• What makes the US health care system so expensive – Outpatient Care

    If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces is going to discuss one of the components of unexpected spending that accounts for why our system is so expensive.

    Remember, these posts are going to follow a common theme.  I am going to highlight how the United States is spending more than you’d expect given our wealth.  Much of this comes from the McKinsey & Company study, Accounting for the cost of health care in the United States.

    The single biggest spending component of our health care system is outpatient care.  In 2006, it accounted for $850 billion, making it more than 41% of our health care spending.  Amazingly, it’s more than double what you would expect, given our wealth:

    Outpatient care can be a slightly misleading term, as it also includes same-day hospital visits and procedures.  In fact, these type of visits account for a significant amount of our “extra” spending, at $186 billion.  Physician office visits also account for a large amount of “extra” spending as well, at $151 billion.  Outpatient clinics add on another $71 billion of extra spending, and ambulatory surgery centers another $21 billion in “extra” care.

    Now the fact that we’re spending so much on outpatient care isn’t necessarily a bad thing.  Same day surgery does cost less in general that longer inpatient stays.  But it’s undeniable that the incentives in the system to financially reward quicker and less invasive procedures have increased their use.  The financial rewards are much more for outpatient than inpatient care, and the fee-for-service mechanisms of the US encourage the use of more care.  In the UK, for instance, almost 60% of hernias are repaired as inpatient procedures; in the US about 11% of those procedures are done on an inpatient basis.

    Other contributors to the increasing “extra” cost of outpatient care include physician salaries (covered in a future post), ownership in surgical or diagnostic imaging centers, and the use of more expensive technology, especially in a diagnostic capacity.  Emergency departments in the United States accounted for more than half of a significant number of outpatient visits and about $75 billion in outpatient costs.

    So here’s our first bit of depressing news.  The single biggest contributor to the money we’re spending that’s “extra” is for medical care.  It’s not a company or a crook.  It’s for actual stuff that we seem to value.  I will get into some of the specifics of this in future posts, but the bottom line is that when we talk about cutting spending, we will need to talk about reducing this amount.  Especially since, if we were spending so much on care, we should expect to see impressive returns in quality (which we don’t).

    We will need to talk, as a country, about spending less for things like outpatient care.  If we don’t, we won’t ever really get a handle on the costs of our health care system.

    I will say this at the end of every one of these pieces.  None of this proves that this money is wasted or fraudently taken.  Nor am I saying that we shouldn’t spend more money than other countries.   But this is money that goes above what you’d expect us to spend based on our greater wealth.  We should at least be able to account for and explain this increased spending in some way.

    Bonus: Austin expanded on some of this here.

    UPDATE: Although the report says it’s up to 56% of outpatient visits, this feels high to me and I can’t confirm it.  So until I can, I edited the text.

    • In focusing on root cause, and this will recur as your series progresses, this “spending gap” is not a singular issue:

      1) Look at beds, MRI’s/ pills per capita, etc, and the US is not the leader. Not what folks would expect.

      2) “It’s the prices stupid,” and we know we pay more for the same services as other countries–rampant.

      3) Niche areas we overutilize technology: cardiology testing and treatment, chemo, and I would guess EOL care (although I have never read confirmatory papers on the latter).

      I could go on. The point I raise is what is the most efficient way to begin to solve the dilemma. I was taught the greatest contributor to the problem is the prices we pay. If that is the case, and we can accept that (big if, but we may have to), is price regulation–the 800 ilb gorilla to free marketeers–the best answer?

      The graph plotting costs for health care per capita vs nation’s GDP demonstrates, as you point out, we are the outlier amongst developed nations. Is it American exceptionalism that needs tweaking, ie, keep current system and tinker at the edges for the grand fix, or get with the rest of the world and ratchet down prices. Overly simplified, but you get my thrust.

      Tough stuff, but inevitably a question that will need answering given the grand purpose of your series of posts.


    • I think price controls simply represent more of what’s ailing us now: By routing almost all our our healthcare transactions through insurance plans, we have removed the most effective element the free market: the buyer’s discrimination of what is the best product for the best price. Instead of millions of self-interested decsion makers taking the time and effort to seek out the best deal, we have removed the cost element from the consumer, and farmed out the bargaining process to a hundred-thousand or so professional contract negotiators. (On both sides of the payor vs. provider competition.) These negotiators are in endless struggle, trying to implement laws/rules/exceptions to get the best deal for the side they represent.

      But these negotiators and their rules are the opposite of nimble. For keeping costs low, formal rules and professional negotiators can’t hold a candle to the instant and responsive power of millions of self-motivated shoppers, each doing what works for him.

      Price controls are just more of the payor vs provider cat and mouse game. If you say I can only charge “X” for “this” service, then I rename it or repackage it into a “new” service, and carry on charging the markup that I want. All I need is good paperwork to justify the cost. Wash, rinse, repeat.

      I say move the control back to someone who truly cares about cost: the consumer.

      • NO. Medical costs do not function and cannot function as a free market. People cannot shop for life-saving surgery. Medical decisions are made based on life and death immediate factors for the most expensive treatments. Regulation is needed.

      • I agree with Robert. The opportunity to shop when your sick is very limited.

    • There were some studies, maybe late 80’s, that showed when hospitals were paid for inpatient treatment, all were at 80% occupancy-regardless of location, general age/health of community, etc. There was a later study showing prices went up as the number of doctor’s went up in a given area. And professional societies want professional behavior,, I.e. don’t compete on price.

      As far as having individuals negotiate for their own best price-how can that work? Appendicitis or brain tumor will both kill me, so how much is my life worth? Should both surgeries cost the same? I mean outcome is the same. Maybe a flat fee per hour in surgery? Insurance groups should be working on behalf of their clients to get best price for best outcome. Unforrtunately they are in many ways a deregulated monopoly “captured” by service providers. The new regulations can start to break that up and maybe gets us closer to the pline.

    • Price controls will not work; they’ll backfire. We need more informed consumer choice and incentives for providers that don’t reward (or better yet punish) them for unnecessary and low quality care. For insights which explain our high cost outpatient health care read Atul Gawande’s June 1, 2009 New Yorker article: “The Cost Conundrum: What a Texas town can teach us about health care” McAllen Texas is the most expensive per capita Medicare town in America. Gawande went there to understand why. It’s not because McAllenites are sicker (just as the 2008 McKinsey study shows overall Americans aren’t sicker or older) or a variety of other obvious explanations for the high spending in McAllen. The article offers many insights but overall gives you the sense there is an ethos in McAllen that more care, and more expensive care is better even if there is no change in outcomes. And prescribing and doing more procedures is rewarded. Unfortunately it’s a payment system and attitude that is pervasive and difficult to root out of our system.

      We have to return to evidence based medicine to guide our choices. Patients and physicians have to stop assuming that more is better.

      Our fee for service payment system rewards more services and higher cost services. Everyone is behaving rationally: if there are incentives to make more money, it won’t do the patient harm (might do some good but that’s not certain) and s/he’s got insurance well then request the procedure. And if you add in a little “defensive medicine” (do the diagnostic test or procedure to lessen the odds you’ll get sued) well you get what we’ve got: too much spending for poor outcomes and low quality. There are many causes, but the outpatient overspending is in my view largely due to a perverse fee for service payment system and price insensitive, insured patients.

    • Sure seems like we (the patients) have to reduce demand or the prices that service providers set will not fall. I still have a hard time believing we can be pre-cogs with regard to our health dilemmas of the future – enough so to “shop around” before we make our purchases. I have a hard time believing that there will be a monumental shift in employer-provided health care unless everyone does that at the same time (to avoid undesirable competitive disadvantage for the best worker bees).

      Dr. Carroll- in your post you mention that “…fee-for-service mechanisms of the US encourage the use of more care.” Isn’t that more the prescription for more care. Hey, I’m a guy, most of us seem wired to a) not ask for directions when we are lost, and b) especially not ask for directions to the nearest doctors office or hospital. Who is actively planning to “use” health care just because its available? Is there good evidence of this phenomenon?

      Also, the item re: “…more than half of outpatient visits” being handled by the ER just blew me away. Do you think thats because: a) the poor among us love to feign emergency conditions just to secure health care for themselves and their families (my brother who works an ER in Detroit might love to chat about this); b) we don’t visit our PCPs enough and let things go to crisis mode before we consider asking for some health care; c) we are prone to accidents as a country?

      Finally, and I’m sure you will do this sooner or later (if not already in a post that I can’t remember!) could you please define “quality” when you get a chance.

      Personally, I think its not so much that we need to talk about spending less time in outpatient setting (cuz that will just shift more visits to inpatient with higher costs); its just health care, in general. I can ‘t believe that a significant reduction in demand won’t have some meaningful downward trend on service provider prices.

      One good way to reduce our feeding frenzy: make a personal commitment to be healthier people (i.e., stay away from State Fairs!)…

      Thanks for the series…

    • @BradF – I have thoughts, but I’m trying not to get into a debate here. I’m talking about the current state; in the future I would welcome a discussion of what to do.

      @Bob – I will say, that these one-size-fits-all type of exhortations won’t work. People won’t negotiate for chemo, nor for anesthesia. Some consumer input is good, but it’s not an answer for everything.

      @golack – Lots of good questions….

      @Jeff – see @Bob, but I would hesitate to agree that everyone is acting rationally

      @Dale – Some good ideas, but really – there are no easy fixes. As you’ll see throughout, there are so many things to blame. I do agree that we could consume a lot less..;.

    • What I find interesting is the constant claim that getting people to pay out of pocket will drive down costs, while over the past decade more and more people have been going to high deductible helaht insurance plans, and yet the costs of these policies have been rising at 8-10% for a decade – I have had one for eight years and I’ve had 10% premium increases year after year, including just a few months ago.

      And I can assure you that I don’t want to buy any medical services at all, even if it is free. While those who think consumers should pay are busy getting annual colonoscopies and full GI tract X-ray every other year because they can talk their doctor to prescribe them so they are free with their gold plated health plans, everyone I know delays going to the doctor and puts off getting tests that are invasive, even when “free”.

      (I can never figure out why conservatives are so driven to seek out all sorts of expensive invasive tests – perhaps an innate masochism….)

      In any case, all the nations with lower health care costs have price controls that eliminate profits beyond return on investment. Doctors are trained by the government, or get their tuition paid for in some other fashion, so doctors don’t need quarter or half million dollar salaries for a decade to repay debt, which of course must continue afterward with the doctors feeling they deserve the extra 100K beyond that of people with similar education and experience who also do things that are life critical. A welder on a nuclear power plant requires a high degree of skill acquired only after years of experience and supervision and testing, and they work in difficult conditions, and if they do a bad job, a radiative leak may result killing people.

      In the nations without price controls and low prices, the doctors earn very little, and serve in poor nations because they care more for the health of people than for money, so they don’t abandon their countrymen and move to the US or other places where they can live well.

    • You present an absolutely convincing counter argument to your argument “Now the fact that we’re spending so much on outpatient care isn’t necessarily a bad thing. Same day surgery does cost less in general that longer inpatient stays. ” Yet you ignore this in the rest of the post. You act as if inpatient care and outpatient care can be analysed separately, but note that hospitals decide whether patients are admitted or sent home.

      The suprisingly high spending on outpatient care compared to inpatient care in the USA demonstrates the effect of ruthless cost reduction efforts in the USA (based on medicare paying by DRG and therefore refusing to pay for more days in the hospitalgiven the diagnosis). US spending is gigantic in spite of things like sending someone home after a hernia operation not because of them.

    • @Robert – come on. I have to break things up to blog. No one would read a 10,000 word post. Of course inpatient and outpatient care are related. Yes, driving hernias to outpatient saves money over inpatient. But we’ve incentivized outpatient care to the point that we likely made it too enticing for providers. Yes, it started out as cost-cutting, but perhaps we’ve gone too far.

      This is a blog, not a specialty journal. The fact that I explicitly said that it’s all part of a series should show it’s all related. Wait for it to be done before you decide I’ve missed something.

    • United States is spending more than you’d expect given our wealth.

      Although we are not as wealthy as Swiss, Norwegians, or Japanese, we are more health conscious. Although *health conscious* is not all that bad, we do need to spend more of our health concerns on exercise and diet but less on doctor visits. I put exercise before diet just to be popular since nobody likes to talk about starving themselves. People like to talk about their last soccer game when they got kicked in the leg, but few of us like to talk about going all day feeling a bit hungry. Is America a land of clubs organizations and community action? Do we need to re-channel more of our group activities into community sports events and just plain exercise sessions according to weight classes and special needs groups? Do we also need study clubs to review important safety issues within our communities? Do we need to spend more free time reviewing our own personal accident prevention programs? Should we set our schedule alarms to change battery in smoke alarm every year? Should we remember to get all the neighbor kids into approved water-safety classes? Do you personally know all the kids in your neighborhood who have not yet learned to swim? Think about it. Do you know some old people in your neighborhood who could use some help at changing light bulbs before they fall off a ladder? A friend of mine who is parenthetically an Emergency Room Physician told me that his father died when he was doing exactly that. Could our teens pay regular visits to seniors just to ask them if they need things done? Is there a dangerous dog in your neighborhood? Could you spare the time to call animal control office?

      Tell me something! Could we side-step lot of unnecessary surgery if we would simply organize support groups for those who merely choose to postpone elective surgical procedures? As we have less surgery we avoid surgical complications and re-operations. Doctors will be less overworked and more tempted to cut their fees. Could supply demand curves also give us lower fees when we decide to burden the system less with overpopulation? Should we be more careful and more community minded with our family planning and birth control? Would that precaution give us a healthier community with a healthier economy?

      Remember this :

      One guy in the White House cannot possibly make it happen. Improvement can happen if and only if all of us chip in. It will take every swinging soul in this land to get things moving, things moving for American the Beautiful!


    • mulp says, “In any case, all the nations with lower health care costs have price controls that eliminate profits beyond return on investment. ”

      and when they’ve had price controls for quite a while the rate of price increases and the level of prices are both smaller than in countries that lack this mechanism.

      It is the prices and utilization. A key is who has the pricing power.

      With universal coverage in a system with effective long-established price control structures you don’t get high medical care spending at the emergency room for routine, but necessary care. In the US you cannot get doctored “after hours” except at emergency rooms. Other countries with functioning systems have night and weekend coverage as a routine.

      Specialists – the GP is gone in this country. All newly minted docs are specialists of one sort or another. The disparity in earnings between the family doctor and specialists is huge, but you still need to see your family doc to be referred to the specialist..

      I agree with Robert Waldmann, hernia surgeries are a horrible example to prove that outpatient care is over-consumed or is driving costs up. Hernias happen and (presumably) these are actually taken care of at less cost on an outpatient basis than they would be in a US hospital. Now if diagnoses of hernias are higher in the US than other nations, that would be a different argument and (perhaps) a valid argument against outpatient care and fee for service model that has incentives to find illnesses to treat in for profit doctor-run clinics.

    • @grooft – Hernias are a bad example if you were making a judgment about our spending. I am not claiming that our high percentage of hernia operations as outpatients is bad, in and of itself. I’m claiming it’s evidence that we have a much stronger shift to outpatient care than other countries. It may be helping or hurting – but whatever incentive is driving us to outpatient care is working.

      As to the spending on practitioners, well, wait for tomorrow.

    • Ug, my third installment here and again I feel you’re missing the major issues.

      Why don’t you mention that in 86 or so, I believe, hospitals were given an exemption from the DRG codes for outpatient care. That’s the entire reason it’s so much higher.

      You’re making this stuff seem as if it’s rational.

    • How on earth do you pull apart physician’s fees, pharmaceutical costs, and amortized facility costs (often part of a hospital facility) from overall outpatient care costs? This category seems to be dependent on several of the costs that are covered in other parts of this analysis.

    • Due to a chronic thyroid condition I take a prescribed medication that requires monitoring by blood test. This requires a visit to a doctor to get a prescription for the blood test and a renewal of the prescription.

      The same monitoring requirement applies to all the folks taking blood pressure or cholesterol medications as preventative measures. I’m pretty sure you could cut outpatient visits substantially by letting pharmacists, insurance providers or even the person treated do the blood test monitoring.

      Further allowing more open competition for lab tests would reduce those costs.

    • It seems that a lot of the increased spending in this area may be due in large part to at least the perception that the care that we are paying for is worth it. Of course, this means that in some cases it isn’t. I have a personal example that I think illustrates this point well.

      My wife recently twisted her ankle and when it hadn’t improved after a week, she went to the doctor. The doctor took an x-ray and told here that it wasn’t broken and that she didn’t tear anything, but that she might have strained or partially torn something. Then, he asked her if she had good insurance, and when she replied yes, he scheduled an MRI. That night while discussing the MRI appointment, my wife and I realized that in this case the MRI didn’t seem to provide any useful diagnostic information. Sure,it would be nice to get it, but it didn’t seem critical in light of the fact that it seemed to have no bearing on her treatment going forward. She chose not to get the MRI because our higher deductible meant that we would have had to pay for all of it out-of-pocket.

      I know that this is one isolated example, but on a large scale, this case or something like it repeated many times could lead to a significant cost, without, perhaps, much direct benefit.

    • Another anecdotal example … my 92 year old father had a cold and a cough that resulted in an Xray study to check for pneumonia. The GP said everything looked OK. The film was checked later by a radiologist who thought there might be a spot in the upper lobe of one of the lungs. The GP then recommended a body CT scan because “we need to know what we are dealing with.”

      My sister and I talked to my father and we intervened. If it looked like a tumor, he was not open to surgery, oncology, or even a biopsy. In other words, the information gained from the CT scan would make no change whatsoever in his treatment . We refused the scan. The GP and radiologist were not happy. This is an example of what is wrong with US medical care. If I had not had a modicum of medical knowledge, he would have gotten the scan. Cha-ching for Medicare! The physicians never brought up the discussion of a choice in the matter.

    • To follow onto Leora’s point, I’m a nurse and I still have my license active, although now I’m working in a policy capacity (So this stuff REALLY drives me crazy).

      My husband (who’s only 43) has a replacement mitral valve, the result of a random infection – then endocarditis in his 30s. So, he takes Coumadin, and presumably will do so for another 30-40 years (fingers crossed).

      His doc requires him to come in monthly for his Coumadin monitoring, despite the fact that the office USES THE SAME EQUIPMENT I used to use doing home care visits.

      We’ve argued to the doc that I could do this testing at home, call in the results and get any orders for adjusting his meds. What we get in response is hemming and hawing and, finally, a ‘no.’ He want’s my husband in, even though the doc doesn’t SEE him during these visits.

      Excess spending due to outpatient care. Yep. I see THAT.

    • Imagine the crazy responses if you gas stations had to pay a fee every time somebody read the word “super”, “plus”, or “unleaded” on their signs. Now don’t imagine and just look at the state of outpatient care. The US Government adopts the AMA’s CPT code book to describe medical care. If you publish your prices using CPT codes, the AMA can and does go after you for violating their copyright. EHR programs ship without CPT codes so you can just punch in your own codes and the EHR vendors don’t have to pay the licensing fees.

      This is absurd.

      Either the USG needs to use a non-copyrighted book of procedure codes or somebody needs to pay a reasonable blanket license to the AMA to do the work. The current situation is making everybody leery of publishing prices and without publishing prices how can consumers price shop? They ask for an office visit cost and wander away confused when they get the answer “it depends” when they should be asking for the cost for a 99213 (office visit – middle of the road complexity) so they get apples to apples pricing and can properly shop.

      This situation is largely Medicare’s fault. It’s the 800 lb gorilla in medical coding, driving near universal adoption of the CPT system. The USG needs to step up to the plate on this issue and stop tilting the playing field against simple, honest ways of transmitting pricing information without license fees.

    • @Bob: a free market with hundreds of millions of customers does some things very well, but I’m not convinced that health care is one of them. First, you’re asking people to negotiate prices and quality just when they’re sick or injured, and thus in a remarkably weak negotiating position. Second, health care outcomes are notoriously hard to measure: some of the results won’t be visible for months or years, some patients will die regardless of treatment, some will recover regardless of treatment, etc.: it’s not clear how individual consumers can make good individual decisions on quality. Third, anybody can get sick or injured, regardless of income; our society has decided (for better or worse) not to turn away sick and injured people for inability to pay. Which means that at the emergency level, there’s no price pressure, with the economic consequences that implies. The only way purely free-market health care can possibly work involves poor people dying of treatable conditions.

    • We don’t have easy access to preventative care without health insurance on a low income… but emergency rooms can’t turn us away. So emergency rooms are utilized as a way to gain access to care even when it is non-life threatening. Many times temporary fixes are given, with a response from the doctor along the lines of “follow up with your family doctor.”
      Well, what family doctor? The one I can’t afford to see, or doesn’t accept my insurance? See you next time I get chest pains!