In this topic, we will introduce some foundational concepts related to healthcare finance and how healthcare providers get paid.   Healthcare finance is an extremely broad and complex topic, that may encompass a number of things.  For example, healthcare finance may include strategies for raising capital (e.g., money) to build new facilities or purchase equipment at a hospital.  It may also include the range of methods by which health care providers are paid by insurance companies (referred to as reimbursement).  And reimbursement methods vary substantially depending on the type of payor (private insurance company vs. governmental program), the type of care being provided, and the setting in which it is provided.  Given the breadth of this topic. we will not be able to cover all aspects of health finance in an introductory class like this. Rather, in this topic, we will focus on introducing some key terms and concepts necessary to understand the current evolution in American health care away from fee-for-service (FFS) to value-based payment.   This week we will look at some of the basics of FFS reimbursement and why it is problematic.  Next week, at the beginning of Module 7, will take a closer look at specific value-based payment models and how those revolve around risk-sharing between payers and providers.

Watch 10-minute “Economics of Healthcare” Video

Please begin by watching this 10-minute video “The Economics of Healthcare.”  This video will provide a review of many concepts regarding the structure of the U.S. health system covered earlier in the class.  However, it will do so in a way that focuses on how these aspects of the health system relate to financial and economic incentives.

Click the Play icon to begin.

If video doesn’t appear, follow this direct link: The Economics of Healthcare: Crash Course Econ #29 (10:26 min.)

Use the direct link above to open the video in YouTube to display the video captions, expand the video, and navigate the video using the transcript.

CrashCourse. (2016, April 6). The Economics of Healthcare: Crash Course Econ #29. YouTube.

More Is Less

Note: This American Life is produced for the ear and designed to be heard. If you are able, we strongly encourage you to listen to the audio, which includes emotion and emphasis that’s not on the page. Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio before quoting in print.

Act Two: Every Cat Scan Has Nine Lives

Ira Glass

It’s This American Life, I’m Ira Glass. Each week on our show of course, we choose a theme, bring you different kinds of stories on that theme. Today’s show, “More is Less.” This is the first of two shows that we’re going to be doing, this week and next, explaining the health care system, or parts of it anyway. Today we’re asking the question, why are health care costs rising so much that they threaten our entire economy?

We’ve arrived at act two of our show. Act Two: Every Cat Scan Has Nine Lives.

This summer at a press conference, President Obama described how he wants to slow the increase in health care costs. He’s going to do it by having patients everywhere adjust a bit.

Barack Obama

They’re going to have to give up paying for things that don’t make them healthier. Why would we want to pay for things that don’t work?

Ira Glass

Of course when he says it that way it sounds like it could not be easier. According to the Dartmouth Atlas of Health, as you’ve just heard before the break, one-third of medical spending is on treatments and tests that are not actually necessary. And in some cases, may actually harm us. And President Obama’s stimulus package devotes a billion dollars to studying and determining which procedures those are. So, let’s just eliminate the stuff that doesn’t work, right?

Well, one of our producers, Lisa Pollak, explains why, in practice, that is not so easy to do.

Lisa Pollak

In the spirit of the president’s advice, here’s a story about what happened at one hospital when one doctor tried to resist ordering a test for a patient.

The patient was a teenage girl who’d been in a minor car wreck. As a precaution she was brought into the ER on a backboard with one of those collars around her neck. The doctor was Jerome Hoffman. He’s a professor of emergency medicine at UCLA. And the first thing he needed to do was rule out the risk of an injury to the girl’s cervical spine. He was able to do this without taking an x-ray. Because when he examined the girl, her condition matched this list of five criteria. For instance, she had no tenderness in the middle of the back of her neck that indicate to doctors when a fracture is extremely unlikely.

Hoffman told the girl’s mother that her daughter was fine, no need for an x-ray, and the mother seemed OK with this.

Jerome Hoffman

But a couple minutes later, the dad showed up.

Lisa Pollak

Dr. Hoffman.

Jerome Hoffman

And the dad was a very tall, very powerful figure, who was very upset and spoke very loudly. And he also happened to mention that he was a lawyer and that there would be consequences for any error that we made. And he said that he wanted to get not just an x-ray, but a CAT scan of her neck.

Lisa Pollak

A CAT scan. Which is not only more expensive than an x-ray, but uses much more radiation.

Jerome Hoffman

So I tried to explain to him that a, she didn’t really need the x-ray, or the cat scan. And b, that there was some harm with it. In fact, if you do a thousand CAT scans to a young woman like this, there’s a pretty good chance that some small number– one, two, something like that– may have harm from it. And the harm is not trivial harm, it’s important harm. She could get a cancer of her thyroid that in 15, 20 years might actually be fatal. So while I can’t say with 100% certainty that her neck was fine, I was pretty sure– 99.9% at least, in my judgment, it would be more harmful than beneficial to her to do the test for her.

So I tried to explain this to the dad and I tried to be really nice and patient, but he was having none of it. He said things like, you will do a CAT scan. And then I said to him something that, actually I had long known, but it never crystallized for me exactly in this way until that moment.

I said to him, you know, for me it really is the right thing to do the CAT scan. I said, you know, if I don’t do the CAT scan, you’re probably going to lodge a complaint about me. If I do the CAT scan, you’re going to be really happy with me. I said, in addition, I’m almost certain that your daughter is fine. But there’s maybe a one in a million chance that she isn’t. That there really is a hidden fracture and I’m missing it. And if that’s the case, the CAT scan will save my butt. And on the other hand, if I do the CAT scan and your daughter gets a cancer 20 years from now, no one will blame me. I said, in addition, I’m spending a lot of time talking to you here that I need to be going doing other things. If I get the CAT scan, I could do it in a second. It would be done with. It would be easy.

And I said, finally, the really strange thing is that I’ll get paid more if I do the CAT scan. Because the way that bills are made, you get paid more for more complex patients. And the insurance companies of the world think that it proves that the patient was more complex and more difficult if you had to do a CAT scan. So everything about this was pushing me to do the CAT scan. I said that to him.

And I said, there’s only one problem, which is that when I decided to become a doctor, I made a pledge. And the pledge was that I would put my patient’s interest in front of my own interest. And in this case, my judgment was that it was not in my patient’s interest to do the CAT scan. And therefore, I can’t do it.

And it was really strange. It was interesting because this big guy, very powerful guy who had been really yelling and angry and screaming, his jaw dropped and he was silent. He didn’t know what to say.

Lisa Pollak

And you didn’t do the CAT scan?

Jerome Hoffman

Oh no. That was the end of the story. I hope it’s the end of the story. It’s been over a year now and I haven’t gotten that famous embossed letter with the lawsuit, so I’m assuming that everything turned out fine.

Lisa Pollak

Hoffman told me this story is not an isolated example. Things like this happen all the time in his department. Whether it’s people wanting antibiotics for illnesses that antibiotics have been proven not to help, or tests such as x-rays and CAT scans.

Jerome Hoffman

Where a patient thinks, well, don’t I need to be sure that I don’t have appendicitis? Or this, that, or the other thing. And really, the right thing for the doctor to do is to think. And in many cases, not to do any tests. At least not right now. There’s a place for tests and there’s a place for interventions. But not in every case. And yet, the incentive to the doctor is often, just do everything.

Lisa Pollak

And the truth is, a lot of us like it that way. It’s hard to understand how doing everything could be bad for us. We think, better safe than sorry. Do everything possible.

In a study published earlier this year, half the public believes someone’s getting unnecessary health care. But only 16% thought it was them. We’re so wired to think that more health care is better that when someone suggests we might be better off with less, it’s upsetting.

Even daring to raise the question, is this device or test or pill really making us healthier, can send people into a panic.

Consider the PSA test, the blood test used to screen men for prostate cancer. The question of whether the benefits of this test outweigh the risks is one of the most controversial issues in medicine. Some doctors worry that the test is leading to unnecessary treatment. Because it catches many prostate cancers that are so slow growing they would never be harmful if left alone.

In 2002, two medical journal editors, both doctors, made this point in an op-ed for the San Francisco Chronicle. Gavin Yamey and Michael Wilkes wrote that since early detection hadn’t been proven through randomized control trials to reduce a man’s risk of dying from prostate cancer, getting the test might not be right for every man. Their op-ed, published under the headline, “Prostate Cancer Screening: Is It Worth the Pain,” did not go over so well.

Gavin Yamey

Lots of people wished that we would die.

Lisa Pollak

That’s Gavin Yamey. Since many of the readers believed the PSA test had saved their lives, they didn’t appreciate being told that the test wasn’t effective.

Gavin Yamey

Lots of people wished we would have a very slow death from a nasty cancer. People accused us of having the deaths of thousands of men on our hands for writing this piece. Of geriatricide.

Lisa Pollak

Michael Wilkes, Yamey’s co-author.

Michael Wilkes

People wrote both to us and to our bosses accusing us of being sort of like the Nazis. And specifically, accusing us of being like Mengele. Others accusing us of truly being men-haters and wanting to wipe out the male population.

Lisa Pollak

When the president says we can cut health care costs by eliminating things that don’t work, things for which there’s no evidence, it sidesteps the fact that in medicine the evidence isn’t always so clear cut. And that’s true with the PSA test.

There’s a lot more evidence about PSA now than there was when Yamey and Wilkes wrote their op-ed. In fact, two long-awaited studies came out this Spring.

One showed that the PSA test did not reduce a man’s risk of dying from prostate cancer. The other showed it reduced prostate cancer deaths by 20%. But it also showed that for every life saved because of PSA screening, 48 other men were diagnosed and treated. In other words, for each prostate cancer death prevented, dozens of men endured surgery or radiation, risking serious side effects, like impotence and incontinence.

Doctors interpret this evidence differently. Some I talked to said it’s proof that the test saves lives. Others said it shows we might be hurting more men than we’re helping. Because the evidence is ambiguous and the balance of risks and benefits is really a judgment call, most national guidelines say that doctors should let men know the pros and cons of PSA testing, and let them decide whether to have it. But most of the time this is not what happens. Studies show that the majority of men get the test without any discussion at all. It’s automatic, a no-brainer. And honestly, it’s not hard to see why.

To question whether the test is necessary, a doctor is flying in the face of all sorts of cultural forces. Like the idea that if you can find cancer early, you always should. Not to mention all the billboards and free PSA screening events and celebrities in TV ads telling men to get tested.

Woman

Want to do something really special for your man this Christmas? Call his doctor and schedule his prostate exam. Prostate exams save lives and prostates.

Lisa Pollak

Here’s another from the NFL.

Man

So get screened and don’t let prostate cancer take you out of the game.

Lisa Pollak

And of course, Larry King.

Larry King

Men over 40, take your PSA test. It’s a simple, little blood test. You get the result in a couple days.

Lisa Pollak

A few doctors I talked to mentioned another reason that physicians might be wary of bucking the PSA trend. They told me what happened to a doctor named Dan Merenstein.

Merenstein was trained in evidence-based medicine, and about 10 years ago, when he was a family practice resident, a 53-year-old man came to him for a routine physical. Merenstein says he followed the guidelines. Talked to the patient about the benefits and risks of getting the PSA test. And the man chose not to have it. Then, a year and a half later, the man went to another doctor. That doctor tested the man’s blood without discussing it with him. His PSA level was extremely high and a biopsy found an aggressive, incurable cancer.

Now there is was proof that having an earlier PSA test would have changed the man’s fate. But Merenstein and his residency program were sued for malpractice. At the trial, the patient’s attorney argued that Merenstein shouldn’t have given the man a choice to have the PSA test, no matter what the national guideline said. The attorney put other family doctors on the stand.

Dr. Dan Merenstein

And they said, you know, we don’t talk to patients.

Lisa Pollak

This is Dr. Merenstein.

Dr. Dan Merenstein

That’s what they do in ivory towers. You know, I order tests. Patients come to me for me to order the test. I’m the one that went to medical school. And these are the tests we order. And if Dr. Merenstein had ordered this– they said this straight under oath. And if Dr. Merenstein had ordered a PSA, this patient would live a long, productive life. But because Dr. Merenstein failed to, this patient is going to die surely.

Lisa Pollak

Merenstein was exonerated, but his residency program was found liable for a million dollars. The jury, just like the doctors on the stand, rejected the idea of following the guidelines based on evidence. To them, the best care meant doing everything you can.

Dr. Dan Merenstein

I should have just ordered it. There should have been no discussion. It shouldn’t have been up to the patient. So that was the approach they took. And they took this approach that this thing called evidence-based medicine is just a way to save money, just a way to ration care.

Lisa Pollak

After the trial, like a lot of doctors who had been sued, Merenstein found it hard not to see patients as potential plaintiffs.

Dr. Dan Merenstein

I think you view people differently after that and you look at patients and you say, this mole, which a thousand times before I would say I’m pretty confident on how to evaluate moles and which ones I need to take off myself, and which ones I think are fine to stay, and which ones need to go. You know, I think I started sending more moles to dermatologists to remove and sending more people with what I was pretty confident was irritable bowel or something like that to GI doctors to get scoped and things like that more than I should have. It sort of just didn’t feel right.

Lisa Pollak

It didn’t feel right, he said, because it didn’t feel like he was doing what was best for the patients. These days, when it comes to the PSA test, Merenstein starts by following the evidence. He still tells his patients the pros and cons, but then he gives them a little nudge and adds something he never used to. “Most people,” he tells his patients, “get the test.”

Ira Glass

Lisa Pollak. If you’re a man and you heard this story and you want to know more about the pros and cons of getting the PSA test, there’s a good summary at the Mayo Clinic web site. Those people really know what they’re doing.^[1]

Problems with Fee-for-Service Reimbursement: Moral Hazard, Supplier-Induced Demand, and Fragmentation

By this point in the class, it should be apparent to you that health expenditures in the United States are unsustainable.  In the U.S., we spend roughly twice much per person on health care than any other developed country and still achieve poorer overall outcomes in terms of population health (Kaiser Family Foundation, 2015).  Moreover, the Institute of Medicine estimates that as much as 30 percent of all health care services provided are unnecessary or wasteful (IOM, 2013).

The vast majority of the cost of most health services is not directly paid for by a patient out-of-pocket.  Rather, they are paid for by a third-party private insurance company or a governmental program such as Medicare, Medicaid, CHIP, TriCare, or Veteran’s Administration.  Most health plans include certain types of cost-sharing mechanisms, such as co-pays or deductibles.  But even still, most of the cost of care is paid for by a third-party health insurance plan.

When a health care provider is paid for services by a third party, this is called reimbursement.  And the most predominant form of reimbursement over the last century has been some form of fee-for-service (FFS).  Under FFS reimbursement, the health care provider provides a service covered by the insurance plan, sends a bill to the insurer identifying the service provided and medical justification using a fairly complicated coding system (such as the CPT- Current Procedural Terminology), and then is reimbursed or paid for providing that service.  As long as the procedure was covered under the insurance plan based on the symptoms the patient presented with, the provider will get paid for the service, regardless of whether it actually improves the patient’s health down the road.

Depending on the type of provider and insurance plan, there are a variety of different types of FFS rates.  For private insurance plans, the FFS rates the insurance company pays are generally negotiated between the health care provider and the insurance company.  If the patient is covered by a governmental program like Medicare or Medicaid, the rate or fee that can be charged for each service is set by the government.  Typically, hospitals and large health systems are able to negotiate much higher rates from private insurers than those paid by Medicare.  For example, a large study found that in 2018, the negotiated rates paid by private insurers for inpatient hospital services were, on average, approximately 2.5 times the Medicare rate and 2.25 times the Medicare rate in 2020 (Whaley et al., 2022).   As an illustration, let’s say two very similar patients are admitted to a hospital for the same procedure.  One patient had their 65th birthday last week and just enrolled in the Medicare program.  The other patient is a year younger, doesn’t qualify for Medicare, and is currently covered by private insurance.   So if the care for the 65-year-old Medicare patient costs $20,000 (based on the rates set by the government), chances are that the exact same care for the 64-year-old patient covered by private insurance would probably be billed at around $45,000 to $50,000 (based on the rates negotiated between the private insurer and the hospital).

From the perspective of an individual clinician, the FFS approach may make a fair amount of sense.  The clinician provides a service and then gets paid for it.  This is more or less the same way that a car mechanic gets paid for fixing a wrecked car or a plumber gets paid for fixing a clogged drain. They have provided the service and get paid for it.  And it’s not the mechanic’s concern if the car owner goes and wrecks it again the very next week.  From an overall system and population health perspective, however, the FFS reimbursement approach when a third-party insurer is paying for health services has proven to be problematic for three interrelated reasons: (1) moral hazard, (2) supplier-induced demand, and (3) fragmentation of health services. We will discuss each of these below.

I. Moral Hazard, Cost Sharing Mechanisms, and the RAND Health Insurance Experiment

Moral hazard is a term used in the field of economics.  Oxford Reference defines moral hazard as: “The observation that a contract which promises people payment on the occurrence of certain events will cause a change in behaviour to make these events more likely. For example, moral hazard suggests that if possessions are fully insured, their owners are likely to take less good care of them than if they were uninsured.”   When it comes to demand for health services, I think it is helpful to think of moral hazard in terms of what I call the “free stuff principle.”  Meaning, that if something is being handed out with no out-of-pocket cost, people are more likely to take it, even if they don’t really need it or want it all that much.  For example, let’s say you’re walking across campus and there’s a table set up with a sign that says: “Student Appreciation Week: Free Donuts”  Unless you’re watching your calories, there’s a fairly good chance that you might grab a donut, even if you had not been planning on eating a donut that day and would not have taken one if you’d had to pay for it.  Why not?  It’s free after all.

And the same thing may happen with healthcare covered by insurance.  The patient may use their insurance coverage for healthcare or opt for more expensive treatment options than they would if they were paying for it out-of-pocket themselves. One Nobel prize-winning economist explained that: “the cost of medical care is not completely determined by the illness suffered by the individual but depends on the choice of a doctor and his [or her] willingness to use medical services.  It is frequently observed that widespread medical insurance increases the demand for medical care” (Arrow, 1963).

And so with a health delivery system where a third party (whether a private insurance company or a governmental program like Medicare) pays for the cost of care, we will likely see an increase in overall health spending due to moral hazard.  For example, let’s say a patient (we will call him “Peter Patient”) sees an advertisement for a brand-name medication on TV.  So Peter goes to his doctor and asks to start taking that medication. This medication will cost $500 per month.  Because Peter’s insurance plan covers the cost of the medication, he doesn’t realize (or even have a reason to really think about) how much the medication costs and whether a similar less-expensive generic medication would work just as well for her.

To help offset the impact of moral hazard, most insurance plans have different types of cost-sharing mechanisms, which require patients to pay a share of the cost of their care.  HealthCare.gov (n.d.) provides the following definitions for the three most common types of cost-sharing:

• Co-pay or Copayment:
  • “A fixed amount ($20, for example) you pay for a covered health care service after you’ve paid your deductible.”
• Deductible:
  • “The amount you pay for covered health care services before your insurance plan starts to pay. With a $2,000 deductible, for example, you pay the first $2,000 of covered services yourself. After you pay your deductible, you usually pay only a copayment or coinsurance for covered services. Your insurance company pays the rest.”
• Coinsurance:
  •  “The percentage of costs of a covered health care service you pay (20%, for example) after you’ve paid your deductible.”

The aim of cost-sharing mechanisms like co-payments and deductibles is to make the patient more attuned to the cost of their care.  Let’s go back to the example above of Peter Patient who wants to be prescribed a brand-name medication.  Many insurance plans will charge higher copayments for brand-name medications than for generics.  So if Peter’s insurance plan includes a $100 per month co-payment for a brand name medication and a $10 co-payment for generics, this might discourage him from using the brand name medication if there is a generic that will work just as well.  In this case, the co-payment would be effective in mitigating the moral hazard effect.

There is also a concern, however, that cost-sharing mechanisms like copayments and deductibles may also discourage patients from seeking necessary care in a timely manner.  For example, let’s say that over the last year, a 45-year-old patient has experienced a lot of stress, has had a poor diet, has stopped exercising regularly, and has gained a fair amount of weight.  The patient is concerned that they need to better manage their blood pressure and may be at risk for diabetes.  And they think they think they should probably go see their doctor about these issues.  But the patient’s insurance plan is set up to have a $20 co-payment for an office visit to see a primary care physician and a $1000 deductible before any procedures (like blood tests) are covered.  The patient fears that if they go to the doctor, they will likely end up paying several hundred dollars out-of-pocket after the co-pay and blood tests get added up.  And so the patient delays going to the doctor to avoid this out-of-pocket cost.   As a result, they suffer a heart attack or stroke that could have been prevented if their high blood pressure had been properly managed.  So there is a concern that patients will put off going to the doctor to avoid those types of out-of-pocket expenses and end up allowing health conditions to go unaddressed and get worse.  When a patient puts off receiving care or limits the amount of care they receive due to financial constraints, this is referred to as “demand-side rationing.”  And demand-side rationing is problematic if causes a patient to put off receiving necessary care at the preventative/primary care level, leading the patient to need emergency or higher-level inpatient care.

To help address how cost-sharing may discourage patients from receiving necessary preventative care (e.g., engaging in demand-side rationing), under the Affordable Care Act, federal law now requires private insurers to cover certain preventative services with no out-of-pocket costs, regardless of whether the patient has met the deductible or not.  There are over 50 different preventive services that insurers must cover with no out-of-pocket costs depending on the characteristics of the patients (e.g., children, women’s health, all adults, and at-risk populations).  These preventative services include cancer screenings (mammograms and colonoscopies), immunizations, depression screening, FDA-approved contraceptives, screening for various STIs, and substance misuse screening and treatment.

In the 1970s and 1980s, the RAND Corporation conducted a multiyear study where families were randomly assigned to different types of insurance plans, some of which had very high levels of cost-sharing (e.g., high co-pays and deductibles), others had moderate cost-sharing (moderate co-pays and deductibles), and others with no out-of-pocket costs. This very influential study, referred to as the RAND Health Insurance Experiment (HIE), demonstrated that cost-sharing mechanisms like co-pays and deductibles do indeed discourage patients from overutilizing expensive and unnecessary treatments without negatively impacting overall health outcomes in the aggregate.  Brooks et al. (2006) summarize key findings from the RAND HIE as follows:

1. In a large-scale, multiyear experiment, participants who paid for a share of their health care used fewer health services than a comparison group given free care.
2. Cost sharing reduced the use of both highly effective and less effective services in roughly equal proportions. Cost sharing did not significantly affect the quality of care received by participants.
3. Cost sharing in general had no adverse effects on participant health, but there were exceptions: free care led to improvements in hypertension, dental health, vision, and selected serious symptoms. These improvements were concentrated among the sickest and poorest patients (Brooks et al., 2006).

In sum, moral hazard contributes to the overutilization of unnecessary and expensive care where a third-party private insurer or governmental program pays for most of the cost of care.  Insurance plans have implemented cost-sharing mechanisms (co-pays, co-insurance, deductibles) that require patients to pay for some of the cost of care out-of-pocket to help mitigate the impact of moral hazard.  However, there is concern that cost-sharing may discourage some patients from receiving care promptly.  For this reason, after the enactment of the ACA, federal law requires insurers to cover certain preventative services–like cancer screenings and immunizations–with no out-of-pocket cost-sharing to patients. The RAND Health Insurance Experiment empirically demonstrated through a large-scale study the impact of moral hazard and the efficacy of cost-sharing in mitigating its effects.

II. Supplier-Induced Demand and “Cost Conundrum” article excerpts

As discussed above, moral hazard is where the fact that healthcare service is covered by insurance may contribute to a patient seeking and using more health services than necessary.  A related phenomenon is “supplier-induced demand”  (sometimes also referred to as “provided-induced demand” or “physician-driven demand”).  Supplier-induced demand (SID) is defined as “the change in demand for health care associated with the discretionary influence of providers, especially physicians, over their patients” (Seyedin et al., 2021).

With most goods or services, the consumer can decide on their own whether they need them or not and when they will buy them.  For example, let’s say you’re thinking about buying a new cell phone.  You (and most people) would likely have no problem shopping around online, reading reviews, comparing prices, and comparing features.  And you would probably be able to decide, based on your needs, whether it’s worth it to spend more for a phone with a better camera, more memory, etc.   Or maybe you decide your current cellphone is working fine for the time being, and you decide to wait to buy a new phone when the prices come down or a new model comes out.

Health care, however, is different from most goods or services in terms of the extent to which the healthcare providers who supply it can influence the demand for the service.  For example, let’s say you begin experiencing severe abdominal pain and decide to seek medical attention.  Diagnosing and treating such a medical condition requires the expert knowledge of medical professionals–there is a whole range of things it could be.  So although you may find good information online, you will ultimately need to rely on the recommendation of your doctor regarding what tests need to be performed to diagnose the issue and how to go about treating it.  And because you’re already sick, it would not work for you to “shop around” or wait and see if better treatment options become available in the future.  Rather, you’d likely accept whatever course of treatment your doctor prescribes.  And if your doctor recommends the need for imaging or blood tests, you’d probably go along with this recommendation.  So as this hypothetical example illustrates, the context in which people seek out health care, the high level of expertise of health care clinicians, and the trust placed in them by patients means health care clinicians have a lot of influence in determining the level of care that is provided.

Under the FFS reimbursement system that has predominated over the last century, there are a lot of factors that incentivize or encourage clinicians to order more intensive and more expensive care.  These factors may include:

• Concern about legal malpractice liability for providing insufficient treatment. If the standard of care in a community is to perform a particular test in every instance a patient presents with a given set of symptoms—even if evidence from empirical studies does not support this practice—a physician could face a malpractice lawsuit for failing to follow the community standard.
• Training and professional culture emphasize extensive use of technology and aggressive treatment approaches, particularly for clinicians practicing in some specialties that utilize a lot of technology; and
• Financial incentives to provide a higher volume of care and more complex, technologically advanced care (which typically is reimbursed at higher rates).

So even if a clinician is not intentionally or consciously trying to induce the utilization of more expensive care, these various factors may converge to create a system that leads to unnecessarily high levels of care.

An article by Dr. Atul Gawande entitled “The Cost Conundrum” published in the New Yorker Magazine in 2009 illustrates how supplier-induced demand caused health spending to balloon in one city in Texas in the 1990s and 2000s.  As discussed in this article, at the time McAllen, Texas had the second-highest per-capita Medicare spending in the country, at roughly double the national average.  Despite being very similar to El Paso, Texas in terms of population demographics (e.g., income, age, unemployment, education levels, overall population health, etc.), the average per capita spending per Medicare beneficiary in McAllen was double what it was in El Paso.  So Dr. Gawande traveled to McAllen to investigate what had caused health spending to grow so much.  Below are excerpts from the article highlighting what he found.  As you read these excerpts, please think about how the approaches to treating gallstones and chest pain described below illustrate supplier-induced demand:

One night, I went to dinner with six McAllen doctors. All were what you would call bread-and-butter physicians: busy, full-time, private-practice doctors who work from seven in the morning to seven at night and sometimes later, their waiting rooms teeming and their desks stacked with medical charts to review.

Some were dubious when I told them that McAllen was the country’s most expensive place for health care. I gave them the spending data from Medicare. In 1992, in the McAllen market, the average cost per Medicare enrollee was $4,891, almost exactly the national average. But since then, year after year, McAllen’s health costs have grown faster than any other market in the country, ultimately soaring by more than ten thousand dollars per person.

“Maybe the service is better here,” the cardiologist suggested. People can be seen faster and get their tests more readily, he said.

Others were skeptical. “I don’t think that explains the costs he’s talking about,” the general surgeon said.

“It’s malpractice,” a family physician who had practiced here for thirty-three years said.

“McAllen is legal hell,” the cardiologist agreed. Doctors order unnecessary tests just to protect themselves, he said. Everyone thought the lawyers here were worse than elsewhere.

That explanation puzzled me. Several years ago, Texas passed a tough malpractice law that capped pain-and-suffering awards at two hundred and fifty thousand dollars. Didn’t lawsuits go down?

“Practically to zero,” the cardiologist admitted.

“Come on,” the general surgeon finally said. “We all know these arguments are bullshit. There is overutilization here, pure and simple.” Doctors, he said, were racking up charges with extra tests, services, and procedures.

The surgeon came to McAllen in the mid-nineties, and since then, he said, “the way to practice medicine has changed completely. Before, it was about how to do a good job. Now it is about ‘How much will you benefit?’ ”

Everyone agreed that something fundamental had changed since the days when health-care costs in McAllen were the same as those in El Paso and elsewhere. Yes, they had more technology. “But young doctors don’t think anymore,” the family physician said.

The surgeon gave me an example. General surgeons are often asked to see patients with pain from gallstones. If there aren’t any complications—and there usually aren’t—the pain goes away on its own or with pain medication. With instruction on eating a lower-fat diet, most patients experience no further difficulties. But some have recurrent episodes, and need surgery to remove their gallbladder.

Seeing a patient who has had uncomplicated, first-time gallstone pain requires some judgment. A surgeon has to provide reassurance (people are often scared and want to go straight to surgery), some education about gallstone disease and diet, perhaps a prescription for pain; in a few weeks, the surgeon might follow up. But increasingly, I was told, McAllen surgeons simply operate. The patient wasn’t going to moderate her diet, they tell themselves. The pain was just going to come back. And by operating they happen to make an extra seven hundred dollars.

I gave the doctors around the table a scenario. A forty-year-old woman comes in with chest pain after a fight with her husband. An EKG is normal. The chest pain goes away. She has no family history of heart disease. What did McAllen doctors do fifteen years ago?

Send her home, they said. Maybe get a stress test to confirm that there’s no issue, but even that might be overkill.

And today? Today, the cardiologist said, she would get a stress test, an echocardiogram, a mobile Holter monitor, and maybe even a cardiac catheterization.

“Oh, she’s definitely getting a cath,” the internist said, laughing grimly.

****

In 2005 and 2006, patients in McAllen received twenty per cent more abdominal ultrasounds, thirty per cent more bone-density studies, sixty per cent more stress tests with echocardiography, two hundred per cent more nerve-conduction studies to diagnose carpal-tunnel syndrome, and five hundred and fifty per cent more urine-flow studies to diagnose prostate troubles. They received one-fifth to two-thirds more gallbladder operations, knee replacements, breast biopsies, and bladder scopes. They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine (Gawande, 2009).

****

Elsewhere in his article, Gawande (2009) sums up the role of clinicians in contributing to high medical spending as follows: “Health-care costs ultimately arise from the accumulation of individual decisions doctors make about which services and treatments to write an order for. The most expensive piece of medical equipment, as the saying goes, is a doctor’s pen.”  In short, with (1) the incentives to provide more care under the FFS reimbursement combined with (2) the moral hazard problem where the cost of care is covered by governmental programs like Medicare or third-party private insurer, it is apparent how supplier-induced demand can contribute significantly to unsustainable health expenditures.

III. Fragmentation and Poor Communication

Another concern with FFS reimbursement is that it contributes to fragmentation in our health delivery system.  Earlier in this course, you were assigned to watch the “Fracture Health Care System” video lecture by Dr. Ted Epperly. In that video, Dr. Epperly presents the following analogy of how FFS reimbursement contributes to fragmentation in our healthcare system:

We’ve got the five greatest basketball players on the planet. These people are truly superstars. But here’s the way our payment system works. We give them each a basketball, we tell them to dribble around at random and shoot at will. And so just imagine these five greatest players, they’re shooting up shots, you get just in your mind’s eye the arcs of all these balls, some of them falling short of the basket, someone clanking off the iron, some going through, some just hitting the backboard.

But the way our payment system works is we say, every time you take a shot, we’ll pay you. Doesn’t matter if it goes in or not. It’s just we’ll pay you for every time you take a shot. And then we play a team, like Spain, or Portugal, or France, or Canada, or Britain, or Australia, or New Zealand, or Japan, and we get beat. Why do you think the United States, with the five best players on the planet, gets beat?

The reason is that we don’t pass the ball. We don’t integrate. We don’t coordinate. We don’t work as a team. We’ve created a system in which there’s minimal communication, because communication, passing of information, is not what gets paid for in our system. Doing things to people gets paid for in our system– operations, imaging, procedures. We’ve got to change the focus…(Epperly, 2013; emphasis added).

By this point in the class, you can hopefully appreciate that effective communication between providers and between providers and patients/family members is vital to providing high-quality care.   However, because healthcare providers are reimbursed for only specific covered services under FFS, this means providers are not paid for taking time to do things that are not covered services, even if those things are really important to maintaining their patient’s health.  In that way, FFS reimbursement focusing on “doing things” has contributed to fragmentation in our health system.

References

Arrow, K. J. (1963). Uncertainty and the Welfare Economics of Medical Care, 53 Am. Econ. Rev. 941, 961.

Brook, B.H., Emmett B. Keeler, Kathleen N. Lohr, Joseph P. Newhouse, John E. Ware, William H. Rogers, Allyson Ross Davies, Cathy D. Sherbourne, George A. Goldberg, Patricia Camp, Caren Kamberg, Arleen Leibowitz, Joan Keesey, and David Reboussin (2006). The Health Insurance Experiment: A Classic RAND Study Speaks to the Current Health Care Reform Debate. Santa Monica, CA: RAND Corporation, 2006. https://www.rand.org/pubs/research_briefs/RB9174.html.

Epperly, T. (Feb. 8, 2013). The Fractured Health Care System. https://www.youtube.com/watch?v=EVPZItQQhNQ

Gawanda, A. (June 1, 2009). The cost conundrum. New Yorker Magazine. http://www.newyorker.com/magazine/2009/06/01/the-cost-conundrum

HealthCare.gov (n.d.). Glossary. https://www.healthcare.gov/glossary/

Institute of Medicine (IOM). 2013. Best Care at Lower Cost: The Path to Continuously Learning Health Care in America. Washington, DC: The National Academies Press. doi:10.17226/13444

Kaiser Family Foundation. Nov. 19, 215. Health of hte Healthcare System. https://www.kff.org/health-costs/video/health-of-the-healthcare-system/

Seyedin, H., Afshari, M., Isfahani, P., Hasanzadeh, E., Radinmanesh, M., & Bahador, R. C. (2021). The main factors of supplier-induced demand in health care: A qualitative study. Journal of education and health promotion, 10, 49. https://doi.org/10.4103/jehp.jehp_68_20

Whaley, C.M., Briscombe, B., Kerber, R., O’Neill, B., & Kofner, A. (2022) Prices Paid to Hospitals by Private Health Plans: Findings from Round 4 of an Employer-Led Transparency Initiative. Santa Monica, CA: RAND Corporation, 2022. https://www.rand.org/pubs/research_reports/RRA1144-1.html.

Listen to 13-minute “Every CAT Scan Has Nine Lives” Podcast Segment (or read the transcript)

Please listen to this 13-minute podcast segment: “Every Cat Scan Has Nine Lives”

Note: This podcast segment comes from an hour-long episode of This American Life from 2009 covering aspects of American health care entitled “Less is More.”  The entire program is interesting and highly informative.  You are encouraged to listen to the whole thing, but only “Act Two: Every Cat Scan Has Nine Lives” is required for this course.

To access the transcript for this podcast, please use the More is Less transcript link.

Below is the transcript of the segment:

Ira Glass

Alix Spiegel. Coming Up, patients are told that they should do with less. That the test or procedure that they want for themselves is unnecessary. And surprise, they are not too happy about it. That’s in a minute from Chicago Public Radio and Public Radio International when our program continues.

Act Two: Every Cat Scan Has Nine Lives

Ira Glass

It’s This American Life, I’m Ira Glass. Each week on our show of course, we choose a theme, bring you different kinds of stories on that theme. Today’s show, “More is Less.” This is the first of two shows that we’re going to be doing, this week and next, explaining the health care system, or parts of it anyway. Today we’re asking the question, why are health care costs rising so much that they threaten our entire economy?

We’ve arrived at act two of our show. Act Two: Every Cat Scan Has Nine Lives.

This summer at a press conference, President Obama described how he wants to slow the increase in health care costs. He’s going to do it by having patients everywhere adjust a bit.

Barack Obama

They’re going to have to give up paying for things that don’t make them healthier. Why would we want to pay for things that don’t work?

Ira Glass

Of course when he says it that way it sounds like it could not be easier. According to the Dartmouth Atlas of Health, as you’ve just heard before the break, one-third of medical spending is on treatments and tests that are not actually necessary. And in some cases, may actually harm us. And President Obama’s stimulus package devotes a billion dollars to studying and determining which procedures those are. So, let’s just eliminate the stuff that doesn’t work, right?

Well, one of our producers, Lisa Pollak, explains why, in practice, that is not so easy to do.

Lisa Pollak

In the spirit of the president’s advice, here’s a story about what happened at one hospital when one doctor tried to resist ordering a test for a patient.

The patient was a teenage girl who’d been in a minor car wreck. As a precaution she was brought into the ER on a backboard with one of those collars around her neck. The doctor was Jerome Hoffman. He’s a professor of emergency medicine at UCLA. And the first thing he needed to do was rule out the risk of an injury to the girl’s cervical spine. He was able to do this without taking an x-ray. Because when he examined the girl, her condition matched this list of five criteria. For instance, she had no tenderness in the middle of the back of her neck that indicate to doctors when a fracture is extremely unlikely.

Hoffman told the girl’s mother that her daughter was fine, no need for an x-ray, and the mother seemed OK with this.

Jerome Hoffman

But a couple minutes later, the dad showed up.

Lisa Pollak

Dr. Hoffman.

Jerome Hoffman

And the dad was a very tall, very powerful figure, who was very upset and spoke very loudly. And he also happened to mention that he was a lawyer and that there would be consequences for any error that we made. And he said that he wanted to get not just an x-ray, but a CAT scan of her neck.

Lisa Pollak

A CAT scan. Which is not only more expensive than an x-ray, but uses much more radiation.

Jerome Hoffman

So I tried to explain to him that a, she didn’t really need the x-ray, or the cat scan. And b, that there was some harm with it. In fact, if you do a thousand CAT scans to a young woman like this, there’s a pretty good chance that some small number– one, two, something like that– may have harm from it. And the harm is not trivial harm, it’s important harm. She could get a cancer of her thyroid that in 15, 20 years might actually be fatal. So while I can’t say with 100% certainty that her neck was fine, I was pretty sure– 99.9% at least, in my judgment, it would be more harmful than beneficial to her to do the test for her.

So I tried to explain this to the dad and I tried to be really nice and patient, but he was having none of it. He said things like, you will do a CAT scan. And then I said to him something that, actually I had long known, but it never crystallized for me exactly in this way until that moment.

I said to him, you know, for me it really is the right thing to do the CAT scan. I said, you know, if I don’t do the CAT scan, you’re probably going to lodge a complaint about me. If I do the CAT scan, you’re going to be really happy with me. I said, in addition, I’m almost certain that your daughter is fine. But there’s maybe a one in a million chance that she isn’t. That there really is a hidden fracture and I’m missing it. And if that’s the case, the CAT scan will save my butt. And on the other hand, if I do the CAT scan and your daughter gets a cancer 20 years from now, no one will blame me. I said, in addition, I’m spending a lot of time talking to you here that I need to be going doing other things. If I get the CAT scan, I could do it in a second. It would be done with. It would be easy.

And I said, finally, the really strange thing is that I’ll get paid more if I do the CAT scan. Because the way that bills are made, you get paid more for more complex patients. And the insurance companies of the world think that it proves that the patient was more complex and more difficult if you had to do a CAT scan. So everything about this was pushing me to do the CAT scan. I said that to him.

And I said, there’s only one problem, which is that when I decided to become a doctor, I made a pledge. And the pledge was that I would put my patient’s interest in front of my own interest. And in this case, my judgment was that it was not in my patient’s interest to do the CAT scan. And therefore, I can’t do it.

And it was really strange. It was interesting because this big guy, very powerful guy who had been really yelling and angry and screaming, his jaw dropped and he was silent. He didn’t know what to say.

Lisa Pollak

And you didn’t do the CAT scan?

Jerome Hoffman

Oh no. That was the end of the story. I hope it’s the end of the story. It’s been over a year now and I haven’t gotten that famous embossed letter with the lawsuit, so I’m assuming that everything turned out fine.

Lisa Pollak

Hoffman told me this story is not an isolated example. Things like this happen all the time in his department. Whether it’s people wanting antibiotics for illnesses that antibiotics have been proven not to help, or tests such as x-rays and CAT scans.

Jerome Hoffman

Where a patient thinks, well, don’t I need to be sure that I don’t have appendicitis? Or this, that, or the other thing. And really, the right thing for the doctor to do is to think. And in many cases, not to do any tests. At least not right now. There’s a place for tests and there’s a place for interventions. But not in every case. And yet, the incentive to the doctor is often, just do everything.

Lisa Pollak

And the truth is, a lot of us like it that way. It’s hard to understand how doing everything could be bad for us. We think, better safe than sorry. Do everything possible.

In a study published earlier this year, half the public believes someone’s getting unnecessary health care. But only 16% thought it was them. We’re so wired to think that more health care is better that when someone suggests we might be better off with less, it’s upsetting.

Even daring to raise the question, is this device or test or pill really making us healthier, can send people into a panic.

Consider the PSA test, the blood test used to screen men for prostate cancer. The question of whether the benefits of this test outweigh the risks is one of the most controversial issues in medicine. Some doctors worry that the test is leading to unnecessary treatment. Because it catches many prostate cancers that are so slow growing they would never be harmful if left alone.

In 2002, two medical journal editors, both doctors, made this point in an op-ed for the San Francisco Chronicle. Gavin Yamey and Michael Wilkes wrote that since early detection hadn’t been proven through randomized control trials to reduce a man’s risk of dying from prostate cancer, getting the test might not be right for every man. Their op-ed, published under the headline, “Prostate Cancer Screening: Is It Worth the Pain,” did not go over so well.

Gavin Yamey

Lots of people wished that we would die.

Lisa Pollak

That’s Gavin Yamey. Since many of the readers believed the PSA test had saved their lives, they didn’t appreciate being told that the test wasn’t effective.

Gavin Yamey

Lots of people wished we would have a very slow death from a nasty cancer. People accused us of having the deaths of thousands of men on our hands for writing this piece. Of geriatricide.

Lisa Pollak

Michael Wilkes, Yamey’s co-author.

Michael Wilkes

People wrote both to us and to our bosses accusing us of being sort of like the Nazis. And specifically, accusing us of being like Mengele. Others accusing us of truly being men-haters and wanting to wipe out the male population.

Lisa Pollak

When the president says we can cut health care costs by eliminating things that don’t work, things for which there’s no evidence, it sidesteps the fact that in medicine the evidence isn’t always so clear cut. And that’s true with the PSA test.

There’s a lot more evidence about PSA now than there was when Yamey and Wilkes wrote their op-ed. In fact, two long-awaited studies came out this Spring.

One showed that the PSA test did not reduce a man’s risk of dying from prostate cancer. The other showed it reduced prostate cancer deaths by 20%. But it also showed that for every life saved because of PSA screening, 48 other men were diagnosed and treated. In other words, for each prostate cancer death prevented, dozens of men endured surgery or radiation, risking serious side effects, like impotence and incontinence.

Doctors interpret this evidence differently. Some I talked to said it’s proof that the test saves lives. Others said it shows we might be hurting more men than we’re helping. Because the evidence is ambiguous and the balance of risks and benefits is really a judgment call, most national guidelines say that doctors should let men know the pros and cons of PSA testing, and let them decide whether to have it. But most of the time this is not what happens. Studies show that the majority of men get the test without any discussion at all. It’s automatic, a no-brainier. And honestly, it’s not hard to see why.

To question whether the test is necessary, a doctor is flying in the face of all sorts of cultural forces. Like the idea that if you can find cancer early, you always should. Not to mention all the billboards and free PSA screening events and celebrities in TV ads telling men to get tested.

Woman

Want to do something really special for your man this Christmas? Call his doctor and schedule his prostate exam. Prostate exams save lives and prostates.

Lisa Pollak

Here’s another from the NFL.

Man

So get screened and don’t let prostate cancer take you out of the game.

Lisa Pollak

And of course, Larry King.

Larry King

Men over 40, take your PSA test. It’s a simple, little blood test. You get the result in a couple days.

Lisa Pollak

A few doctors I talked to mentioned another reason that physicians might be wary of bucking the PSA trend. They told me what happened to a doctor named Dan Merenstein.

Merenstein was trained in evidence-based medicine, and about 10 years ago, when he was a family practice resident, a 53-year-old man came to him for a routine physical. Merenstein says he followed the guidelines. Talked to the patient about the benefits and risks of getting the PSA test. And the man chose not to have it. Then, a year and a half later, the man went to another doctor. That doctor tested the man’s blood without discussing it with him. His PSA level was extremely high and a biopsy found an aggressive, incurable cancer.

Now there is was proof that having an earlier PSA test would have changed the man’s fate. But Merenstein and his residency program were sued for malpractice. At the trial, the patient’s attorney argued that Merenstein shouldn’t have given the man a choice to have the PSA test, no matter what the national guideline said. The attorney put other family doctors on the stand.

Dr. Dan Merenstein

And they said, you know, we don’t talk to patients.

Lisa Pollak

This is Dr. Merenstein.

Dr. Dan Merenstein

That’s what they do in ivory towers. You know, I order tests. Patients come to me for me to order the test. I’m the one that went to medical school. And these are the tests we order. And if Dr. Merenstein had ordered this– they said this straight under oath. And if Dr. Merenstein had ordered a PSA, this patient would live a long, productive life. But because Dr. Merenstein failed to, this patient is going to die surely.

Lisa Pollak

Merenstein was exonerated, but his residency program was found liable for a million dollars. The jury, just like the doctors on the stand, rejected the idea of following the guidelines based on evidence. To them, the best care meant doing everything you can.

Dr. Dan Merenstein

I should have just ordered it. There should have been no discussion. It shouldn’t have been up to the patient. So that was the approach they took. And they took this approach that this thing called evidence-based medicine is just a way to save money, just a way to ration care.

Lisa Pollak

After the trial, like a lot of doctors who had been sued, Merenstein found it hard not to see patients as potential plaintiffs.

Dr. Dan Merenstein

I think you view people differently after that and you look at patients and you say, this mole, which a thousand times before I would say I’m pretty confident on how to evaluate moles and which ones I need to take off myself, and which ones I think are fine to stay, and which ones need to go. You know, I think I started sending more moles to dermatologists to remove and sending more people with what I was pretty confident was irritable bowel or something like that to GI doctors to get scoped and things like that more than I should have. It sort of just didn’t feel right.

Lisa Pollak

It didn’t feel right, he said, because it didn’t feel like he was doing what was best for the patients. These days, when it comes to the PSA test, Merenstein starts by following the evidence. He still tells his patients the pros and cons, but then he gives them a little nudge and adds something he never used to. “Most people,” he tells his patients, “get the test.”

Ira Glass

Lisa Pollak. If you’re a man and you heard this story and you want to know more about the pros and cons of getting the PSA test, there’s a good summary at the Mayo Clinic web site. Those people really know what they’re doing.