We cannot continue to spend at the current rate and yet the goal is to insure the 40 million uninsured while remaining budget neutral over time. The only way to do this is to reduce per capita spending while increasing the number of people covered.
How do we achieve this goal? There is really only one way. We must narrow practice variation. Practice variation between doctors is absolutely huge. The data are compelling. Even small changes in the degree of practice variation have the potential to save hundreds of billions. I refer readers to an article in the New England Journal of Medicine by Elliott Fisher, et al (360:9, 849, February 26, 2009), entitled Slowing the Growth of Health Care Costs – Lessons from Regional Variation. This short paper gives examples derived from the Dartmouth Atlas on Health (which I have referred to in the past and which is absolutely fascinating reading concerning Medicare practice variation nationally) that make it clear that doctors are major determinants of healthcare costs. We order the tests, we order the drugs, we put people in the hospital and we determine where they go in the hospital and, to the chagrin of hospital administrators, we determine how long they stay.
Using Medicare as an example, at our current rate of spending growth in healthcare it is estimated that Medicare will be in the hole by about $660 billion by 2023. If per capita growth could be decreased from the national average of 3.5% to 2.4% (just a measly 1.1%), Medicare would have a $758 billion surplus. Just a measly 1.1%.
Now for some examples. Per capita inflation-adjusted Medicare spending in Miami over the period 1992 to 2006 grew at a rate of 5% annually. In San Francisco it grew at a rate of 2.4% (2.3% in Salem, Oregon). In Manhattan, the total reimbursement rate for noncapitated Medicare enrollees was $12,114 per patient in 2006. In Minneapolis it was $6,705.
It is noted that three regions of the country (Boston, San Francisco and East Long Island) started out with nearly identical per capita spending but their expenditures grew at markedly different rates – 2.4% in San Francisco, 3% in Boston and 4% in East Long Island. Although these differences appear modest, by 2006 per capita spending in East Long Island was $2,500 more annually than in San Francisco, with East Long Island representing about $1 billion dollars more from this region alone.
Are the patients sicker in East Long Island? Hardly. There is no evidence that health is deteriorating faster in Miami than in Salem. So what’s the difference? People point to “technology” as being one of the biggest sources of costs in American healthcare. But “technology” does not account for these regional differences. Residents of all U.S. regions have access to the same technology and it is implausible that physicians in regions with lower expenditures are consciously denying their patients needed care. In fact, Fisher and colleagues note that the evidence suggests that the quality of care and health outcomes are better in lower spending regions.
So what is the answer? It is physician behavior. It is how physicians respond to the availability of technology, capital and other resources in the context of the fee-for-service payment system. Physicians in the higher cost areas schedule more visits, order more tests, get more consults and admit more patients to the hospital. Medicine does not fit the supply and demand model of modern day capitalism. Normally when there is lots of competition, prices go down. Not in medicine. In medicine payment remains the same and is not sensitive to supply or demand.
And normally when there are a lot of businesses providing the same service, there are fewer customers per business. Not in medicine. Although doctors may have fewer patients in an area saturated with providers, they don’t necessarily have fewer visits because doctors determine the frequency of revisits. Plus, the literature indicates there is huge variability in what they consider the appropriate frequency for revisits when given identical patient scenarios. And do patients shop prices to choose medical providers? No way; it is impossible. Bottom line: medicine is largely immune to the laws of supply and demand and other economic drivers.
So what’s the solution? It is simple, yet hard. Doctors in high cost areas need to learn to practice like doctors in low cost areas. Are doctors in low cost areas beating their chests and bemoaning the inability to care for their patients with the latest technology? Not at all. But doctors in high cost areas are largely clueless to the practice patterns of physicians in low cost areas and are likely to whine if asked to tighten their belts and learn to be more cost-effective. The good thing, mathematically speaking, is that this will result in only half the doctors in the country complaining as they are prodded to emulate the practices of their more cost-effective cousins.
To accomplish this narrowing in practice variation, doctors will need help (and, particularly, motivation). Payers and policymakers will need to get involved to facilitate and stimulate the information transfer between doctors. Based on research by Foster and colleagues, it’s advised that integrated delivery systems that provide strong support to clinicians and team-based care management offer great promise for improving quality and lowering costs.
Given that most physicians practice within local referral networks around one or more hospitals, it is suggested that they could form local integrated delivery systems with little disruption of their practice. Legal barriers to collaboration would need to be removed by policymakers and incentives to create these systems would drive their formation.
Fundamentally, Medicare would need to move away from a solely volume-based payment system (since doctors are the drivers of their volumes) and other forms of payment would need to be incorporated (such as partial capitation, bundled payments or shared savings). Hospitals and doctors lose money when they improve care in ways that result in fewer admissions, and they lose market share when they don’t keep pace in the local “medical arms race” (does everyone need a 64-slice CT?). In the current system there are no rewards for collaboration, coordination or conservative practice. This must change.
The bottom line is this: much can be done to save money yet provide patients with high quality, technologically advanced care without rationing (or worse yet, having some government “board” telling you what to do). There is so much waste in the current system largely resulting from physician practice variation that the opportunities are huge.
And, should they choose, doctors are in a position to take the lead. The AMA and other physician organizations can initiate (well, that may be asking a lot) and support incentives that will facilitate the needed changes outlined above. Unfortunately, organized medicine is reactionary more often than not. “What are they (payors) making us do now?” is the typical response. What’s needed is for physicians to take the leadership role that their patients expect of them. The status quo is not an option. And if doctors won’t act, the payors will. Because ultimately, the payors have the power. That is one rule of economics that does apply even to the practice of medicine.
5 Comments
Thanks so much for this excellent article, and the reference to Fisher’s work. Something has to be done about this issue, but I am sorely pessimistic. All the incentives are in place to perpetuate this situation. Health care reform MUST address these issues to stop the runaway increases in health care costs.
I completely agree. However, I do wonder what the malpractice environment is like in these “high cost” areas? Has the culture to order more / admit more / consult more / revisit more formed out of a more difficult malpractice climate? Also, what about the patient population? I work for a group that staffs 5 emergency departments in areas with VERY different patients. Patient reliability, comorbidities, expectations, and area resources significantly impacts my work-up. Changing the healthcare “culture” of a community is going to be the rate-limiting step in my opinion.
The article makes the good point that doctors currently have little financial incentive to practice smarter, more efficient medicine. It strays badly when it makes sweeping statements that basic laws of economics don’t apply to medicine. If the supply of doctors increases while the demand of patients stays the same or decreases, common sense tells us that the prices of medical services will fall. We see that occurring in elective procedures markets, such as the one for laser vision correction. As patients become less insulated from the actual cost of their medical care, they and their agents, their insurance companies, will demand more efficient care. Doctors will have to respond or see the demand for their services drop as their more efficient competitors (the “supply”) lower their prices.
With the advent of third party payors, the relationship between doctor and patient was drastically altered.
Now, the politics of the day are machinating toward a single payor with final authority over all aspects of medical care. We know from experience the efficacy of centralized bureacracies, especially large governmental bureacracies.
My concern is not only with the quality of the fruit such an effort will produce, but also with the impact on the physician / patient relationship. Something is lost when a physician loses his/her autonomy and becomes an agent of the collective. It is that autonomy, that desire to do what is right despite the direction of the prevailing winds, that makes a good physician. What is ‘right’ is hard to quantify, but it is the most important part of medical care. We will miss it when it is gone, and no amount of scientific data will be able to help us then.
Rick – you are ignoring the elephantin the room – TORT REFORM! If it were more universal, ALL docs would be ordering fewer tests ! Look at rwegional variation in states that have damage caps. And I always hear tons of lectures on “evidence based medicine”, but when docs speak up at these conferences, NOBODY practices it – we all practice defensive medicine ! When will the politicians come up with some proposal that includes this ? (Don’t hold your breath…..)