Who Us? Providers and the Cost of Care

I came home the other day to a local paper, the News and Observer, sitting on my desk.  “Major Hospitals Pile Up The Cash” blazed across the front page, encircled by pen with a bold exclamation point written to the side.  The article highlighted the inflated costs of major North Carolina hospital networks – more than 10 percent above the national average. 

Large providers leverage their local market share to increase prices without adding any new value in caring for patients.  These aggressive strategies are done while maintaining tax-exemption from their non-profit status.  The higher costs are passed to insurance companies that, after tacking on a profit margin, pass the costs to their patients, the community members for whom the hospitals supposedly exist to serve.

U.S. healthcare spending is at a concerning level.  It is common for patients and providers alike to point to the insurance industry as the villain, insinuating that the implicit self-interest of a for-profit company must be driving costs skyward.  Though third-party payers are a part of the problem, their role is likely that of an enabler rather than a driver.

The complexity of insurance in the U.S. shields consumers and physicians from the horrific levels of spending occurring in the system.  However, payers are probably one of the few major stakeholders that are attempting to restrain healthcare spending.  Every charge from a physician or hospital threatens to eat into their profits.  It is a strange twist to see that in some contexts, our beloved hospitals are driving costs up and our much despised insurers may be fighting to keep costs down.

The Organization for Economic Cooperation and Development (OECD) is a collection of the world’s most industrialized nations; many of the members have comparable economic health to the U.S. and the group provides an appropriate cohort to compare benchmarks for the performance of given industries, such as healthcare.

You may ask yourself “compared to OECD countries, do we really spend that much on healthcare?” Unfortunately, yes we do.  In 2000, the OECD median spending on healthcare per capita was $1,983, the U.S. spent $4,631 – 137% greater than the median and 44% more than the next highest country, Swizterland.  Not only are we spending more in absolute terms, but relatively as well; a greater part of our economy is dedicated to healthcare, 13% of GDP in 2000 compared to the OECD median of 8.0%.¹  These trends have only worsened over time.

In 2000, analysts noted a pattern of convergence.  Countries that were spending more than average on healthcare had lower growth rates in healthcare spending, and those spending less than average had higher spending growth rates.   A global, per-capita price to healthcare was emerging.  The U.S. was the only country that defied this pattern; though it had the highest per-capita cost, its growth rate was still above the OECD median.

The trends from that time have changed very little.  The U.S. remains the most costly system in the world and we have yet to significantly shift the growth curve of spending.  This wouldn’t be a major problem if we received appropriate value for the money spent.  It seems, however, that is not the case. The U.S. averaged 118 hospital admissions per 1000 patients, the average length of stay was 5.9 days, and the acute care hospital days per capita was 0.7;  all of these user indicators were less than the OECD medians: 154 admissions, 6.4 days, and 1.0 acute care days respectively.  We are paying more for less care.

Though inefficiency and higher costs of inputs, such as supplies and labor, play a part, providers are finding ways to increase prices without changing the services they provide.  This brings us full circle to the sensational news headline on my desk; large hospital networks can dominate a geographic region, effectively monopolizing care.  Healthcare is unique in that it must be provided locally – care can never be outsourced abroad or even to another state.  Large nation-wide insurance companies must accept higher rates from locally dominant networks.

It sounds a bit theoretical and cerebral, but the concepts do play out in the real world; the price of a given procedure is significantly associated with the size of the health network offering the procedure.  The News and Observer, in their recent expose, reported that a local hospital charges 3 to 10 times the cost of many common procedures, basically because they can.

The current uncertainty about healthcare reform is driving hospitals to strategically grow, acquiring surrounding physician practices.  As they increase in size, so do they in market leverage.  Physician groups join large networks to partake in the bargaining power – their reimbursements increase with renegotiated contracts but nothing of value is added.  The increased costs are then passed to patients, through insurance companies.

As reform continues, we can expect a heavy focus on the insurance industry; it is already the case with the Supreme Court decision underway.  Many providers will likely support this focus, claiming that reforming insurance is essential to cost control while simultaneously asserting that the stance is in the best interest of the communities they serve.

We, as consumers of healthcare, should be aware that a conflict of interest exists.  Providers historically have charged as much as they can get away with.  It is visible both in local examples and comparative international trends, we should not expect otherwise in the future.  If our political dialogue ignores the  role of providers in the pricing of care, a significant driver to our rising national spending will be preserved.

That is all for now.  Hopefully I have left your emotional state somewhere between hope, fear, and a belief of the infinite.  Until next time…

References

1. Anderson GF, Reinhardt UE, Hussey PS, Petrosyan V. It’s the prices, stupid: Why the united states is so different from other countries. Health Aff 2003;22(3):89-105.