Five Major Challenges for a $2 Trillion Industry

Just about everyone has their own set of beefs with the U.S. healthcare system. Some start with the number of folks who go without healthcare, usually with no choice in the matter — that’s some 47 million people right there. Escalating costs are another huge concern: Not only do Americans collectively spend one dollar out of every six earned on healthcare, its costs are shooting up faster than anything else in the economy, rising two to three times faster than general inflation every year.

Those are enormous problems with huge implications for companies in every corner of the healthcare business. To my mind, though, they’re largely symptoms of more fundamental issues that suggest we’re all getting much less for our healthcare dollar than we often think.

1. The U.S. healthcare system delivers both too little and too much care.This may strike many people as a paradox, but it’s true. The uninsured, almost by definition, get too little care. They often skimp on doctor visits and rely on hospital emergency rooms for treatment, which inevitably means that minor problems — unusually high blood sugar, say — get overlooked until they turn into full-blown (and expensive) medical issues such as diabetes. Of course, caring for the underinsured also overburdens ERs, meaning that people who truly need emergency treatment are less likely to get it, sometimes simply because no beds are available and a hospital has closed itself to further admissions.

What’s really surprising, though, is that the system also overtreats many patients, providing care that’s not only wasteful, but often dangerous as well. Shannon Brownlee’s new book “Overtreated” offers a terrific overview of the problem, suggesting that as much as a third of all medical care in the U.S. is unnecessary. And because getting taking drugs or undergoing surgery involves risks of their own, a lot of that unneeded care can be harmful.

One hero in the effort to bring the scope of this problem to light is Jack Wennberg, the recently retired head of Dartmouth’s Center for the Evaluative Clinical Sciences. Wennberg spent several decades pointing out anomalies such as the fact that Medicare patients in places like south Florida are “doctored” far more heavily than their counterparts elsewhere, and yet tend to fare worse when all is said and done. Wennberg’s message, which his medical colleagues long did their best to ignore or discredit, is finally starting to get the hearing it deserves.

2. Doctors are paid to perform procedures, not to make patients healthy. One primary reason for that level of overtreatment is the fact that doctors and hospitals get paid more for doing more, whether or not the treatment in question is medically necessary — or even advisable. Much of the fault here lies with Medicare, which has historically paid healthcare providers on a “fee for service” model that takes no account of how well patients actually fare. (Private insurers like Aetna, WellPoint and Cigna do likewise.) Other medical work that’s equally important — taking time to understand a patient’s symptoms thoroughly, or counseling people to eat right, exercise and stop smoking — pays only a pittance.

Now, of course most healthcare professionals are conscientious, caring people who want to do the best for their patients, and virtually no one deliberately sets out to overtreat. But doctors are susceptible to economic incentives just like the rest of us, and it’s undeniable that many have convinced themselves that more care, which just happens to be good for their bottom line, is medically necessary as well — regardless of the evidence.

3. Health plans make money by insuring healthy people, not sick people. Of course, not all insurers are that mercenary. But the industry’s economic incentives work exactly this way, and that affects how individual insurers do business regardless of how humanitarian their impulses may be. A health plan whose members are predominantly young and healthy is simply going to make a lot more money than one whose ranks are filled with the aged, infirm and chronically ill, because it can rake in premiums without needing to shell out for a lot of costly medical care.

As a result, most every insurer in the country has an incentive to insure the healthy and deny care to the sick. Few do so aggressively and overtly, partly because of the popular backlash against HMOs in the 1990s and in part because it’s often illegal. Still, insurers have a variety of tools at their disposal to keep their costs down –denying coverage for pre-existing conditions, for instance, or jacking up already expensive premiums for those unfortunate enough to want insurance when they need it. These problems are particularly acute for anyone trying to buy insurance on their own — and more folks fall into this category all the time, as the system of employer-centered healthcare coverage is rapidly unraveling.

Some insurers take this to a ridiculous extreme, of course. Blue Cross of California (an arm of WellPoint), for instance, has been in hot water recently for trying to get doctors to tattle on patients who failed to disclose pre-existing conditions and for aggressively canceling policies of sick individuals for minor application errors, a practice known as “rescission.” In general, though, there isn’t much point in railing against “evil” insurance executives as many critics do, because this is just how the industry’s economic logic works. It sure doesn’t serve the sick, though — and sooner or later, that’s just about all of us.

4. No one knows which medical treatments actually work best for patients. The near-total absence of good information on the effectiveness of expensive drugs, medical devices and surgical procedures is truly astonishing. Brownlee, for instance, cites a study that suggests as little as 15 percent of what doctors do is actually evidence based. Instead, doctors tend to rely on personal experience, that of their colleagues, and what they pick up from the often misleading medical literature and the legion of omnipresent drug and representatives that haunt their clinics.

The result: The federal government — the only institution really capable of filling that informational vacuum, because the trials necessary to establish a solid base of medical evidence are expensive, and industry has little incentive to do them itself — so far hasn’t been up to the job, partly by political design. The Food and Drug Administration is already overwhelmed by the task of ensuring that drugs and devices are safe and effective, and is further hamstrung by the fact that it typically only requires that a new treatment prove superior to placebo, not to currently available therapies.

A little-known federal outfit called the Agency for Healthcare Research and Quality could pick up some of the slack, were it funded properly. But AHRQ — then called AHCPR — faced a vociferous backlash in the 1990s from surgeons worried, in part, that a recent recommendation favoring non-surgical alternatives for lower back pain might jeopardize their incomes. The Republican Congress almost succeeded in killing the agency altogether, and it survives today as a mere shadow of its former self.

5. Patients demand more care than they want to pay for. In the overall scheme of things, patient-driven overuse of medical care probably isn’t one of the system’s biggest problems, as most studies suggest it accounts for a relatively small proportion of waste and overtreatment. The issue takes on outsized importance, though, because unlike many other health issues, it’s something everyone can understand. It also feeds a narrative preferred by proponents of “consumer-driven healthcare” — sometimes for ideological reasons — which holds that people with insurance insist on expensive but marginally useful tests and treatments because they don’t have to pay for them.

That’s really only part of the story, however. An explosion in “direct-to-consumer” advertising leads many individuals to demand prescriptions for new expensive drugs whether or not they’re any better than older and usually cheaper alternatives, which often enough they’re not. The pharmaceutical industry has also cannily exploited its own medical research to essentially create new medical conditions — rebranding shyness as “social anxiety disorder,” for instance, or greatly expanding the definitions of real disorders such as depression — in order to drive consumer demand for new treatments. Doctors and hospitals also play a role here, buying new high-tech scanning equipment or building new surgical centers and then advertising them liberally in hopes of attracting new patients and driving up billable services.

That’s not an exhaustive list, of course. I could have just as easily written about the incredibly slow adoption of electronic medical records, or the plight of the overworked and (relatively) underpaid general practitioner, or unnecessary “defensive medicine” intended to ward off lawsuits. All these, and others I’ve undoubtedly overlooked, are undeniably real and important issues.

At heart, however, these symptoms reflect one central, deeper sickness in our dysfunctional healthcare system, which is that economic incentives in medicine are fundamentally broken. An ideal healthcare system would provide timely, effective, efficient care only to those who really need it, keep costs down and fund the research and innovation necessary to produce new treatments for deadly disease and injury. The existing U.S. system, however, does virtually none of that, largely because no one — not doctors, not hospitals, not insurers and not Big Pharma or the device industry — stands to gain from improvements in healthcare quality, as opposed to quantity. And we are all the ones who will end up bearing the cost one day.

The scale of the problem has renewed calls for reform, in particular for a “single-payer” healthcare system like those of most other industrialized nations, in which the government takes on responsibility for funding and, yes, rationing medical care. I’m not sure that’s the right solution, although I’m a lot more sympathetic to it than I used to be, just because a government monopoly — even a benevolent one — would bring in an entirely new set of serious problems.

Another alternative, which I’m just starting to get my head around, would be a reform that somehow realigns market incentives in order to force insurers, hospitals and other companies to compete based on how well patients are treated. It’s a great idea, because while market mechanisms in healthcare currently produce all manner of perverse outcomes, the right kind of competition should, in theory, improve quality while driving down prices the way it does in other industries.

At the moment, however, I have no idea whether that sort of framework is even possible, much less what it would look like. I’m currently slogging through a weighty tome on the subject — “Redefining Health Care,” by Harvard’s Michael Porter and Elizabeth Olmsted Teisberg — and I’ll have more to say as I get deeper into its more than 500 pages.

(Photo courtesy of Flickr user jayYliz under Creative Commons license.)