A New IOM Report Reveals Why Medicare Costs So Much (Hint–It’s Not Just the Prices)

George W.  Bush is 67. Chances are Medicare paid for the stent operation that I describe in the post above.  For years, medical researchers have been telling us that this procedure will provide no lasting benefit for a patient who fits Bush’s medical profile.   Nevertheless, in some hospitals, and in some parts of the country, stenting has become as commonplace as tonsillectomies were in the 1950s.

Location matters. Last month, a new report from the Institute of Medicine confirmed what Dartmouth’s researchers have been telling us for more than three decades: health care spending varies  across regions. More recently, as Dartmouth’s investigators have drilled down into othe data,, they have shown that even within a region, Medicare spends far more per beneficiary in some hospitals than in others.

In a recent Bloomberg column, former CBO director Peter Orszag notes that “Because this variation doesn’t appear to be reliably correlated with differences in quality, the value [that we are getting for our health care dollars] seems to be much higher in some settings than in others.” He asks the logical question: “What is causing this and what might we do about it?”

Some health care analysts claim that as a nation, we spend far more on health care than any other developed country because we over-pay for everything—from statins to surgery. (A landmark article that appeared in Health Affairs in 2003 put it this way “It’s the Prices Stupid!” )

Others put more emphasis on overtreatment. Up to one-third of Medicare dollars are squandered, physicians like Dartmouth’s  Dr.  Elliott Fisher, Boston surgeon Atul Gawade and former Medicare director Dr. Don Berwick argue.  As Fisher puts it, “hospital stays in the U.S. may not be as long as in some other countries, but more happens to you while you’re there.” (Note: the authors of “It’s the Price’s Stupid” also point out that care in the U.S. is “more intensive.”)

I agree that both theories are true: We have managed to devise a health care system where we both over-pay AND are over-treated. The  Institute of Medicine report that came out at the end of July supports this thesis.

              The Difference between Medicare and Commercial Insurers

The IOM report reveals that both Medicare and commercial insurers are spending about 40 percent more per patient in some areas and in some hospitals than in others. “This has persisted over decades;” Orszag observes.  “Regions that spent the most in 1992 tended to remain big spenders in 2010.”

But, he adds, “There is one important difference between Medicare and commercial insurance, the Institute found, and that is in the causes of spending variation. With commercial insurance, spending is higher in some areas because of markups — that is, the difference between the charge for a service and the cost of providing that service.

“Seventy percent of the variation in commercial spending was attributed to differences in markups, which in turn probably reflect local differences in market power among hospitals and other providers relative to insurance companies and beneficiaries.”

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The State of Healthcare Reform – and the Challenges

Health Beat readers may be interested in listening to the speech that Dartmouth’s Elliott Fisher delivered at the Lundberg Institute’s inaugural event at the Commonwealth Club of California on October 25. Fisher does an excellent job of summing up where health care reform stands today, reformers’ goals, and the challenges they face. The Question & Answer session may be of particular interest. Fisher handled it beautifully. Click here: http://www.commonwealthclub.org/events/archive/podcast/elliott-s-fisher-achieving-sustainable-health-care-system-102511

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