Why is U.S. healthcare so expensive?

October 4, 2012

Joe McWilliams

Dr. David Hubbard, a heart patient from Reno, Nevada, recently came face to face with one of the most impactful issues today: the skyrocketing cost of healthcare.

Sitting in his doctor's office, according to a recent article in the Wall Street Journal, Dr. Hubbard was shocked to learn that his echocardiogram cost his insurer $1,605, four times the $373 it paid when he had the same procedure with the same equipment at the same office six months earlier. Dr. Hubbard has a high-deductible health plan and had to pay about $1,000 out of pocket.

Why is this happening?

In everyday life, most people are accustomed to receiving higher quality by paying more for many types of goods and services. It certainly seems like a common sense exchange. For example, when buying a car, a higher price generally implies better engineering or more luxury features. In healthcare, however, cost and quality are generally not correlated.

Despite having the most expensive healthcare system in the world, the U.S. ranks last overall compared to industrialized countries such as Germany, Australia, and Canada on measures of health system performance in key areas such as quality, efficiency, access to care, equity, and the ability to lead long, healthy, productive lives. (This is despite spending $7,960 per capita on healthcare in 2009 compared to $3,837 spent per capita in the Netherlands, which ranked first overall.)

One of the key factors responsible for healthcare costs spiraling out of control is the lack of standardized pricing for routine services and procedures. For example, the cost of a service such as an MRI can range from a few hundred dollars to several thousand "“ for exactly the same test. As is often the case, Medicare pays less for some medical services if they are performed in a freestanding doctor's office rather than a hospital facility. As hospitals increasingly acquire private physician practices, the same service, even sometimes provided in the same location, can cost more once a practice joins a hospital, as was the case for Dr. Hubbard's echocardiogram.

Today, patients are often insulated from the costs and consequences of the medical decisions they make. Yet we know from research that when patients are provided with access to fair, transparent information about the costs, benefits, risks, and tradeoffs of healthcare decisions, they tend to choose about 30 to 40 percent less treatment and their rate of consumption drops to about the level that their own doctors choose when they're confronted with those same medical problems. When you give patients truly informed choices, they tend to make decisions that involve less invasive, less aggressive, and less costly care.

Wild price variations in the U.S. healthcare system hurt consumers. New approaches that promote open, market-driven dynamics while preserving choice and access to care will go a long way toward addressing skyrocketing healthcare costs in the U.S.

Patients must become empowered and involved in the medical decision-making process. Dr. Hubbard, the Reno heart patient, said that when he needed another echocardiogram early this year, he became more involved in the medical decision-making process and sought out an independent imaging center that performed the procedure at the insurer's rate of $265.31, far less than the earlier test. It is inspiring to see patients like Dr. Hubbard take greater control over their journey through the rapidly changing healthcare system.

Joe McWilliams is a healthcare strategy consultant and committed supporter of a smarter, more efficient healthcare system. He currently works in strategy and marketing at Philips Healthcare, where he is focused on the identification and development of new business models for next-generation healthcare applications. Prior to Philips, Joe worked at Scientia Advisors, a healthcare strategy consulting firm in Cambridge, Mass. He has also worked as a consultant at Accenture and in business development and licensing at Partners Healthcare Research Ventures and Licensing, the technology transfer arm of Partners Healthcare responsible for investing in novel technologies from Massachusetts General Hospital.

Originally published Oct 4, 2012 9:00:12 AM.