US Health Care Costs: Why So High? Part 2


In the previous article in this series on health care costs, I identified a few reasons why US health costs are so high. One was supply-driven care. John Wennberg and his research partners at the Dartmouth Atlas Working Group on practice variations deserve credit for documenting supply-driven care[1]. What does it mean? It means that doctors and hospitals focus on generating revenues rather than good health at the lowest cost.

Let me make it as graphic as I can:

When you visit a doctor in the US, he tries to determine what’s wrong. His next thoughts are: “how can I make more money off this patient? Maybe more visits, perhaps surgery? Or kickbacks via tests, hospitalization, prescription drugs, or referrals?”

And he hopes to do all this in 5 minutes or less. And the hospitals are in cahoots with the doctors. But don’t blame the doctors or hospitals – blame the incentive structures under which most doctors/hospitals operate.

You think I might be overstating this? Then you should read Atul Gawande’s article in the New Yorker.[2] In it, he documents why health expenditures are so high in McAllen Texas.

The way hospital managers and doctors think was explained to me by Henry Tulgan, a cardiac doctor who has also focused on continuing medical education in The Berkshires. He said:

Doctors get incentive payments from the hospital on nearly everything the hospital can charge for patients, referrals, tests, and other equipment use.

And remember that the costs resulting from excessive hospitalizations and diagnostic testing include more than just the financial charges:

  • hospitals are infection chambers: hospital infections unrelated to the reason people are in hospitals are estimated to kill as many as 20,000 people a year;
  • serious side-effects have been associated with certain diagnostic tests, including CT scans and prostate exams.

I quote a recommendation from a report done by the health care “profiteers” – the CEOs of hospitals, insurance companies, and drug firms[3]. Recognizing the supply-driven problem, they want clinicians to be able to share in the cost saving resulting from reducing unnecessary health expenditures:

As health care leaders who operate in our current system, we firmly believe that upwards of 30 percent of the resources spent on health care in the United States are a result of too few efforts to coordinate care and not enough attention to quality.

How? The “profiteers” say by:

  • Linking payment to value, not volume, for all providers in the Medicare program;
  • Aligning incentives across multiple providers to give efficient, high-quality care both medical and business value.

They want to share in the health care savings but believe this will be difficult because:

Existing antitrust laws, anti-kickback statutes, anti-bribing laws, and other laws and regulations often make it difficult for clinicians and hospitals to share in the savings realized when costs and utilization are reduced…. 

So now, after all these groups have been milking their customers for more care than they need via kickbacks and bribes, we now need to bribe them to provide appropriate levels of health care….


The US spends far more on health care and gets less for it than any developed nation. What does it spend on and how it is financed?

Table 1 shows how the US spends on health care. It is not surprising that hospitals, doctors, and drugs top the list. It is somewhat troubling to find that the overheads, advertising and profits of private insurers are the next largest expenditure item.

Regarding nursing home and at-home care, few people realize that The Americans with Disabilities Act bans discrimination on the basis of disability. The U.S. Supreme Court ruled in Olmstead v. L.C. that people who live in institutions like state hospitals and nursing homes but could live successfully on their own have a civil right, under the ADA, to get their care at home. Momentum on this issue is picking up speed, and it can be expected that the at-home care share will increase in future years.

Table 1. – US Health Spending, 2008 (in bil. US$)

  Amount % Share
TOTAL 2,339 100%
Hospitals 718 31%
Doctors 496 21%
Drugs 234 10%
Private Insurance* 160 7%
Dental 101 4%
Nursing Home Care 138 6%
Home Health Care 65 3%
Other 426 18%

*This includes insurers’ overheads and profit.

Source: US Department of Health and Human Services

Table 2 provides summary data on how US health care is financed. 53% of the funding for US health care comes from private sources. 12% of the total is paid for out-of pocket, 33% by private insurance, and 47% by government programs of which Medicare (20%) is the largest. State and local governments, now strapped for funds, pick up 12% of the total.

Table 2. – US Health Funding, 2008 (in bil. US$)

Amount % Share
TOTAL 2,339 100%
Private 1,232 53%
   Consumer 1,061 45%
      Direct 278 12%
      Insurance 783 33%
   Other 171 7%
Public 1,107 47%
   Federal 817 35%
      Medicare 469 20%
      Medicaid 203 9%
      Other 145 6%
   State/Local 290 12%
      Medicaid 144 6%
      Other 146 6%

Source: US Department of Health and Human Services

Back Office Paperwork

The following list covers the reasons suggested in earlier articles on why the US health care system is so inefficient:

  • supply-driven care;
  • back office paperwork resulting from so many insurance providers;
  • keeping old people alive too long in hospitals;
  • doctors unwilling to delegate patients’ first meetings to lesser qualified health care personnel;
  • malpractice;
  • the US overweight/obesity epidemic, and
  • uninformed patients.

Consider now back office paperwork. Because there are so many insurance companies, both public and private, a large number of health care workers do nothing but interact with their insurance company counterparts. Dr. Tulgan believes that if the US standardized what insurance paid for and the reimbursement forms, “one million back office workers would lose their jobs”. At $50,000 per worker, that would save $50 billion a year. Blumenthal, Cutler and Liebman estimate that the administrative costs in private insurance average 14 percent of benefits or approximately $108 billion[4].

Holahan and Blumberg of the Urban Institute did a review of how the administrative costs of public and private insurance companies compare[5]. They found significant differences. They quote a study by Merrill Matthews who concluded that the administrative costs of public health insurance administrative costs are in the 6-8% range while private insurance administrative cost were anywhere from 12.5% (with competition) to 30% (where an insurance company had no competition). Holahan and Blumberg also quote a study by the Congressional Budget Office that found Medicare administrative costs at 2% and private insurance at 11%.

From all of this, I conclude that if private insurance companies used the same reimbursement forms and standardized what they paid for, administrative savings should be at least 5% or more than $100 billion annually.


Supply driven care and back office paperwork are wasting a lot of US health care monies. My other cost savings candidates will be discussed in the next article in this series. Consideration will also be given to whether there is any way to realize these savings.

[1] John Wennberg, “Tracking Medicine: A Researcher’s Quest to Understand Health Care”, Oxford University Press, 2010.

[2] For documentation on this, see Atul Gawande, “The Cost Conundrum: What a Texas town can teach us about health care”, New Yorker Magazine, June 1, 2009

[3] “Health CEOs for Health Reform – A Better Health System for All”, New America Foundation, June 2009.


[5] John Holahan and Linda Blumberg, “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?”, The Urban Institute Health Policy Center, 2008.

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