How to reduce health care costs.

• Author: Riczo, Steven

THE U.S. health care system rapidly is absorbing an ever-increasing share of the gross national product, rising from 5.3%o in 1960 to 13% in 1993, with projections to 18% in the next seven years. Hospital care accounts for approximately 40%; physicians, 19%; drugs, eight percent; nursing homes, eight percent; and the remainder is divided among dental, personal health needs, vision, home health, public health, and miscellaneous. The payment system through insurance undoubtedly is a major contributing factor for health care costs today. Aging of the population and high-technology care often are cited as contributing factors as well. However, the population does not age enough in a single year to cause double-digit inflation, and technology overuse is a result of health insurance reimbursement that pays for it.

It long has been recognized that if a physician is going to order a test and the patient is responsible for none or very little of the cost thanks to insurance coverage, there is a strong tendency to treat resources as if they are free. Health insurance initially evolved as a means to pay for expensive hospitalization and catastrophic care, but now frequently compensates for small items such as office visits, inexpensive tests, etc. Patients pay a mere four percent of hospital costs and 18% of physician out-of-pocket charges. This discourages efficiency and produces high administrative expenses for filing claims. As a result, price all too often becomes an insignificant factor and an ineffective regulator of supply and demand, which become distorted. Health insurance obviously is a requirement for expensive, high-tech care, but specific reimbursement formulas must encourage efficiency.

Current methods of reimbursement result in numerous market distortions. For instance, payments to doctors have been skewed heavily toward procedures by specialists, with lower fees going to primary care physicians who provide general medical care. Communities with a higher percentage of primary care physicians have been shown to have lower health costs.

Recent studies demonstrate that specialists order more expensive tests, and a number of others found significant unnecessary testing. The Rand Corporation has documented certain types of unnecessary surgeries, including 14% of heart bypass operations and more than 30% of those to remove atherosclerotic plaque from the carotid artery. Medical journals have reported numerous unwarranted hysterectomies, and 50% of coronary angiograms may be uncalled for. Studies in Florida indicate that physicians who own clinical laboratories and imaging centers order more tests, including 54% more magnetic resonance imaging (MRI) exams.

The reasons for unnecessary testing undoubtedly have their roots in the current reimbursement system and include residency training emphasizing high-tech care in teaching institutions; too many specialists, with insurance reimbursement geared to specialized procedures; disregard for diminishing returns, often obtaining very little clinically useful information at a very high cost; consumers demanding procedures or tests they hear or read about; malpractice / defensive medicine; financial gain/fraud; lack of established practice standards; and tests performed out of the mainstream of medicine that circumvent normal technology assessment.

There are economies of scale in health care just as there are in other businesses whereby large volumes drive down the unit cost of production. Insurance props up many small, inefficient, and high-cost health providers. For instance, large national clinical laboratories that conduct blood and other tests for...