The high cost of health care: getting past denial

      

Jonathan S. Skinner, Elliott S. Fisher, and Jonathan Sutherland of the Dartmouth Atlas Project at the Dartmouth Institute for Health Policy and Clinical Practice at Dartmouth College write about the opportunities to pay for health care reform by reducing unnecessary spending.

The President’s recent speech called on Congress to move forward with much needed health care reform.  He wisely argued that reducing the waste in our current health care system can help provide the savings needed to cover the costs of expanding coverage to the uninsured.  This might appear to be obvious – many studies (including this one from the Commonwealth Fund) have shown the U.S. spends twice as much as other countries on health care, yet often lags behind in quality.  Furthermore, a number of studies from the Dartmouth Atlas group (here and here) have pointed to the dramatic differences in both levels of health care spending -- $16,351 per Medicare beneficiary during 2006 in Miami, compared to $6,604 in Richmond Virginia – and the apparent lack of better outcomes in these higher cost regions.

But not everyone is convinced.  One recent critic today even claimed that all regional variations in spending can be justified by medical need and poverty: The reason why Medicare spends so much more for patients in Newark, N.J. than it does for patients at the Mayo Clinic in Minnesota is because people in Newark are poorer and sicker.   In a recent article published online in the New England Journal of Medicine, we test this hypothesis rigorously using a large nationally representative sample of more than 15,000 Medicare enrollees.  By using individual data reporting income, health status, price-adjusted Medicare expenditures (to account for the fact that cost-of-living in New York is greater than in Oklahoma City), and other factors, we sought to gain the most accurate picture of what explains regional variations in spending – and more importantly, what doesn’t.

We found that spending is six times higher for people who say they are in poor health ($21,064) compared to those in excellent health ($3,469).  In other words, health status does explain Medicare expenditures across individuals.  Poverty also matters, but not as much: Spending is $9,841 for people in the lowest income group (with income less than $10,000) compared to $5,814 for those in the highest income group (with income above $50,000). 

The key finding of the article, however, is that these individual factors don’t matter much when it comes to explaining differences across regions in overall health care expenditures.  For example, poverty explains less than one-tenth of the total $2,300 per capita gap in spending for the highest cost regions compared to the lowest cost regions.  Health status is somewhat more important, accounting for nearly 20 percent of the difference, which again points to why it is important in any reform to compensate hospitals for patients that are truly sicker.  But this leaves 70 percent of the total gap in spending between the highest and lowest cost regions unexplained – meaning that there is still plenty of potential savings in the U.S. health care system to help pay for health care reform, spending that has nothing to do with health, poverty or urban/rural status. 

So why are so many in the health care industry resistant to the idea of capturing savings available in their own hospital or practice?  In part, we would suggest that there is a behavioral bias at work, a belief shared across all hospitals that their patients are sicker than average, and this explains why their own spending so high.  (This is a “Lake Woebegon Effect” in reverse – the belief that the health of all of their patients are below average.)  But this behavioral bias, leading to the denial of the potential for real cost-savings in the U.S. health care system, can potentially derail health care reform – to the long-term detriment of the medical and financial health of the American people.   

Comments

[Ann Roberts]

Dr. Atul Gawande's recent article in the New Yorker compares healthcare costs in El Paso, TX, to those in McAllen, TX, and offers insights on why the costs differ dramatically - in spite of the similarity in the populations. It's well worth reading: http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande