Currently, the U.S. spends about 18% of GDP or close to $4 trillion a year on healthcare. That is about $11,000 per person living in the U.S. Our neighbors to the north, Canada, spend about $5,000 per person. So, what do we get for all that spending? It surely must be the best care in the world.
According to the Commonwealth Fund the U.S. has the lowest life expectancy among the ten highest income OECD countries. We have the highest chronic disease burden and our obesity rates are twice the average of other OECD countries. We also have the highest number of hospitalizations from preventable causes and the highest rate of avoidable deaths.
To me that sure sounds like we spend a lot of money on healthcare but are not getting a lot of value in return. So how did we get here? Why is our healthcare system more expensive that other high-income countries and how did we build a system where health insurance is tied to our employment? Why do we not have a system like most other countries where our healthcare services are guaranteed by the government?
The answer to that is linked to WW II, but let’s start at the beginning. The first healthcare plan was established in 1929 in Texas when Blue Cross was created to allow teachers to pay a hospital 50 cents a month so that when they went to the hospital later to have children, they did not have to pay for the cost of their care. Blue Shield was later created to cover physician expenses. Fast forward to the late 1940s when the U.S was converting its war economy to a peacetime economy. During the war there were very few consumer goods so people saved much of their income. Once the war ended, consumers wanted to spend their savings. At the same time, there was a shortage of workers to manufacture the goods people wanted to buy. To prevent runaway inflation, the government instituted wage and price controls. As companies could not keep or attract workers by increasing wages, they expanded the benefits they offered. One of those benefits was healthcare insurance. During the Truman administration, attempts were made to pass a universal healthcare law, but the effort failed in Congress.
Employee healthcare insurance did not become a significant cost for companies until the 1980s. It was only then that expenditures started to make a meaningful dent in corporate profits. This is when schemes emerged to control costs. These included health maintenance organizations that limited where a person could receive care, pre-authorization requirements for certain expensive services, and deductibles and co-payments that shifted some costs from the employer to the employee.
So why did costs start to rise so quickly in the past few decades? There are many reasons including the technological advances in medical devices, breakthroughs in drug development, and the aging population. When I was in medical school computer tomography or CT scans were the latest technology while MRI scanners were experimental. Today, MRI machines are everywhere, even in privately held imaging centers. The original mapping of the human genetic code cost over $1 bil. Today it can be done for less than $1,000. Medical advances are occurring at an increasingly rapid pace. For example, we developed messenger RNA vaccines delivered in polysaccharide containers developed in less than a year that are safe and over 90% effective. And the first vaccine prototype was built by a computer in just 2 weeks after receiving a data file containing the 30,000 base pair genetic code of the coronavirus, something the Chinese published on the Internet in January 2020. Each medical advance is associated with a large investment in R&D which companies need to recoup from the sale of those new products. But just because a product is new, does not mean it is better. Yet we jump to these new products and modalities not paying enough attention to the incremental value compared to the incremental increase in cost.
And with all this technology, we are unable to produce healthcare outcomes that match all the money we spend on care. There are several reasons for this. First, no on knows what it actually costs to provide a particular service. Organizations do not know what it costs them to do hip replacement surgery, treat a heart attack, or set a broken leg. So how is an organization able to evaluate whether they are efficiently delivering care or being wasteful? Why does the cost of hip replacement surgery vary by more than 4X around the country with no positive correlation between price and patient outcome? In fact, a higher price often is associated with a worse outcome.
The U.S. is the only country, other than New Zealand, that allows the advertising of pharmaceuticals to consumers. Is it not surprising that more prescriptions are written per person in the U.S. than anywhere else in the world. Patients can be quite persuasive in asking for drugs they see on television, in some cases where they do not even have the illness the drug is used for. Care variation was documented by Dr. John Wennberg at Dartmouth more than 40 years ago. And that variation in care across hospitals, clinics, and regions continues to this day. We are all not practicing medicine using the best available medical knowledge that delivers the best outcomes for patients.
And what about the incentives? For the most part, a patient’s out-of-pocket care costs, their co-pay and deductible, are relatively small. Most of the costs fall to the employer through premiums set by their insurance company. The prices for services are very hard to find. Since patients are not paying the bulk of the cost of their care and they are unable to easily compare prices, they choose service providers for reasons other than price. These include convenience, reputation, and those their physician recommends. In addition, as most providers are paid fee-for-service, they have an incentive to err on the side of recommending and providing more services than are necessary.
Now, I am not suggesting that providers intentionally order tests and procedures to increase their revenue, although there are cases where there were schemes to do exactly that, but an incentive is an incentive and they mostly influence us without our knowing it. That is why most hospitals do not allow pharmaceutical and other vendors to give staff members the most trivial items such as a pen, pad, or pizza lunch. They do not want their staff to make decisions that may be influenced by acceptance of gifts.
I have described for you an overly costly healthcare system where the value obtained from all the money spent on care is considerably less than it should be. How do we fix that? But before I share with you my thoughts on the potential we have to change healthcare around the world for the better, I need to share with you a bit about healthcare information technology and the vendors in that space. And that will be shared in a separate post. Thanks for your time and reach out if you have any questions or suggestions.