US Health Care: Why Privatization Is Inefficient – Part 2 of 4

Spending More, Getting Less — The Public System

Because of their identity as government programs, societal scepticism about the US government’s ability to manage efficiently, and the relative reduction of power and status allotted to the primary recipients of public health care (the poor and elderly), Medicare and Medicaid are often the target of spending criticisms. There are legitimate problems with public health care efficiency, however, to focus on Medicare and other public programs ignores a much larger problem. Inefficiency is a problem for health care in general, not just the programs that are widely understood to be paid for by taxpayers.

Contrary to popular belief, spending more money or providing more medical services does not necessarily equate to better quality of care for patients (Fisher & Welch, 1999). In terms of Medicare, a recent study determined that higher spending often results in more expensive care, more intensive interventions, and more services provided, though not ones necessarily likely to improve patient health (Baicker & Chandra, 2004).

In 2001, the state of New Hampshire spent approximately $5,000 per Medicare beneficiary and achieved the highest overall quality ranking. In comparison, Louisiana spent the most per Medicare beneficiary at $8,000 per person, and received the lowest overall quality ranking (Baicker & Chandra, 2004).

Baicker and Chandra (2004) note that higher spending does not cause lower-quality care, but reflects a particular style of health care delivery and resource utilization. Ballooning health spending by individual states may not be a reflection of commitment to improve health so much as they are a result of the ineffective management of services. Unfortunately, what is observed is that states that spend the most are also the most likely to attract a higher concentration of specialists, which may actually compound the problem.

The relative number of general practice (GP) doctors versus specialists in a particular area greatly influences how the system will be used in that area. A higher ratio of general practitioners in a given state correlates with higher ratings in quality of care, and lower spending per beneficiary, while the reverse is true for increased density of specialists (Baicker & Chandra, 2004; Davis et al., 2007). An increase of one GP per 10,000 people correlated with with a rise in quality ranking and a spending reduction of $684 per beneficiary. Comparatively, an increase of one specialist per 10,000 people resulted in an overall drop of rated quality of a state’s care, and a spending increase of $526 per beneficiary (Baicker & Chandra, 2004).

Defining Quality

In the aforementioned study, the ratings were based on an analysis of twenty-four quality measures developed by the Medicare Quality Improvement Organization (QIO) and data from the Dartmouth Atlas of Health Care.

States that were rated as providing high quality care tended to emphasize pro-active interventions and preventative methods in targeted areas such as cancer screening, post-heart-attack follow-up, and regular blood and vision tests for people with diabetes. Those rated as lower quality had more frequent hospitalizations and a higher use of intensive care units, suggesting that a reactive treatment model results in increased spending and a lower quality of life, particularly for those in their last 6 months of life (Baicker & Chandra, 2004).

Spending Cuts?

While increases in spending can foster an inefficient system, cutting Medicare spending in the hope of sparking a reactionary improvement in quality may have just the opposite effect — reducing the quality of care for patients in low-performing, high-spending states even further. Baicker & Chandra (2004) recommend changes to policies, such as the establishment of national practice benchmarks for basic quality measures, improved access to general practitioners, and more focus on preventative care.

Paying More, Getting Less — The Private System

In recent years, double-digit increases in premiums have resulted in huge profits for insurance, health-care and pharmaceutical companies.

Mergers, which are often touted as positive developments in the creation of greater efficiency, reduction of duplication of services, and lowered costs, do not seem to be materialising that way in the hospital sector. In 2004, aggregate profits for U.S. hospitals reached a record $26.3 billion, having risen substantially each of the past number of years despite the number of hospitals and hospital beds declining over the same period (Institute for Health and Socio-Economic Policy [IHSP], 2005)

A 2003 study of the 100 most expensive hospitals in the U.S. (commissioned by the California Nurses Association) found that high profits margins, not high quality or efficiency was the primary cause of expense. Intriguingly, of the 100 hospitals, ninety-five were owned and operated by for-profit hospital chains (Mahar, 2006).

A related study examining the most expensive hospitals determined that for-profit hospitals had the highest average charges, billing 366% of their actual cost, while government hospitals the had the lowest, charging 181%.

In for-profit hospitals, markups on drugs, operating room use and medical supplies accounted for much of this profit. On average, the top 40 most expensive hospitals charged a 2,319% markup for drugs, 1,073% for operating room use, and 5,090% on medical supplies (IHSP, 2005). Because these charges are not standardized, and few consumers think to inquire about the markups on everything their treatment will require while they are being hospitalized, the selection of one hospital over another can have dire consequences. For those funded by a health maintenance organization (HMO), the negotiation gap between hospital charge and eventual payout may fall to the consumer if the charge exceeds the HMOs maximum coverage. In the case of self-payers or the uninsured, the entire charge — regardless of the variable markup — is their own.

Just as hospitals consolidate their market power by merging into chains or larger organizations, so do insurance companies. In 2005, the ten largest private insurers managed 48% of the insured population. In 1995, the top ten controlled only 27% (Mahar, 2006).

Rather than creating well-funded, economically stable entities able to offer lower premiums, their premiums have increased. Rather than saving money by streamlining and eliminating duplication during the amalgamation process, they have instead become increasingly bloated and inefficient – but wealthy. The 20 largest HMOs in the U.S. made $10.8 billion in profits in 2004 (IHSP, 2005).

The fastest rising costs in health care spending over the last five years has been in the insurance companies administrative overhead. Between 2000 and 2005, net overhead (including profit) increased an average of 12 percent a year (Davis et al., 2007). The cost of this inefficiency is being passed along to employers, and to the employees in turn.

Premiums paid by businesses offering employer-based health insurance rose by 7.7 percent in 2006, and the smaller the business was, the greater the increase. Small employers saw their premiums increase an average of 8.8 percent; companies with less than 24 employees saw an increase of 10.5 percent (NCHC, 2007). In 2006, the annual premium that insurance companies charged an employer for an employee family health plan (4 people) averaged $11,500. For workers, this represented an average $300 increase over 2005. Additionally, this annual premium exceeded even the gross earnings of full-time, minimum-wage workers ($10,712), making family coverage an impossibility. The premiums for employee health insurance in the United States have been rising at a rate four times faster than employee earnings since 2000 (NCHC, 2007). Meanwhile, in 2004, the 12 top HMO executives earned $222.6 million in direct compensation for their efforts (IHSP, 2005).

The Pharmaceutical Industry
It sounds reasonable to assume that pharmaceutical research exists for the purpose of curing disease, and in an ideal world this would be the case, but in reality they exist to make money. The world’s 13 largest corporations earned $62 billion in profits in 2004, while the top 12 drug company executives earned $192.7 million over the same period (IHSP, 2005; NCHC, 2007).

In 2002, pharmaceutical corporations spent a combined $30 billion for various types of promotion. This amounts to about one-seventh of their total revenues, and considerably more than the $19 billion they re-invested for research and development initiatives (which in many cases were directed at me-too drugs to capture a share of an emerging market from competitors) (Mahar, 2006).

The industry’s contribution to inefficiency is in its choice of research areas. While it would make sense to aggressively pursue the most pressing health problems, increasing national health, lowering sick days, thereby improving American productivity and increasing GDP, this is not the dominant thinking. Markets are examined and products developed based on their potential to generate huge profits, regardless of the relative importance of the disease or condition in question.

In the U.S., a textbook example of this is the phenomenon of Viagra, which prompted the development of the me-too drugs Cialis and Levitra, as well as flood of lower-tier non-prescription alternatives like Enzyte and Maxoderm.

Meanwhile, there continue to exist a significant number of serious diseases which research has sidelined as unimportant. Sleeping sickness, malaria, schistosomiasis, and Ebola are a few examples. What they share in common is that they are primarily contracted by the poor in developing countries. In the case of schistosomiasis (a parasitic infection that can cause liver and urinary tract disease, and bladder cancer), the abundant availability of the endod berry (a natural treatment with some promise) made it difficult to for corporations to generate a desirable profit level. In the case of Ebola — a truly horrific and lethal disease — the expense and difficulty in developing a treatment was judged too high of an investment for the low potential returns. When asked about the possibility of an Ebola virus vaccine, Gordon Douglas — a retired chief of vaccines formerly of Merck, and one of the world’s leading developers — said, “There’s no market for this” (Perelman, 2002). Wall Street agrees.

Thus, the modus operandi of the U.S. research industry is: examine the market for opportunities, initiate research toward a product, patent it, fund or self-test the product’s efficacy, obtain FDA approval, price the product at the highest level the market will tolerate, examine potential off-label uses of the drug, expand it into other treatments if possible (if only informally, by physician word of mouth), make as much money as possible for as long as possible, and when the patent nears expiration — lobby for an extension (Perelman, 2002; Baker, Johnsrud, Crismon, Rosenheck & Woods, 2003; S. Sabesen, MD; & D. May, MSN, personal communication, 2001).

When the patent for Claritin was due to expire in 2002, Schering-Plough Pharmaceuticals attempted to protect their flagship product by requesting a 3 year special patent extension from Congress. Legislators were initially in favour of the “Claritin Monopoly Relief Act” (as it was nicknamed by Representative Henry Waxman) until a groundswell of negative publicity arose (Perelman, 2002).

While Schering-Plough may been unsuccessful in this instance, the industry as a whole has been enormously successful — not always in curing disease, nor substantially improving health, but generally in managing illnesses. Their highest achievements, however, have been in identifying and exploiting market niches, and shaping the American culture to alter their relationship with both physicians and clients.

  • Baicker, K. & Chandra, A. (2004). Medicare spending, the physician workforce, and beneficiaries’ quality of care. Health Affairs, W4, 184-197.
  • Baker, C. B., Johnsrud, M. T., Crismon, M. L., Rosenheck, R. A., & Woods, S. W. (2003). Quantitative analysis of sponsorship bias in economic studies of antidepressants. British Journal of Psychiatry, 183, 498-506.
  • Davis, K., Schoen, C., Guterman, S., Shih, T., Schoenbaum, S. C. & Weinbaum, I. (2007). Slowing the growth of U.S. health care expenditures: What are the options? The Commonwealth Fund Report, 47.
  • Fisher, E. S. & Welch, H. G. (1999). Avoiding the unintended consequences of growth in medical care: How might more be worse? Journal of the American Medical Association, 281(5), 446-453.
  • Institute for Health and Socio-Economic Policy. (2005). Third annual IHSP hospital 200: The nation’s most—and least—expensive hospitals, fiscal year 2003/2004. Orinda, CA: Author.
  • Mahar, M. (2006). Money-driven medicine: The real reason health care costs so much. New York: Collins.
  • National Coalition On Health Care. (2007). Facts on health care costs. Washington, DC: Author.
  • Perelman, M. (2002). Steal this idea: Intellectual property rights and the Corporate confiscation of creativity. New York: Palgrave.

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