical marketplace, quality improvements are questionable and prices continue to rise.

Examples of a normal marketplace include cell phones, computers, cameras, and music players. Twenty-five years ago, cell phones were large and bulky, limited in their features, and very expensive. Today's cell phones are compact, have multiple applications, and are relatively inexpensive. There are two areas of health care where quality has increased and price has decreased: plastic surgery and corrective eye surgery (radial keratotomy and now Lasik). This has occurred because the individual consumer pays for the entire bill. When you have a third party paying for the majority of any particular expense, there is no incentive for the individual consumer to control costs. It is a common practice for consumers to demand additional costly and unnecessary testing and procedures especially once their annual deductible has been met. Almost every primary care physician has had a patient come to his office in October and say, "I've paid my deductible for the year, so now I want to get every test possible." It is also common to delay elective surgery until it is covered by insurance. These practices increase the cost of medical care. In many respects, health insurance is not insurance at all. It is instead prepayment for the consumption of medical care. 

Medicare is the eight-hundred-pound gorilla sitting in the waiting room. Medicare sets reimbursement rates for all types of procedures and office visits. Insurance companies simply follow Medicare's lead with reimbursement rates that are a multiple of Medicare rates, generally from 110% to 140%. Once Medicare reimburses for a particular procedure or device, like motorized scooters, there is an incentive to qualify as many people as possible. Medicare gives more emphasis to procedures relative to office visits. The Medicare reimbursement for removing a toenail is more than three times the reimbursement for an office visit to control a patient's blood pressure. Physicians are incentivized to do things to patients rather than maintain their health. Physicians are not paid to keep you healthy (even though that is our goal). We are paid to do things to you. The system for physician and hospital reimbursement is incentivized to increase costs, not to "bend the curve."

So how do we "bend the curve"? Do we continue with a cost-plus health care system that does not control costs, or do we make a fundamental change to a market-based competitive system? Until Congress and the president have the will and the courage to change the incentives in Medicare, the curve will not be bent. Until patients are put in charge of their own medical expenses, doctors and hospitals will just find new ways to increase revenue. The solution will occur only when the federal and state governments encourage insurance companies to work with physicians on innovative payment methods that do promote health and quality. Health care costs cannot be controlled unless we empower individuals and make it in their self-interest to become prudent buyers of health care. When individuals have control of their own health care dollars through insurance policies like health savings accounts, they won't purchase health care services unless the services are worth the price. What is the right amount of money to spend on health care? In general, there is no right amount; it is whatever people choose to spend, as long as they are spending their own money (or money that they control) and are knowledgeable about prices that reflect the real costs of medical services.
There will always be health care rationing. The real question is, "Do you want to make medical decisions about what you spend on health care with money that you control, or do you want the decisions to be made by a bureaucrat?"

John Lilly, MBA, D.O. is a family physician and Vice President of The YOUNG Conservatives of America (tycoa.com). He can be reached through the website.

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