By Hamilton E. Davis
The central reason for the national consensus in support of health care reform is the explosive growth in medical delivery system costs since the mid-1960s, when the federal government instituted Medicare and Medicaid to pay for health care for the elderly and the poor.
A few statistics: In 1966, Americans spent 6.6 percent of their annual output (the Gross National Product) on health care; now the figure is just short of 20 percent. In Vermont, hospitals doubled their spending from 2000 to 2009, with no appreciable increase in state population or improvement of health status.
When Al Gobeille, the chair of the Green Mountain Care Board, talks about health care reform he often cites the following data:
A typical bill for health insurance for a Vermont family of four with an income of $60,000 in 2015 would be $23,957, 38 percent of their gross income. If costs continue to grow at an historical rate their income would grow to $73,140 in 2025, whereas their health insurance bill would grow to $41,253 per year, 56 percent of their income.
The above figures have been picked out of an ocean of data on the inflation of health care costs over the last half-century. The result is that no serious person thinks Vermonters or Americans generally can allow costs to continue to grow on their historical trend.
The question is what to do about it.
The first response to the cost explosion was conventional regulation, which was tried at both the state and national levels. If a doctor-hospital combination has been getting paid, say, $4,000 to take out an appendix, just tell them they can only increase that amount by so much a year. We now have roughly 40 years of experience to tell us that price regulation has been a total failure. A dreary parade of alphabet soup agencies, boards, government gizmos of all kinds — all failed to keep costs remotely within a reasonable range.
By the 1980s, the health policy community figured out why. Most of the public, including most of the press, legislators and government boohoos of all kinds, are inclined to think of health care as a conventional market. A patient (consumer) goes to her doctor and purchases care in the same way she buys a television set, a car, or a bag of carrots at the farmers’ market.
She decides what she wants and if the seller can deliver it at a price the consumer thinks is reasonable, they have a deal. If not the consumer walks away, and if too many consumers walk away, the supplier goes out of business.
That is a conventional market and in such a market competition acts as a rein on costs.
Health care is simply not a conventional market. One of the first to articulate that thesis was a Stanford University researcher who argued in the 1980s that the cost driver in health care was what he called supplier-induced demand. In a conventional market, the buyer creates the demand the producer supplies it, or meets the demand. In health care the doctor does both — he or she tells patients what they need and then they supply it. The effect is to shift the driver of system cost from unit price — how much is charged for an appendectomy, or heart surgery or to sew up a cut finger — to the volume of care. In a given population, the volume of care can and does vary dramatically.
Example: A person who has a headache can go to the doctor and be treated on a sort of continuum. The doctor can prescribe two aspirin; or she can order an MRI to rule out the possibility of a brain cancer. Let’s say the charge in one place for an MRI is $900, and the charge in another is $1,200. The first is cheaper, right?
Not necessarily. The doctors in the first place may order twice as many MRIs as the doctors in the $1,200 facility. In that case, the cost over a cohort of, say, 10,000 people in a hospital service area would be $72,000 for a utilization rate of 60 MRIs per capita, and $108,000 for a similar cohort in the supposedly cheaper location.
Could such a disparity actually exist? It not only could, but does, all over Vermont and all over the United States. Doubters could check out resources such as the Dartmouth Health Atlas, which documents the variability in utilization rates in the U.S. The ability to understand the problem of cost inflation in health care, and further, to understand the reform movement in Vermont and in the country, rests absolutely on acceptance of this fundamental reality:
The cost of health care isn’t determined by the unit cost, it is equal to the unit cost times the volume.
If you can’t control costs without considering volume, then you really have no choice but to change the way you reimburse doctors, hospitals and other providers for the care they deliver. Which is precisely what the Vermont reform effort aims to do. It is also the course fixed on by the Centers for Medicare and Medicaid Services (CMS) for the country at large. Moreover, the elegance of the Vermont design is why CMS has selected Vermont to lead the way toward new framework for delivering health care.
The buzzword to describe the Vermont project is the All-Payer Model, the infrastructure for which is now in place in the state. I’ll sketch out what that means in the next episode…