Pharmaceuticals are often portrayed by politicians and the media as the main drivers of health-care costs. When we look at the relative share of spending, however, we find that hospitals are the largest category, by far. According tonew data from the Altarum Institute, annual hospital expenditures totaled $1.133 trillion through June. That compares with $708 billion for physician and clinical spending and $359 billion for prescription drugs.
Another way of measuring this spending is against gross domestic product. Hospital costs are 5.9% of GDP; physician and clinical, 3.7%; pharmaceuticals, 1.9%.
If policy makers really want to try to control health-care spending, they should focus where the money is: America’s 5,564 hospitals, most of which are non-profits. The hospital sector seems to offer excellent opportunities for cutting or restraining overall health-care costs – especially considering that the key metrics for hospital use are dropping. Still, lowering costs won’t be easy. The place to begin is a nuanced, careful discussion of how American spends its hospital dollars.
More for Less
In late June, H-CUP, the Healthcare Cost and Utilization Project, a federal-state-industry partnership, issued a report titled, “Trends in Hospital Inpatient Stays in the United States, 2005-2014.” The results are shocking. While the U.S. population has been rising – and the population of seniors has been rising even more – inpatient hospital stays have been falling, from 38.2 million in 2010 to 35.4 million in 2014 (the most recent year for these data). Surgical inpatient stays dropped from 8.1 million in 2008 to 7 million in 2014, a 12.5% decline in just six years.
This trend applies to both men and women and cuts across all age groups. For example, the Centers for Disease Control reports that between 1975 and 2015, the proportion of women aged 45 to 64 who had at least one hospital stay in the past 12 months fell from 12% to 8%.
The H-CUP study found that, between 2005 and 2014, total hospital stays declined 6.6%, but the average (mean) cost per stay, adjusted for inflation rose a total of 12.7%. The cost of a maternal (childbirth) hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%.
Inflation during the 2005-2014 period totaled 19.3%, so, in terms of actual dollars paid out, hospital costs rose by about one-third in less than a decade.
A Quiet Revolution
A combination of factors is reducing hospital stays. For example, better medicines to treat high cholesterol and blood pressure mean fewer people are suffering crippling heart disease. The H-CUP study found that over the nine years “the number of stays for coronary atherosclerosis and other heart disease decreased by 63 percent (from 1,076,100 to 397,000)… Stays for congestive heart failure decreased by 14.4 percent (from 1,053,100 to 901,400).”
The report also points to “growing efforts to reduce unnecessary hospitalizations, greater use of chronic disease management programs, and a shift toward outpatient treatment.”
The CDC refers to changes in Medicare, which “implemented a prospective payment system for hospital care which paid a flat rate per case based on diagnosis rather than reimbursing costs.” In other words, hospitals had less financial incentive to put patients in beds and keep them there. Also, says the CDC, “technological innovations have reduced recovery times and allowed some formerly hospital inpatient procedures, such as laparoscopic surgery and cataract removal, to take place in outpatient settings.”
Becker’s Hospital Review, a trade publication, reports that “there was an average of 2,174 outpatient visits per 1,000 people in 2014, up from an average of 2,000 visits in 2007, supporting the trend of inpatient surgeries moving to the outpatient setting.”
The results are nothing short of a quiet revolution. From 1990 to 2014, says Becker’s, the average length of a hospital stay fell from nine days to just five. Those five days, however, aren’t cheap. The average cost for an inpatient stay(not counting procedures such as surgery) at a non-profit hospital during a period that long is about $12,000.
The CDC reports that, from 1975 and 2014, the number of hospital beds at community hospitals (which account for 85% of all U.S. hospitals) fell from 4.6 per 1,000 population to just 2.5. The occupancy rate for those fewer hospital beds declined from 75% to 63%. Emergency room visits are also falling, a decline that began even before the Affordable Care Act was implemented.
In addition, the total number of U.S. hospitals dropped from 7,156 to 5,627 from 1975 to 2014, a period when U.S. population rose by 100 million.
Resolving the Paradox
But, again, if demand for hospital beds is declining, why are costs rising? On page 316 of that same CDC document that shows a shrinkage of hospitals and overnight stays, it’s reported that hospital spending rose from $50 billion in 1975 to $981 billion in 2014. Inflation alone can’t explain that near-20-fold increase.
There is no single answer for exploding expenditures. One factor, certainly, is a health-care reimbursement system that has grown more and more complicated. As The Economist magazine reported in its Aug. 12 issue:
That complexity contributes to costs. America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).
These bookkeeping entanglements also affect physician efficiency. A time-and-motion study published last year in Annals of Internal Medicine found:
For every hour physicians provide direct clinical face time to patients, nearly 2 additional hours is spent on EHR and desk work within the clinic day. Outside office hours, physicians spend another 1 to 2 hours of personal time each night doing additional computer and other clerical work.
Another factor is the increase in overall labor costs. Despite fewer hospitals and fewer beds, employment at hospitals rose from 4.5 million in May 2007 to 5.1 million seven years later, according to the Bureau of Labor Statistics – an increase of 13%. By contrast, total U.S. employment during this period rose just 4%. Salaries and other labor costs are also rising. For example, Cleveland Clinic, the 13th largest hospital in America, last year spent $4.5 billion on “salaries, wages and benefits,” or 63% of its total expenses. Compensation costs there rose 13% in a single year.
Research by Michael Mandel, published May 28 with data from the Bureau of Economic Analysis, found that rising labor costs – mainly associated with hospitals -- accounted for 44% of the increase in health care spending last year. “All told,” wrote Mandel, chief economic strategist of the Progressive Policy Institute, “the increase in labor compensation for health care workers is 4x the increase in net spending on pharmaceuticals.”
Yet another reason for increased costs is consolidation. Between 2011 and 2015, the number of physician practices owned by hospitals increased 86%. Four out of 10 physicians are now employed by hospitals. Both physicians and hospitals are responding to economic incentives. For example, as the publication Medical Economics reported last year: “Medicare pays more for the same services delivered in the hospital outpatient setting versus the physician office setting.”
A study published in Health Affairs in 2014 found “that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians--ownership of physician practices--was associated with higher hospital prices and spending.”
In testimony before a California state legislative committee last year, Paul Ginsburg, an economist with the Brookings Institution, concluded: "Health care markets are becoming more consolidated, causing price increases for purchasers of health services, and this trend will continue for the foreseeable future despite anti-trust enforcement.”
There is no simple answer to the paradox of hospital costs, but it is clear that the best minds in America should be focused on it. According to the Centers for Disease Control, between 2000 and 2015, annual spending on health care rose by about $1.8 trillion. Two-thirds of that increase came from three parts of the system. Spending on…
If you wanted to solve the problem of rising costs, where would you look first? The answer jumps out – especially when you realize that people are spending less and less time in hospitals having surgery or lying on their backs recovering.
It stands to reason that an unhealthy person will demand more from a health-care system than a healthy person. Illness can strike anyone at any time, but certain behaviors make people more vulnerable to diseases – especially chronic diseases that are expensive to treat.
Consider the three most costly conditions in the United States. According to a major study published in JAMA last December, Americans in 2013 spent $101 billion on diabetes, $88.1 billion on ischemic heart disease and $87.6 billion on lower back pain. Some 90% of all U.S. health spending is devoted to patients with at least one chronic condition, according to a RAND Corporation reportthis year.
The JAMA study’s authors, led by Joseph L. Dieleman of the Institute for Health Metrics and Evaluation in Seattle, noted that diabetes, ischemic heart disease, lower back pain, plus several others among the 20 most costly conditions…
have an underlying health burden nearly exclusively attributable to modifiable risk factors. For example, diabetes was 100% attributed to behavioral or metabolic risk factors that included diet, obesity, high fasting plasma glucose, tobacco use, and low physical activity. Similarly, IHD [ischemic heart disease], chronic obstructive pulmonary disease, and cerebrovascular disease each have more than 78% of their disease burden attributable to similar risks.
Any serious, systematic discussion of health-care costs has to look at the demand side – at the unhealthy behaviors that cause Americans to spend more than one-sixth of our GDP on health care – by far the highest proportionof economic output among all developed countries.
Perhaps our high rate of health-care spending is not as confounding as many think. Paraphrasing James Carville’s famous comment about Bill Clinton’s election, we might conclude, “It’s the health, stupid!”
The Impact of Obesity, Drinking, and Smoking
on Disability and Longevity
Two new studies show the powerful effect of unhealthy behaviors. Research by Neil Mehta of the University of Michigan and Mikko Myrskyla of the Max Planck Institute looked at the impact of smoking, obesity, and alcohol consumption on disability and longevity. The results were published in the August issue ofHealth Affairs.
Using data from the Health and Retirement Study, the authors examined a sample of 14,804 respondents ages 50 to 74 in 1998 and looked at the average (mean) age at the first incident of disability among those in the sample. (Disability is a good marker for significant and expensive disease. It was defined as having a limitation in at least one of five daily activities: dressing, bathing, getting in or out of bed, walking, and eating.) Mehta and Myrskyla then looked at metrics involving obesity, smoking, and alcohol consumption.
The authors judged that the effects of behavioral risks on health were “massively damaging.” For example, women who were obese became disabled, on average, at age 63 while women who were not obese, did not smoke, and who used alcohol moderately did not have her first incident of disability until age 75.2 – so the penalty, compared with an obese woman, was 12 years; for men, the penalty was seven years.
(Obesity was defined as having a body mass index of 30 or greater. An example is a woman who is 5 feet-5 inches and weighs 180 pounds or more.)
The authors also found:
A fifty-year-old woman who has never smoked, is not obese, and drinks moderately will live until she’s almost 89, roughly twelve years longer than a fifty-year-old obese woman who ever smoked and does not drink moderately. For men, the difference in life expectancy between these two categories is slightly more than eleven years.
The researchers discovered as well that “people with multiple behavioral risk factors not only live shorter lives than those without these factors but also experience an extended time disabled.” “By contrast, compared to the whole U.S. population,” those who “had never smoked, who were not obese and who consumed alcohol moderately…experienced a delay in the onset of disability of up to six years.”
While cigarette smoking is on the decline, rates of having smoked -- among middle-aged Americans, especially -- are still high, about one adult in six. (Separately, the Centers for Disease Control has found that disabled people are 50% more likely to smoke cigarettes than non-disabled.)
Obesity continues to plague this country. In 1990, just 11.6% of Americans were obese; today, the figure is 29.8%. One reason is lack of lack of exercise. According to the United Health Foundation, “For the past 15 years, the prevalence of physical inactivity among adults has hovered around 25%.” Meanwhile, excessive alcohol use is causing “fetal damage, liver diseases, hypertension, cardiovascular diseases, and other major health problems.” The U.S. is suffering an annual average of 87,798 alcohol-attributable deaths and 2.5 million years of potential life lost. Mainly because of opioids, drug-overdose deaths have tripled since 2000.
Meta and Myskyla found, incredibly, that “nearly 80 percent of Americans reach their fifties having smoked cigarettes, been obese, or both.”
The irstudy does not look specifically at the costs of treating disability-inducing diseases, the costs of housing or otherwise caring for disabled seniors, or the loss to economic production of their absence from the work force. Clearly, those costs are enormous.
How Weight Gain Contributes to Chronic Disease
The second new study, published as an original investigation in JAMA on July 18, looked at the effects of weight gain on health. The nine authors – most of them affiliated with the Harvard Medical School – examined 118,000 men and women from age 18 or 21 to age 55. They found that “moderate weight gain from early to middle adulthood was associated with significantly increased risk of major chronic diseases and mortality.” Specifically, compared with those who maintained their weight from early to middle adulthood (gaining no more than 5.5 pounds), those who gained a moderate amount of weight (5.5 to 22 pounds) had increased incidence of type 2 diabetes, cardiovascular disease, and obesity-related cancer.
For every 11 pounds gained during those 35- and 37-year periods, Americans have:
Comparisons With Other Countries
In neither study, did researchers compare outcomes with other countries – though it would be a good idea for the future. We can see, however, from other research that in the United States the prevalence of both unhealthy behaviors and chronic, disabling disease is higher than other nations.
For example, according to the Organization for Economic Cooperation and Development, “Obesity rates among adults in the United States are the highest among OECD countries.” While smoking rates are fairly low, “by contrast with many other OECD countries, overall alcohol consumption per adult in the United States has gone up since 2000. Whereas alcohol consumption per capita in the United States was more than 10% lower than the OECD average in 2000, it is now equal to the OECD average.”
Also, according to the United Nations Office on Drugs and Crime, the United States, with 4% of global population, accounts for 27% of the world’s drug-related deaths. Our rate of deaths per million people is about 10 times that of Western Europe. Drug use, of course, leads not only to death but, more commonly, to other diseases and disability.
As for the effects of these unhealthy behaviors…
A Commonwealth Fund study looked at the proportion of adults in 11 countries that had multiple chronic conditions. The conditions were joint pain or arthritis, asthma or chronic lung disease, diabetes, heart disease, and hypertension. (Many of these conditions are deeply influenced by unhealthy behaviors.) Researchers found that the U.S. the leader among low-income adults. More than 41% Americans in this category had multiple chronic conditions compared with 23% in France, 24% in Germany, and 32% in the U.K. Among all other adults, the U.S. topped the list again, with 25% of Americans having multiple chronic conditions, far ahead of Canada, in second place, at 18%.
A study by the International Diabetes Federation found that 11% of Americans aged 20 to 79 suffered from the disease – a total of 30 million patients. The U.S. had two-thirds the number of diabetes patients of the other 37 developed nations combined. The U.S. rate was more than double that of such nations as Belgium, Italy, Australia, and the United Kingdom.
The results of unhealthy behaviors are also evidenced by infant mortality, where the U.S. ranks 29th of the 35 developed OECD countries, and life expectancy at birth, where the U.S. ranks 26th, behind nations with much lower incomes per capita, including Slovenia, Chile, and Greece.
Again, the trend is not good. In 1970, life expectancy in the U.S. was one year above the OECD average; today it is 1.7 years below average.
What Can Be Done?
To bring health-care costs down, Americans have to get healthier. The Mehta-Myrskyla study of the benefits of a healthy lifestyle concludes that “the high prevalence of risky behaviors poses a formidable challenge to achieving improvements in population health.” Still, they write:
Evidence shows that population-level behavior profiles can be responsive to large-scale and high-level policy efforts, with some of the most convincing evidence coming from anti-smoking campaigns…. There is also solid evidence of the effectiveness of financial ‘sticks’ such as taxes on cigarettes, alcohol, and potentially beverages and foods associated with obesity.
America is the most unhealthy rich country on earth – and not because of medical resources. Thanks to vast investments in research and development, we produce the best medicines; our acute-care hospitals are unmatched; our physicians are considered the most skilled and innovative. But our resources are being overwhelmed by demand from people whose conditions are often the result of their own unhealthy behaviors.
To change these behaviors, we need to change the incentive structure across the health-care system. Today, that structure is built around sick care, with a focus on treatment and services rather than wellness. There is no accountability for one’s own health. A better structure would compensate physicians for health outcomes and patients for healthy behaviors and choices. Only when we take these steps, will we begin to bend the cost curve in health care and improve outcomes, especially for non-communicable diseases.
Changing unhealthy behaviors is not easy, but the effort must become a major focus of efforts to lower health-care costs.
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