The “Money Pit” redux

Readers of this site know that just a few days ago, I wrote a post about healthcare costs and used the movie the Money Pit as an example. Today’s post is an updated “Money Pit” with new information and points made in a recent New York Times article by Uwe Reinhardt.

In his paper,”DIVIDE ET IMPERA: PROTECTING THE GROWTH OF HEALTH CARE INCOMES (COSTS)” Professor Reinhardt begins with an important point:

“Every health care system naturally pursues two distinct goals, as is illustrated in Figure 1 (below), namely (1) enhancing the quality of patients’ lives and (2) enhancing the quality of lives of those who provide real resources to the process of health care (Reinhardt, 1987).”

As I wrote in the last Money Pit post, we cannot remove ourselves from any conversation about healthcare involving money as the two are inextricably linked. In order to understand healthcare, we must understand what drives healthcare and this is often the underlying business model or  “economic engine”.

With healthcare costs growing at this uncontrollable rate, we all know this is a major component of what needs to change in healthcare.

Everyone reported on what the CBO estimated would happen with healthcare spending – the selection below is from Reuters:

“In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit.”

Healthcare is expensive, and growing more expensive by the minute.

Reinhardt suggests that there are two main drivers or contributors to the healthcare spending.

The first is what Reinhardt calls “indefensible administrative costs“. Here he quotes from a paper by Dr. Steffie Woolhandler, Terry Campbell and Dr. David Himmelstein that estimates “in 1999 total administrative costs of health insurers and all other parties in health care, save patients, accounted for 31 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada.”

The second “major factor accounting for high health spending per capita in the United States is the significantly higher prices Americans pay for virtually all health care services and products.” Now here is where it gets good.

Reinhardt’s premise here, found clearly in his paper, is that “these much higher prices are the product of a deliberate strategy, hashed out in our political bazaars between the supply side of health care and state and federal legislators, always to keep the payment side of our health system fragmented and relatively weak vis à vis the supply side of health care.”

Whoa. While linking politics to the “business” of healthcare is not new, his approach to this complicated issue seems to better explain not only the etiology of our healthcare cost mess, but how mired in the muck we are. As an example, he describes the opposition to a public option in the healthcare reform as a “manifestation” of the aforementioned strategy.

We previously wrote about other drivers of healthcare costs such as increase in high cost technology and rise in prescription drugs cost, administrative costs, and increase in chronic disease and people living longer.

What I absolutely find amazing in Reinhardt’s argument is a very simple point he makes about the community, the consumers of healthcare.

“To an economist it is astonishing that Americans have been content for so long to allow an economic sector that has absorbed an increasing portion of their incomes — 18 percent of their gross domestic product now and 20 percent before too long — to operate without any meaningful price transparency. The question is how long this indifference can last.”

Why have we settled with the rising costs in healthcare (that we see reflected in our pay checks) without doing anything about it? Why are we content not knowing why some hospitals charge more than others? Why are we OK with the fact that we have no idea what all those various charges are on our healthcare “invoices” after we receive services? And even further, why are we OK not knowing how those charges may compare to someone else and their charges?

So again, we are back to the Money Pit. We bought in to something without fully realizing the implications of our purchase. We continue to put money towards it in hopes that it will get better, but it is not.

Well, at least we know where we are spending the most money?

The updated, more user friendly graph below shows that we continue to spend a lot of our healthcare dollars on and in hospitals.

Reinhardt concludes with a very important point that we have made here on this site before - we do need more transparency in healthcare. We do need to know where we are putting the majority of our dollars, and why some services cost more than others.

“An interesting Web site on prices for health care appears to have been established by a physician who, as the father of a sick child, was appalled by the price opacity he confronted…But better, publicly accessible price transparency is only one of the emerging pushbacks from the payment side of health care in the United States. Both private and public payers are experimenting with alternatives to the time-hallowed fee-for-service payment method that has long been thought to be the root of many problems in modern health systems.”

Oh, and don’t forget that underneath this all remains the need for an entirely new business model.

Thanks to wonderful work like that of Dr. Paul Starr, we know that many of these issues in healthcare are grounded with deep historical roots. They are not going away any time soon, and just like Tom and Shelley, we are stuck in a “Money Pit”.

Dr. Miller has his doctorate in clinical psychology and is an Assistant Professor in the Department of Family Medicine at the University of Colorado Denver School of Medicine where he is the Director of the Office of Integrated Healthcare Research and Policy. His core task is to integrate mental health across all three of the department’s core mission areas: clinical, education, and research. Opinions expressed here are his own and not those of his employer.

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  • Michael Judge

    From my point of view (as a free market thinker) it seems that the secretive nature of the contract negotiation between the hospital or physician (group practice) is the biggest impediment to transparent prices. If we in healthcare (I am nearly complete with an MHA ) disconnect that process, it enables patients to engage in free market interactions with their providers (at least those healthcare expenses that are out-of-pocket/non-catastrophic). It would also allow physicians to market against each other based on prices. Rather than dealing with a top down approach of readmission rates, we could begin offering guarantees on work done at our institutions. When doctors have to fix their (or their colleague’s) mistake for free, then physicians will be held much more accountable to the administrators and other physicians than they are today with licensure. The free market interaction would also reduce compliance costs since transactions would now be direct rather than through a third party. Fee-for-service isn’t an issue when the price is agreed upon in this direct transaction.
    Hospitals have always been cost centers and allowing them to further consolidate local monopoly power through ACOs makes me skeptical that transparency is possible. Price fixing is an option to solve transparency, but not one that is effective in economic efficiency.

  • Michael Judge

    Forgot to mention, very interesting article! I have the referenced paper on my stack to read.