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January 9, 2003

The cost of health care: How much and who pays?

Three health care industry experts agree that the cost of health care in the United States is “out of control.”

Contributing factors to an overall increase of 13.7 percent in health care premiums nationally between 2001 and 2002 alone include more than 40 million uninsured Americans, the growing cost of medical research and high-tech health care, staggering malpractice awards and premiums, rising provider expenses, higher drug costs, stiffened government regulations and increased consumer demand.

Using terms such as chaotic, complicated, fragmented, misaligned, unevenly distributed, irrational and bureaucratic, the head of the largest health care system in western Pennsylvania, the dean of the region’s only medical school and a prominent health care economist lambasted the current U.S. health care system as a runaway train, a national problem with no clear-cut solution.

The health care experts spoke Dec. 5 on “The Cost of Health Care — How Much and Who Pays?” at the concluding session of Pitt’s fourth annual Mini-Medical School, a series of presentations, sponsored by the School of Medicine, that provide the general public with information on current health care issues and medical topics.

Judith R. Lave, professor and interim chair, Department of Health Policy and Management, Graduate School of Public Health, addressed “Issues Related to the Cost of Health Care”; Arthur S. Levine, senior vice chancellor for Health Sciences and dean of Pitt’s School of Medicine, spoke on “Special Health Care Cost Issues Related to the Academic Medical Center,” and Jeffrey A. Romoff, president of UPMC Health System, talked about “Perspectives on Addressing Health Care Issues: Pittsburgh as a National Model.”

Issues related to the cost of health care

“In a simple world, we would go to doctors and they would give us medical services and we would pay them money,” Judith R. Lave said. “But, we have developed a system that relies on third parties: government agencies like Medicare and Medicaid; insurance companies like Highmark and UPMC Health Plan, and providers.”

A large part of the problem stems from having no standard health plan, she said. “Health plans differ with respect to the services, technologies and drugs they cover, the providers they cover, the terms under which services are accessible and a whole host of methods for paying,” Lave said.

For example, employers pay premiums, general taxes and payroll taxes; individuals pay premiums and out-of-pocket charges and contribute through state lotteries.

Who pays for the U.S. health care pie? “The government pays for 45 percent; private insurance pays 34 percent; out of pocket is 15 percent, with 6 percent coming from a myriad of other sources,” Lave said.

“What does this mean? Let’s say Presby has six or seven appendectomy patients on a particular day. One will pay a percentage of surgery costs; one will pay a per diem rate; one covered by Medicaid will pay considerably more than those with other plans, and one will pay nothing.

“This is true across the board; each plan has its own way to do business.”

Expenditures for U.S. health care in 2000, the latest available numbers show, totaled $1.3 trillion, averaging $4,637 per capita, Lave said. “I don’t need to tell you that that money was not evenly distributed,” she said. “In fact, 5 percent of the population accounts for some 60 percent of expenditures.”

(By comparison, she said, Switzerland, which has the second highest per capita expenditure rate, spent $2,853 per person in 2000.)

The percentage of increase of health care spending in the share of the gross domestic product of the economy continues to rise — 6.9 percent between 1999 and 2000 — but did have a slower growth period in the years 1995-1997 (a 3.9 percent increase), Lave pointed out.

“Most of this is attributed to managed care, which introduced aggressive competition for business, primarily with employers,” and drove down costs while expanding benefits, she said.

But managed care organizations led to unwanted controls. “Can you see a specialist? Can you have a particular test? Can you be hospitalized? Which drugs are covered? All these are efforts to control costs,” to the detriment of providing health care.

There are complicated repercussions, including for health care services that are not covered by certain plans, such as physical therapy, mammograms and obesity surgery.

Now the U.S. has reverted to a steep upward spiral of rising health care costs because of major changes in advertising that stimulate the demand for services; rapid advances in technology, with more and better products; an increased range of illnesses that can be treated; the availability of more, and more expensive, drugs; cost of labor increases; inflation, and escalating malpractice insurance costs, among other reasons, all “in a political environment that doesn’t want to raise taxes, but still wants to put more of the cost-paying on the federal government,” Lave said.

“Where does this take us? If costs continue going up, premiums have to go up to pay for these services, or, you have to decrease the benefits.” There’s no middle ground, she said.

Special issues related to the academic medical center

“Health care costs for medical research and medical education is not a crisis, it’s a disaster,” according to Pitt senior vice chancellor for Health Sciences Arthur Levine.

In 1980, health care represented 7-8 percent of the gross domestic product (GDP), Levine said. Extending the current trend to 2020, “We can expect to be paying 20 percent of our GDP or $20 trillion, which is unimaginable.”

The situation is particularly dire in the country’s academic medical centers, Levine said. The cost of running a hospital that does research and teaching is about a third greater than a community hospital, partly because 50 percent of American citizens without health insurance are treated in the 6 percent of hospitals that do teaching and research, where the non-insured are rarely, if ever, turned away.

“The 42 million of our citizens without health insurance get more sick and stay sicker longer, with less access to health care,” Levine said.

“The difference is usually compensated for by research grants, NIH grants, medical student tuition, state appropriations and philanthropy.”

But in the current health care climate, Levine said:

• Clinical revenue has been declining, in part because reimbursement for the insured is down. “NIH appropriations are now flattening, after nearly doubling over the last five years from about $13.5 billion to $27 billion. But now they’re going down to what the Bush administration projects as about 4 percent increase per year, certainly nothing like the increases we’ve been experiencing, despite the fact that we have more scientific opportunity to treat illness now than ever.”

• Tuition for medical students is already too high.

• State appropriations are low, particularly in Pennsylvania, which is the second worst state in the country with regard to how much the state invests in education, including medical education, and

• The current economic slump has reduced philanthropy.

Factors driving up costs, according to Levine, include:

• The rapid increase in costly technology and drug development. “Consider pharmaceuticals: We spend $.5 billion for one new drug development.”

• Insurance overhead, including marketing and consumer advertising.

• Overemphasis on end-of-life care. “A large fraction of health care costs are spent in the last few weeks of life. If everybody made a living will, it would solve one problem overnight,” Levine maintained. “With the money we would save from end-of-life care for those who don’t want it, we could pay for health insurance for the 42 million Americans who have no health insurance.”

• Malpractice premiums and awards. “Malpractice awards and the consequent premiums are outrageous. Awards can be disproportionately high; there is no limit on malpractice premiums, especially in Pennsylvania, and importantly, there is no discount for academic physicians,” he said.

“Here at the School of Medicine we have some wonderful physicians, some of the world’s leading experts, who perhaps want to see patients a couple days a week, and a couple days work on research or teaching medical students. They have to pay the same premiums as if they worked in private practice.”

• The structure of the health care system. “Out of every dollar spent on health care, 50 cents goes for overhead, it goes for marketing and profit, and most of all, it goes to the huge army of lawyers and bureaucrats who deny your claims; and, at the same time, hospital systems have to have an equal bureaucracy to fight the denial of claims.”

• Failure to focus on preventable illnesses. “About 75 percent of all health care costs go toward the 125 million Americans with often preventable chronic illnesses: illnesses due to obesity, due to smoking, due to drinking, due to violence.”

• Non-evidence based treatment. “Doctors seem compelled to do something, even when there’s nothing to do, and patients demand that their doctors do something, even when there’s nothing based in science to do,” Levine said.

Levine suggested some proposals that might reduce the overall health care cost dilemma.

• Introduce a single payer national insurance plan for every American. “When I talked about this three years ago, I was called a socialist. Three years later, I’m probably seen as a pragmatist or a realist, rather than a socialist.”

• Support socially responsible, non-profit, regionally integrated health care systems.

• Regulate malpractice awards and premiums.

• Increase the focus on prevention, and decrease the focus on end-of-life care.

• Provide loan forgiveness for medical graduates willing to serve the nation’s most needy. “Eighty-five percent of our medical students were in debt on graduation day,” with an average debt of $125,000. “Certainly this limits the choice of specialties. Nobody with that kind of debt is going to become a pediatrician or a family practitioner, and certainly nobody will become a researcher. I would love to be able not to charge tuition in exchange for their going to inner cities or rural communities in America, which would be an ideal way to abort these phenomenal debts that prevent physicians from thinking about a research career or a career in primary care.”

• Train more physician extenders. “Physician assistants and other health care professionals can address many health care needs.”

• Build collaboration. “This is not a time for asymmetry. Physicians, insurers, regulators, hospitals and patients are all members of the same team,” Levine said.

“These are the best of times, these are the worst of times,” said Levine, quoting Charles Dickens. “The best of times because we’ve learned more about human biology and the scientific basis of disease in the last 15 years than we have in the entire history of science theretofore. The worst of times because the delivery of health care and its economics are deteriorating.”

Perspectives on addressing health care issues: Pittsburgh as a national model

“We talk about the health care delivery system as being complex, fragmented and frequently irrational,” UPMC Health System President Jeffrey Romoff said. “These are the polite words. In fact, no one in their right mind would invent the American health care system if they actually had a concern about health care. It evolved and we’re in a position of re-inventing it.”

Romoff said that the evolution of the current system resulted from two clashing approaches.

“Really, there are two models, with conflicting notions of what we want from our health system,” he said. “The first one is the classic social welfare model: Focus on needy populations, the poor and those who are old.

“In the 1960s, ’70s and ’80s, in a era when providers, that is, hospitals and physicians, were dominant, there was a concerted effort to protect the weak and as a result we became over-providing and became inefficient and we kept eating up a growing proportion of the gross national product.”

The second is the competitive model, which rose to prominence in the 1990s, Romoff said. “Except, competition is an illusion. Under the competitive model, no one buyer and no one seller can control the market. Under marketplace dynamics, you get to a price that’s kind of fair, because there are lot of people who want to sell you health care, and lot of people who want to buy health care, and it evens itself out,” Romoff said.

Unfortunately, that model is based on false premises, he said. “It assumes an intelligent consumer; it assumes an elastic market; it certainly doesn’t assume the existence of that wonderful entity known as a third-party payer that mucks up the whole interaction between the forces.”

He said America is full of examples of the failed competitive model. “If you look at any industry — not just the health care industry, but the steel industry or the banking industry or Wal-Mart or Microsoft — it starts out competitive but then someone wins and someone loses. They win for some good reasons: They have better technology, they have better marketing, better products, they can deliver products less expensively.

“But what happens to the losers? They go away or they get bought out. What happens to the winners? They get bigger and bigger.”

At that point true competition disappears, he said.

“For anyone to get into that market they have to have a large chunk of capital to compete with the winners, who won the old-fashioned competitive way. The problem with the old-fashioned competitive way is that there is no new-fashioned competitive future. That’s the problem with it: It is self-liquidating.”

The competitive model gained strength in the 1990s because there was a push to control an inefficient social welfare health care delivery system.

“It was not the desire for someone to control the system that was wrong; it just was the wrong place to look,” Romoff said. “No one would ever believe that your life insurance agent should actually advise you on your life decisions. No one believes that your auto insurance provider has the capacity to actually fix your car. Why do we believe that a health insurer, which is basically the same thing as an auto insurer, that is, a sales force taking actuarial data and marketing and packaging it, has the capacity to make health care decisions? This is why none of these health insurance packages are consistent with one another.”

Today, the health system is so complicated and convoluted, Romoff said, that only one of two things can happen.

“One is to continue the amalgamation — and UPMC is the classic example of that amalgamation. There’ll be winners and losers and there are going to be a bunch of big guys. Just like there are three automakers left, one Microsoft, three steel companies, et cetera.”

The other choice is to develop a socially responsible system that is subjected to genuine regulation. “Someone, whether it’s government or a private utility model, needs to oversee health care and understand that’s it’s not going to get much further along in this chaotic, allegedly self-regulated way, which actually is not self-regulated at all.”

Romoff maintained that UPMC Health System, as reflected in its mission and commitment to the economy of the region, is doing the best it can under the current circumstances of health care delivery.

As the largest employer in the region, with 36,000 employees and 20 affiliated hospitals, UPMC helps drive economic development while serving a major portion of the regional population’s health care needs, Romoff said.

“But it doesn’t make much sense to have something that’s so scientifically based, so quality based without any parameters for measuring, without monitoring quality and security, other than our faith in exceptionally well-intended, exceptionally well-educated people called our physicians and our health care providers. I don’t think that’s enough to drive a $1.3 billion industry and oversee something we hold sacred such as our health,” he said.

Filed under: Feature,Volume 35 Issue 9

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