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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Cash Cows and Health Care Quality

With so much of the fight over health care reform now coming down to issues of health care cost containment, it’s a pretty good time to take a look at the available evidence about where our system seems to “over-price” care as opposed to other countries.
TDS Co-Editor William Galston did a fascinating piece for The New Republic last week detailing the results of a McKinsey & Company study comparing health care spending patterns in the U.S. to those of other OECD (i.e., advanced) countries. Unsurprisingly, the U.S. has higher costs (about $2,000 per capita higher each year) and poorer health outcomes, and not because we are unhealthier to begin with.
One of the differential costs factors is pretty well known: Rx drug prices in the U.S. are on average 50 percent higher than in other OECD countries, and it’s attributable to marketing expenditures, not just R&D.
But two other factors are less well known:

* Much of the spending gap is attributable to the soaring use of out-patient services, which generate much higher profit margins than do hospital-based services. The ability of physicians to control the number of procedures patients receive drives up costs, and physicians’ ownership of testing facilities and ambulatory surgical clinics give them an incentive to drive up utilization….
* Generous physician compensation also contributes to higher costs. On average, U.S. general physicians earn 4.1 times per capita GDP, compared with the OECD average of 2.8 times. For specialists, the gap was even greater: 6.5 times per capita GDP, compared with 3.9 times elsewhere. McKinsey finds that higher than average physician incomes added $64 billion to total U.S. health care expenditures in 2006.

This has two big policy implications: the first is that there is indeed a tension between cost containment and the well-known desire of Americans to let physicians call most of the shots in terms of tests and treatments. The second is that the President is right in claiming that there are often less expensive ways of delivering quality health care, and that insisting on them is not, as conservatives so often argue, a form of “rationing.”
Still another important McKinsey finding is that cost-shifting from public to private insurance programs is in fact a significant problem in the growth of private health care costs. This is important in terms of proposed changes in Medicare and Medicaid reimbursement policies, and in the design of any “public option.”
Here’s Galston’s bottom line:

[W]e must look for ways of cutting the link between physicians’ earnings and the multiplication of high-cost procedures. Eliminating the loopholes in laws preventing physicians from owning test facilities would be a good start, as would reducing the compensation for high-tech tests to more reasonable levels. In the long run, fee-for-service is an unsustainable model of physician compensation, and health insurance reform should create incentives to move away from it.
We also need ways of exposing consumers more fully to the cost of the services they want without discouraging them from using the services they need. One strategy is to focus insurance coverage more on truly insurable events–the big-ticket medical events that can disrupt lives and bankrupt families–and less on routine medical expenditures and elective procedures. It should be possible to protect average families from spending an unaffordable share of their income on health care without entirely eliminating their awareness of trade-offs and costs.

Unfortunately, identifying unnecessary costs and then overcoming the institutional resistance to steps to reign them in, tough as that is, may not be enough in the current political climate. There’s also the problem of getting official recognition of costs savings–particularly by the Congressional Budget Office, which refuses to “score” some of the most fundamental structural changes as big cost-savers because, well, they haven’t been tried before.
And that’s why despite the understandable obsession with cost containment and the associated issue of covering the uninsured, we must continue paying attention to the third item on the health care reform agenda aside from cost and acces–health care quality. What we are buying for our dollars is as important as the price, and may well determine whether universal health coverage can achieve a more effective health care system both for individuals and for the country. And if we don’t pay attention to quality, then health care reform could be caught up in a destructive triage between cost and access factors that pit the insured against the uninsured with no common higher ground.

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