Opinion: Health-care financing debacle: Should we be paying for procedures rather than health?

January 1, 2009

The current system pays hospitals and physicians for procedures rather than maintaining patients' health. That only encourages the deployment of ever more expensive equipment and therapies, with little evidence that they improve health outcomes.

The fact that the Athletics' GM feels compelled to give organized medicine advice should be a wake-up call to all of us. However, what Mr. Beane fails to appreciate is that there are serious impediments to the widespread implementation of evidence-based medicine. One obvious impediment is the cultural tradition of US medicine that favors the latest and most aggressive care, even if unproven. Another is our collective fear of litigation. But I would argue that a more subtle reason that we have been slow to adopt evidence-based medicine lies at the heart of our moribund health-care financing system. This system encourages hospitals to engage in an endless "arms race" with each other deploying ever more expensive equipment and therapies with little evidence that they actually improve health outcomes. Our system also pays physicians for procedures instead of health. The resulting vicious cycle escalates costs, increases the number of uninsured, and degrades our relative health-care performance compared to other developed nations.

Medicare: The poster child for our sick health-care financing system

Over the first decade of Medicare's existence, while the consumer price index rose 89%, hospital costs increased 345%.3 In retrospect, hospitals had every reason to drive their costs up, since they could recoup their added expenses and magnify the absolute amount of their 2% profit. Payments to hospitals generated from worker payroll taxes (Part A) doubled between 1970 and 1975 and doubled again by 1980. While of lesser magnitude, physician costs also began to rise. First younger doctors increased their fees, and then older physicians followed suit.3 These costs were borne by retirees' monthly contributions and, increasingly, by general tax revenues (Part B).

Evolution of Medicare hospital payments

Initial efforts to staunch the financial hemorrhage included President Nixon's attempt to cap routine costs. However, hospitals successfully gamed the system by switching cost assignment from the capped routine category to the uncapped ancillary category. From 1974 to 1977, hospital costs increased 15% per year, twice the rate of inflation. In 1977, President Carter again attempted to cap hospital costs but his efforts were stymied by effective lobbying from the AMA and the American Hospital Association. The latter favored a "voluntary" approach. Predictably, this failed and hospital costs resumed their upward spiral, rising 18% in 1981 alone. Indeed, between 1970 and 1980, total health-care spending increased from $69 billion to $230 billion and Medicare faced insolvency by the early 1990s.3