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The High Cost of Health Care in America - Don't Blame the Legal System

March 9, 2012

What the Business Roundtable knows about American health care

Ezra Klein - Washington Post

Tuesday, March 6, 9:19 AM

On Sunday, I reported on new data from the International Federation of Health Plans showing that health-care prices are far higher in the United States than anywhere else. An MRI, for instance, costs $1,080 here, but only $280 in France. The disparity is explained, I said, by the fact that in other countries, the government sets the price and providers take it or leave it.
But some readers thought I missed the boat on this one. So let’s go through some of the objections.
Perhaps the most common complaint was that I omitted any mention of the medical malpractice system and administrative costs. As one reader wrote, ”you fail to address that more bureaucracy, more paperwork and persistent unchecked liability are at the root of price hikes.”
Let’s start with medical malpractice. Its direct costs — premiums, payouts, legal fees, etc. — amount to about one-half of 1 percent of total U.S. health-care spending. It’s barely a rounding error.
I specify “direct costs” because there’s a separate question related to “defensive medicine” — tests and treatments doctors prescribe to protect themselves from lawsuits. The problem is it’s very difficult to figure out what is and isn’t defensive medicine. In a world where patients and their families want every treatment that might help and where doctors and hospitals are paid more for every additional treatment they try, there are plenty of incentives pushing doctors to do more. Fear of lawsuits is simply one of many.
In October 2009, in response to a request from Sen. Orrin Hatch (R-Utah), the Congressional Budget Office took a careful look at the evidence on defensive medicine and concluded that aggressive reforms to the medical malpractice system “would reduce total national health care spending by about 0.5 percent.”
Absent in this conversation, however, is the fact that many medical malpractice lawsuits aren't frivolous, and the United States actually has a higher rate of medical errors than other countries. One of the most common medical errors occurs when surgeons leave a “foreign body” — a sponge, for instance — inside a patient. According to the Organization for Economic Cooperation and Development, such errors are more frequent in the United States than in any other developed country, except Switzerland and New Zealand.
So while I’m for medical malpractice reform — I believe we should have “safe harbor” provisions that protect doctors who follow accepted best practices — it’s not a cure-all for our cost problem, and it can’t be used to hide the very real mistakes that lead to these lawsuits in the first place.
Which brings us to billing and other administrative costs. A 2007 report by the McKinsey Global Institute estimated that high administrative costs accounted for 21 percent of America’s excess spending on health care. Most of those costs were on the private market. Medicare, they found, spends about 3 percent of its budget on administration. But private insurers spend much more. The excess is mostly attributable to “underwriting health risks and sales and marketing — costs that do not arise in the public systems of most [other industrialized] countries.” And private insurers lead to higher administrative costs for doctors and hospitals, too, as they have to negotiate different insurers with different payment processes who are paying different rates. That’s another thing doctors in other countries don’t deal with.
That’s all to say that higher administrative costs are part of why American health care costs so much. But it’s a story that’s essentially identical to the one I wrote: The difference between the United States and other systems is that, in other systems, the government sets prices, and that saves money.
I also got a lot of feedback from doctors who were angry that the article implied they were charging too much. Some noted that they graduate from medical school burdened with hundreds of thousands of dollars in student debt — a problem doctors in other countries don’t deal with. That’s true. They also argued that they work very hard. That’s also true. As one wrote, “maybe a little appreciation and less complaining is in order.”
It’s not complaining to point out that Americans pay more per unit of health care than residents of any other country. It’s just a fact. And here are a few more: As of May 2010, the average general practitioner made an annual salary of $173,000. The average surgeon made $225,000. In January, the New York Times reported that “doctors are more likely than any other profession to be in the top 1 percent — one in five is.” Doctors in the United States also make far, far more than doctors in any other country. Our nurses make more than nurses in other countries, too.
That’s not a value judgment. It’s just another part of the story of American health-care costs, and we have to be honest about it. That said, I worry less about how much money doctors make than how that money is made. Currently, doctors make more by treating more — and there’s little evidence that the extra interventions are providing significant health benefits.That’s why moving from volume-based payments to quality-based payments is so important.
Finally, some readers had a very simple response: Americans pay more because they get more. We have, in the words of many of our politicians, “the best health-care system in the world.” That’s why it costs so much.
On this, I’ll appeal to the Business Roundtable — hardly a hot-bed of known communists. They created a "value index" incorporating “a total of 19 measures of health care spending and health performance measures” — everything from cancer mortality to medical errors to mean cholesterol. “When measured against our competitors’ health value scores, we trail significantly,” the group concluded. “If global economic competition were a 100-meter race, the G-5 group” — Canada, Japan, Germany, Britain and France — “would have a 23-meter ‘head start,’ and the BIC group” — Brazil, India and China — “would have a 46-meter head start on U.S. employers and workers.”