By Hewett Chiu
Mr. and Mrs. Garcia walked into a local community clinic. Mr. Garcia has had trouble breathing for quite a while now, but he has resisted seeing a doctor. In fact, he has not been to any healthcare provider since coming to America twenty years ago. This time, he relented, as Mrs. Garcia became very worried and urged him every day to go. Being a construction worker and the only working member of the family, Mr. Garcia has had to work seven days a week, close to fourteen hours each day, on minimum wage. His family lives paycheck to paycheck and they have never seriously considered obtaining health insurance. As he gets older, Mr. Garcia is becoming increasingly weak working a physically demanding job for such long hours every day.
What healthcare options are available to the Garcias? It seems that they will have to wait until they really cannot battle the illness any longer without care. Then, they will have to pay entirely out of pocket for what medical care they can afford at a local clinic. The Garcias heard recently that with the Patient Protection and Affordable Care Act (“PPACA”) starting to take effect, many citizens would find it easier to receive medical services. Nonetheless, they continue to question whether they can really afford the growing cost of healthcare. Why should patients have to worry about their ability to afford crucial medical services? Can we better understand increasing healthcare costs from multiple perspectives – namely that of providers, patients, and the healthcare system?
The healthcare industry has grown into a multi-trillion dollar industry over the past forty years, with national healthcare expenditures totaling close to $2.6 trillion in 2010, accounting for 17.9 percent of the United States Gross Domestic Product (GDP).[i] In 1970, by comparison, the United States spent $75 billion on healthcare, accounting for 7.2 percent of GDP.[ii] Since 1970, healthcare expenditures have grown approximately 2.5 percentage points faster than GDP,[iii] and projected to account for about 20 percent of GDP by 2016.[iv]
Healthcare expenditures fall into many categories, as seen in Figure 1. However, the most important components are hospital care and clinical services, which accounted for more than half of the total healthcare expenditures in 2010.
Figure 1: Breakdown of national healthcare expenditures in 2010. Note that hospital care and clinical services account for more than half of all healthcare costs.
Healthcare can be compared to any other business. In fact, many firms deliver medical services as their primary, profit-driving business. Consequently, it may be modeled as a competitive industry, with suppliers (pharmaceutical companies, medical supply firms), service providers (physicians, nurses, allied health professionals), and consumers (patients), with numerous transactions made within the healthcare system each and every day.
Unique to the healthcare system compared to other industries, however, is that many times the payer is not necessarily the consumer. While patients seek and utilize medical services, they often share the burden of payment with other sources. Insurance companies, governments, and in certain cases, providers (charity-care centers) pay for healthcare services for the patients. In the case of insurance, patients pay premiums to join a health insurance plan that requires insurance companies to pay a large portion of healthcare bills for the patient. However, patients may still pay deductibles – where an agreed upon amount is paid by the patient before the insurance company will pay on behalf of the patient – or co-pays – where the patient remains responsible for a portion of his/her healthcare costs. Insurance plans can be operated by either for-profit or not-for-profit corporations, the government (Medicare or Medicaid), or the providers themselves (some health maintenance organizations).
Because the payer and consumer are so often separate roles in the healthcare industry, modeling this relationship gives us a lens into the industry. Each party within this unique dynamic must protect his/her interests, which vary for each of the parties. For example, insurance companies will be concerned with decreasing payouts for members’ healthcare bills, while provider practices will strive to maximize returns on investment, and government actors may seek to ensure efficiency and regulatory compliance in the healthcare marketplace. These divergent interests potentially raise a principal-agent problem, where one actor, the agent, makes decisions for another, the principal, and the agent acts in a way that is most advantageous for him/herself, rather than the principal.
Because interests may diverge within the healthcare landscape, I will analyze the system on multiple dimensions. Important factors from the healthcare system, provider, and patient perspectives contribute to the continually growing cost of medical care.
Figure 2: The three dimensions of growing healthcare costs. Factors from the Healthcare System, Provider, and Patient dimensions contribute to rising costs of healthcare in the United States.
The Healthcare System Dimension
Within the healthcare system, the increasing costs of health service structures, provider reimbursement models, and system priorities have contributed to the increased cost of healthcare. For example, health-maintenance organizations (HMOs) regularly require a patient to see a primary care physician (PCP) before obtaining a referral for specialty care. While this requirement may lead to cost savings in some cases where the PCP is able to appropriately guide patient care, it leads to unnecessary higher costs in others such as mental health cases. If a patient only seeks counseling or therapy with a mental health professional and is otherwise healthy, HMOs may still require the patient to see a PCP to conduct a full physical examination just to obtain a referral for a social worker. Even where the PCP cannot directly treat or fully diagnose the patient’s condition, an extra visit is needed, and the patient is therefore billed for a visit in which he/she is not treated.
Another factor is the traditional model of provider reimbursement, a fee-for-service, retrospective payment, whereby the provider is reimbursed for each service after it is performed. This motivates providers to perform more procedures and tests, even if the procedures do not always contribute to healing the patient. This factor increases the consumption of healthcare through provider-induced demand, in which the provider drives the consumption of health services, based on an incentive to recommend unnecessary procedures.
Asymmetric information between the provider and the patient is the primary factor enabling excessive, provider-induced demand to contribute to growing healthcare costs. This occurs when a difference in knowledge exists between the two parties, with one party bearing specialized knowledge and skills the other party lacks to make an informed decision in their own interest. Asymmetric information remains a prevalent factor leading to unnecessary tests in healthcare, as providers normally possess the specialized medical knowledge necessary to know which tests are really needed, and patients normally place their trust in providers to order only required tests. However, in 46 out of 50 of modern medicine’s most commonly used laboratory tests, at least 30 percent of the tests ordered were found to be unnecessary.[v] Moreover, $6.8 billion is spent annually on unnecessary care and treatment, with physicians inappropriately ordering tests in 56 percent of routine physicals.[vi]
System-wide healthcare priorities have also led to a great increase in healthcare costs. The system focuses on treating diseases, rather than encouraging good behavior and preventing the onset of acute conditions, such as heart attacks, and chronic conditions, such as diabetes. The healthcare system, from clinicians to medical-equipment suppliers, to biotechnology and pharmaceutical firms, has allocated considerable funding and resources towards providing treatments for those already ill or injured, rather than developing programs to encourage healthy lifestyle choices and social behaviors. As such, the clinical manifestations of patients visiting a physician are much more severe than they otherwise would be, and the majority of the healthcare revenues and expenses are related to treating conditions, many of which, such as cardiovascular diseases, pulmonary conditions, or even common cancers, could have been prevented with proper lifestyle management. As an example, a 2014 study of PepsiCo’s employee Healthy Living wellness program found that lifestyle and disease management together led to reduced healthcare costs of $160 per member per month and decreased hospital admissions rate by 66 percent.[vii]
The Provider Dimension
Clinical practitioners, including physicians, nurses, nurse practitioners, physicians’ assistants, and allied health professionals, form the core of service providers within the healthcare system. From the perspective of the individual service provider, major cost factors include the lack of an integrated medical records system with the ability to share a patient’s electronic medical record (“EMR”) across the full spectrum of his/her providers, the refusal of many older generation providers to adopt the use of an EMR, the need to learn new technology and unstandardized protocols among specialties and providers, and the constant practice of defensive medicine, where providers order a full spectrum of tests to avoid malpractice litigation.
The lack of a regularly used, integrated records system means that patient information is not transferred in its entirety from one provider to another. This leads to wasted time when a new provider or specialist needs to re-evaluate the patient based on his/her own practice guidelines. Having to repeat examinations, labs, and imaging may prolong the treatment process by several weeks, while requiring the new provider to reassess the patient, gather the necessary test results, reinterpret the results, and follow up with the patient. This leads to increased costs through billable hours of the provider’s time.
Because medical practice carries significant liability, providers often order a full spectrum of tests to protect themselves against possible malpractice suits. In 2008, for example, $55.6 billion was spent on medical liability and the practice of defensive medicine, with 11.5 percent of physicians who report being worried about malpractice suits ordering additional advanced imaging for a condition such as headaches, compared to 6.4 percent of physicians who report being less concerned about malpractice.[viii] Additional tests are not necessarily harmless to the patient, as services such as CT scans require the patient to be exposed to potentially cancer-causing radiation and performing invasive procedures such as blood work carries the risk of infection. These excess tests not only increase costs for patients, but also place undue stress on them. Moreover, as many physicians own or co-own practices and diagnostic centers, they are potentially profit-driven, with incentive to increase the return on investment in diagnostic equipment at every possible chance.
As an example, the cost of care for cardiovascular disease, a prevalent condition and the leading cause of death in the United States, has increased dramatically. Heart disease alone accounts for 33.6 percent of all U.S. deaths, and in 2010, the total expenditures for cardiovascular disease were $444 billion, with $1 out of every $6 spent on healthcare being spent on heart disease.[ix] While these figures represent the result of developing technologies and advanced techniques, ranging from new drug therapies to minimally invasive open-heart surgery, the treatments themselves do not always guarantee the desired outcomes in a streamlined, cost-effective fashion. Cardiovascular disease has widespread and integrated risk factors with many other organ systems and lifestyle factors, making it difficult to pinpoint exact causes, and thus, treatment options.[x] For example, cardiac diseases have shown to be related to diabetes, obesity, nutrition, exercise, kidney function, and even depression. Effective treatment requires stringent interventions to not only multiple organ systems, but also general lifestyle choices and social behavioral habits. For many individuals, this can be difficult to pinpoint and alter. The time and resources spent on cardiac care may not be the most effective means of directly addressing the condition, based on several sources contributing to the manifestation of the condition.
The Patient Dimension
From the patient perspective, health literacy, awareness, and education play major roles in increasing the cost of health care. Knowledge among the general public regarding the effects of medical conditions, the need for timely care, and understanding basic healthcare concepts and how to navigate the healthcare system are major determinants in the appropriate utilization of care by patients. Patients who do not understand the seriousness of medical conditions may ignore seemingly minor pains and other clinical presentations until it is too late. Many patients who are unfamiliar with the healthcare system are unaware of treatment options available to them. This is especially true for undocumented immigrants who are afraid to seek help, such as the Garcia family introduced earlier. They are unaware of rights granted to them, such as sliding scale fee clinics that are blind to documentation or the eligibility criteria of the Persons Residing Under Color Of Law, which allows non-citizens residing in the country under the knowledge of the government to receive care. As such, undocumented immigrants usually wait until the last minute to seek medical help in the emergency room, developing worsened conditions that are much more expensive to treat.
Beyond immigrant-specific issues, many underprivileged individuals do not have a PCP. Instead, they visit the resource-intensive emergency room for simple conditions that could be easily treated in a less expensive clinic. Because emergency rooms require so much more supplies and equipment to be sufficiently prepared for any emergency, they carry much higher costs of care. An emergency room visit for an outpatient condition can cost, on average, $1,200,[xi] while a visit in a primary care setting costs, on average, between $65 and $85.[xii] Addressing the structural issues that cause patient-specific factors such as immigration and socioeconomic status to seek care at the emergency room would go a long way to reducing healthcare costs.
With a broad array of factors contributing to the rising cost of medical care from the system, provider, and patient perspectives, it is necessary to take a multi-tiered and multi-faceted approach to reducing healthcare costs. This includes developing a coordinated and integrated community healthcare system and creating more health education and awareness programs tailored for individual communities.
A coordinated healthcare system focused on addressing medical needs at the community level would provide a level of customization that can produce cost savings. Communities may be defined by geographic neighborhoods, specific cultural groups, or other natural demographical divisions. As an example, accountable care organizations (“ACOs”), networks of healthcare providers who coordinate care for patients to ensure that appropriate, quality care is given, were collectively able to save $380 million in their first year of operations.[xiii] In understanding the specific needs of a community, a coordinated system can make strategic investments in specialized services to address health issues within the community without neglecting basic health needs and primary care. These strategic choices pave the way for greater social return on investment, as tailored services have greater impact at a lower cost for targeted patients than a general set of services.
When particular needs of a community are defined, the major players within the local healthcare system will need to be identified and their full support solicited. Local clinics, physicians, community centers, pharmacies, allied health professionals, specialty care centers, and additional parties must work together to provide the level of coordination required. This consortium can be an association much like ACOs, formed and overseen by a managing body, such as a community board, a community-based organization, a prominent health center or hospital, or even the providers themselves. In any case, the coordination must come from policy intervention, which can bring these individual actors together as a collective.
Funding for this coordination remains an issue. Initial capital expenditures may be funded through grants aimed at researching the means of improved healthcare coordination and contributions from willing community businesses and organizations with social impact focuses. More sustainable funding may come from insurance companies with substantial enrollees in the targeted community, with an interest to decrease healthcare expenditures. Other local agencies, such as the city council district offices, community boards, or chambers of commerce, may also see the opportunity for cost savings and invest in such coordination.
Figure 3: The stakeholders of an integrated and coordinated community healthcare system.
A secure and shared means of communication would need to be implemented both as a means of coordination and to adopt a single EMR system that can be accessed and shared throughout the system. Doing so would allow records to be immediately accessible to any provider the patient seeks within the community, and thus, diagnostic procedures, histories, physicals, and examinations would not need to be repeated and billed again. In addition, all administrative and coordinative matters would be handled in a more streamlined fashion on the provider end, lessening this burden for patients. Aggregating across all the patients who undergo repeat procedures in a community, this reduction of expenses, lowered stress, and saved time for the patient and provider may be substantial.
Another method of cost reduction is introducing health education and awareness programs within each community as an integrated part of healthcare services. Refocusing the healthcare system from primarily addressing treatments to encouraging prevention and healthy lifestyles is one of the best methods of reducing healthcare costs.[xiv] (With the basic skills and knowledge necessary for the average person to understand what health conditions may develop, how to control and prevent these conditions and how to lead generally healthier lives, patients can reduce the incidence of conditions and the need to consume healthcare.)
Health education programs can include targeted workshops, community seminars, and mass advertising campaigns in languages specific for each particular community. Health coaches selected for their ability to communicate to each population can continually push healthy choices and check with patients regularly to ensure compliance with treatment plans. By selecting familiar voices, patients will feel more comfortable discussing issues with coaches, and problems can be addressed as they arise.
Each program can be administered through the managing body of the consortium of community care providers, using local community-based, health-advocacy, and support organizations that are already funded to provide health education and social service support. With the PPACA significantly focused on prevention and coordination of care, many private and public foundations and government entities would be focusing their funding investments to such community based organizations, recognizing that the best means of connecting with the most at-risk populations are through these very organizations. As an example, the New York City Council Discretionary Funding provides city-based government funding specifically to community-based organizations for such grassroots initiatives, and for many New York City not-for-profit organizations, a large portion of their annual budgets are accounted for by the Discretionary Funds. On the provider side, clinicians may be incentivized to work with these programs to improve the health outcomes and quality of care for their patients through continuous coaching and assessment, which currently require more time and attention than is available to provide for each patient in such detail.
Finally, encouraging simple and often low-cost or free changes in lifestyle, such as simple changes in diets or decisions to take the stairs instead of waiting for the elevator, help to establish a pattern of continual healthy decisions, which can lead to a significant reduction in healthcare costs over the long term.
Recognizing that healthcare costs are growing tremendously is the first step to reducing them. We now understand the dynamics by which this is occurring. Reducing these costs cannot be completed immediately; it requires open, honest communication and dedication from all parties participating in the healthcare system. The system and the interaction of its numerous stakeholders must be reformed to meet the needs of the population it serves in a coordinated manner. A general framework is not enough for a system to expect optimized results. Rather, we must understand and appreciate the needs of individual communities and address them with a strategic combination of services specialized for those needs. Providers and patients must be willing to work together and with the system itself.
These strategic interactions can be achieved with proper policy intervention to encourage coordination. This intervention will encourage each party to consider interests beyond their own to those of other parties involved in the delivery of healthcare. When full buy-in with a willingness to work together as a cohesive healthcare system is achieved among all stakeholders, a true impact can be made. With a little hard work now, we will be able to reap great benefits over the long run.
Hewett Chiu is a healthcare professional and teaching colleague at the New York University Wagner Graduate School of Public Service.
[i] Martin A.B. et al. 2012. “Growth In US Health Spending Remained Slow in 2010; Health Share of Gross Domestic Product Was Unchanged from 2009.” Health Affairs 31:208-19.
[ii] Henry J. Kaiser Family Foundation. 2012. Health Care Costs: A Primer. Key Information on Healthcare Costs and Their Impact.
[iii] Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. 2012. http://www.cms.hhs.gov/NationalHealthExpendData/.
[iv] Borger C. et al. 2006. “Health spending projections through 2015: changes on the horizon,” Health Affairs Web Exclusive, 25(2): 61-73.
[v] Zhi M., Ding E.L., Theisen-Toupal J., Whelan J., Arnaout R. 2013. The Landscape of Inappropriate Laboratory Testing: A 15-Year Meta-Analysis. PLoS ONE 8(11): e78962. doi:10.1371/journal.pone.0078962.
[vi] Andrews, M. 2011. “$6.8 Billion Spent Yearly On 12 Unnecessary Tests And Treatments.” Last modified October 31, 2011.
[vii] Caloyeras, J.P. et al. 2014. Managing Manifest Diseases, But Not health Risks, Saved PepsiCo Money Over Seven Years. Health Affairs, 33(1), 124-131.
[viii] Carrier E, Katz D, Mello M, et al. 2013. High Physician Concern About Malpractice Risk Predicts More Aggressive Diagnostic Testing In Office-Based Practice. Health Affairs.
[ix] Centers for Disease Control and Prevention. 2010. “Heart Disease and Stroke Prevention.” Last modified July 21, 2010. http://www.cdc.gov/chronicdisease/resources/publications/AAG/dhdsp.htm.
[x] Centers for Disease Control and Prevention. 2014. “National Cardiovascular Disease Surveillance.” Last modified March 7, 2014. http://www.cdc.gov/DHDSP/ncvdss/index.htm.
[xi] Caldwell N., Srebotnjak T., Wang T., Hsia R. 2013. “How Much Will I Get Charged for This?” Patient Charges for Top Ten Diagnoses in the Emergency Department. PLoS ONE 8(2): e55491. doi:10.1371/journal.pone.0055491
[xii] Appleby, J. 2013. “Consumers Beware: Not All Health Plans Cover A Doctor’s Visit Before The Deductible Is Met”. Last modified December 23, 2013.
[xiii] Centers for Medicare and Medicaid Services. 2014. https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2014-Press-releases-items/2014-01-30.html
[xiv] Ormond B.A. et al. 2011. “Potential National and State Health Care Savings from Primary Prevention,” American Journal of Public Health 101, 1:157–164.