by Dick Goldhill
published online at:
How American Health Care Killed My Father
Almost two years ago, my father was killed by a hospital-borne infection in the intensive-care unit of a well-regarded nonprofit hospital in New York City. Dad had just turned 83, and he had a variety of the ailments common to men of his age. But he was still working on the day he walked into the hospital with pneumonia. Within 36 hours, he had developed sepsis. Over the next five weeks in the ICU, a wave of secondary infections, also acquired in the hospital, overwhelmed his defenses. My dad became a statistic—merely one of the roughly 100,000 Americans whose deaths are caused or influenced by infections picked up in hospitals. One hundred thousand deaths: more than double the number of people killed in car crashes, five times the number killed in homicides, 20 times the total number of our armed forces killed in Iraq and Afghanistan. Another victim in a building American tragedy.
About a week after my father’s death, The New Yorker ran an article by Atul Gawande profiling the efforts of Dr. Peter Pronovost to reduce the incidence of fatal hospital-borne infections. Pronovost’s solution? A simple checklist of ICU protocols governing physician hand-washing and other basic sterilization procedures. Hospitals implementing Pronovost’s checklist had enjoyed almost instantaneous success, reducing hospital-infection rates by two-thirds within the first three months of its adoption. But many physicians rejected the checklist as an unnecessary and belittling bureaucratic intrusion, and many hospital executives were reluctant to push it on them. The story chronicled Pronovost’s travels around the country as he struggled to persuade hospitals to embrace his reform.
It was a heroic story, but to me, it was also deeply unsettling. How was it possible that Pronovost needed to beg hospitals to adopt an essentially cost-free idea that saved so many lives? Here’s an industry that loudly protests the high cost of liability insurance and the injustice of our tort system and yet needs extensive lobbying to embrace a simple technique to save up to 100,000 people.
And what about us—the patients? How does a nation that might close down a business for a single illness from a suspicious hamburger tolerate the carnage inflicted by our hospitals? And not just those 100,000 deaths. In April, a Wall Street Journal story suggested that blood clots following surgery or illness, the leading cause of preventable hospital deaths in the U.S., may kill nearly 200,000 patients per year. How did Americans learn to accept hundreds of thousands of deaths from minor medical mistakes as an inevitability?
My survivor’s grief has taken the form of an obsession with our health-care system. For more than a year, I’ve been reading as much as I can get my hands on, talking to doctors and patients, and asking a lot of questions.
Keeping Dad company in the hospital for five weeks had left me befuddled. How can a facility featuring state-of-the-art diagnostic equipment use less-sophisticated information technology than my local sushi bar? How can the ICU stress the importance of sterility when its trash is picked up once daily, and only after flowing onto the floor of a patient’s room? Considering the importance of a patient’s frame of mind to recovery, why are the rooms so cheerless and uncomfortable? In whose interest is the bizarre scheduling of hospital shifts, so that a five-week stay brings an endless string of new personnel assigned to a patient’s care? Why, in other words, has this technologically advanced hospital missed out on the revolution in quality control and customer service that has swept all other consumer-facing industries in the past two generations?
I’m a businessman, and in no sense a health-care expert. But the persistence of bad industry practices—from long lines at the doctor’s office to ever-rising prices to astonishing numbers of preventable deaths—seems beyond all normal logic, and must have an underlying cause. There needs to be a business reason why an industry, year in and year out, would be able to get away with poor customer service, unaffordable prices, and uneven results—a reason my father and so many others are unnecessarily killed.
Like every grieving family member, I looked for someone to blame for my father’s death. But my dad’s doctors weren’t incompetent—on the contrary, his hospital physicians were smart, thoughtful, and hard-working. Nor is he dead because of indifferent nursing—without exception, his nurses were dedicated and compassionate. Nor from financial limitations—he was a Medicare patient, and the issue of expense was never once raised. There were no greedy pharmaceutical companies, evil health insurers, or other popular villains in his particular tragedy.
Indeed, I suspect that our collective search for villains—for someone to blame—has distracted us and our political leaders from addressing the fundamental causes of our nation’s health-care crisis. All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.
These are the impersonal forces, I’ve come to believe, that explain why things have gone so badly wrong in health care, producing the national dilemma of runaway costs and poorly covered millions. The problems I’ve explored in the past year hardly count as breakthrough discoveries—health-care experts undoubtedly view all of them as old news. But some experts, it seems, have come to see many of these problems as inevitable in any health-care system—as conditions to be patched up, papered over, or worked around, but not problems to be solved.
That’s the premise behind today’s incremental approach to health-care reform. Though details of the legislation are still being negotiated, its principles are a reprise of previous reforms—addressing access to health care by expanding government aid to those without adequate insurance, while attempting to control rising costs through centrally administered initiatives. Some of the ideas now on the table may well be sensible in the context of our current system. But fundamentally, the “comprehensive” reform being contemplated merely cements in place the current system—insurance-based, employment-centered, administratively complex. It addresses the underlying causes of our health-care crisis only obliquely, if at all; indeed, by extending the current system to more people, it will likely increase the ultimate cost of true reform.
I’m a Democrat, and have long been concerned about America’s lack of a health safety net. But based on my own work experience, I also believe that unless we fix the problems at the foundation of our health system—largely problems of incentives—our reforms won’t do much good, and may do harm. To achieve maximum coverage at acceptable cost with acceptable quality, health care will need to become subject to the same forces that have boosted efficiency and value throughout the economy. We will need to reduce, rather than expand, the role of insurance; focus the government’s role exclusively on things that only government can do (protect the poor, cover us against true catastrophe, enforce safety standards, and ensure provider competition); overcome our addiction to Ponzi-scheme financing, hidden subsidies, manipulated prices, and undisclosed results; and rely more on ourselves, the consumers, as the ultimate guarantors of good service, reasonable prices, and sensible trade-offs between health-care spending and spending on all the other good things money can buy.
These ideas stand well outside the emerging political consensus about reform. So before exploring alternative policies, let’s reexamine our basic assumptions about health care—what it actually is, how it’s financed, its accountability to patients, and finally its relationship to the eternal laws of supply and demand. Everyone I know has at least one personal story about how screwed up our health-care system is; before spending (another) $1trillion or so on reform, we need a much clearer understanding of the causes of the problems we all experience.
Health Care Isn’t Health (Or Happiness)
“Money is honey,” my grandmother used to tell me, “but health is wealth.” She said “health,” not “health care.” Listening to debates over health-care reform, it is sometimes difficult to remember that there is a difference.
Medical care, of course, is merely one component of our overall health. Nutrition, exercise, education, emotional security, our natural environment, and public safety may now be more important than care in producing further advances in longevity and quality of life. (In 2005, almost half of all deaths in the U.S. resulted from heart disease, diabetes, lung cancer, homicide, suicide, and accidents—all of which are arguably influenced as much by lifestyle choices and living environment as by health care.) And of course even health itself is only one aspect of personal fulfillment, alongside family and friends, travel, recreation, the pursuit of knowledge and experience, and more.
Yet spending on health care, by families and by the government, is crowding out spending on almost everything else. As a nation, we now spend almost 18 percent of our GDP on health care. In 1966, Medicare and Medicaid made up 1 percent of total government spending; now that figure is 20 percent, and quickly rising. Already, the federal government spends eight times as much on health care as it does on education, 12 times what it spends on food aid to children and families, 30 times what it spends on law enforcement, 78 times what it spends on land management and conservation, 87 times the spending on water supply, and 830 times the spending on energy conservation. Education, public safety, environment, infrastructure—all other public priorities are being slowly devoured by the health-care beast.
It’s no different for families. From 2000 to 2008, the U.S. economy grew by $4.4 trillion; of that growth, roughly one out of every four dollars was spent on health care. Household expenditures on health care already exceed those on housing. And health care’s share is growing.
By what mechanism does society determine that an extra, say, $100 billion for health care will make us healthier than even $10 billion for cleaner air or water, or $25 billion for better nutrition, or $5 billion for parks, or $10 billion for recreation, or $50 billion in additional vacation time—or all of those alternatives combined?
The answer is, no mechanism at all. Health care simply keeps gobbling up national resources, seemingly without regard to other societal needs; it’s treated as an island that doesn’t touch or affect the rest of the economy. As new tests and treatments are developed, they are, for the most part, added to our Medicare or commercial insurance policies, no matter what they cost. But of course the money must come from somewhere. If the amount we spend on care had grown only at the general rate of inflation since 1970, annual health-care costs now would be roughly $5,000 less per American—that’s about 10 percent of today’s median income, to invest for the future or to spend on all the other things that contribute to our well-being. To be sure, our society has become wealthier over the years, and we’d naturally want to spend some of this new wealth on more and better health care; but how did we choose to spend this much?
The housing bubble offers some important lessons for health-care policy. The claim that something—whether housing or health care—is an undersupplied social good is commonly used to justify government intervention, and policy makers have long striven to make housing more affordable. But by making housing investments eligible for special tax benefits and subsidized borrowing rates, the government has stimulated not only the construction of more houses but also the willingness of people to borrow and spend more on houses than they otherwise would have. The result is now tragically clear.
As with housing, directing so much of society’s resources to health care is stimulating the provision of vastly more care. Along the way, it’s also distorting demand, raising prices, and making us all poorer by crowding out other, possibly more beneficial, uses for the resources now air-dropped onto the island of health care. Why do we view health care as disconnected from everything else? Why do we spend so much on it? And why, ultimately, do we get such inconsistent results? Any discussion of the ills within the system must begin with a hard look at the tax-advantaged comprehensive-insurance industry at its center.
Health Insurance Isn’t Health Care
How often have you heard a politician say that millions of Americans “have no health care,” when he or she meant they have no health insurance? How has a method of financing health care become synonymous with care itself?
The reason for financing at least some of our health care with an insurance system is obvious. We all worry that a serious illness or an accident might one day require urgent, extensive care, imposing an extreme financial burden on us. In this sense, health-care insurance is just like all other forms of insurance—life, property, liability—where the many who face a risk share the cost incurred by the few who actually suffer a loss.
But health insurance is different from every other type of insurance. Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. We’ve become so used to health insurance that we don’t realize how absurd that is. We can’t imagine paying for gas with our auto-insurance policy, or for our electric bills with our homeowners insurance, but we all assume that our regular checkups and dental cleanings will be covered at least partially by insurance. Most pregnancies are planned, and deliveries are predictable many months in advance, yet they’re financed the same way we finance fixing a car after a wreck—through an insurance claim.
Comprehensive health insurance is such an ingrained element of our thinking, we forget that its rise to dominance is relatively recent. Modern group health insurance was introduced in 1929, and employer-based insurance began to blossom during World War II, when wage freezes prompted employers to expand other benefits as a way of attracting workers. Still, as late as 1954, only a minority of Americans had health insurance. That’s when Congress passed a law making employer contributions to employee health plans tax-deductible without making the resulting benefits taxable to employees. This seemingly minor tax benefit not only encouraged the spread of catastrophic insurance, but had the accidental effect of making employer-funded health insurance the most affordable option (after taxes) for financing pretty much any type of health care. There was nothing natural or inevitable about the way our system developed: employer-based, comprehensive insurance crowded out alternative methods of paying for health-care expenses only because of a poorly considered tax benefit passed half a century ago.
In designing Medicare and Medicaid in 1965, the government essentially adopted this comprehensive-insurance model for its own spending, and by the next year had enrolled nearly 12 percent of the population. And it is no coincidence that the great inflation in health-care costs began soon after. We all believe we need comprehensive health insurance because the cost of care—even routine care—appears too high to bear on our own. But the use of insurance to fund virtually all care is itself a major cause of health care’s high expense.
Insurance is probably the most complex, costly, and distortional method of financing any activity; that’s why it is otherwise used to fund only rare, unexpected, and large costs. Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?
Is this really a big problem for our health-care system? Well, for every two doctors in the U.S., there is now one health-insurance employee—more than 470,000 in total. In 2006, it cost almost $500 per person just to administer health insurance. Much of this enormous cost would simply disappear if we paid routine and predictable health-care expenditures the way we pay for everything else—by ourselves.
The Moral-Hazard Economy
Society’s excess cost from health insurance’s administrative expense pales next to the damage caused by “moral hazard”—the tendency we all have to change our behavior, becoming spendthrifts and otherwise taking less care with our decisions, when someone else is covering the costs. Needless to say, much medical care is unavoidable; we don’t choose to become sick, nor do we seek more treatment than we think we need. Still, hospitals, drug companies, health insurers, and medical-device manufacturers now spend roughly $6 billion a year on advertising. If the demand for health care is purely a response to unavoidable medical need, why do these companies do so much advertising?
Medical ads on TV typically inform the viewer that a specific treatment—a drug, device, surgical procedure—is available for a chronic condition. Many also note that the product or treatment is eligible for Medicare or private-insurance reimbursement. In some cases, the advertiser will offer to help the patient obtain that reimbursement. The key message: you can benefit from this product and pass the bill on to someone else.
Every time you walk into a doctor’s office, it’s implicit that someone else will be paying most or all of your bill; for most of us, that means we give less attention to prices for medical services than we do to prices for anything else. Most physicians, meanwhile, benefit financially from ordering diagnostic tests, doing procedures, and scheduling follow-up appointments. Combine these two features of the system with a third—the informational advantage that extensive training has given physicians over their patients, and the authority that advantage confers—and you have a system where physicians can, to some extent, generate demand at will.
Do they? Well, Medicare spends almost twice as much per patient in Dallas, where there are more doctors and care facilities per resident, as it does in Salem, Oregon, where supply is tighter. Why? Because doctors (particularly specialists) in surplus areas order more tests and treatments per capita, and keep their practices busy. Many studies have shown that the patients in areas like Dallas do not benefit in any measurable way from all this extra care. All of the physicians I know are genuinely dedicated to their patients. But at the margin, all of us are at least subconsciously influenced by our own economic interests. The data are clear: in our current system, physician supply often begets patient demand.
Moral hazard has fostered an accidental collusion between providers benefiting from higher costs and patients who don’t fully bear them. In this environment, trying to control costs is awfully tough. When Medicare cut reimbursement rates in 2005 on chemotherapy and anemia drugs, for instance, it saved almost 20 percent of the previously billed costs. But Medicare’s total cancer-treatment costs actually rose almost immediately. As The New York Times reported, some physicians believed their colleagues simply performed more treatments, particularly higher-profit ones.
Want further evidence of moral hazard? The average insured American and the average uninsured American spend very similar amounts of their own money on health care each year—$654 and $583, respectively. But they spend wildly different amounts of other people’s money—$3,809 and $1,103, respectively. Sometimes the uninsured do not get highly beneficial treatments because they cannot afford them at today’s prices—something any reform must address. But likewise, insured patients often get only marginally beneficial (or even outright unnecessary) care at mind-boggling cost. If it’s true that the insurance system leads us to focus on only our direct share of costs—rather than the total cost to society—it’s not surprising that insured families and uninsured ones would make similar decisions as to how much of their own money to spend on care, but very different decisions on the total amount to consume.
The unfortunate fact is, health-care demand has no natural limit. Our society will always keep creating new treatments to cure previously incurable problems. Some of these will save lives or add productive years to them; many will simply make us more comfortable. That’s all to the good. But the cost of this comfort, and whether it’s really worthwhile, is never calculated—by anyone. For almost all our health-care needs, the current system allows us as consumers to ask providers, “What’s my share?” instead of “How much does this cost?”—a question we ask before buying any other good or service. And the subtle difference between those two questions is costing us all a fortune.
There’s No One Else to Pay the Bill
Perhaps the greatest problem posed by our health-insurance-driven regime is the sense it creates that someone else is actually paying for most of our health care—and that the costs of new benefits can also be borne by someone else. Unfortunately, there is no one else.
For fun, let’s imagine confiscating all the profits of all the famously greedy health-insurance companies. That would pay for four days of health care for all Americans. Let’s add in the profits of the 10 biggest rapacious U.S. drug companies. Another 7 days. Indeed, confiscating all the profits of all American companies, in every industry, wouldn’t cover even five months of our health-care expenses.
Somebody else always seems to be paying for at least part of our health care. But that’s just an illusion. At $2.4 trillion and growing, our nation’s health-care bill is too big to be paid by anyone other than all of us.
In 2007, employer-based health insurance cost, on average, more than $12,000 per family, up 78 percent since 2001. I’ve run several companies and company divisions of various sizes over the course of my career, so I can confidently tell you that raises (and even entry-level hiring) are tightly limited by rising health-care costs. You may think your employer is paying for your health care, but in fact your company’s share of the insurance premium comes out of your potential wage increase. Where else could it come from?
Let’s say you’re a 22-year-old single employee at my company today, starting out at a $30,000 annual salary. Let’s assume you’ll get married in six years, support two children for 20 years, retire at 65, and die at 80. Now let’s make a crazy assumption: insurance premiums, Medicare taxes and premiums, and out-of-pocket costs will grow no faster than your earnings—say, 3 percent a year. By the end of your working days, your annual salary will be up to $107,000. And over your lifetime, you and your employer together will have paid $1.77 million for your family’s health care. $1.77 million! And that’s only after assuming the taming of costs! In recent years, health-care costs have actually grown 2 to 3 percent faster than the economy. If that continues, your 22-year-old self is looking at an additional $2 million or so in expenses over your lifetime—roughly $4 million in total.
Would you have guessed these numbers were so large? If not, you have good cause: only a quarter would be paid by you directly (and much of that after retirement). The rest would be spent by others on your behalf, deducted from your earnings before you received your paycheck. And that’s a big reason why our health-care system is so expensive.
The Government Is Not Good at Cost Reduction
Every proposal for health-care reform has featured some element of cost control to “balance” the inflationary impact of expanding access. Yet it goes without saying that in the big picture, all government efforts to control costs have failed.
Why? One reason is a fixation on prices rather than costs. The government regularly tries to cap costs by limiting the reimbursement rates paid to providers by Medicare and Medicaid, and generally pays much less for each service than private insurers. But as we’ve seen, that can lead providers to perform more services, and to steer patients toward higher-priced, more lightly regulated treatments. The government’s efforts to expand “access” to care while limiting costs are like blowing up a balloon while simultaneously squeezing it. The balloon continues to inflate, but in misshapen form.
Cost control is a feature of decentralized, competitive markets, not of centralized bureaucracy—a matter of incentives, not mandates. What’s more, cost control is dynamic. Even the simplest business faces constant variation in its costs for labor, facilities, and capital; to compete, management must react quickly, efficiently, and, most often, prospectively. By contrast, government bureaucracies set regulations and reimbursement rates through carefully evaluated and broadly applied rules. These bureaucracies first must notice market changes and resource misallocations, and then (sometimes subject to political considerations) issue additional regulations or change reimbursement rates to address each problem retrospectively.
As a result, strange distortions crop up constantly in health care. For example, although the population is rapidly aging, we have few geriatricians—physicians who address the cluster of common patient issues related to aging, often crossing traditional specialty lines. Why? Because under Medicare’s current reimbursement system (which generally pays more to physicians who do lots of tests and procedures), geriatricians typically don’t make much money. If seniors were the true customers, they would likely flock to geriatricians, bidding up their rates—and sending a useful signal to medical-school students. But Medicare is the real customer, and it pays more to specialists in established fields. And so, seniors often end up overusing specialists who are not focused on their specific health needs.
Many reformers believe if we could only adopt a single-payer system, we could deliver health care more cheaply than we do today. The experience of other developed countries suggests that’s true: the government as single payer would have lower administrative costs than private insurers, as well as enormous market clout and the ability to bring down prices, although at the cost of explicitly rationing care.
But even leaving aside the effects of price controls on innovation and customer service, today’s Medicare system should leave us skeptical about the long-term viability of that approach. From 2000 to 2007, despite its market power, Medicare’s hospital and physician reimbursements per enrollee rose by 5.4 percent and 8.5 percent, respectively, per year. As currently structured, Medicare is a Ponzi scheme. The Medicare tax rate has been raised seven times since its enactment, and almost certainly will need to be raised again in the next decade. The Medicare tax contributions and premiums that today’s beneficiaries have paid into the system don’t come close to fully funding their care, which today’s workers subsidize. The subsidy is getting larger even as it becomes more difficult to maintain: next year there will be 3.7 working people for each Medicare beneficiary; if you’re in your mid-40s today, there will be only 2.4 workers to subsidize your care when you hit retirement age. The experience of other rich nations should also make us skeptical. Whatever their histories, nearly all developed countries are now struggling with rapidly rising health-care costs, including those with single-payer systems. From 2000 to 2005, per capita health-care spending in Canada grew by 33 percent, in France by 37 percent, in the U.K. by 47 percent—all comparable to the 40 percent growth experienced by the U.S. in that period. Cost control by way of bureaucratic price controls has its limits.
In 2007, health companies in the Fortune 1,000 earned $71 billion. Of the 52 industries represented on Fortune’s list, pharmaceuticals and medical equipment ranked third and fourth, respectively, in terms of profits as a share of revenue. From 2000 to 2007, the annual profits of America’s top 15 health-insurance companies increased from $3.5 billion to $15 billion.
In competitive markets, high profits serve an important social purpose: encouraging capital to flow to the production of a service not adequately supplied. But as long as our government shovels ever-greater resources into health care with one hand, while with the other restricting competition that would ensure those resources are used efficiently, sustained high profits will be the rule.
Health care is an exceptionally heavily regulated industry. Health-insurance companies are regulated by states, which limits interstate competition. And many of the materials, machines, and even software programs used by health-care facilities must be licensed by state or federal authorities, or approved for use by Medicare; these requirements form large barriers to entry for both new facilities and new vendors that could equip and supply them.
Many health-care regulations are justified as safety precautions. But many also result from attempts to redress the distortions that our system of financing health care has created. And whatever their purpose, almost all of these regulations can be shaped over time by the powerful institutions that dominate the health-care landscape, and that are often looking to protect themselves from competition.
Take the ongoing battle between large integrated hospitals and specialty clinics (for cardiac surgery, orthopedics, maternity, etc.). The economic threat posed by these facilities is well illustrated by a recent battle in Loma Linda, California. When a group of doctors proposed a 28-bed private specialty facility, the local hospitals protested to the city council that it was unnecessary, and launched a publicity campaign to try to block it; the council backed the facility anyway. So the nonprofit Loma Linda University Medical Center simply bought the new facility for $80 million in 2008. Traditional hospitals got Congress to include an 18-month moratorium on new specialty hospitals in the 2003 Medicare law, and a second six-month ban in 2005.
The hospitals’ argument has some merit: less complicated surgical cases (the kind specialty clinics typically take on) tend to be more profitable than complex surgeries and nonsurgical admissions. Without those profitable cases, hospitals can’t subsidize the cases on which they lose money. But why are simple surgeries more profitable? Because of the nonmarket methods by which Medicare sets prices.
The net effect of the endless layers of health-care regulation is to stifle competition in the classic economic sense. What we have instead is a noncompetitive system where services and reimbursement are negotiated above consumers’ heads by large private and government institutions. And the primary goal of any large noncompetitive institution is not cost control or product innovation or customer service: it’s maintenance of the status quo.