Cost drivers of American Health Care

"The principles of Jefferson are the axiom of a free society"

Abraham Lincoln


A Nonpartisan Economic, Health and Public Policy Research Foundation

Cost drivers of American Health Care
By John A. Lanzalotti, MD
Copyright 2011

Table 1 – Health Care Cost Driver Comparison

Title

Moral hazard (reversible)

Brief Description

Individuals use services the cost of which is greater than their benefit.

How Driver is Currently Used

Currently, insurance is designed to cover discretionary and price-sensitive events.  This is an inefficient incentive stemming from the government in the form of Medicare and Medicaid and private sector insurance carriers in their design of insurance financing.  Patients do not have a financial incentive to remain healthy, thereby increasing risk.  Currently, insurance may require some combination of eligibility requirements, co-payments and deductibles or other provisions to try and offset this moral hazard. Laws may limit the ability to do so.

Deficiencies, inaccuracies and Problems with This Driver

People develop many habits and lifestyles that are not healthy.  They then develop many diseases that are caused by these habits which are then paid for by insurance, driving up the cost of treatment.  Many Americans cannot afford deductibles and co-payments especially for non-discretionary and price insensitive events.     

Advantages of Eliminating this Driver with the AHCP

Patients do not have to pay expensive deductibles and co-payments especially for non-discretionary and price insensitive events. The need for eligibility requirements and all other provisions are eliminated. Moral hazard is eliminated so there is no need to offset it. By separating non-discretionary and price insensitive events from discretionary and price sensitive events, insurance can then lower risk and create a proper incentive for patients to remain health, changing to more healthy lifestyles and dropping unhealthy habits.  By eliminating insurance for discretionary and price sensitive events, the premium for insurance drops considerably.  The difference in premium payment from today’s much more expensive payment can be kept in an asset savings account (reformed HSA) and used for events which are not insurable, discretionary or price sensitive. 

Table 2 – Health Care Cost Driver Comparison
Under market physician and hospital reimbursement (reversible)

Title

Under-market physician and hospital re-imbursement (reversible)

Brief Description

Under-market physician and hospital re-imbursement increases inefficiency by providing incentives for physician-induced demand for expensive, high-tech procedures.

How Driver is Currently Used

Government and insurance reduce reimbursement to under market payments in an attempt to control costs.  This is a type of price control.  Physicians have to maintain a certain income to pay for office overhead, malpractice insurance and to derive an income that is commensurate with their degree of professional responsibility.  There is thus an incentive for the physician to inappropriately use expensive high tech diagnostic and treatment options to maintain this level of income.  More patients also have to be seen in a given time period, reducing the time spent with each patient.  More expensive and inclusive options are selected to accommodate this reduced time.

Deficiencies, inaccuracies and Problems with This Driver

Price controls are ineffective at maintaining low costs.  More expensive, high-tech options cost more money and drive costs up.  Less time spent with the patient lowers quality of care.

Advantages of Eliminating this Driver with the AHCP

The patient will receive enough money for non-discretionary, price insensitive events to pay for all appropriate expenses arising from the insurable event at full, fair market value.  More doctors will be able to provide optimal visit time to each patient.  Full fair market payment will eliminate the necessity of inappropriately using more expensive options when less expensive options suffice.  The need for price controls can then be eliminated.

Table 3 – Health Care Cost Driver Comparison
Consumer demand for expensive high tech procedures (reversible)

Title

Consumer demand for expensive high tech procedures (reversible)

Brief Description

Consumers demand easier and broader access to care and for greater service intensity.

How Driver is Currently Used

Because of third party payment directly to providers, the patients have no idea of the cost of various options.  To the patient, one option is as good as the next regardless of cost.  Therefore patients want the “best” option.     

Deficiencies, inaccuracies and Problems with This Driver

This driver results in over-consumption of needlessly expensive options by patients.  This drives costs up.

Advantages of Eliminating this Driver with the AHCP

Results in the reduction of the inappropriate overconsumption of expensive options by patients.  Patient demand takes cost into account, allowing for more appropriate and optimal diagnostic and treatment options, lowering costs.  The patient pays for medical care and knows the actual costs.  The patient perceives the HSA assets as his “money” and not someone else’s.  Therefore, the patient spends the money more efficiently.

Table 4—Health Care Cost Driver Comparison
Growing and aging population (not reversible)

Title

Growing and aging population (not reversible)

Brief Description

More people consuming health care drives up the cost.

Advantages of Eliminating this Driver with the AHCP

This driver cannot be reversed.

Table 5—Health Care Cost Driver Comparison
Patient overconsumption (reversible)

Title

Patient overconsumption (reversible)

Brief Description

Third party payment provides incentives to patients to over-consume medical services and make inappropriate visits to the doctor.

How Driver is Currently Used

Because of third party payment directly to providers, the patient has no idea of the cost of various options.  Patients make more visits to the doctor than is optimal because they are insured and not paying directly for their care.  Since the insurance (“someone else” in the mind of the patient) is paying for their care, patients have no reason to question the appropriateness of their visits or limit the costs thereof.

Deficiencies, inaccuracies and Problems with This Driver

This increases demand for limited resources, thereby driving up costs.  More consumption than is optimal costs more money.

Advantages of Eliminating this Driver with the AHCP

Optimal use of medical services based on a more conscious interaction between patient and cost has the impact of lowering costs themselves.  The patient pays for medical care for which he knows the costs and directly paying for care with money that he perceives is his, making him more sensitive to the cost of those services.  Therefore, the patient spends the money more efficiently, removing unnecessary spending and resource consumption.

Table 6—Health Care Cost Driver Comparison
Physician over-utilization (reversible)

Title

Physician over-utilization (reversible)

Brief Description

Third party payment provides incentives to physicians to over-utilize the most expensive procedures and options. 

How Driver is Currently Used

Because of third party payment directly to providers the patients have no idea of the cost of various options.  Patients make more visits to the doctor than is optimal because they are insured and not paying directly for their care.  Since the insurance and not they themselves who are paying for their care, patients have no reason to question the appropriateness of their visits and the options chosen by their doctor.  There is an incentive for the physician to inappropriately use expensive diagnostic and treatment options to maintain income.  More expensive and inclusive options are selected.

Deficiencies, inaccuracies and Problems with This Driver

This increases demand and, when the resources are limited, drives costs up.  Inappropriate use of expensive options costs more money.  These high-tech options themselves cost more money and drive costs up. 

Advantages of Eliminating this Driver with the AHCP

The physician has a proper incentive to provide the patient with high quality care at the lowest price because he is under the restraints of a budget.  The more efficiently and cost-effectively he selects care for the patient, the more money the physician can make for himself.  Patient-induced demand for inappropriately expensive options are eliminated, thus lowering costs.  By offering the patient options within the context of appropriate care based on their price and value, competition between options is added at the doctor/patient level, thus driving costs down. 

Table 7—Health Care Cost Driver Comparison
Procedure-driven medicine (reversible)

Title

Procedure-driven medicine (reversible)

Brief Description

Fee-for-procedure medicine ( procedure driven medicine ) and the costly infrastructure necessary to file claims and receive payment

How Driver is Currently Used

The provider currently is paid by submitting a claim to the insurance company listing the diagnosis and procedure code with modifier code.  This has led to physicians treating disease episodically with a series of unrelated procedures which may or may not be optimal for that particular patient, often by different physicians who unaware of what the other physicians are doing.  A large office staff is necessary to file claims and follow up with the insurance carriers when claims aren’t paid in a timely manner. 

Deficiencies, inaccuracies and Problems with This Driver

By designing fee-for-procedure health delivery, insurance, both public and private in the current paradigm, has created incentives in the delivery of health care that fragment that care instead of treating the patient most efficiently in a coordinated fashion.  This inefficiency is not cost effective, and the cost of treating the patient rises.  The large office staff necessary costs money and overhead costs are high.

Advantages of Eliminating this Driver with the AHCP

By eliminating procedure-driven care, health care delivery is more efficient, thus lowering health care costs.  By using the protocols in the AHCP, the patient receives a budget that is appropriate to treat the patient’s episode of care.  A large office staff used exclusively for claim submission and retrieval can be eliminated, lowering costs for the physician and thus for his patients.

Table 8—Health Care Cost Driver Comparison
Opaque administrative mechanisms of managed care (reversible)

Title

Opaque administrative mechanisms of managed care (reversible)

Brief Description

Managed competition involves problems of information, coordination, and incentives in the supply of clinical services.

How Driver is Currently Used

This provides limited consumer choice and provider coordination.  There is limited consumer cost sharing.  Physician group practices work best in this system, and solo practitioners are discouraged with an emphasis on large physician and hospital organizations.  There is physician credentialing by the carrier.  It primarily uses price controls and rationing to control costs.  Competition is based on cost alone.

Deficiencies, inaccuracies and Problems with This Driver

Large bureaucracies require money which is taken from patient care.  This is inefficient and not cost-effective.  Competition based on price alone results in poor choices and money wasted.  Physician credentialing eliminates competent physicians from the available work force.  This increases the work load and inefficiency of those physicians selected.  This increase the possibility for error and needless repetition.  This drives up the costs of care.  Tight provider networks and increased consumer sharing drive up costs and threaten efficiency and delivery equity.  Managed care has poor incentives to control costs.

Advantages of Eliminating this Driver with the AHCP

Large bureaucracies are replaced with software using protocols and an automated process.  The AHCP offers a more transparent, flexible and personal system with no redundancy.  This lowers costs and provides the proper incentives to both provider and patient.  The AHCP introduces competition at the physician/patient level and provides optimum incentives to lower costs.

Table 9—Health Care Cost Driver Comparison
Micromanagement of physicians (reversible)

Title

Micromanagement of physicians (reversible)

Brief Description

The tendency for both private and federal insurance to micromanage providers is not cost effective and drives up costs in long run.

How Driver is Currently Used

Large bureaucracies are necessary to micromanage individual providers according to the needs of the insurance rather than those of the patient or physician.  Only a two-tiered utilization management system is permitted.

Deficiencies, inaccuracies and Problems with This Driver

Large bureaucracies cost money that can be better used for patient care.  The use of a mandatory two-tiered system leads to an inferior and more costly situation.

Advantages of Eliminating this Driver with the AHCP

No bureaucracy is necessary.  All costs associated with physician management can be eliminated.  The automated protocols are designed to provide each patient with the appropriate funds required by the insurable event in the most efficient and cost-effective way.

Table 10—Health Care Cost Driver Comparison
Regulatory overgrowth (reversible)

Title

Regulatory overgrowth (reversible)

Brief Description

Administrative costs and central organizational overgrowth as exhibited by federal government legislation/regulations. Not just administrative cost, Morbidity claims are impacted even worse. This is interrelated to many other cost drivers such as moral hazard (tax code with premium exclusion in 1954 started over-insurance which resulted in Medicare and Medicaid, which led to present price controls).

How Driver is Currently Used

Annually, $600 billion are spent on administration.  Layers of opaque regulation are used by the government to regulate the current market.  With the current insurance design, administrative costs are now very high, though they were initially low. 

Deficiencies, inaccuracies and Problems with This Driver

The regulation is ineffective and expensive.  Administration costs of third party payment are high because of the incentives inherent in the design and the abuses that have occurred over the past forty years.  Third party payment could not contain costs as our medical knowledge/technology has exploded over the past 50 years.

Advantages of Eliminating this Driver with the AHCP

The protocols of the AHCP reduce administrative costs to less than 2%.

Table 11—Health Care Cost Driver Comparison
Cost shifting (reversible)

Title

Cost shifting (reversible)

Brief Description

Cost shifting among payers; also from government payers to private sector purchasers.

How Driver is Currently Used

All insurances pay under market value payments.  Hospitals shift their losses to people with insurance in the form of increased premiums, and to the taxpayer in the form of increased payroll and income tax.

Deficiencies, inaccuracies and Problems with This Driver

Cost shifting subsidizes the elderly, the uninsured, the poor, and those who are underinsured in the most expensive, least cost-effective and least efficient way, inflating the overall cost of health care.

Advantages of Eliminating this Driver with the AHCP

Since all patients using the AHCP (or HAS) pay full, fair market value for their care, there is no cost shifting, therefore cutting cost inflation.

Table 12—Health Care Cost Driver Comparison
Longer, deeper insurance underwriting cycle (reversible)

Title

Longer, deeper insurance underwriting cycle (reversible)

Brief Description

A longer and deeper insurance underwriting cycle; insurance entities raise premiums in order to restore their profitability: insurer premium “catch-up.”

How Driver is Currently Used

The tendency to swing between profitable and unprofitable periods over time is known as an insurance underwriting cycle.  These cycles are unpredictable.  This is because there is not enough data with a base of similar risks to accurately predict future risks and thereby minimize the effects of the cycle.  The losses that result from this lack of data and risk minimization often force insurers to raise prices, thereby increasing costs.

Deficiencies, inaccuracies and Problems with This Driver

The boom/bust cycle causes premium rates to inflate.

Advantages of Eliminating this Driver with the AHCP

The AHCP produces enough data with a stable base of similar risks to accurately predict claims, thereby lowering costs.

Table 13—Health Care Cost Driver Comparison
Inflated drug costs (reversible)

Title

Inflated drug costs (reversible)

Brief Description

Escalating prescription drug costs and over-use.

How Driver is Currently Used

The government/industrial complex currently gives monopoly power to the drug industry, allowing the industry to raise profits through market manipulation.

Deficiencies, inaccuracies and Problems with This Driver

This behavior drives up the cost of drugs.  This cost is then shifted to American citizens to make up for the shortfall due to foreign price controls.

Advantages of Eliminating this Driver with the AHCP

AHCP institutes a free market that keeps any one provider or factor from having exorbitant power over the health care market, thereby lowering costs.

Table 14—Health Care Cost Driver Comparison
Provider negotiations (reversible)

Title

Provider negotiations (reversible)

Brief Description

Provider negotiations with health plans for higher reimbursement.

How Driver is Currently Used

Hospitals and physicians are suing insurance carriers for higher reimbursement.    

Deficiencies, inaccuracies and Problems with This Driver

This activity drives up costs to offset losses elsewhere, plus the cost of the ensuing legal fees.

Advantages of Eliminating this Driver with the AHCP

All providers are paid at fair market value and do have an incentive to sue.

Table 15—Health Health Care Cost Driver Comparison
Over supply of hospital beds, high-tech equipment, and specialists (reversible)

Title

Over supply of hospital beds, high-tech equipment and specialists (reversible)

Brief Description

The oversupply of hospital beds, expensive equipment and specialists.

How Driver is Currently Used

There is no free market to regulate these goods and services, so hospitals pay for many more of these expensive commodities than is necessary.

Deficiencies, inaccuracies and Problems with This Driver

This causes gross inefficiencies and cost-ineffective management.

Advantages of Eliminating this Driver with the AHCP

Goods and services are allocated in an efficient and cost-effective way, cutting out excess while still meeting patient and physician needs.

Table 16—Health Care Cost Driver Comparison
Volume of medical services (reversible)

Title

Volume of medical services (reversible)

Brief Description

The volume of medical services provided for inpatient care.

How Driver is Currently Used

There is no free market to regulate these goods and services.

Deficiencies, inaccuracies and Problems with This Driver

This causes gross inefficiencies and the least cost effective management because the volume is needlessly high.

Advantages of Eliminating this Driver with the AHCP

Goods and services are allocated in an efficient and cost effective way through cutting out unnecessary medical services.

Table 17—Health Care Cost Driver Comparison
Defensive medicine (reversible)

Title

Defensive medicine (reversible)

Brief Description

Defensive medicine as used by physicians to protect against malpractice suits.

How Driver is Currently Used

Physicians deviate from the most efficient and cost-effective practices of medicine to doing more procedures in order to avoid the threat of lawsuit.

Deficiencies, inaccuracies and Problems with This Driver

This unnecessarily drives up the cost of health care

Advantages of Eliminating this Driver with the AHCP

The AHCP has incentives for both the patient and physician to discuss their options, and the choice for care is made cooperatively, decreasing physician liability.

Table 18—Health Care Cost Driver Comparison
End of life care (reversible)

Title

End of life care (reversible)

Brief Description

Excessive and inappropriate treatment at the end of life.

How Driver is Currently Used

Third party payment by Medicare pays for all care no matter how inappropriate.

Deficiencies, inaccuracies and Problems with This Driver

This is inefficient and not cost effective and drives costs up, also using up medical resources.

Advantages of Eliminating this Driver with the AHCP

In the AHCP patients, cannot be rationed excess care by the government or insurance carriers.  Only non-discretionary and price insensitive events are insurable events, so patients are financially responsible for any excess care they desire.

Table 19—Health Care Cost Driver Comparison
Medical price inflation (reversible)

Title

Medical price inflation  (reversible)

Brief Description

The medical price inflation which results from a dysfunctional market and economy.

How Driver is Currently Used

Price insensitivity on behalf of consumers, lack of competition, and technological complexity controls the cost of medical services.

Deficiencies, inaccuracies and Problems with This Driver

This is inefficient and not cost effective and drives costs up

Advantages of Eliminating this Driver with the AHCP

In the AHCP there is a competitive free market where innovations are used only if they are efficient and cost effective, and consumers make more informed, efficient choices.

Table 20—Health Care Cost Driver Comparison
Poor-quality care (reversible)

Title

Poor-quality care (reversible)

Brief Description

Poor-quality care including errors, overuse, misuse and under-use of health care services, including avoiding sick patients, lowering staff-to-patient ratios, and the denial of care by some insurers and health plans.

How Driver is Currently Used

The use of third party payment, under market payment, price controls and rationing lead to poor incentives.

Deficiencies, inaccuracies and Problems with This Driver

Poor incentives translate into poor quality care.

Advantages of Eliminating this Driver with the AHCP

In the AHCP there is a competitive free market where negative incentives are eliminated by full, fair market payment.

Table 21—Health Care Cost Driver Comparison
State insurance mandates (reversible)

Title

State insurance mandates (reversible)

Brief Description

State insurance mandates that guarantee benefits.

How Driver is Currently Used

State mandates are all related to third party payment,

Deficiencies, inaccuracies and Problems with This Driver

This increases costs to insurance companies and raises patient premiums.

Advantages of Eliminating this Driver with the AHCP

The AHCP eliminates third party payment and there is no necessity for state mandates.

Table 22—Health Care Cost Driver Comparison
Solvency requirements (reversible)

Title

Solvency requirements (reversible)

Brief Description

State solvency requirements oversee and require health plans’ financial solvency.

How Driver is Currently Used

Although these State solvencies were meant to benefit consumers, they result in costs that are borne by insurers and are ultimately passed on to those consumers.

Deficiencies, inaccuracies and Problems with This Driver

This increases costs to insurance companies and raises patient premiums.

Advantages of Eliminating this Driver with the AHCP

The AHCP creates a risk stabilized market for insurance which lessens the risk of insolvency.   

Table 23—Health Care Cost Driver Comparison
Fraud and abuse (reversible)

Title

Fraud and abuse (reversible)

Brief Description

Use of the rules and loopholes of our current finance system that uses a claim form to benefit unilaterally to increase payment beyond appropriate levels.

How Driver is Currently Used

Physicians notify the insurance payer and validate the fact that an insurable event has occurred in a given patient using the rules and loopholes of our current finance system that uses a claim form to benefit unilaterally to increase payment beyond appropriate levels.

Deficiencies, inaccuracies and Problems with This Driver

This increases costs to insurance companies and raises patient premiums.

Advantages of Eliminating this Driver with the AHCP

Allows physician verification that a particular insurable event has occurred without the physician being able to use the rules and loopholes of our current finance system to benefit unilaterally to increase payment beyond appropriate levels, thus preventing fraud.