• What makes the US health care system so expensive – Responses to comments

    There have been a lot of excellent comments and questions.  I wish I could get to them all, but there are only so many hours in the day.  I am going to try to get to some, though, and this post is a start.

    1. Many of you (physicians) take exception to the post on how much docs earn.  Some of you claim that as long as a shortage of physicians exist, docs will make more.  Fair point.  But there’s likely not a shortage because docs don’t make enough, as we obviously make more compared to other countries.  It could be because we don’t train enough physicians, but that can be fixed.

    Other reasons cited include the high cost of education.  Having paid a small fortune for my education, I don’t disagree it’s expensive.  But is this the reason for the overspending?  I’m not sure.  Here’s another chart from an older version of the McKinsey & Company paper:

    The bubbles underneath the x-axis show how many years various professions are in school/training. The dark shaded columns are the median educational debt at graduation. The light shaded bars are the median lifetime annual salaries. I don’t know how much higher the light shaded column should be than the dark shaded one.  But you don’t hear lawyers complaining about this as much as you do doctors, and our light shaded bar is much higher than our dark shaded bar.

    Some of you are complaining it’s malpractice insurance.  But malpractice insurance is a business expense and not salary.  Most doctors aren’t paying for their insurance in after-tax take home pay.

    2. A lot of you are angry that England and Japan aren’t in the graphs.  I didn’t make all of them, so I can’t say why they aren’t.  I’m going to try and replicate the key chart as soon as I can.  Don’t get your hopes up, though.  England and Japan are two of the cheapest health care systems around, and are not going to make that line’s slope higher.

    3. One of you snarkily said that in the “science world” an r2 of 0.76 isn’t considered significant.  I would normally ignore this, because I don’t appreciate the tone.  But others may read this and think you are right.  So I invite you to find me a source that claims what you say is true.  I think you may be confusing a p value and an r2 value, but I won’t claim to know what’s in your head.

    4. Some of you claim I don’t understand the difference between cost exposure and paying more.  I assure you I do.  I don’t think exposing people to the cost of care will work nearly as well as you think.  Here are a few posts that might explain why:

    The moral hazard
    The moral hazard – ctd.
    Medicare and increased cost-sharing

    5. Many of you still think it’s obesity.  Here’s why I disagree:

    The blame du jour

    6. Many of you still think it’s all malpractice.  It’s not.  And while those costs are real, tort reform still won’t work.  Read these posts:

    Health Affairs Covers Malpractice
    The odd logic of tort reform
    The odd logic of tort reform – ctd.

    7. Some of you are upset with me because I didn’t go into detail on one point or another.  You’re right.  This is a blog, not a book, and I have to limit myself to a certain length of post or I lose people.  Moreover, this was already a 10-part series, so I already think it was long.  I wanted to do something that would be a start.  I also did not spend a lot of time on the why as much as the what.  I think the why we overspend is even more complicated, so please forgive me for not completely answering that question.

    8. Some of you were confused by the chart.  Let me explain it again:

    The green part is health care spending that is in line with GDP.  It’s what we can expect to pay given our wealth.  You can argue we could spend more for better outcomes, but since we’re not getting them*, there’s no reason to spend more.

    The slivers that start at the top and move clockwise are areas of overspending.  Since the physician overspending is entirely included in outpatient and inpatient overspending, I pulled those parts out for you.

    There was no good way to show underspending, so I didn’t try.

    The prevalence and malpractice spending are at the end.  Those of you who pointed out that those should be inside the other slivers of overspending (like physicians) are correct.  But there was no way for me to accurately portray that, nor do I have good data to know where they lie, so I didn’t try.  I included them as separate slivers so that you could see their relative size.

    *I promise you, the Outcomes series is coming.

    • You are mostly correct about physician pay, but I would just add a bit. First, I would emphasize that the difference is mostly in specialist pay. Our PCPs are surprisingly close to those in other countries.

      Next, I think that you underestimate, or rather your chart does, the effect of residency and fellowships. If you want to compare with lawyers, we have one more year of formal schooling, followed by 3-8 years of residency and maybe a fellowship. Being a dinosaur, I did those when there were no limits on hours. We figured that we made about minimum wage for that time. If we had been out making lawyer or master’s level salaries, we would have been better off. If we had been making those pro-rated to the hours, much better off. I would also expect some of the specialists to have shorter, viable life time working years. It gets much tougher to do those emergency procedures at 0300 when you get up in years. Wait and see.


    • I know the rules of blogging, but I wouldn’t have bothered to respond too much to the snarky comments.

      I thought the whole series was very good EXCEPT that I didn’t quite understand how you were doing the “green” in the pie chart either, and that means you didn’t explain it very well if so many people didn’t get that part. Now I do get that part, so this post corrects that part as far as I am concerned. You could give a value to the size of your pie by noting it is 17% or so of GDP (whichever year it is), and then the green part is 12% of GDP, right? Or would that be an incorrect proportional argument??


    • As a citizen and a voter who has nothing to do with the health care industry, I really appreciate this series. It’s the first time I’ve seen everything put into a unified, rational perspective. I’ll definitely be coming back to this series again so I can put reform proposals in context. Thanks!

      One minor nit: In the introduction post, the link to this post is broken.

    • Thank you, Dr Carroll.

      ( i read this recent article in the NYT on Big Pharma which certainly adds to the cost of our health care system

      http://www.nytimes.com/2010/10/03/business/03psych.html?_r=1&ref=business&pagewanted=all )

    • Aaron,

      The very little on your site about HSAs shows how much you miss about price exposure.

      The math on HSAs leads to a very specific implementation, that you haven’t gotten to yet:

      1. Start with MAX tax free contribution: $6K
      2. The insured then have $6K, $7K or say $10K deductible based on risk they are will to take… it is better to maximize the tax advantage than to work off a smaller contribution / deductible.
      3. Now stick with me… we need a YELP style crowd-sourcing web site based on prices for HSA users.
      Here’s why: All doctors have a CASH price. All doctors also charge you normally the price your insurance company allows for each service.
      4. With this set up, user have a HUGE incentive to NOT USE their $$$, and to price shop like fiends. This is the model that must be tested before you moan further about price exposure.
      5. To achieve this… doctors have to get paid the CASH price (or better if you can haggle it), and get paid immediately. Policy change.
      6. So insurance companies have to accept instantly without any paperwork on DR side, the $ amount you spent against your deductible. Policy change.

      This model works for group, small, individual, employer contribution, it doesn’t matter.

      In fact, I encourage you to do some actual insurance company modeling – go to esurance, and set up as any age with any medical conditions, in any market – you’ll see the policy I described is CATEGORICALLY the optimal policy – I’ve tried it 50+ times.

      In fact on investigation, with some actuaries… because technically what I’ve found shouldn’t be actuarially possible.. it leads me to think the insurance companies are pricing this model to push people towards it… for a reason.

      People on HD plans WITH a funded HSA CHOOSE not to get treatment (the 50%+ wasteful stuff – see Indiana public employees)… so with a system that funds HSAs for the poor (where they keep some of what they don’t use), your response to the moral hazard is meaningless.

      Add that to the changes to price exposure and cash payment system for DRs / insurance companies – and I’ve built the winning play.

      Sure, I’d like to have Soup Kitchen Care for the poor – VA style care at $3K a man on a global budget… but the one I’m suggesting is just fine.

    • “Here’s why: All doctors have a CASH price. All doctors also charge you normally the price your insurance company allows for each service.”

      My group has a standard charge. We discount for insurance companies who bring us significant numbers of patients (we do not discount for low volume insurers). If you come to us as an individual you will usually pay about 50%-70% more than the insurance companies pay. We discount solely by income, based upon a formula used by our hospital.


    • With respect to the magnitude of the R^2, or square of the Pearson product-moment correlation coefficient, the snarky comment about 0.76 being low in the “science world” is correct, there is no confusion there. As an engineer, I’ve noticed that the “social sciences” regularly report R^2 values as “excellent” correlation that would make an engineer throw out the data. What I’ve come to realize is that there are different standards for different data sources. When you “social science” types report these R^2 values as acceptable, I just take your word that in your field they are.

      To summarize, Apples & Oranges.

      NOTA BENE: I didn’t make the original snarky comment, but was slightly relieved that someone else had noticed that. The correlation of your curve fits make me cringe, but like I said, Apples & Oranges.

    • Doctors,,. not hospitals.

      Going to a hospital is foolish on price. Who does that? Clinics, medical facilities, practices, any doctor paying rent on their place of business happily discounts for cash in the door, over dealing with medical billing, waiting 60 days etc.

      If you really want to argue this point with me, point me to a DR office that doesn’t have a cash price. I want to hear it from them. Again, I’ve spent many moons making these calls, in many markets for research on a start up – the feedback has been near universal. And by that I mean 80%+

      Other nearly universal feedback, DR’s who have to ensure themselves use HSAs…. so do insurance agents.

      Other feedback I’ve gotten in FL, NY, and TX… Hospitals are on a buying spree – making acquisitions of clinics left and right.

    • I fully agree with your comments on malpractice, but have two questions:
      Since lowering malpractice caps doesn’t make a big dent in defensive medicine, what does? My guess is that simply maoving away from fee for service will make a major impact, revealing that much of what gets called defensive medicine was only weakly determined by malpractice while strongly determined by payment structure. I also think that the fewer small practices, the easier it will be, since even though malpractice insurance is a business expense if you are running a small business the threat of a large award and thus higher premiums can be substantial. Is there evidence to support that belief?

      Second question: if you couldn’t distribute malpractice and defensive medicine into other buckets, aren’t you double counting it? It seems that this is being included in the higher medical cost slices as well as in its own slice. Did I misunderstand?

      • I’m not a physician. But I just don’t buy that the incredibly high cost of malpractice insurance in the US, on an average per physician basis, doesn’t significantly contribute to the cost and thus pricing of physician’s services. And I also wonder if this huge cost is buried/reflected in the macro as looking like higher per capita physician revenue/income?

        The data just doesn’t support any other conclusion, does it? Let’s just look at one specific sector/sliver – OB/GYN. The average cost of malpractice insurance premiums is over $100,000 per year! Even though Aaron discounts this away as a “pre-tax business expense”, you’re talking about each individual OB/GYN, whether in a group practice or not, having to recover an additional nearly $10,000 per month in fees, just to cover it!!!

        If an OB/GYN can MAYBE see 10 patients per day, and there’s on average 20 working days a month, that comes to an additional $50 needed per patient visit JUST to cover the malpractice premiums! (Not including the add’l overhead coverage of rent/leaseholds, nurses/office staff, lights, equipment amortization, yada yada, before they get paid!)

        How can this NOT be a significant contributing cause to healthcare costs?!?

        Here’s something glaringly missing from your series: How much do physicians in other countries pay for malpractice insurance, and how does that compare to the US? Does that difference – whatever it is – also fall above “what otherwise might be expected…”?

    • Have there been any studies on the cost of health care to immigrants from typically low-cost countries? In other words, for people who immigrate from countries that traditionally spend far less than us on health care (Japan, England, etc), do the immigrants’ health care costs over their remaining lifetime usually catch up the US average or do they stay relatively low? I would imagine they catch up over time, and that would probably also lay to rest the idea that obesity, or smoking/drinking patterns, or demographics, play a significant role in increasing our costs more than expected…

    • Steve is correct. Most of the overspending on Physicians salaries is accounted for by the overspending on Specialists. Surgeons are highly compensated relative to internists and family docs.

      The reasons for the overspending in the United States are rather straight forward and illustrated by two observations in your second post (inpatient care): 1) we do 25% more procedures than other countries; 2) health care organization is inefficient. To find the reasons for overspending, we must ask: Why is this so?

      The US performs 25% more procedures because the system is incentivized toward doing more procedures. Health insurance is not ‘insurance’. There is no pooling of money to reduce the effect of low probability, high risk occurrences. The availability of procedures raises the probability that they will be used.
      Neither doctors nor patients are incentivized away from doing procedures. In fact, they are both incentivized toward doing more procedures. Because most patients do not pay out of pocket for procedures, they have no incentive to seek less invasive forms of treatment. Because doctors are paid more for procedures than other treatments, they are incentivized toward doing more procedures. In addition, because testing and treatment are preferred by patients to non-treatment, doctors are incentivized to test and treat even when their medical judgment would dictate otherwise.

      Hospital inefficiencies are improving but still limited by geographic constraints and the non-profit model of many small hospitals. Small hospitals also serve less urban areas where they have more variation in patient load. Because trauma centers need to be within close proximity to victims, inefficiencies will continue. However, the hospital consolidations of the last 10 to 20 years will reduce most other inefficiencies.

    • Where there is elective surgery, there is price deflation. Which means when people are paying for their own way, they worry about price.

      This is the starting point. How to make people worry about price.

      The first step is silencing the left who does not want people to worry about price, but instead wants to decide for everyone what procedures they get.

      We are not “all in this together” – past basic level of care, those with money demand that they get BMW style care, that they get iPhone style care. And they deserve it.

      which is fine…. because in all pricing schemes “functional value” is achieved within the first 20% of menu pricing.

      Basic car: $15K 5 series BMW: $75K
      Basic phone: $100 iPhone: $500
      Basic cheese; $4/lb Fancy stuff: $20/lb

      Basic care: $3K a year per man Premium care: $15K a year

      What is IMPERATIVE is that we establish what the “functional services are and package those up into a floor – the kind of care those that cannot pay should be given.

    • @Morgan Warstler
      “That is the starting point. How to make people worry about price.”

      Exactly. That is also the ending point. People do not worry about prices that are invisible to them. When a person with health insurance has a specific pain, they go to the doctor so that the doctor will alleviate the pain. To them, price is no object because they do not have to pay the bill. Therefore, they are more than happy to get an x-ray or MRI or CT scan or biopsy or any other procedure as long as it stops the pain. These tests and treatments are not ‘elective’. Depending on the diagnosis, any or all of them can be justified as necessary to alleviate the symptoms or identify and remove the source of the pain. The problem is that, under the current system, both doctor and patient are incentivized to do more, not less.

      It will be extremely difficult to identify what level of services are ‘functional’ and what level of services are ‘luxury’. Treatment decisions are highly diagnosis-driven. Is trauma care ‘functional’ or ‘luxury’.? What level, duration, and location of pain must be experienced before an MRI or diagnostic procedure can be justified as ‘functional’?

    • Do not be ridiculous.

      It means X-rays are functional. MRIs and CTs in non life-threatening situations are luxuries.

      Off patent drugs are functional. Patented drugs are luxuries.

      Heart surgeries that leave a giant scar down your chest are functional, one that go through your armpit are luxuries.

      Queuing for a specialist is functional. Seeing a specialist immediately is a luxury.

      Just take the last 10 years of invention and put it in the luxury column. In another 10 years it will be int he basic column.

      Start with the kind of care they provide in Cuba, and call that Functional. Cuba does a great job without MTIs and CTs – just ask Michael Moore.


      As I keep saying… people with health insurance are BEING PUSHED to HSAs where they ARE PAYING the bill… they get to keep the money they don’t spend

      The failure of Aaron to get down into the giant success coming from these plans makes his efforts questionable.

      Look, people who try to keep money in their HSA are very very likely to spend the money when they are in REAL PAIN.

      We can solve for the moral hazard, make real savings, and only have a few instances where people deny themselves care and die because of it.

      There is always eventuality a cost component – the approach I lay out best solves for it.

    • “It means X-rays are functional. MRIs and CTs in non life-threatening situations are luxuries.”

      MRI’s and CT’s are not luxury versions of x-rays; they are cheaper and less-risky alternatives to exploratory surgery. There are many instances where x-rays are not sufficient for non-invasive diagnosis. The more correct trade-off is either to treat the most likely cause and cross your fingers or use a tool to try and pinpoint the cause more exactly.

      “Heart surgeries that leave a giant scar down your chest are functional, one that go through your armpit are luxuries…ust take the last 10 years of invention and put it in the luxury column.”

      Understand that the last 10 years of invention are actually MORE efficient than the older techniques and tools. Minimally invasive surgeries are typically compensated at lower rates to the surgeon and frequently result in less time spent in the hospital. As more procedures become MIS (and the older surgeons who eschew MIS retire) the operating time will likely reduce as well.
      The higher costs are a result of more patients opting for the MIS treatment because it has lower risk and lower recovery times. Open surgery was daunting for most people. Now they can be home the same day and back to work after only a few days off. Demand increases and more procedures are performed.

      I am not a health care provider; I have no dog in that fight. However, I understand enough to know that one who seeks a solution to this problem cannot be quite as dismissive of these complexities.

    • HSA accounts have significant perverse downsides. I see a very significant number of these patients defer (possibly year after year) expensive elective procedures that may be life saving and potentially cost saving . Think colonoscopy vs colon cancer colectomy + chemotherapy + monitoring. Also they get charged full price for hospital services. No discount if you pay cash is the usual rule. Hospitals have also discovered that refusing to have CT schedulers after the day shift and on weekends ensures these patients need to go through the ER generating an additional charge. When the study is ordered by the ER it’s suddenly possible to be scheduled by the department not the schedulers. Some part of your HSA becomes an additional “tax”payment for addition to general revenue.