Medical technology drives spending

Medical technology is the engine that drives health-care costs. It accounts for an estimated one-half to two-thirds of spending growth.

Technology can come in the form of new procedures, drugs, medical devices or support systems such as telemedicine or electronic health records. The National Center for Health Statistics took a snapshot of technology changes from 1996 to 2007. Use of advanced imaging technology in outpatient facilities tripled during that time. Knee and hip replacements increased 60 to 70 percent. Angioplasty surgeries open blocked or narrowed coronary arteries. Nearly two-thirds of angioplasties involved no stents in 1996. By 2006, more than 90 percent included stents – and more than three-quarters of those were coated with drugs.

All of these procedures are expensive. Technology expansion contributed mightily to the fact that Medicare Part B reimbursement, which covers doctor and outpatient services, more than doubled, to $14.1 billion, from 2000 to 2006.

Outpatient care does not require an overnight stay in a hospital. It can take place in a doctor’s office, hospital or outpatient surgery center. Health-care providers have aggressively expanded outpatient care for a number of reasons. The centers are highly profitable, sometimes exceeding a 25 percent margin. Outpatient procedures often result in quicker patient recovery and can be performed less expensively than during hospitalization. However, lucrative fee-for-service reimbursement and customer convenience encourage excessive use of services. In other words, it is doubtful that the need for advanced imaging tripled in a decade. Moreover, health outcomes were not twice as good for a Medicare patient in 2006 as they were in 2000.

Technology serves a useful purpose for providers, beyond the possibility of improved treatment. Health-care innovation leads to higher prices for services. There is scant resistance to this from patients, because they pay so little of the bill. Government programs and health plans also offer little resistance,  because they do not want to be accused of denying patients access to the latest medical tools.

Hospitals also like to market their cutting-edge technology to attract physicians and their patients,  because it serves as a proxy for quality. The consequence in many markets is a medical arms race as hospitals try to match their competitors, creating an oversupply of facilities and a temptation to overuse the equipment to justify the expense. Even the most efficient health-care organizations must grapple with acquiring technology and charging high prices for procedures. This can offset – even overwhelm – their best efforts at supplying more cost-efficient care in other services.

At best, the evidence is spotty that all of this technology is bettering health outcomes – or even is an improvement over the services they replace. Health care arguably is not an important determinant of health. Other factors – health behavior, genes, education and income – play much greater roles in health outcomes. Health care rarely cures disease. It mostly helps patients cope with what they have.

How complex is U.S. health care administration?

Brookings Institution economist Henry Aaron described the U.S. health-care system as “an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird.”

For example, Johns Hopkins Health System in Baltimore deals with about 700 different health plans, employers and other payers. Each payer has an annually negotiated rate for each service. Each also has different payment cycles and eligibility rules that must be tracked. The sheer complexity creates its own redundancies in several Hopkins departments, which the organization calculated to be more than $40 million annually.

Simply moving money from the payer to the provider based on negotiated rates is extremely expensive. Billing and insurance-related functions can account for more than half of administrative expense at a hospital or large physician practice. For an insurance company, the share can exceed 80 percent. Health-care clerical workers outnumber physicians 9 to 1, and registered nurses 3 to 1.

The U.S. spends about three times as much on health administration and insurance per capita as Canada. Brookings economist Aaron estimated in 2003 that the U.S. would save more than $213 billion annually if it had a single-payer system similar to that nation’s.

The complexity of the health-care system places an enormous administrative burden on physician offices. For example, many economic sectors other than health care devote 100 or fewer full-time equivalent employees (FTEs) to collect $1 billion. By comparison, the median number of physician-office FTEs to collect $1 billion is 770. For a 10-physician practice, those extra FTEs cost $250,000 annually.