Wednesday, December 4, 2013

Why American Health Care Costs So Much

An ongoing New York Times series delves into the uniquely-expensive American health care system, and its latest installment As Hospital Prices Soar, a Stitch Tops $500 tackles one of the biggest culprits: hospital care.

The United States now spends over $2.7 trillion on health care every year, averaging $8,400 per person, thousands more per capita than any other country on the planet. Roughly a third of those costs come from hospital care, and hospitals account for the biggest driver of medical inflation (which has unsustainably outpaced market inflation for decades). The whole series is worth a read, but here is a summary of the main points of this important article, which features many California hospitals:

- Hospital mergers have consolidated the market over the last several years, allowing a small number of hospital chains to dominate the market and demand higher prices from private and public insurance. 

- The ever-elusive 'chargemaster' of each hospital lists prices for each and every facet of a hospital admission (IV bags, aspirin, physical therapy visit, x-rays, procedures), that are largely arbitrary and far above the actual market price. Every effort is made by hospitals to keep these lists secret from the public. 

- Growing armies of costly non-clinical administrators are employed by these hospital systems to maximize revenue through billing and coding processes.

- Rates and charges for identical procedures vary widely across regions independent of cost of living, even at hospitals within the same community.

- When the largest health systems are able to charge more, smaller hospitals will soon follow suit causing a ripple effect of inflated costs. 

- While the actual payment to hospitals is usually less than what is charged because of negotiated discounts, these payments are still far higher than fair market prices. 

Government spending as a proportion of American health expenditure has increased substantially over the last 20 years, and now represents almost half of total health spending. This trend will continue to rise as more individuals enter Medicare and through implementation of the Affordable Care Act, specifically through Medicaid expansion and subsidies for individuals to purchase private insurance. The onus will fall on deciding how best to maximize these tax dollars, while creating structural change to allow better cost-consciousness for individuals in a competitive marketplace.

As I have discussed in the past, the Independent Payment Advisory Board (IPAB) may have a significant role to play in reducing unnecessary costs and maximizing efficiency in our health care system. This may be even more true now, for our leaders in the political arena have essentially removed a long-standing line in the sand: The Filibuster. Over recent years Presidential nominees have faced an increasingly entrenched need for sixty votes in the Senate to begin working, effectively crippling the appointment process and leaving vital leadership posts unfilled. As a result of the new reform, appointments now only require a simple majority for approval. The yet-to-be-formed IPAB is a Presidentially-appointed board that has stalled because of this political reality, but with this new development may now come to fruition.


  1. On point as always, Adam. As they say, sunlight is the best disinfectant, and transparency is one of our best tools to containing inflated prices.

    In the wake of The Bitter Pill, it seems like chargemasters have been popping up all over the place. Most states have laws on the books requiring disclosure, but most are only on demand. Californian hospitals, however, are published here. There is also a nifty comparison tool organized by topic. Sadly, these are still pretty cumbersome and not all that user friendly or easy to digest. This wealth of info is siloed and wasted on policy nerds like ourselves, never making it out to the public.

    A neat project is Clear Health Costs. It's crowd-sourced hospital bill database that is well organized, visually appealing, informative, and off-the-grid, so to speak, so it skirts a lot of the bureaucracy that encumbers so many legislative efforts. Besides, we know how good the government is a websites...

    If we could harness this data to create user-friendly, accurate, informative price comparisons associated with meaningful quality indicators, it would provide a huge advantage in the fight against $500 stitches!

  2. Thank you so much for mentioning us at! We're using not just crowdsourcing but also our skills as journalists to conduct pricing surveys and to source and curate databases, revealing the pricing information others won't tell you.

    In this spreadsheet, all the prices are reported by our journos except for the ones tinted in aqua: that aqua tint means "crowdsourced" per the site key.

    Our view is that once price comes out of the shadows, meaningful quality metrics will too, because someone will have to explain what makes the $3,000 MRI ten times better than the $300 MRI.

    Eventually, that will deliver what we all want: cost and quality information, which lead you toward something resembling Value.

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