Why “Commercial” Health Care Is Expensive

For all the acrimony over health care reform, there is one issue on which everyone seems to agree — health care is too expensive. In recent years, health care costs have been rising at twice the rate of inflation. According to the Congressional Budget Office, spending on Medicare and Medicaid will double as a percentage of GDP by 2035.

A couple of years ago, McKinsey Global Institute (MGI) released a study that compared spending on health care with other advanced countries, and calculated that if our spending practices were similar to other countries, the U.S. would be spending $477 billion a year less than it is now. That extra spending amounts to 3.6 percent of our national economic output, or $1,645 per person, every year. (MGI is the research arm of McKinsey & Company, a respected international management consulting firm.)

People disagree why U.S. healthcare costs so much. For years, conservatives have pinned the blame on malpractice suits and have argued that “tort reform” is the key to affordable health care. However, the number of malpractice suits has dropped sharply in recent years, yet health care costs continue to rise.

Health care costs and the right to sue for damages in court are critical issues to people suffering from asbestos-related diseases, such as mesothelioma. It’s important for us to understand what is really driving cost before citizens give away more of their legal rights.

There probably are many factors working together to push up the cost of health care. But one factor came about because of a 1975 Supreme Court decision, Goldfarb v. Virginia State Bar. The Goldfarb case was not specifically about medicine, but rather was an antitrust case about law firms. However, Goldfarb opened a door to doctor-owned hospitals and clinics and the commercialization of the medical profession.

The Supreme Court ruled in Goldfarb that minimum fees for legal work imposed by a state bar association amounted to price fixing. Chief Justice Warren Burger wrote that “learned professions” participated in “trade or commerce” as defined by the Sherman Act and could not engage in “anticompetitive conduct.”

Before Goldfarb, the American Medical Association and state medical associations discouraged doctors from advertising and making financial arrangements with drug companies and other suppliers. After the Goldfarb shift in antitrust law, however, physicians began to enter into profit-making business arrangements. Today, physicians who work in for-profit hospitals and practices receive income from the tests and procedures they order, which provides an incentive or order tests and procedures.

In 2007, the McKinsey Global Institute found that physicians who are investors in diagnostic labs and outpatient surgical clinics order two to eight times more tests and surgeries than doctors who don’t. These “extra” tests and procedures add up.

These “extra” procedures often are blamed on “defensive medicine” — that is, doctors say they have to order more “stuff” to reduce their liabilities in case they are sued. But today in many states, “tort reform” has significantly reduced the chance of being sued, yet there is no data showing that physicians have changed their procedure-ordering practices as a result.

On the other hand, there is copious documented evidence that physicians who make extra income from the procedures they order, do order more procedures than physicians who don’t. Meaningful health reform will need to include some way to separate physicians from such financial incentives.

Barbara O’Brien

This entry was posted on Monday, August 24th, 2009 at 10:47 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.