Tuesday, October 19, 2010

It just costs too much

Stuart Altman and I were invited to share the podium as lunchtime speakers today at the New England-Israel Business Council's 2010 Life Sciences Summit. The Summit is designed to foster relationships between the life science industry, research, healthcare and the investment community in New England and their counterparts in Israel.

We had not really coordinated our talks beforehand, but we ended up with similar themes. Stuart starting out by reminiscing about one of his first jobs, when he was warned that if the then-current 7.5% of GDP represented by health care spending increased to 8.0%, a disaster would be befall the country. Of course, it is now over 17%. He explored the trends that have led to this and suggested that the higher prices of US medical services accounts for a significant portion of this result.

He concluded by advocating for a change in the current fee-for-service pricing regime and for implementation of the Accountable Care Organizations envisioned in the recently passed US health care bill. Turning then to specific concerns of the audience, Stuart suggested that there will be pressure to limit the use of drugs that are not cost-effective and that the pharma and device industry will be incented to produce products that enhance quality and improve efficiency.

My talk centered on topics familiar to readers here. I touched on the marketing-driven success of certain products whose clinical efficacy has yet to be found superior, and yet whose costs inflate the overall health care budget. I challenged those firms in the audience to focus on innovation that has the potential to reduce the cost of health care delivery.


Anonymous said...

Here is one interesting idea for Medicare:


Whether one agrees with the idea or not, we cannot argue with the author's thesis that all the talk about cutting costs has done nothing to actually cut costs - some concrete action must be tried.


Barry Carol said...

While doctors, especially specialists, in the U.S. earn considerably more than their counterparts abroad, I don’t think most other healthcare employees do, at least in relation to per capita GDP.

There is no question that brand name drug and medical devices cost considerably more in the U.S. and our litigation system pushes doctors to practice defensive medicine. Administrative complexity is an issue for primary care doctors but is not a major contributor to higher U.S. healthcare costs according to most experts.

I think hospital costs are probably far higher in the U.S. than elsewhere. As I understand it, roughly 13-14 million people work in the U.S. healthcare sector of which about five million of those work in hospitals or stand alone hospital owned outpatient facilities. If we looked at the number of hospital employees per inpatient bed in the U.S. vs. elsewhere as a rough proxy for costs, that metric is likely significantly higher in the U.S. Interestingly, while hospital inpatient bed days per thousand people are higher overseas than in the U.S., much more happens to U.S. patients while in the hospital. Some of this probably relates to different approaches around end of life care, some is defensive medicine, some is probably general differences in practice patterns, and some has to do with less intensive convalescent care that might take place in a hospital setting in Europe but in a rehabilitation center here. At the same time, the prices for each hospital based service, test or procedure are far higher in the U.S.

I never understood why almost everything else in Western Europe is more expensive than it is in the U.S. but, somehow, healthcare is a lot cheaper. In Switzerland, for example, healthcare costs per capita are 30%-40% lower than in the U.S. even though they use private insurers as payers including for the elderly and the poor. Yet, if you walk through a typical supermarket outside of the major cities, almost everything is more expensive than it would be in the U.S. Go figure.

Anonymous said...


Love the blog!

While I agree with your assertion that efficiency will save money, I also believe there is another partner in this besides industry. It is the regulatory authorities that oversee these expensive drugs and devices.

Now while I am one who strongly believes that this regulation is absolutely necessary, I am also one who believes that there is a tremendous lack of efficiency in the process.

Take for example NASA's recent purchase of a $19M dollar toilet (http://popsci.typepad.com/popsci/2007/07/nasas-19-millio.html). How much of this was actual parts, labor, and needed regulatory test and checks ... and how much was waste (no pun intended) from various regulatory and governmental agencies?

Regulatory bodies are a partner in this equation, and should be committed to the very same innovation that industry will naturally pursue to assure their bottom line.

Anonymous said...

It's not like it's a big secret. American health care is more expensive because WE DO MORE. We cath more people, we scan more people, we keep more people clinging onto life in the ICU for a few more days. The rest is just a smokescreen - it's hardly like Medicare is increasing per-procedure reimbursement, so why are expenditures constantly rising?

Patients want more, doctors want more, lawyers want more. As long as malpractice is defined as doing what everybody else isn't, and everybody else does lots of stuff, there's no other choice. Hardly a mystery.

Anonymous said...

Americans do demand MUCH more expensive care than anyone else and people have not shown a willingness to change this reality. Let's take beginning of life costs... are we ready to get rid of infertility coverage and the multiple births and the long NICU stays? Are we ready to let premature babies die instead of months in the NICU and a lifetime of disabilities? At the end of life are we ready to tell anyone over 70 years old that nothing other than comfort measures will be available to them? This is where all the money is spent... beginning and end of life and I don't see anyone ready to tell people what healthcare would look like if we withdrew these beginning and end of life costs. We are doing MUCH more on the youngest and oldest patients in our country and this results in higher overall costs. Heck, we even do much more to the relatively healthy middle age population as a result of new technology and defensive medicine but it is at the beginning and end of life where the majority of costs are.

Anonymous said...

There are a great many reasons behind this. I will add two more:
1. Cost allocation methods drive quirky and sometimes inefficient decision making. Many expenses are cost allocations of large fixed expenses. For example, a new CT system may cost 1 million dollars, regardless of whether it is used once per week or once per hour, but it is priced based on a per use cost allocation of that million. Increasing usage does not increase the actual costs, and decreasing use does not decrease the actual costs. So price driven behavior changes do not result in appropriate system cost responses.
2. The decision makers are often highly divorced from the beneficiaries. Although they may have the best of intentions, they usually make sub-optimal choices and the tendency is to provide excess use, rather than deny alternatives that are sometimes optimal. You see this in more than just medicine, and you find that cost control is much better in systems where the patient has a direct input and cost participation.

Jalex said...

Hello, Paul.

My name is Joseph, and I work for Lead To Conversion, an industry partner of Strata Decision Technologies. I came across your blog while doing some research, and I must say that I am thoroughly impressed, not only with the wonderful content of your blog, but also with the fact that you can make time for it, given your incredible amount of responsibility.

Clearly, the rising cost of health care (both to patients and to hospitals and doctors) is a cause for concern. The need to provide excellent patient care and the desire to keep the business of a hospital afloat should not (in an ideal world) be conflicting goals, and it heartens me to see professionals such as yourself striving to resolve that conflict. As an industry partner with a company that develops software for hospital financial planning, I am constantly looking for more information on how hospitals can lower their bottom line and, consequently, raise the bar for patient care.

I have not yet come across any posts on here that deal specifically with financial planning, but if you are interested in writing one and would like any information from Strata, I would be happy to provide you with whatever you need.

(On a personal note, thank you for your post Dear Coach. Made my day.)

Thank you for your time, and I hope you keep up the wonderful work, both in Boston and online.

Unknown said...

A reality that hospital administrators can easily capitalize on and demonstrate "wins" in cost reduction is examining the terribly poor job every hospital does when it comes to running the pure operational,non-clinical aspect of the business.
The line share of dollars spent within a hospital are regulated and mandated.
Turning on the lights,providing service amenities, keeping the building running right,provide parking and site upkeep are totally ignored and mismanaged. Hospital administrators view themselves as above such 'bluecollar' aspects of the businesss and as a result spend unnecessary millions and ignoring creative efficiency and quality improvement from these functional activities.
Healthcare will run into the same buzzsaw that the auto industry did and those that recognize that this industry is ill eqiuipped and look for new resources to steer this part of the ship will avert some of the pending disaster.