Medicare – Fewer Benefits or Less Waste

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If the highest cost 20% of hospitals were to cut in half the differences in price and utilization between them and the distinguished Mayo Foundation, and if all Medicare cost savings were proportional to Medicare cost savings of the last two years of life, annual savings could potentially reach $26 Billion. Over ten years and without cutting benefits, Medicare costs could be reduced by $260 Billion.

No one would complain about Mayo whose Medicare composite quality score ranks among the highest in the nation.  Key to Mayo’s success has less to do with pricing than with utilization.  Length of hospital stays and physician visits are significantly less than average, yet they handle some of the toughest cases in medical care. It is also noted that health care delivery in other countries is closer to the Mayo model than the more typical fee for service provider.


What senior would object to having medical coverage by the Mayo Clinic?  The Mayo Foundation manages 20 hospitals in its network, and has a world-wide reputation as a very high quality institution handling the toughest cases.  Less well-known, is that they provide this coverage at below average costs. For Medicare reimbursements within 2 years of death, Mayo costs average $28,000 per patient.  

This sounds expensive, and it is.  However, the national average to cover the last 2 years costs was just over $30,000.  Multiply that by 930,000 average (2001-2005) annual Medicare deaths and Medicare costs for just this segment are about $28 Billion per year.  This is some serious money.  The first question is where is it going?

The following graph consists of two groups of bars. On the left are hospital cost differences from U.S. average for the highest and lowest 10% of hospitals, and the highest and lowest 10% of physicians. The 5th bar in each is Mayo. The bars at right are the same except they show physician cost differences from average.

The highest 10% of hospitals incur nearly $19,000 more hospital costs compared to the U.S. average while the lowest 10% of hospitals incur almost $9,000 less than the average, a high/low difference of $28,000. Physician cost differences are similar, but the magnitude in dollars is smaller.

Costs become even more serious when one considers quality scores.  Hospitals whose costs are in the top 10% of all hospitals had lower average quality scores.  Yet, their costs were more than $50,000 per patient.  Similar results occur for hospitals sorted by Physician costs.  In all cases, higher cost providers had lower average quality scores than lower cost providers.  In short, more may not mean better as shown below


So how do providers like Mayo Foundation and other similar quality hospital and physician systems attain such high quality scores while holding the line on costs?  It may help to first show these costs as percent differences between the highest and lowest cost providers. The graph below uses the same data from the 1st graph but presents cost differences as a percent.

Those hospitals and physicians whose costs are in the highest 10% are nearly 75% above average, while those with lowest costs are more than 30% below average.  Mayo’s hospital costs are slightly below average but its physician costs are significantly lower.

Seniors are worried that proposed reforms and reductions in Medicare spending will reduce benefits.  A greater worry should be why there are such large reimbursement disparities now between providers.  Either some are being over-served or others are being under-served. Neither should be acceptable.

Medicare recipients might rightly ask, since all people pay into Medicare at about the same rate, why isn’t the payout more evenly distributed between high and low cost providers.  The difference between the highest and lowest hospitals and physicians almost equals the average cost of $30,000 per patient. Despite the huge cost differences, the result is the same.  The patient died.

Just as showing percents is more meaningful than dollars, the above cost differences can be further broken down into two components. One component is price and the other is volume or utilization.

Remember when gas prices were over $4.00 per gallon? People cut back on driving so their gasoline consumption (volume) went down. Fewer miles driven helped people offset some of the high price per gallon. A similar outcome occurs in healthcare. 

Hospital costs are affected by the cost per day (price) times how many days a patient stayed (volume or utilization).  For physicians, the analogy is the cost per physician patient visit (price) times the number of visits by the physician (volume).  Volume times price equals total cost, and “all in” costs equal total hospital costs plus total physician costs. The graph below shows the four components of price and volume.

Hospital Volume (utilization – length of stay)

The first group of  bars shows differences in hospital days.  Patient stays at the most expensive hospitals were nearly 40% more than average while those at the least expensive hospitals were some 20% less than average. From a utilization view, there is a significant difference in hospital (days) at higher cost hospitals. Higher cost hospitals tend to be larger, more complex and more intensive.  Yet, Mayo hospital days are comparable to the lowest cost hospitals.

Hospital Price (average daily cost)

The second group of bars shows differences in Hospital cost per day, or pricing.  Here both high cost hospitals and Mayo are more than 20% above average reflecting the sophisticated and expensive equipment and procedures performed.  In hospitals where physician costs are high or low, hospital pricing tends closer to the national average.  But Mayo more than not offsets their higher daily hospital costs with shorter length of stays.  The higher cost hospitals compound higher prices with more lengthy stays for a total hospital cost 75% higher than average.

Physician Volume (visits) and Price (cost per visit)

The remaining two groups show differences for physician volume and price.  Visits at high cost hospitals deviate even more from average than length of stays.  Physician visits at low cost hospitals mirror shorter hospital stays.  Physician costs per visit do not vary nearly as much as do hospital costs.

With regard to Mayo, utilization is also below average (fewer visits), but here physician pricing (cost per visit) is also below average.  Combining fewer patient visits AND lower costs per visit, yields a cost difference 30% below average for Mayo.

Medicare Reductions Need not Lower Benefits

What conclusions to draw?  Some legitimate cost differences should be expected.  But data suggests that if the high cost hospitals changed some of the care delivery nearer to Mayo’s performance, significant savings could occur with NO loss in benefits.  The graph below shows the potential savings if these higher cost hospitals had the same price and utilization structure as Mayo.  If the cost structure of the top 50% of all hospitals were the same as Mayo, annual savings would be nearly $4 Billion.

But there is more.  The savings described apply only to the Medicare costs associated with the last 2 years of patient life.  Those costs were noted at some $28 Billion per year.  However, Medicare annually reimbursed over $400 Billion in total. If total savings were comparable to the last two years of life costs, the savings could be 15 times larger than in the above graph. 

The graph below shows a 15X multiplier effect with annual savings for 6 groups of hospitals: the highest 10%, 20% and 50% of hospitals filtered on total hospital costs.  Plus a similar 10%, 20% and 50% of hospitals filtered on total physician costs.  Significant in this graph is that the differences between the highest cost and the more average cost hospitals are fairly extreme.  If one were to focus reform efforts on just these extremes, Billions could be saved.

The graph shows total theoretical savings. A more reasonable assumption would be to halve the theoretical savings. Thus, if the highest cost 20% of hospitals were to cut in half the differences in cost and utilization between them and the distinguished Mayo Foundation, and if all Medicare cost savings were proportional to Medicare cost savings of the last two years of life, then the annual savings could potentially reach $26 Billion. Over ten years and without cutting benefits, Medicare costs could be reduced by $260 Billion.  Actually achieving this level of savings would be a challenge. But Billions of dollars in waste, fraud and abuse could be safely removed without affecting real benefits. 

Why will those levels of savings not likely occur?  It would require hospitals, physicians and insurers to change their “business model” to achieve significant savings and that is a very broad challenge.  There needs to be a major shift from the “fee for service” model where every procedure, item and encounter are tracked and billed, to a more managed care model.

Insurers are familiar with managed care in the form of HMO policies. In HMO’s, the risk is on the insurer that premiums that are fixed per enrollee are sufficient to cover the health care costs of enrollees.  Some insurers are also providers so they would carry the insurance risk as well as the provider risk.

For health care providers, the risk of managed care is similar. For any specific encounter, like an appendectomy, the provider is paid a fixed amount from the insurer, and the hospitals and physicians are responsible for dividing up the payment and are at risk to deliver quality patient care for that amount.

While much focus has been on insurance reform to make it available to more people, attention must also be paid to wringing waste and abuse out of the system. Some of the currently proposed Medicare reforms include pilot programs to gradually shift the heavily “fee for service” orientation towards manage care.  In fact, of the 1,000 pages in House bill 3200, half are devoted to reducing waste in Medicare and Medicaid and pushing towards less skewed reimbursements than exists in the current environment.



Dartmouth 2005 Atlas of Health Care    DAP_Hosp_HRR_ST_01_05.xls

Table 1. Hospital information (2001-05) – Number of deaths among chronically ill patients assigned to hospital

Table 2. Medicare spending per decedent by site of care during the last two years of life (deaths occurring 2001-05)   (HOSPITAL)

Table 3. Medicare Part B spending by type of service (BETOS category) per decedent during the last two years of life (deaths occurring 2001-05)  (PHYSICIAN)

Table 4. The Medical Care Cost Equation: Disaggregation of hospital (facility) reimbursements per decedent into contributions of volume (patient days per decedent) and price (average reimbursements per day in hospital) during the last two years of life (deaths occurring 2001-05)

Table 5. The Medical Care Cost Equation: Disaggregation of payments for physician visits per decedent into contributions of volume (physician visits per decedent) and price (average payments per physician visit) during the last two years of life (deaths occurring 2001-05)

Table 6. Resource inputs per 1,000 decedents during the last two years of life (deaths occurring 2001-05)

Table 8. CMS Hospital Compare technical process quality measures (all patients, 2005)   (QUALITY COMPOSITE SCORE)

Centers for Disease Control:  Table 128. Personal health care expenditures, by source of funds and type of expenditure:  United States, selected years 1960-2006

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Medicare Trends

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Medicare became law only in 1965 in part to mitigate the adverse effect of rising health care costs on seniors’ income. Those costs were driving many millions of seniors below the poverty line. In the pre Medicare environment, nearly 30% of seniors had fallen below the poverty level. In the intervening years, the percent of seniors with income below poverty level has dropped nearly three times.

While the benefits to seniors have dramatically improved their lot, the cost to society is the elephant in the room that needs to be addressed in Congress.  This report looks at the components that are driving up Medicare costs as well as increasing seniors’ out-of-pocket expenses.

 Overall population is increasing demands for care

As expected, growing populations result in growing health care costs. What is evident from the graph below is that in addition to overall growth, the percent of people 65 years and old is increasing.

Two factors are contributing. One is that the baby boomers as a group are beginning to move into the senior group. They are followed by a drop off (percent wise), in younger people.  Projections refer to the increasing mix of older people with fewer people working to pay into Medicare. But this trend is not permanent, and once the baby boomer “bubble” works its way through the population, the mix of retirees to workers stabilizes.  But that is out past the year 2040, beyond the range of most forecasts.

In short, solve the Medicare problem expected for the next 30 years and only minor changes will likely be needed after that.

Source: Center for Disease Control – Health, United States 2008 Figure 01

Greater life expectancy adds to aging population

The second factor contributing to the growth of seniors is their increasing life expectancy.  The graph below  shows that all major groups of seniors have benefited from better health care. Life expectancy at birth show lower increases.

The question is whether these significant increases will continue into the future.  If they continue, then the percent of seniors will continue to increase.  If trends tend to slow, then the population age mix may stabilize.

On the other end of the age scale, if birth rates rise, this will create a greater percentage of younger people.  And there is some evidence of this occurring, though not equally among different races. 

Source: Center for Disease Control – Health, United States 2008 Figure 14 

It may be 30 years before age group % stabilizes

On the assumption that the mix of aged people stabilizes in the 2040-2050 range, this still represents a significant change from today where less than 15% of population is 65 and over.  By the time it stabilizes, seniors will represent over 20% of population and may for some time to come beyond that.

Current Medicare premiums assessed on workers is not enough to cover those future costs. Two events clearly need to happen. One is to increase the “premiums” paid into the system.  Options include raising all rates uniformly or raising the wage ceiling on which premiums are based. The other is to take costs out of Medicare.

Another analysis has shown huge discrepancies being paid in Medicare indicating excess care being provided to some and not others that needs to be addressed.

Source: Center for Disease Control – Health, United States 2008 Figure 01

As people get older, their health demands increase

It is common knowledge that seniors slow down as they age.  The graph below shows the five most common reasons seniors reduce their activity level.  As they age, each factor grows in significance.

 Nearly 3 in 10 seniors over 85 will become limited by arthritis or musculoskeletal conditions.  2 in 10 seniors over 85 will be limited by heart or circulatory conditions.  Though climbing with age, vision, hearing and senility are factors in less than 1 in 10 seniors 85 and older.

While the graph shows the number of medical conditions increasing with aging, it does not indicate severity.  But on volume alone, seniors require more health care. This can be mitigated somewhat by more exercise and healthier diets, the two largest slowdown factors. Less can be done about vision, hearing, senility or dementia.

Source: Center for Disease Control – Health, United States 2008 Figure 13 

Medicare a major factor in improving poverty levels

Medicare came law only in 1965 in part to mitigate the adverse effect of rising health care costs on seniors’ income. Those costs were driving many millions of seniors below the poverty line. The success of Medicare was dramatic as shown in the graph below. With pre Medicare environment, nearly 30% of seniors had family income below the poverty level. In the short span of 7 years, the percent of seniors with family income below poverty level dropped to 15%, roughly in half. Gradual reductions since have lowered that threshold to about 10%.  This could partially explain why older seniors are often very protective of their benefits. They remember when there was no safety net.

Source: Center for Disease Control – Health, United States 2008 Figure 04 

 Price inflation creates higher bills for seniors

The graph below highlights cost trends for four groups of people from 1996 to 1996. Except for a slight break around, 1998 – 2000, costs have trended upward every year for every age group. Within each age group there is another consistent trend. Seniors 65-74 years incur only about half the expense that seniors 85 and over do, while those 75-84 years incur more than half again as much as seniors 65-74. This confirms the comments above that as people age, their health demands increase.

Now these data are per enrollee. So price inflation is causing costs for all seniors to rise. As seniors age, their costs continue to rise. And finally, as the baby boomer bubble moves into the senior ranks, the total number of seniors increases dramatically. It is sort of a “perfect storm” where all factors are pointing towards Medicare costs consuming more and more of the nation’s economic output.

Source: Center for Disease Control – Health, United States 2008 Table 143 

Cost sharing of Medical Expense Also Rising

In nearly all cases where medical expense is incurred, insurance picks up a large share of the costs, but not all. Amounts paid by individuals is called “cost sharing” or deductibles and co-payments, or out-of-pocket expense. Below are 6 age groups that incurred over $2,000 in out-of-pocket expense. This threshold allows a focus on the more expensive medical encounters. Cost sharing for all seniors has consistently risen over the entire period.  Any solutions to rising Medicare costs that reduce benefits, shifting more costs to seniors should at least take into account that seniors have for years, been paying higher out-of-pocket costs for health care. 

Source: Center for Disease Control – Health, United States 2008 Table 133

 One Good Example of Government Run Medicare

While overall Medicare costs have continued to rise, there is one component that is trending favorable – Administrative Expense. Early on, there were inefficiencies in Medicare part B as these tended to be smaller dollar claims but the same amount of manual effort to record claims into the system.  As automation and standardization increased, these costs came down such that since 2000, the administrative costs per claim dollar for both hospitals and doctors are roughly equal.

What is far mor telling is that since 2000, these administrative costs have (a) stayed level and (b) averaged just two (2%) of total costs.  In the 1980’s private insurers, primarily non-profit, had administrative costs of about 5%. Today, insurers are frequently incurring administrative costs of more than 20% on large blocks of their businesses.  In at least one area, government appears to have done better.

Source: Center for Disease Control – Health, United States 2008 Table 142

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Government Bureaucracy?

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Some people say any Government health plan is a huge bureaucracy. Below are two application forms for personal health insurance. The first is representative of private insurers. The second is from the Government.  Help me out here.  Which one is the bureaucracy?

Private insurer Personal Health Insurance Application Form

8 pages of questions

Government Medicare Personal Health Insurance Application Form

8 questions

Date of Birth:  
Marital Status:  
Type of Medicare Coverage:  
Do you have Medicaid:  
Are you living outside of the U.S.:  
Household Income Range:  
Are you receiving health benefits from employer:  
Retirement type:  

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McAllen & El Paso Texas – The Cost Conundrum

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Download New Yorker article PDF >>> New Yorker Mag – McAllen Tx

Atul Gawande wrote a long article for the June 1, 2009 New Yorker Magazine titled “The Cost Conundrum – What a Texas town can teach us about health care.  This document condenses some of the highlights from that article.

McAllen versus El Paso Texas

  • McAllen Texas is one of the most expensive health-care markets in the country.  In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average.
  • El Paso County, eight hundred miles up the border, has essentially the same demographics.  Yet in 2006 Medicare expenditures in El Paso were $7,504 per enrollee half as much as in McAllen.
  • And yet there’s no evidence that the treatments and technologies available at McAllen are better than those found elsewhere in the country.
  • The annual reports that hospitals file with Medicare show that those in McAllen and El Paso offer comparable technologies.
  • Public statistics show no difference in the supply of doctors.  Hidalgo County actually has fewer specialists than the national average.
  • Nor does the care given in McAllen stand out for its quality.  Medicare ranks hospitals on twenty-five metrics of care.  On all but two of these, McAllen’s five largest hospitals performed worse, on average, than El Paso’s.
  • Something fundamental had changed since the days when health-care costs in McAllen were the same as those in El Paso and elsewhere.

McAllen overuse of medicine

  • Compared with patients in El Paso and nationwide, patients in McAllen got more of pretty much everything more diagnostic testing, more hospital treatment, more surgery, more home care.
  • Between 2001 and 2005, critically ill Medicare patients received almost fifty per cent more specialist visits in McAllen than in El Paso.
  • In 2005 and 2006, patients in McAllen received  
    • 20% more abdominal ultrasounds,
    • 30%  more bone-density studies,
    • 60%  more stress tests
    • 200% more nerve-conduction studies
    • 550% more urine-flow studies
    • And Medicare paid for five times as many home-nurses visits. 
  • The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.

More Quantity does not mean more Quality

  • Americans like to believe that, with most things, more is better.  But research suggests that where medicine is concerned it may actually be worse.
  • In fact, the four states with the highest levels of spending Louisiana, Texas, California, and Florida were near the bottom of the national rankings on the quality of patient care.
  • That’s because nothing in medicine is without risks.  Complications can arise from hospital stays, medications, procedures, and tests, and when these things are of marginal value the harm can be greater than the benefits.
  • In 2006, doctors performed at least sixty million surgical procedures, one for every five Americans. No other country does anything like as many operations on its citizens.
  • Some hundred thousand people die each year from complications of surgery far more than die in car crashes.
  • Patients in high-cost areas were actually less likely to receive low-cost preventive services, faced longer waits at doctor and emergency-room visits, and were less likely to have a primary-care physician.
  • They got more of the stuff that cost more, but not more of what they needed.

Some places get it right

  • Most Americans would be delighted to have the quality of care found in places like Rochester, Minnesota, or Seattle, Washington, or Durham, North Carolina all of which have world-class hospitals and costs that fall below the national average.
  • If we brought the cost curve in the expensive places down to their level, Medicare’s problems (for the next fifty years) would be solved.
  • 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. As a rule, hospital executives don’t own the pen caps.  Doctors do.
  • Why do [doctors respond] so differently from one place to another?
  • It turned out that differences in decision-making emerged in only some kinds of cases.  In situations in which the right thing to do was well established made the same decisions.
  • But, in cases in which the science was unclear, some physicians pursued the maximum possible amount of testing and procedures; some pursued the minimum. And which kind of doctor they were depended on where they came from.
  • In case after uncertain case, more was not necessarily better.  But physicians from the most expensive cities did the most expensive things.

Medical Schools are not Business Schools

  • No one teaches you how to think about money in medical school or residency.  Yet, from the moment you start practicing, you must think about it.
  • Beyond the basics, however, many physicians are remarkably oblivious to the financial implications of their decisions.  They see their patients.  They make their recommendations.  They send out the bills.
  • Others think of the money as a means of improving what they do.
  • Then there are the physicians who see their practice primarily as a revenue stream.  They figure out ways to increase their high-margin work and decrease their low-margin work.  This is a business, after all.
  • In every community, you’ll find a mixture of these views among physicians, but one or another tends to predominate.
  • The anchor tenants [at shopping centers] that set norms encouraging the free flow of ideas and collaboration, even with competitors, produced enduringly successful communities, while those that mainly sought to dominate did not.
  • [Possibly] anchor tenants play a similarly powerful community role in other areas of economics, too, and health care may be no exception.
  • About fifteen years ago, it seems, something began to change in McAllen.  A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this.  But they failed to discourage those who did.

Medicine first, team approach

  • Mayo Clinic is among the highest-quality, lowest-cost health-care systems in the country.  Among the things that stand out was how much time the doctors spent with patients.
  • There was no churn no shuttling patients in and out of rooms while the doctor bounces from one to the other.  Most of the patients, required about twenty minutes.
  • The core tenet of the Mayo Clinic is The needs of the patient come first not the convenience of the doctors, not their revenues.
  • But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers.
  • It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors goal in patient care couldn’t be increasing their income.
  • Mayo promoted leaders who focused first on what was best for patients, and then on how to make this financially possible.
  • The aim is to raise quality and to help doctors and other staff members work as a team. But, almost by happenstance, the result has been lower costs.
  • The Mayo Clinic is not an aberration.  One of the lowest-cost markets in the country is Grand Junction, Colorado, that nonetheless has achieved some of Medicare’s highest quality-of-care scores.
  • Years ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients.
  • They also agreed, to meet regularly on small peer-review committees to go over their patient charts together.  They focused on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates.  Problems went down.  Quality went up.
  • The leading doctors and the hospital system adopted measures to blunt harmful financial incentives, and they took collective responsibility for improving the sum total of patient care.

Someone has to be accountable for total care

  • The question we have to ask is whether the doctor is set up to meet the needs of the patient, first and foremost, or to maximize revenue.
  • There is no insurance system that will make the two aims match perfectly.  But having a system that does so much to misalign them has proved disastrous.  As economists have often pointed out, we pay doctors for quantity, not quality.
  • As they point out less often, we also pay them as individuals, rather than as members of a team working together for their patients.  Both practices have made for serious problems.
  • The lesson of the high-quality, low-cost communities is that someone has to be accountable for the totality of care.  Otherwise, you get a system that has no brakes.  You get McAllen.
  • Expanding public-insurance programs like Medicare and shrinking the role of insurance companies will not make much difference. [Neither will expanding insurance companies role.]
  • The use medical savings accounts and hold high-deductible insurance policies will not work. Who is going to haggle price for a surgery? Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.
  • Providers have to be weaned away from their untenably fragmented, quantity-driven systems of health care, step by step.
  • And that will mean rewarding doctors and hospitals, in which doctors collaborate to increase prevention and the quality of care, while discouraging overtreatment, under treatment, and sheer profiteering.
  • Under one approach, insurers whether public or private would allow clinicians who formed such organizations and met quality goals to keep half the savings they generate.
  • Government could also shift regulatory burdens, and even malpractice liability, from the doctors to the organization.  Other, sterner, approaches would penalize those who don’t form these organizations.
  • Congress has provided vital funding for research that compares the effectiveness of different treatments, and this should help reduce uncertainty about which treatments are best.
  • But we also need to fund research that compares the effectiveness of different systems of care to reduce our uncertainty about which systems work best for communities.  These are empirical, not ideological, questions.
  • And we would do well to form a national institute for health-care delivery, bringing together clinicians, hospitals, insurers, employers, and citizens to assess, regularly, the quality and the cost of our care, review the strategies that produce good results, and make clear recommendations for local systems.
  • Dramatic improvements and savings will take at least a decade. But a choice must be made.
  • Whom do we want in charge of managing the full complexity of medical care? We can turn to insurers (whether public or private), which have proved repeatedly that they can’t do it.
  • Or we can turn to the local medical communities, which have proved that they can.
  • But we have to choose someone because, in much of the country, no one is in charge.  And the result is the most wasteful and the least sustainable health-care system in the world.
  • In the war over the culture of medicine the war over whether our country’s anchor model will be Mayo or McAllen the Mayo model is losing.
  • We face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now.
  • The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions.  If we don’t, McAllen … will be our future.

Download PDF Report >>>McAllen and El Paso Texas

Download New Yorker article PDF >>> New Yorker Mag – McAllen Tx

High and Lowdown of Medicare Costs

Many seniors have become fearful that cutting excess costs means cutting benefits.  Medicare’s own data highlights differences between about 20% of states with the lowest costs and 20% of states with the highest costs.  Cost of living explains some of the differences.  But 71% higher physician and clinical service costs for essentially the same results suggests there are billions of dollars being spent with little or no added benefit.

Rationing or Waste in Healthcare

Download PDF Report >>> Health Rationing or Waste


Rationing is not getting needed care.  Waste is getting care not needed and causes rationing for those in need. One way to determine if there is waste is to compare large samples of people in areas of highest cost to those in lowest cost.  While some variation will exist because of cost of living factors, larger variations can only be explained by greater use of care in higher areas versus lower areas.

The method used compares selected components of health care.  Each category compares the highest 20% of population with the lowest 20%.  For national data, rankings mean there are two groups of nearly 60 million.  For Medicare and Medicaid, it is over 8 million each.  Age differences among these populations were minimal, though higher cost areas tended to be more urban than the lower cost population.

Differences between the highest and lowest were minor in some cases.  But in a number of categories, differences were huge.  Either millions in the United States are being under-served, or millions are being over-served wasting billions.

For the population as a whole, total health costs in the highest states were nearly 40% higher than the lowest cost states. In hospitals, the spread was slightly over 40%, while physicians were less than 30%.  Highest spreads were nursing home costs that were nearly three times higher.

In Medicare, hospital costs are 30% higher, but physician costs are some 70% higher for similar populations.  With all paying equally into Medicare, rationing already exists.

Despite these higher costs, a number of quality measures suggest that quality is actually better for lower cost states.

Healthcare expenditures for the entire population

In 2006, the U.S. spent over 1.7 trillion dollars on health care. The graph below shows the analysis of expenditures:  37% went to hospitals, 25% to physicians, 7% to nursing homes, 12% to drugs, and 18% to other.

Not only are costs high but they are rising faster than the economy consuming ever more funds that might otherwise go for jobs, education and infrastructure.  The country is also jeopardizing its world competitiveness because other countries are able to offer quality health care at less cost.

The aging of the population is a compounding factor when it comes to Medicare spending.  Here the government plays a greater role at a time when seniors’ health puts greater demands on any healthcare system.  It will be almost 2050 before the baby boomer bubble works its way through and medical costs for seniors stabilize as a % of total spend.

Source: Center for Disease Control – Health, United States 2008 Figure 19.

Cost differences for the entire population

Rather than compare absolute costs, this report focuses on relative costs, high versus low, and for very large samples.  The graph below compares 8 categories comprising over 96% of total health care expenditures. The states included in each group may be different depending on the category.

Total health care spend in the highest states was 38% more than the lowest states. The highest hospitals that comprise 37% of total spend, were 42% above the lowest. Physicians accounting for 25% of spend were 28% higher.

Home health and Nursing home care showed the largest differences, approaching 200% or nearly three times higher than for the lowest cost states. These lowest cost areas may be providing less care than what is considered “enough” and /or have found family sources that help out internally without outside help.

 Source: Centers for Medicare & Medicaid Services, National Health Statistics Group

Medicare, a barometer for the total population

The graph below shows that while government plays an increasing role in the over 65 group, there is still a major portion of costs being paid for by the private sector.  And, after years of steady increase, total costs are accelerating due to the influx of baby boomers into this age group.

Comparing year to year national averages is too broad to draw actionable conclusions. Comparing a single city to another may be too narrow.  Fortunately, the government has in its favor a wealth of statistics for their programs. 

When comparing selected health components for very large populations, costs can only be explained by differences in volume of care.  Other government statistics show little difference in outcomes despite wide differences in service.

Medicare is the biggest government program, and below are some comparisons of interest.

Source: Center for Disease Control – Health, United States 2008 Table 141.

Cost differences for Medicare enrollees

The graph below compares 6 categories comprising over 96% of Medicare expenditures. The drug program Part D did not start in time to be reflected in these 2004 data. The sample is large with 8 million in each group.  States in each group may be different depending on the category.

When compared to the total population, Medicare‘s spread between physician and other professional service costs is far greater while hospital differences are less.

Home health care and nursing home care show similar large differences though the amount spent in these two areas is limited to 10-11% of all costs.  Medicare imposes more restraints in these extended care areas.  That may explain how, with nearly all nursing home residents being seniors, Medicare home and nursing costs are a relatively low proportion of the total.

Source: Centers for Medicare & Medicaid Services, National Health Statistics Group

Cost differences for Medicaid enrollees

The graph below compares 6 categories comprising 92% of Medicaid expenditures. Here there are differences not only in cost (highest cost more than double the lowest) but in the mix. For Medicaid, hospitals and doctors do not play as large a role.  Instead, costs tend more to drugs, nursing home care and other personal care.

This group covers poorer people of all age groups so their needs are more like the broader population in terms of mix with one exception.  Medicaid offers nursing home help with those costs being 19% of total spend.

There is another key difference from Medicare and that is the states contribute significantly to Medicaid, and states cut back some if funds are not available.  This plays a role in the greater difference between the highest and lowest cost states for all categories.  One can fairly assume that the lowest cost states get fewer services.

Source: Centers for Medicare & Medicaid Services, National Health Statistics Group

Hospitalization rate nearly 50% higher

Tracking discharges also tracks admissions and the graph below shows 45% more total discharges in the highest cost states.  Non ambulatory care sensitive (ACS) events have roughly comparable rates of discharge. On the other hand, ACS discharges are more than 50% higher than the lowest cost states.

The number of beds does not appear to be a factor as many lower cost states actually have more beds per capita.  Data is not available as to acute beds, though in any case, it is a doctor admitting a patient.  While higher cost states may have more doctors per capita, that difference is nowhere as high as the difference in admissions. 

One can conclude that there are major differences in how often doctors admit similar patients, especially when you consider some 16 million people in two sample groups.

Source: Kaiser State Health Facts – 50 State Comparison

While reimbursements more than 50% higher 

Of course, for every admission, there is a cost.  Using a still finer “filter”, the graph below shows wide differences depending on what services are performed.

Inpatient short stays are 50% higher.  But long stays are 200% or 3 times those of the lowest states. Diagnostic, laboratory and X-ray services are more than double the costs in the lowest states. Either the first group is getting excess care, or the second group’s care is being rationed.

The biggest difference was in home health and for once, higher may be better as it compare the highest cost states to the lowest cost states.  Home health is a more efficient use of funds than hospitalization or intermediate care facilities, so more may be better.  Or it can simply be more take advantage of the service because it is available.

Source: Dartmouth Atlas of Healthcare – Medicare reimbursement measures

Higher cost states have more specialists per capita

Aside from complaints that insurers make medical decisions there would be no decision to make without a request. In the graph below, the number of primary physicians is about the same with a slight tilt toward lowest cost states.

There is a measurable difference in the number of other physicians, including specialists.  As shown, primary care physicians are outnumbered by specialists.  And with admissions greater for the high cost group, it is logical to assign a greater share of hospitalizations to specialists.

Some people, especially those who are well insured claim that greater hospitalization and its attendant costs are worth it.  Leaving cost considerations aside, one might expect with all this extra care to have a lower mortality rate.  Alas, this is not the case.  More services do not necessarily yield better quality outcomes.

Source: Kaiser State Health Facts – 50 State Comparison

Mortality rate slightly worse in higher cost states

The basis for high and low states is Medicare’s mortality tables.  The data adjust mortality by age so a state with a greater proportion of very old people is not penalized.

As the graph below shows, mortality is consistently higher in more expensive areas.  What is even more interesting is that those without HMO coverage have a higher mortality rate than the total average.  For that to occur, mortality rates for seniors with HMO coverage must be lower than for those without HMO coverage.

For all the cynics who think HMO’s are “too restrictive”, the results for Medicare folks at least, speak otherwise.  And one factor is working in HMO’s favor.  They have a greater tendency to work in teams, and statistics show that better managed providers do work in teams, with perhaps the most familiar name being the Mayo Clinic.

Source: Dartmouth Atlas of Healthcare – 2005 Medicare Mortality Rates

While final services and costs are more than double 

So, did higher mortality result in lower costs? If a person dies, medical care stops.  The graph below compares cost averages in which the patient died.  It tracks costs of that final stay and also costs in the last six months leading to it.

For the highest states, all 7 categories shown costs are more than double those of the lowest states. Remember, this is a sample of 8 million people in each group, from states north and south, east and west. 

The data show that seniors in high cost states are incurring nearly five times the cost of being in intensive care or coronary care units. This applies not only to the final hospitalization but to repeat admissions to ICU/CCU in the six months preceding death.  And despite all that extra cost and effort in the last six months, it does not appear to lead to better quality or lower mortality.

Source: Dartmouth Atlas of Healthcare – State Performance Report

More doctors leads to more utilization

In the previous graphs, there are numerous examples of huge differences between high and low-cost states without a comparable difference in outcomes. That observation alone suggests that cost cutting will not necessarily reduce benefits.  While the majority of spend occurs in hospitals, it is the physicians who make the treatment decisions.

The graph below shows the total number of physicians per population by region.  Though not homogeneous, the New England and Mid Atlantic states tend to include the highest states using different criteria shown in the above graphs. 

And these areas clearly have significantly higher physician ratios than other areas.  True, there is much research occurring here, but only a portion of the difference would be due to those efforts.  In summary, there are numerous areas when cuts could safely occur without losing quality.

 Source: Center for Disease Control – Health, United States 2008 Table 109

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