A doctor’s prescription for understanding healthcare costs

At one of the Clark Insurance Breakfast Briefings in 2013, we invited a noted Maine physician to offer his analysis of the stubborn facts of U.S.health care system. While shocking, the facts suggest immense opportunity to take control of our health and the cost of health care.

Dr. Daniel Landry, president of Spectrum Medical Group, provided a sobering context for understanding the Patient Protection and Affordable Care Act (PPACA). First and foremost is the magnitude of the nation’s financial challenge; persistent deficit spending and the cumulative national debt. As the title of his presentation stated, “This Time, It Really Is Different”.

Currently, the total federal debt, all the money owed by the federal government (currently $19 trillion), is greater than the value of everything our nation produces and sells in an entire year. This is known as the gross domestic product (GDP).

The last time that our debt exceeded our GDP was during World War II. The difference between then and now, however, is that explosive economic growth occurred in the 1940s and 50s but is unlikely to occur today or in the foreseeable future.

In 2011, the federal government spent $1.3 trillion more than it received in taxes. Even if the federal government seized the net assets of all U.S. billionaires ($1.3 trillion), it would balance the budget for only one year.

With the federal deficit in mind, he then described where much of our tax dollars are going. According to usgovernmentspending.com, in 2010, the federal government spent*:

• 21% of its budget on healthcare (e.g. Medicare, Medicaid, CHIP)
• 20% for defense spending
• 20% for Social Security
• 6% for debt service

Closer to home, 20% of Maine residents are covered by Medicare and 24% are covered by Medicaid. That’s nearly half of Maine residents relying on government spending for their health benefits at a cost of $4.3 billion.

The United States is spending 17.6% of its gross domestic product on health. In the 1940s, we spent only 4.2% of GDP for health care. The kicker is that while health care spending is growing at 6.7% per year, the growth of the economy is all but flat. The U.S. is on track to spend more than 20% (one of every five dollars) on health care by 2018.

Dr. Landry concluded that we cannot tax our way out of this problem. We must change how we deliver and fund health care. He also stated that the cost of U.S. health care is too expensive and of poorer quality compared to other industrialized nations.

For example, if the U.S. could lower the percentage of its gross domestic product spent on health care from 17.6% to that of France (11.2% of GDP), Americans would save $1 trillion, the federal government could add $463 billion per year to pay toward the national debt andfamily health insurance premiums would drop from $14,000 per year to $8,000 per year.

Can we change behaviors to improve our health and be smarter consumers? Not until there are incentives for the consumer and providers to do so. The five percent of the population responsible for more than 50% of all health care spending have chronic illnesses – cancer, diabetes, heart disease and hyper tension. These patients also often fall in the lower tiers of income and education. Change is a daunting task. So what’s the solution?

Part of the proposed solution to lowering costs and raising quality are Accountable Care Organizations (ACOs) in which outcomes are rewarded instead of fee-for-service procedures. In a major three-year demonstration study of ten physician group practices (5,000 doctors and 220,000 patients), all ten groups met the majority of quality metrics. However, only two practices were able to meet the stated 2% savings threshold and only five met the mark after three years. Total savings by all groups was 1.9%; hardly the transformation in cost savings that is expected of a major reform.

Another cost driver is end-of-life health care in which, no matter the cost, patients, spouses, children and doctors go to all lengths to prevent death with too little regard for quality of life or cost. The 6.6% of Medicare beneficiaries in their last year of life account for 23% of total Medicare expenditures.

For example, in 2009, the fifth most expensive Medicare patient in the United States had a heart transplant, spent a year in the intensive care unit, had multiple operations, unrelenting pain and died ten months following the transplant. Cost: $2.1 million.

Our conclusion from Dr. Landry’s analysis is that Americans must assume more financial risk through insurance plans that encourage wellness and financial gain if we are going to rid ourselves of this drag on the U.S. economy.Health savings accounts (HSAs) are one way in which individuals can save on insurance premiums and keep more of their weekly paycheck. In addition, we have to engage in difficult conversations about life, death and health lest we dig a personal and governmental hole that, one day, will be too deep to climb out of.

Photo by 401(K) 2013