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Booknotes: Money-Driven Medicine

February 13th, 2007 at 12:26 am

Every time I hear a news story about the rising cost of health care I ask myself, “Just where does all the money go?” Somebody must be getting rich from all this, but it’s not clear who it is. So I was pleased to see Money-Driven Medicine on the new books shelf of my library. It’s written by Maggie Mahar, a financial journalist. While I have no means to judge her credentials, the book is well written and has some interesting points. (If anyone else can recommend similar books on the topic I’d love to read them!)

First, a breakdown of where the money is coming from:
(* denotes money from taxpayers, for a total of 51% funded by the government)
30% Private insurance
17% *Medicare
16% *Medicaid & SHCIP (I think this is a program for uninsured children?)
14% Patients out-of-pocket (ie copays and uninsured self-pay)
12% *Other public spending (including veterans, public hospitals, school programs)
6% *Private insurance for government employees
5% Charity and philanthropy (includes private money for hospital construction)


Next a breakdown of where the money is going:
31% Hospital care
22% Physicians and other clinical services
22% Other spending (dentists, home health services, over-the-counter medicines, etc.)
11% Prescription drugs
7% Nursing home care
4.5% Private insurance profits and administrative costs
2.2% Government programs administrative costs

According to the author, in theory free market competition should reduce the cost of a product, but in practice, “the current system pits each of the health care industry’s players against one another: hospital vs hospital, doctor vs hospital, doctor vs doctor, hospital vs insurer, insurer vs insurer, insurer vs drugmaker, drugmaker vs drugmaker.” She quotes Michael Porter, a Harvard Business School professor, “competitors do not create value, they divide it. And sometimes, they destroy it... all are trying to assemble bargaining power so that they can strike a better deal for themselves while shifting cost.” Gains from one player come at the expense of another, creating no net value and adding administrative cost.

Another thing that hinders market forces is the nature of health care. The customer is faced with a great deal of ambiguity. According to Kenneth Arrow, a Nobel laureate economist, “Recover from disease is as unpredictable as its incidence…The information possessed by the physician as to the consequences and possibilities of treatment is necessarily very much greater than that of the patient.” The author states, “Health care is not a commodity. While two consumers may derive pretty much the same value from a new refrigerator, a particular course of treatment can have a drastically different effect on two different bodies…Three out of four health care dollars are spent on products and services that the patient has not purchased before…there are no warrants and no guarantees. The patient cannot return an unsuccessful operation.”

Historically, the fee-for-service model of medicine had the supplier (the doctor) both telling the customer (the patient) what he needs to buy and setting the price for it. “Allowing physicians so much autonomy all but guaranteed that the cost of health care would soar…The patient wanted as much care as possible; the physician had been trained to provide the best care possible. The price was not his concern. To the contrary, from a purely economic point of view, it was in his interest to see health care spending climb.” Until the 1930’s the patient’s ability to pay was the only check on rising health care costs.

When private insurance became the norm, this restraint was removed. “Blue Cross helped pave the way for health care inflation by reimbursing hospitals on the basis of their costs – an early example of the perverse incentives that would fuel health are spending for the rest of the century…Any hospital that tried to be more efficient and managed to reduce the cost of doing business would find its income reduced by an equal amount….hospitals were encouraged to solve financing problems, not by minimizing costs but by maximizing reimbursements.”

The book’s first chapter goes on to cover the rise of insurance, Medicare, and HMO’s, and concludes, “As medicine becomes more corporate, it is driven by the quest for profits…more sales lead to higher earnings. But more health care – more devices, more drugs, more procedures – does not necessarily lead to greater health.”

The second chapter covers how all the players are competing against each other. For instance, all the hospitals in an area may have a “medical arms race” to all open competing facilities in the most profitable areas such as cardiac care. The result is redundant service centers and a push to do procedures to profit from the investment, thus encouraging patients to have things done sometimes with doubtful benefit. On the other hand, “If too many facilities are trying to specialize in heart surgery, the surgical teams at these hospitals do fewer procedures. They may draw enough business to turn a nice profit – but not enough to remain at the top of their game.”

“Private insurers regularly skim off the top 10-25 percent of premiums for administrative costs, marketing, and profits. The remainder is passed along a gauntlet of satellite businesses – insurance brokers…lawyers, consultants, billing agencies…and so on. Their function is to limit services in one way or another. They, too, take a cut….as much as half of the health-care dollar never reaches doctors and hospitals.”

The third and fourth chapter cover (in far too great length!) various instances of hospital takeovers by for-profit companies and some of the sleazy doings of the guys at the top.

The fifth chapter covers the issue of end-of-life spending. Some of the rise in health care cost is attributable to doing lots of procedures on elderly and frail patients who die anyway a short time later of other causes. There is a map of the US showing a map of Medicare spending. It’s titled, “During the final six months of life, Medicare patients in high-spending regions receive 60% more care.” “Doctors like to fix whatever is fixable, and as a result, many patients die in intensive care units with their blood chemistries in perfect order.”

The sixth chapter covers the impact of the uninsured. “While well-insured Americans face the hazards of overdiagnosis and overtreatment, millions of uninsured patients routinely receive care [that can be described as] ‘too little, too late.’ And in the long run, ‘too little, too late’ proves expensive.” “Contrary to urban myth, it is not the uninsured who are crowding emergency rooms.” Hospitals find subtle ways of discouraging uninsured patients – such as charging the uninsured higher rates than those with insurance.

The seventh chapter calls for the industry as a whole to improve their use of computer technology, to move to “pay for performance” models (paying hospitals and doctors based on measured quality rather than simply on number of procedures performed), and to adopt evidence-based medicine.

The eighth chapter covers device makers, drugmakers, and their relationship with the FDA. Large device makers have very high profit margins – something like 19 percent in some cases. Some things other countries do to regulate or negotiate prices for devices and drugs: set reimbursement rates for new drugs based on how they compare to existing drugs (Japan), capping profits (Britain), putting a ceiling on total spending (France), restricting the rate of medical device and drug inflation to no more than general inflation (Canada). In the US, drugmakers and device makers can charge whatever the market will bear.

All in all, a very interesting read, although it’s hard to take away from this book a bullet list of why everything is so expensive.

2 Responses to “Booknotes: Money-Driven Medicine”

  1. monkeymama Says:

    It sounds quite interesting. I just replied to that one thread that things are so overly simplified. I often hear doctors are greedy and the cause, and working with a big doctor client-base, they aren't always doing as hot as everyone would assume. Obviously the answer is far more complicated. Sounds like an interesting read.

  2. jodi Says:

    Very interesting. Thank you for sharing.

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