Money-Driven Medicine

The Real Reason Health Care Costs So Much

Maggie Mahar

• Publisher: HarperCollins e-books
• Year: 2009
• Topic: Business
• eBook ISBN:
  9780061873829
• Subtopic: Business General
• Index: Business

Why is medical care in the United States so expensive? For decades, Americans have taken it as a matter of faith that we spend more because we have the best health care system in the world. But as costs levitate, that argument becomes more difficult to make. Today, we spend twice as much as Japan on health care—yet few would argue that our health care system is twice as good.

Instead, startling new evidence suggests that one out of every three of our health care dollars is squandered on unnecessary or redundant tests; unproven, sometimes unwanted procedures; and overpriced drugs and devices that, too often, are no better than the less expensive products they have replaced.

How did this happen? In Money-Driven Medicine, Maggie Mahar takes the reader behind the scenes of a $2 trillion industry to witness how billions of dollars are wasted in a Hobbesian marketplace that pits the industry's players against each other. In remarkably candid interviews, doctors, hospital administrators, patients, health care economists, corporate executives, and Wall Street analysts describe a war of "all against all" that can turn physicians, hospitals, insurers, drugmakers, and device makers into blood rivals. Rather than collaborating, doctors and hospitals compete. Rather than sharing knowledge, drugmakers and device makers divide value. Rather than thinking about long-term collective goals, the imperatives of an impatient marketplace force health care providers to focus on short-term fiscal imperatives. And so investments in untested bleeding-edge medical technologies crowd out investments in information technology that might, in the long run, not only reduce errors but contain costs.

In theory, free market competition should tame health care inflation. In fact, Mahar demonstrates, when it comes to medicine, the traditional laws of supply and demand do not apply. Normally, when supply expands, prices fall. But in the health care industry, as the number and variety of drugs, devices, and treatments multiplies, demand rises to absorb the excess, and prices climb. Meanwhile, the perverse incentives of a fee-for-service system reward health care providers for doing more, not less.

In this superbly written book, Mahar shows why doctors must take responsibility for the future of our health care industry. Today, she observes, "physicians have been stripped of their standing as professionals: Insurers address them as vendors ('Dear Health Care Provider'), drugmakers and device makers see them as customers (someone you might take to lunch or a strip club), while . . . consumers (aka patients) are encouraged to see their doctors as overpaid retailers. . . . Before patients can reclaim their rightful place as the center—and indeed as the raison d'être—of our health care system," Mahar suggests, "we must once again empower doctors . . . to practice patient-centered medicine—based not on corporate imperatives, doctors' druthers, or even patients' demands," but on the best scientific research available.

1

The Road to Corporate Medicine

The story of health care in America is, first and last, a story about power. This, Paul Starr made clear in 1982 when he published his landmark study of U.S. health care, The Social Transformation of American Medicine.

Starr’s history opens with a single, stark statement: “The dream of reason did not take power into account.”¹ Medicine, perhaps more than any other science, epitomizes the “dream of reason”—the Enlightenment hope that, in the end, the human mind can tame nature and find order in chaos—or, in the case of medicine, make sense of flesh. But that pure, scientific endeavor does not unfold in a vacuum. It takes place in society, in a world of men. Inevitably, those men will jockey for position.

Throughout most of the 20th century, the nation’s physicians won the battle to control American medicine. For decades, they held virtually unchallenged economic, moral, and political sway over what we now call the “health care industry.” Doctors were able to gain dominion, in part because their patients wanted them to rule the nation’s health care system, and in part because the market’s normal laws of supply and demand do not apply to medicine.

In most industries, supply responds to demand. When it comes to deciding what to produce—and in what quantity—the supplier follows the customer’s lead. Or as UCLA economist Thomas Rice puts it in The Economics of Health Reconsidered, “In the traditional economic model, demand is key; supply is essentially along for the ride.”² But in the case of health care, the supplier (traditionally, the doctor) plays a much more active role in determining what consumers believe they want—or need. Indeed, health care providers enjoy nearly unparalleled influence over demand for the very services that they sell.

This is completely understandable. Health care is different from other “purchases” in large part because the customer faces so much ambiguity. Dr. Atul Gawande, a surgeon at Boston’s Brigham and Women’s Hospital puts it best in Complications: A Surgeon’s Notes on An Imperfect Science: “Medicine is an enterprise of constantly changing knowledge, uncertain information, fallible individuals…. the core predicament of medicine, its uncertainty, [is] the thing that makes being a patient so wrenching, being a doctor so difficult, and being part of a society that pays the bills so vexing.”³

While Consumer Reports can rate midpriced refrigerators briskly and clearly, in a way that makes comparisons easy, it is all but impossible, even for a physician, to be positive of the relative benefits of a great many medical procedures.

“Uncertainty as to the quality of the product is perhaps more intense here than in any other [market],” Kenneth Arrow, the Nobel laureate economist who launched the study of health care economics, observed in 1963. “Recovery from disease is as unpredictable as its incidence…and further there is a special quality to the uncertainty: it is very different on the two sides of the transaction. The information possessed by the physician as to the consequences and possibilities of treatment is necessarily very much greater than that of the patient, or at least so it is believed by both parties.”⁴

This is what makes the purchase of health care so different from any other purchase: it is a transaction based on trust.

Granted, today both physicians and patients enjoy access to far more information than ever before, and “with all that we know nowadays about people and diseases and how to diagnose and treat them, it can be hard to…grasp how deeply the uncertainty runs,” Gawande writes. Yet as anyone who has ever been seriously ill knows all too well, the more one learns about a disease and the odds of success with possible treatments, the more ambiguous the situation can become.⁵

A Transaction Based on Trust

It is not just the complexity of the human body, but the uniqueness of each body that makes it so difficult to predict health care outcomes. Put simply, health care is not a commodity. While two consumers may derive pretty much the same value from the same midpriced refrigerator, a particular course of treatment can have a drastically different effect on two different bodies. This makes it difficult for heath care “shoppers” to rely on their friends’ experiences the way they might when choosing, say, a computer or a car.

Nor can the consumer rely on his own past experience. Three out of four health care dollars are spent on products and services that the patient has rarely, if ever, purchased before—and probably hopes never to purchase again.⁶ To make the consumer’s dilemma even more wickedly difficult, when purchasing health care, he knows that there are no warrants and no guarantees. The patient cannot return an unsuccessful operation. And if he winds up unhappy with the outcome, he may find himself stuck with something far worse than a bad haircut.

The patient wants to believe—needs to believe—not only that his doctor possesses superior information, but that his doctor is committed to putting the patient’s interests ahead of his own. As a customer, he is in a uniquely vulnerable position: he cannot sample the product beforehand; there is real possibility that the product will do him more harm than good; and yet, even if it proves useless, he is expected to pay for it. How could he go forward with the purchase if he did not trust the seller?

As Arrow emphasizes, whether the buyer’s belief in the supplier’s superior knowledge and complete professionalism is wholly justified is not the question.⁷ It is simply that without it, the health care market could not function. This is one marketplace where “caveat emptor” cannot apply.

This is not to say that the 21st-century health care consumer places blind faith in his physician. Today brave-hearted patients research their own conditions, and armed with computer printouts, many participate in each treatment decision. But the truth is, however one strains against surrender, even the 21st-century patient has no choice but to place considerable faith in his doctor.⁸

The Physician’s Autonomy:
The AMA Takes On Capitalism

Still, the physician’s dominion was not easily won. Over the course of the 20th century, as American physicians struggled to maintain their position, they had to fend off both government and corporate intervention.

Almost everyone knows that the American Medical Association spearheaded the battle against government intrusion, or what it called “socialized medicine.” Following World War II, most Western nations granted governments a major role in organizing their health care systems. In the United States, by contrast, the population’s distrust of big government combined with the AMA’s fierce insistence on autonomy effectively quashed any talk of a national health care system.⁹

But not everyone realizes that the medical profession also fought tooth and nail to resist the forces of capitalism—what the AMA termed “corporate medicine.” The doctors’ guild made its opposition to the basic tenets of capitalism startlingly clear in 1934 when it adopted a code of ethics that declared it “unprofessional” for a physician to permit a “direct profit” to be made from his labor. This is not to say that the AMA believed it wrong for doctors themselves to profit from their work. What the AMA objected to, was “for anyone else, such as an investor, to make a return from physicians’ labor.”¹⁰

Here, the AMA struck at the very heart of a capitalist system. Under capitalism, the entrepreneur who owns the means of production (the real estate, the equipment, the raw materials needed to make the product) profits from the labor of the individual worker. The worker is guaranteed a wage, while the capitalist, who takes a larger risk by paying for the costs of production, reaps whatever return is left after those costs have been met.

The AMA, in its wisdom, erased the capitalist from the picture. In the association’s view, “the full return on physicians’ labor had to go to physicians, and consequently, by implication, if medicine required any capital that doctors themselves could not provide, it would have to be contributed gratis by the community, instead of by investors looking for a profit,” Starr explains. “In other words, physicians must be allowed to earn whatever income the capital contributed by the community might yield to them.”¹¹

And so the community provided doctors with the real estate and equipment that they needed—i.e., the community hospital—free of charge. In retrospect, the arrangement may seem inevitable, but in fact, things could easily have worked out differently. Hospitals might have charged physicians fees to use their equipment, or they could simply have hired doctors as salaried employees. Insurance companies also might have hired physicians, paying them to provide services to their beneficiaries. But for most of the 20th century, the AMA won its battles, and the solo practitioner avoided being swallowed by the hospital, the insurer, or any other institution that might want to absorb him into its hierarchy.

Of course doctors are not unique; other highly skilled workers might well have wanted to avoid becoming cogs in a larger corporate machine. Why did doctors succeed? The answer, some would suggest, lies with the advance of science and technology, which lent the medical profession ever-greater authority. Yet the march of progress could just as easily have had the opposite effect. Rather than strengthening the physician’s position, it might have reduced professional autonomy by making doctors dependent upon organizations that could provide the capital that they needed. After all, few scientists remained independent; most became salaried employees of universities or industries that could provide them with labs and equipment. And as technology advanced, modern medical practice would require huge capital investments.¹²

What insured the physician’s autonomy was not technology, but rather his intimate relationship with his patient—even when medical care took place in the hospital. Hospitals, after all, do not “have patients.” Doctors “have patients”—whom they may or may not refer to a particular hospital. Thus, hospitals depend on doctors to fill their beds. Even today, the average doctor sends 90 percent of his patients to a single hospital.¹³

As for the commercial insurers, here the AMA protected the doctors’ sovereignty by insisting that, rather than paying doctors directly, insurers would reimburse the patient for his medical expenses on “fee-for-service” basis. In this way, physicians maintained their direct relationship with the patient—and avoided any system of payment that would force them to negotiate with a single organized payer.¹⁴

The doctors’ lobby also objected violently to the idea of prepaid medical clinics—even when they were run by doctors. During the thirties and forties a number of such “medical cooperatives” sprang up across the country. Typically, they were structured as group practices, and rather than charging fees for individual services, they accepted a lump sum prepayment of, say, 85 cents per patient per month. But the AMA rejected any model other than fee-for-service, insisting that physicians should be free to set prices for each procedure, thus leaving total health care costs open-ended.

As usual, the doctors’ guild prevailed, and by 1950 most states had passed laws that barred the co-ops. Prepaid plans like Kaiser Permanente and Group Health Cooperative of Puget Sound would survive only on the West Coast where doctors controlled prepaid plans and built their own clinics and hospitals.¹⁵

When it came to the pharmaceutical companies, the doctors once again used their cultural authority and strategic position to become gatekeepers. They and they alone decided when medicine should be prescribed, and in what dose. Understanding the importance of their power, physicians blocked efforts by drug manufacturers to market their products directly to the public, arguing that such advertising would threaten public safety and interfere with the doctors’ control over their patients’ health. Some would argue that the AMA was trying to withhold information from consumers while ensuring that all drug purchases were channeled through doctors. But, to be fair, physicians were not simply guarding their own position; they were also watching over their patients. Many of the drugs that the manufacturers of the day wanted to peddle to the public were, at best, worthless, and at worst, dangerous.

Ultimately, pharmaceutical companies, hospitals, and insurers came to accept the power that flowed from the physician’s intimate relationship with his patient: he, after all, directed the flow of health care dollars. Rather than trying to capture and control the physician, they learned instead to court his goodwill—which meant letting him be his own boss.

Make no mistake, from the patient’s point of view, there was much to be said for guarding the direct relationship between doctor and patient, without allowing a third party to intrude. While many of the AMA’s most self-serving pronouncements displayed a surprisingly frank combination of cupidity and self-righteousness, physicians were driven, by and large, by something more than pure self-interest. Most saw themselves as members of a healing profession. And as professionals, the majority lived up to the expectation that they would put their patients first—even when they knew those patients would not be able to pay the bills. “When I was a child, we lived next door to a doctor, and I can remember seeing him coming home from visiting patients, carrying pans of baklava,” recalls a medical reporter who grew up in the fifties.¹⁶

As for patients, they wanted their physicians to be all-powerful. Then, as now, trust was essential not only for the transaction to take place, but to medicine’s healing power. Without it, a querulous, uncertain patient would be far less likely to respond to even the most skilled laying on of hands.¹⁷

Insurers Open the Door to Health Care Inflation

That said, allowing physicians so much autonomy all but guaranteed that the cost of health care would soar. Because the doctor was a free agent, he was responsible only to himself and to his patient. The patient wanted as much care as possible; the physician had been trained to provide the best care possible. The price was not his concern. To the contrary, from a purely economic point of view, it was in his interest to see health care spending climb.

Moreover, from a totally disinterested point of view, most physicians would say that when more of a society’s resources are devoted to medical care, everyone benefi...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Acknowledgments
• Preface
• Chapter 1
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• Where We Are Now: Everyone Out of the Pool
• Notes
• Searchable Terms
• About the Author
• Also by Maggie Mahar
• Credits
• Copyright
• About the Publisher