Ten Ways To Reduce The Cost of Healthcare


The cost of US healthcare is growing at an unsustainable rate. Despite measures that were supposed to lower the rate of growth of healthcare costs (like the Affordable Care Act), the rate of growth in 2015 was 5.8%, the highest in 8 years. The total cost of healthcare in 2015 was $3.2T, with the Federal Government spending 29% of those dollars, and state and local governments contributing another 17%. Overall, healthcare costs were 18% of GDP and healthcare costs are growing at a rate significantly faster than the GDP. In 1995, healthcare costs were only 13.1% of GDP.

More important, in 2015 the Federal Government spent $990B on healthcare alone, which was 31% of an all-time record tax revenue of $3.2T (the government spent $3.7T with a deficit of $439B). State governments spent an additional $200B on healthcare, which was about 11% of state revenues. Local governments provided a similar amount of funding. Despite this record spending, there are still about 30 million uninsured people in the US, along with many millions more who have insurance that cannot practically be used due to high deductibles.

If you remember none of the above numbers, remember this: we spent the same amount on healthcare last year as the US treasury collected in a year with record high tax revenue: $3.2T, even with 1 in 11 folks uninsured. While overall healthcare cost growth was 5.8%, the federal Medicaid growth rate was 12.6%. Total federal healthcare expense growth was 8.9% in 2015 and 11% in 2014.

If you favor a governmental single payer system, then historically high tax revenue will have to at least double to make that happen. If you took every penny from the top 5% of US earners (100% taxation), you would only have $3.1T, still not enough to cover the rising costs of US healthcare. If we assume that a stable cost of about $3.5T would be necessary for universal coverage, and add the other 2015 costs of government to that, the Treasury would need to collect about $6.3T in taxes. This is equivalent to the entire incomes of the top 30% of Americans and and 70% of all dollars earned in America by US citizens (total income was $9T). What about free education? Hah.

The point? We need to lower the cost of healthcare. Here are 10 ways:

  1. Lower pharmacy costs. Prescription drugs in the US cost $324.6B in 2015, growing 9% over the previous year. This is 1/10th of the total cost of healthcare. We account for 42% of drug company revenue in the entire world while accounting for less than 5% of the world population. Drug prices are outrageous and the growth in cost is fueled by spending on new prescription drugs. Much of this total reflects a small percentage of branded drugs. Read my article about drug prescribing for practical examples of how prescription costs can and should be lowered. Lots of excellent raw data are located here. We need to:
    • End advertising and direct selling to physicians. The pharmaceutical industry spent $3B in 2012 marketing to consumers and another $24B advertising directly to doctors, or about 1/10th of total drug costs in the US. Marketing is not education, it is expensive salesmanship. Doctors don’t need to learn about new drugs over expensive steak dinners, they need to read journals.
    • Create price ceilings related to the international costs of drugs. The government could easily dictate that the US will not pay more than say 10% above the average international cost of a drug. There is no good reason why the same bottle of Humalog insulin costs $12.47 per ml in the US and only $2.78 per ml in Canada.
    • Lower the costs of drug development and sales by indemnifying approved drugs against lawsuits. These lawsuits don’t benefit consumers. In 2014, Merck, the maker of NuvaRing, agreed to pay $100M to settle a class action lawsuit related to the birth control product, and in 2012 Bayer paid over $400M related to lawsuits against Yasmin and Yaz. All three safe, quality drugs are still on the market and still very popular. What did this half a billion dollars get consumers? More expensive drugs and richer plaintiff attorneys. The drug companies just respond by setting aside billions of dollars into legal funds, assuming they will eventually get robbed in court by bandit attorneys who keep most of the proceeds for themselves.
    • Reform the FDA. The FDA has failed abysmally at approving the applications of generic drugs (thousands are currently awaiting processing) and creates so many regulatory hurdles that it costs just under $3B per drug to get approved and to market. This obscene number reflects an industry, not a mission-critical necessity to keep patients safe. The FDA has become a training ground for Big Pharma executives who have created a regulatory nightmare only an insider can navigate; they learn at the FDA and then parlay that experience into millions working for pharmaceutical companies.
    • Provide a government funded account for helping those catastrophically harmed by drugs that can be accessed through an application to an expert committee. Some folks are definitely harmed by drugs, but the plaintiff attorney industry that preys on every new drug that comes to market must end.
  2. Lower cost of other equipment and supplies. Retail medical equipment costs were another $107B in 2015. The pricing in this industry has many of the same influences as the pharmaceutical industry; companies will charge whatever the government will pay and their costs are high due to regulatory and legal considerations. But beyond the retail industry, hospitals pay way too much for durable equipment and supplies. Only in healthcare could a blanket warmer the size of a mini fridge cost $3200 or a hospital bed $25,000. This highway robbery is the result of regulation, a lack of transparency in cost, and a lack of competition in the industry (due to the high regulatory costs to compete).
  3. Lower regulatory burdens to hospitals that make operational costs too high. Over $1T was spent on hospital care in the US last year, and over $100B on building new structures and equipment. All this spending and most hospitals are operating in the red. Regulation hurts hospitals at every turn. Every detail of hospital form and function is regulated in enormous detail. Very little of this regulation is known to improve patient outcomes, but all of it makes a lot of money for a lot of people with their hands in the cookie jar. Construction costs are dramatically higher, competition is almost non-existent, and innovation is stagnant. Hospitals could operate at a dramatically lower cost  if they were allowed to innovate and compete, but they are suffocated by regulation.
  4. Enact real tort reform and some levels of indemnification for hospital and physicians. Tort reform works and the total dollar amount of malpractice settlements has dropped from about $4.8B per year in 2003 to $3.6B in 2014, mostly due to tort reforms at the state level. But the real cost comes in practicing defensive medicine (over-ordering tests and interventions for fear of being sued), which BlueCross BlueShield estimates to cost about $46B per year. Other countries in the world are far ahead of the US in terms of tort reform and the number of lawsuits and settlements reflects this difference. Physician charges should go down with increased tort reform. For some specialities like mine (Ob/Gyn), malpractice premiums are 1/4-1/3 of our salaries.
  5. Promote transparency about physician (and hospital) quality and promote competition that includes pricing rewards/penalties. The current system doesn’t really allow consumers to reward good doctors and good hospitals with their business, nor does it allow them to reward those doctors and hospitals who work hard to lower costs. There is no reason why patients should not have access to data about individual physician costs and quality metrics, as well as information about hospitals and other facilities. Physicians who provide too expensive care or poor quality care should feel a financial motive to improve, driven by a savvy segment of their patients who shop based on quality and low cost. What is quality? Quality ratings should include things like overall cost of care, adherence to evidence based guidelines, and appropriate utilization of resources. In Atul Gawande’s article ‘Overkill’, he discusses a 2010 Institute of Medicine report that found that some $750B per year was spent on waste – mostly unnecessary health care services – each year. This number (more than is spent on all K-12 education in the US) is more than 23% of all healthcare dollars. These unnecessary services are mostly eliminated if physicians adhere to evidence-based guidelines. Quality care and lower cost are intimately related. Please read The Financial Impact of Not Utilizing Evidence-Based Medicine.
  6. Legislate transparent pricing for all services with fixed and rational costs. The truth is, doctors and patients really have no idea how much services actually cost. Patients are often not financially incentivized to care about the cost of labs or imaging, and doctors check boxes without really understanding the value of the service to the patient, rapidly spending thousands of dollars in a few seconds. Patients and physicians need a cost sheet so that they fully understand what they are spending, and then better appreciate its worth to them. Transparent pricing includes making the cost of health insurance itself transparent. Private health insurance companies spent over $1T dollars on healthcare in 2015, and patients spent another $338B out of pocket. They should know exactly what they are getting for those dollars. Most employees who receive health insurance through work don’t really appreciate how much their employers are spending. A worker making about $20,000 per year may have another $20,000 per year spent on healthcare for her and her family, but because she only pays a small premium each month for that insurance (say 10% of the monthly cost while the employer contributes 90%), it doesn’t feel like she is spending half of her income on health insurance – but she is. Let’s pay her $40,000 per year and make her write the check for the full amount of the premiums. This will greatly increase her interest in the largest single expense in her budget and she will demand low cost and high quality.
  7. Make all patients have some degree of financial responsibility. Patients usually have no concern about healthcare costs, particularly if they are a government-insured patient. Since they are responsible for none of the cost, they don’t care what that cost is. On the other hand, those patients with high-deductible insurance plans may avoid accessing healthcare services at all because they will be paying for 100% of the outrageous cost until their deductibles are met. Of course, once that $5,000-or-so deductible is met, then they want as many services as they can get, regardless of the cost. Both extremes are broken and do not really engage the patient to be a savvy consumer. Instead, patients should always pay 10-20% for every service (up until a predefined cap that varies with expense of policy). This will empower patients to make better financial decisions and promote competition among providers. But it must be every service – every prescription, every test, every surgery. The out-of-pocket expense can still be capped, and this cap will effect premium prices. But if a patient has to pay 10% for her hysterectomy, she will choose a hospital that charges $5,000 for that service rather than $55,000; or if she needs an antihypertensive drug, she will pick the one that costs $3 per month rather than the one that costs $350. Patients are our best check against run away costs, but under the current system, they are not engaged.
  8. Mandate a low-cost catastrophic plan for those who don’t have (or don’t want) normal insurance. I opposed the individual mandate that was part of the ACA (Obamacare). But I am not opposed to mandating that patients have catastrophic plans. Such coverage is in the public interest in the same way that liability car insurance is in the public interest (but not comprehensive coverage). If I drive a car and hit you, I am required by law to have liability insurance to pay your expenses, but I am not required to carry insurance to pay for my own losses and my own car. In this same way, it is reasonable that patients be required to carry a catastrophic plan that picks up costs over, say, $250k, but nothing under this amount. If a patient otherwise chooses to go uncovered, they will be responsible for every dollar up until that threshold is reached. Such insurance would be relatively inexpensive and could be based on the patient’s age and perhaps living will intentions. This type of catastrophic policy would also dramatically lower the cost of all other insurance products, because those companies would have a cap for the risk they are assuming by providing coverage to each patient. Most of us would never use the plan, but if it became necessary, it would save our families from bankruptcy and hospitals form unpaid bills.
  9. Encourage more humane and rational end of life care and more clear end of life planning. We spend probably about 30% of healthcare dollars on end of life care provided in the last year of life. Frankly, many hospitals, cancer clinics, and doctors are predators – seeking every last dollar from elderly patients for care that does very little to extend life or provide meaningful quality of life. We need a society that promotes death with dignity, not death with exploitation by the healthcare industry. Too many families see their inheritance depleted by vultures picking the last bit of flesh off the bone. The fact that nearly 1 in 3 dollars are spent on the elderly in the last year of life demonstrates a serious gap in personal and societal ethics. A serious public debate about euthanasia should be part of this conversation.
  10. Demand transparency about the risk/benefit ratio (and cost/benefit ratio) of our interventions and services. Just as we exploit the dying to make a buck, we do tons of unnecessary interventions just to make money with very little or no benefit to the patient. Many surgeries are performed unnecessarily: 70% of hysterectomies, 12% of angioplasties, 22% of pacemakers, at least 17% of spinal fusions, 26% of hip replacements, 38% of knee surgeries, and probably half of cesarean deliveries are unnecessary (sources). Overall, 10-20% of surgeries are performed for no benefit. Even when benefit is present, it may not be worth undergoing surgery to the patient. The same issue exists for prescription drugs; it is estimated that at least 1 in 3 drugs are unnecessary and many more provide such a marginal benefit that the cost/benefit ratio is probably not justified. Doctors should be required to express risks and benefits to patients in numbers that can be understood, like numbers need to benefit or harm, and costs of interventions should, of course, be transparent. Please read Lesson #5 here if you haven’t already.

Bonus tip: Healthcare is not a right, it is a privilege; that doesn’t excuse us from decency and charity. Nothing that can be paid for can be construed as a right. The freedoms of speech and assembly don’t come with a cost to the right-bearer nor to the entity that grants the right. If you haven’t recently, take a look at our Bill of Rights; nothing in there costs a penny. I have the right to own a gun, but the government isn’t obligated to buy me one, nor are any of my fellow-citizens; if I want it, I’ll buy it, and me being unable to afford a gun doesn’t compel you to buy one for me.

There are a lot of things that are hard to live without, but that doesn’t give us a Constitutional right to posses them. Imagine if car ownership were a right: would everyone have a Pinto or a Ferrari? If everyone drove a Pinto, then innovation would by stymied and quality low. By everyone having a Pinto, the true right to car ownership would actually be dampened because choice and aspiration are removed; even if everyone had a Ferrari, some would want minivans and Toyotas instead (or maybe a Rolls).

In any event, the dream of universal Ferrari ownership would bankrupt us all. If this sounds like a false comparison, it is not: most poor Americans would prefer to have a functioning car with prepaid maintenance and gas expenses than health insurance. Mobility in most parts of the US is key to pursuing the American dream (to getting a job, visiting friends and family, even going to the doctor). The point is, healthcare is a luxury, not a right. We cannot lose track of this fact in our public discourse.

If we choose to define healthcare as a right (a relatively modern idea), then we must constrain it. What are the minimum aspects of the medical industry that must be granted to all? Breast implants? Lasik eye surgery? And what are the maximums? Liver transplants for 90 year olds? Perpetual life support for someone who is brain dead? By robbing people of their choice in healthcare, we rob them of their freedoms. It would be akin to granting you the right to free speech as long as what you say is contained on a certain list (don’t laugh – we live in an age where more and more people believe that speech should be limited). If it seems crazy to you that healthcare shouldn’t be considered a right, then you probably work in healthcare and have a rather biased and myopic view. Just because it is a priority for those of us in the field doesn’t mean it is a priority for others.

The belief that we should work to give healthcare to everyone in need has nothing do with the belief that healthcare is a fundamental right. Indeed, imagine a world where medical charity was common (right now the tax code doesn’t incentivize it and regulatory hurdles all but prevent it). Such changes are needed so that we can truly fulfill our ethic to serve those in need. But in the meantime, we must face the reality that serious (and painful) reforms must happen, or none of us will be able to benefit from healthcare in the future.