The Top Ten Reasons for US Healthcare Spending

Everyone complains that U.S. healthcare is too expensive and it certainly is! Where is all that money going: well over $2 trillion/year? Objective analysis shows ten reasons why we spend money on healthcare.

Ten Reasons For U.S. Healthcare Spending

1. New value

2. More people living longer

3. Action without evidence

4. Bureaucracy

5. Disconnection

6. Perverse incentives

7. Defensive Medicine

8. Adverse outcomes and errors

9. Money removed from healthcare

10. Fraud and embezzlement

We actually want to spend money on the first two. The other eight are costs we would like to minimize – elimination is desirable but improbable in the extreme.

The 19th century doctor’s black bag had little in it: strict bed rest, amputation, home remedies, and medicines made from garden plants. Today, doctors can operate on the heart without even opening the chest; replace failing organs with new ones; and prescribe pills that can target specific areas or functions within the body. Whooping cough, rabies, diphtheria, and polio have become the purview of medical historians rather than practitioners.

Modern capabilities – inconceivable in the 19th century – provide 21st century people with new value. They come with a price, sometimes astronomical. You can buy an expensive pill, say Flomax at $2 for one pill, and avoid a $20,000 surgery. You can have a quarter of a million dollar heart transplant and live, or take the cheaper route and die. We get new value and we should gladly pay for it.

There are more people today who are living longer. When you add new value to more people, two reasons for increased healthcare spending become apparent. This is spending we like. We are getting something we want for the money we spend.

Thirty percent of all healthcare dollars is paid to providers of all kinds. Thirty percent reimburses institutions: hospitals, pharmaceutical companies, wheelchair manufacturers and the like. The remainder (40% or roughly $920 billion in 2008 in the USA) just…disappears. It goes to activities and services that provide no health care for patients.

If Congress makes laws without proof in advance of what the law will actually do (reason #3), bad things happen. The Public gets two undesired outcomes: laws that harm us and huge costs, invariably much, much more than Congress projected when they passed the legislation. In 1990, the GAO showed that Medicare had already cost 845% more than estimated in 1965.

Two good examples of how Congressional action-without-evidence harms us (reason #3) are HIPAA (Health Insurance Portability and Accountability Act) and CPSIA (Consumer Product Safety Improvement Act). The first – HIPAA – was a draconian and expensive solution for which Congress never proved there was a problem. CPSIA was supposed to protect consumers from lead poisoning. By its requirements, CPSIA unintentionally killed the entire cottage industry of children’s clothing.

The Federal bureaucracy consumes so much money because a) it performs so many tasks, and b) it has no incentive to be efficient. In addition to administering the flow of dollars, people and papers, the bureaucracy engages in quality control, enforces regulatory compliance, is constantly trying to reconcile, and is engaged in a never-ending battle to root out fraud and abuse. However, cost/benefit analysis – a requirement in all other activities that involve money – is not part of how the Federal bureaucracy operates.

All free markets work by allowing supply and demand to balance each other. The government does not determine that balance: consumers and suppliers do. In healthcare, supply and demand are “disconnected” (reason #5), and therefore they cannot balance. The consumer does not pay the supplier. A third party does that. Neither consumer nor supplier has any reason to economize. The result is a system that cannot achieve balance. No wonder the cost spiral keeps rising without stop. There is nothing to stop it.

Healthcare pays when we are sick. The sicker we are, the more it pays. This is called a perverse incentive: rewarding what you don’t want rather than what you do. Incentives are perverse not only for dollars but also behaviors. Doctors fear they will be blamed for bad outcomes even when they did nothing wrong. Therefore, they increase healthcare costs by practicing defensively: every head injury gets a CAT scan and every murmur gets an echocardiogram.

Adverse outcomes and errors (they are notsynonymous) cost money by direct payments to providers, by lost productivity, and through the legal process. Most of these costs are avoidable.

The commercial side of healthcare takes money out of the system and gives it as dividends or equity growth to shareholders. Thereby, for-profit enterprises such as insurance and pharmaceutical companies remove dollars from healthcare (reason #9). Whether we wish them to do so or not is an open question.

Finally, there is the most obviously undesirable expenditure – overcharging (accidental), fraud, and embezzlement – which is also the smallest of the costs of healthcare.

Do we want to spend less? Do we want to spend more effectively? Of course we do! Then we need to reduce reasons three through ten by identifying the root cause of each and then treating it, not the symptom.