Improving Health While Reducing Cost

The United States spends much more of its resources on health care than any other country. In 2008, the last year for which broad international comparisons are available, the U.S. spent 16% of Gross Domestic Product (GDP) on health care, compared with 8% (Japan) to 11% (France) spent by other countries (Organization for Economic Co-operation and Development (2010): "OECD Health Data").

What are we getting for our health care dollars? Are we healthier than other countries? The sad answer is: “No, just the opposite.” According to the CIA World Fact Book, we rank #50 in the world in life expectancy, just behind Portugal and five spots behind Bosnia. While life expectancy has been increasing throughout the world, and is now 78.4 in the U.S., this is three to five years less than the countries in the top 10.

Using another measure, we are dead last among 16 high-income nations in age-standardized mortality rates due to illnesses that are amenable to health care such as heart disease, diabetes, stroke and bacterial infections. (E. Nolte and M. McKee, “Variations in Amenable Mortality—Trends in 16 High-Income Nations,” Health Policy, published online Sept. 12, 2011.) Our age-standardized mortality rates for these illnesses are 33% to 40% higher than Japan and France, respectively, and 20% higher than the U.K. (which spends 8.7% of its GDP on health care).

Another measure of health status is the infant mortality rate: the number of infant deaths in the first year per 1,000 live births. By this measure, we are 43rd in the world, at 6.81, just behind Lithuania and Slovakia (World Infant Mortality Rates by Five-Year Averages, Population Reference Bureau).

Paradoxically, the gap in spending is widening despite the lagging health outcome statistics. In 1970, the U.S. spent about 7% of its GDP on health care, only a few percentage points higher than the 4% to 6% spent by other countries. By 2008, however, we were at 16% of GDP, about 5% to 8% higher than other countries. In 2009, the last year for which data are available (Center for Medicaid and Medicare Services. NHE Fact Sheet, 2009), our percent of GDP spent on health care increased to 17.6%. In a nation where GDP is about $14.5 trillion, each percent of GDP is about $145 billion. Thus, we spent about $230 billion more on health care in 2009 than in 2008.

How can we resolve the paradox of the U.S. population being less healthy despite spending more on health care? The first step in understanding this apparent contradiction is to appreciate that good health depends on healthy behaviors and the prevention of illness more than on utilization of health care resources after an illness occurs.

Consider, for example, the phenomenon of obesity, defined as a BMI of 30 or greater. In King Henry IV, part 2, the King admonishes Falstaff, whose girth had been expanding: “Leave gormandizing; know the grave doth gape for thee thrice wider than for other men.” Shakespeare was a pretty good epidemiologist: among obese individuals, the risk of diabetes is threefold higher and the risk of cardiovascular disease is twofold higher than non-obese individuals (U.A. Ajani et al. Annals of Epidemiology 2004;14:731-9). Sadly—and tellingly—obesity is the one thing for which the U.S. ranks first internationally. In 2005, 30.6% of the adults in the U.S. were obese (OECD Health Book 2005). Mexico was ranked #2 at 24.2%. About 14% of Canadians and 3.2% of Japanese were obese.

Moreover, the epidemic of obesity in the U.S. does not appear to be plateauing. In 2010, almost 34% of adults in the U.S. were obese (CDC, Obesity Trends, 1985-2010). No wonder that, as noted above, we have the highest mortality rates for heart disease, diabetes and stroke among 16 high-income nations. Thus, part of the increase in health care expenditures is due to an increase in medical conditions that result from modifiable behaviors. As a nation, we are generating more disease from lifestyle choices associated with limited exercise and poor food choices.

Another part of the increase in health care expenditures is the aging of the “baby boom” generation. The Census Bureau Brief on data from the 2010 Census shows that seniors are increasing faster than younger populations. Each year more than 3.5 million Boomers turn 55. Their swelling numbers suggest that, by 2012, America's 50 and older population will reach 100 million of a total population of about 315 million. By 2035, 1 in 5 people in the U.S. are expected to be 65 or older. As the population ages, and as life expectancy increases, so does the demand for medical care.

A third factor that increases health care expenditures relates to advances in technology. Given that there is more disease in the population due in part to advancing age and poor lifestyle choices, new (and expensive) tools for diagnosis and treatment have improved outcomes in many cases. Indeed, the United States has been an international leader in the development of new drugs, devices, surgical procedures and diagnostic laboratory and imaging technologies that have materially improved the outcomes of treatment.

There is another element, however, that relates not to the presence of a health condition or the technology to treat it, but rather to our payment system in the context of an imperfect market. Each country has a unique system of health care delivery and finance. Countries with “single payer” health systems are not homogeneous but are variably nationalized, and those with “free market” systems have varying degrees of government intervention. In the U.S., the “free market” part of the system is that providers (hospitals, health care professionals, pharmacies) are paid largely on a fee-for-service basis. There is a market price (the amount providers are paid) and a market quantity demanded at that price. But because of generous insurance, whether commercial or government (Medicare, Medicaid), the price paid by the consumer is only a small fraction of the “market” price received by providers. Given the inverse relationship between price and quantity demanded, consumers will show a much higher demand for office visits, lab tests, imaging studies, surgical procedures, etc. if they have to pay only the co-pay than if they had to pay the entire amount collected by the provider from the insurance company.

Further, the market for health care doesn’t follow the theory of Adam Smith’s invisible hand that allocates resources in a market where there is a homogeneous product and perfect information. In such a market, supply and demand curves are independent. Put differently, suppliers cannot create demand. In the world of health care, however, providers can indeed induce demand. The number of surgical procedures per capita in a region is highly correlated with the number of surgeons. The number of MRIs performed per capita is highly correlated with the number of MRI machines in the region. And so on.

Subsidized price and induced demand combine to expand dramatically the amount of health care consumers use. This expanded utilization has enormous budgetary implications, since total expenditures does not equal utilization times the subsidized price, but rather utilization times the much higher market price collected by the providers.

Greater utilization due to price subsidies and induced demand applies to those with insurance. What about the 50 million people in the U.S. without insurance? This question is highly pertinent for Alachua and Duval counties, where about 20% of the population between the ages of 18 and 65 do not have commercial or governmental health insurance. Uninsured individuals tend to have many health care needs, but poor access in the absence of coverage, so they seek care late in the disease process, and at inefficient locations such as the Emergency Room. The costs of providing emergency room care to uninsured individuals are much higher than if they were seen in an outpatient office or medical home earlier in the disease process. Early intervention would improve their health and reduce their need for more complex and costly medical care. The expense of health care services for the uninsured is borne by all of us—by health care providers and hospitals who absorb the cost without reimbursement, by taxpayers in locales with hospital districts, by higher commercial premiums, and by increased governmental outlays that fund programs to defray these expenses.

The continual expansion of health care utilization and cost without constraint in the U.S. among insured individuals is not sustainable economically, and our bifurcated system of insured and uninsured is not cost-effective nor societally appropriate. What is the way out? The broad answer relates to transitioning the payment system from one that incentivizes continual increases in the volume of services provided to one that incentivizes keeping people healthy so that they don’t utilize health services, and creating benefit plans and cost-sharing mechanisms that encourage engagement by individuals in their overall health. In its most effective form, the latter approach would entail a health system receiving a fixed (but adequate) amount of funds (from an employer or from the government) to provide care for a defined population (e.g., company employees or a defined population subsidized by the government such as Medicare or Medicaid). This places a budget target on the cost of care for this population as a whole, and encourages the health system to prevent disease (nutrition and exercise programs, smoking cessation, immunizations, etc.), promote early diagnosis and effective management early in the disease process, and use laboratory and imaging studies in an evidence-based, cost-effective manner, all of which will reduce the need for inpatient admissions.

Varying forms of this scenario are evolving, such as Accountable Care Organizations for Medicare populations, Medicaid Managed Care, self-insurance plans among employers, and health exchanges for individuals who do not receive commercial insurance from their employers but are not eligible for Medicaid. The details of these approaches are evolving day by day, and UF&Shands is preparing accordingly. As an academic health center, we have the benefit of being able to contribute to an improved health care delivery system in all the relevant roles—provider, employer, educator and health services researcher.

Forward Together,

David S. Guzick, M.D., Ph.D. Senior Vice President, Health Affairs President, UF&Shands Health System