Anatomy of the World’s Most Expensive Healthcare System

Many leading healthcare experts believe that fee for service is the root cause of our extremely expensive healthcare system.  While there is an element of truth to this position, it is only part of the story.  Meanwhile, multiple fundamental design flaws that drive healthcare costs upward are not being given the credit they deserve.

Top 5 reasons that Healthcare costs are so high:

1.  Insured patients have not been concerned about the costs of healthcare.  Until recently, a third party payer has covered most healthcare costs and the percent paid by healthcare consumers has been steadily falling from 50% in 1960 to 12% in 2010 (1).   Without skin in the game, the healthcare consumer has had no incentive to reduce costs and the provider has had no constraint from offering high cost care.  The landscape is changing with the cost-sharing insurance strategies that are placing more financial responsibility with the consumer. High-deductible and co-insurance policies are forcing healthcare consumers to learn about cost and value.

2.  Patients and providers are unaware of the costs of care.  Unconcerned about the costs of care, consumers have engaged in healthcare without any knowledge of the costs. Consumers get an MRI of the brain for $3900 when they could have one for $425, or an endoscopy for $7700 when they could have had one for $500.  Neither consumers nor providers have had access to the information about cost (2).  Several organizations around the country have been striving to introduce cost transparency but, thus far, patients have been slow to access the data.  Leaders in this space include Castlight, Healthsparq, Robert Wood Johnson Foundation, Healthcare Blue Book, Clear Health Costs, Costs of Care, Catalyst for Payment Reform (CPR), Health Care Incentives Improvement Institute (HCI3). Health Care Cost Institute (HCCI), Change Healthcare, and FAIR Health.  Cost data without meaningful and reliable quality measures will be very difficult for consumers to interpret.

3.  Private insurance companies have been able to increase premiums annually and , therefore, have had little incentive to hold down the costs of care. This trend has reached its limit as businesses have been shifting more of the costs of insurance coverage to employees.  For many low and middle class families, costs have hit a breaking point with deductibles in the range of $4000-$8000 per year.  Consumers can no longer ignore costs when choosing their healthcare providers.   AHIP (America’s Health Insurance Plans) recognizes that it is time to lower healthcare costs and is supporting the idea of fee transparency.(3)

4.  Providers have incentive to spend more – resulting in more income and more protection from malpractice claims.  Elimination of the fee for service system is the most widely touted solution for controlling healthcare costs.  The proposed solution is designed to remove the provider’s incentive for more healthcare spending either by making all physicians employees, or by creating a financial incentive to spend less (ACO, bundled care).  However, salaried physicians working for large institutions that retain their profit motive, and may still be pushed to think of profits first.(4,5).  Physicians are now gravitating to salaried positions in large institutions where the contracted fees from private insurance carriers are substantially higher (6).   It is unlikely that any cost savings from this model will balance the cost increases that accrue from consolidation….particularly since ACOs, to date, have only managed to save about 1% of costs. (7)

5.  We do not have enough primary care providers.   The US has the highest ratio of specialists to primary care providers in the world – driven largely by the lack of medical student interest in primary care.  The lower earning potential of primary care in the face of very high college and medical school debt, leads most new physicians to choose specialty care.  More specialists leads to higher costs of healthcare.(8)   Reforming the relative value payment scale to recognize the benefits of primary care would help to alleviate this imbalance.

Making consumers aware and concerned about healthcare costs will drive them to seek high value providers.  Combine this with incentives for providers  to be more efficient with healthcare resources, and the mechanisms for real cost reduction will be in place.  Failure to address all of the flaws in our current system will limit the success of healthcare reform.



1.  Baicker, Katherine, and Dana Goldman. 2011. “Patient Cost-Sharing and Healthcare Spending Growth.”  Journal of Economic Perspectives, 25(2): 47-68.

2.  Michelson, Dan,  “Doctors don’t know or care about cost?  That’s half right.”  Healthcare IT News, 2/20/14

3.  AHIP web site: “Rising healthcare costs”

4.  “Hospital Chain Said to Scheme to Inflate Bills”, Julie Creswell and Reed Abelson, The New York Times, Jan 23, 2014.

5.  “A Hospital War Reflects a Bind for Doctors in the US”, Julie Creswell and Reed Abelson, The New York Times, Nov 30, 2012.

6.  “Apprehensive, Many Doctors Shift to Jobs With Salaries”,  Elisabeth Rosenthal, The New York Times, Feb 13, 2014.

7. “ACOs Saving Some Money, But Medicare is Short on Details”, Jenny Gold, Kaiser Health News, Jan 31, 2014.

8.  “What’s The First Step in Transforming American Health Care”  Robert Pearl, Forbes, Feb 20, 2014.

Accountable Care: We Can Do Better Than This

With the spotlight shining on healthcare over the past few months during the troubled roll out of the Affordable Care Act (ACA), Americans are now painfully aware that health care, and the insurance to pay for it, are extremely expensive.  Millions of uninsured Americans are now able to purchase healthcare insurance, but will need a subsidy to make the premiums affordable.  Many, however, will find that high deductibles will impede their access to care.  Those not qualifying for a subsidy may find that their new policy is more expensive than their old one, and that the provider networks are much more limited.  Pre-existing conditions can no longer get in the way of finding healthcare coverage, but this humane provision of the ACA has driven up the cost of insurance.   These are some of the challenges confronting consumers in the world’s most expensive healthcare system.

Reducing the cost of care (and insurance) must be the primary focus in the next phase of healthcare reform.  The Affordable Care Act is relying on Accountable Care Organizations (ACO) to make this happen.  Thus far, over 5 million Medicare recipients get their healthcare from one of 360 Medicare ACOs.  Private insurers are also encouraging this model and have written ACO contracts with well over a thousand medical practices.

Numerous reviews tout the virtues of ACOs including better quality and lower cost of care, more satisfied patients, payment for value rather than volume of care, fewer hospitalizations, better coordination of care, and so on.   It is important to note that the improvements in healthcare that are attributed to ACOs, have also been incorporated into non-ACO practices throughout the country.  Currently, there are more than 5000 Patient Centered Medical Homes that use the same methods as ACOs to improve care: electronic health records, patient portals for improved communication, care coordination for the most fragile patients to keep them out of hospitals and to prevent hospital re-admissions, use of practice data to improve population health, patient safety, adherence to screening guidelines, and patient satisfaction.   Thanks to the influx of technology, the process of healthcare delivery is improving almost everywhere.

While the ACO model addresses some of the problems in our flawed system, it perpetuates or creates others.   What follows are some of the problems inherent in ACOs that rarely get mentioned:

1. Patients of an ACO do not share in the incentive to lower healthcare costs.   Without engaging the consumer in this way, there is nothing to keep them within the confines of an ACO where costs can be controlled.  Furthermore, since the patient is unable to reduce healthcare expenses by making healthier lifestyle choices, the ACO has lost an opportunity to motivate positive behaviors.

2.  ACO patients will not be engaged in decisions to lower the cost of care.   Strategies for cost control will be dictated by ACO policies.   Complex clinical decisions, where cost may play a significant role, may not include input from the patient.  Care options will be limited in this “prix fixe” model of healthcare.  If the ACO is successful at reducing healthcare costs, Medicare will lower the bar (per member per year allocation) after 3 years, forcing ACOs to adhere to an even more restrictive menu of care options.  The absence of cost transparency will keep consumers in the dark, just as they are now, and make it impossible to identify the high value healthcare providers.

3. Risk sharing models of care such as the ACO impose a conflict of interest on providers by giving a financial incentive to reduce the costs of care.  After achieving specific quality improvements, ACOs will be eligible for a bonus equal to 50-60% of the savings generated in the previous year.   ACO providers that overspend their targets will be nudged to fall in line.   Patients will become suspicious that even appropriate recommendations for cost control are being made to pad the bonus for the ACO providers.  The consequence will be an erosion of “trust” in the doctor-patient relationship, an essential ingredient for quality healthcare.   With tort reform nowhere in sight, decisions to cut costs by withholding care will add to the liability risk of clinicians.

4. Consolidation of providers is encouraged by the large up-front costs necessary to form an ACO.   Larger practices are more likely to monopolize a community and command higher fees from third party payers.  Less competition will lead to less innovation, and of course, fewer options for patients.

5.  The ACO model has produced almost no savings in the first 6 years of its implementation even with the most enthusiastic of medical centers.  The 5 year pilot program (Physician Group Practice Demonstration Project) that involved 10 medical practices and ran from 2005-2010 produced a total savings of just 1.1%.  More disturbing, however was the result of the 32 Pioneer ACOs in their first year of operation.  These were centers with enough confidence to accept a downside risk if they overspent their target.   Despite an abundance of “low hanging fruit” in their first year of operation, these practices, in aggregate, increased costs of care by 0.3% (compared to 0.8% in a control group).  Nine of the 32 Pioneers have dropped out of the ACO program.  How will this look in year 10 of operation with practices that are not as enthusiastic?

We can do better than this.  One alternative is based on transparency of cost and quality.  With access to data on healthcare costs and quality of care, consumers will be able to select their providers, just as they would any other service in a free market economy.   This will preserve competition, help consumers identify high value care, and allow them to participate in all of their own care decisions.  It will also engage patients in ways that may inspire better lifestyle choices.  Costs will fall because consumers with higher out-of–pocket expenses are becoming more concerned, will resist unnecessary spending, and will find lower cost options.  High value screenings and immunizations can be encouraged by reducing the out-of-pocket expense for these services.  Quality will improve because the market will demand it.   Accurate and meaningful measures of quality will need to be established.  Many providers of care, as well as hospital and insurance administrators understand that these are essential steps for a sustainable healthcare system.    We cannot afford to wait 10 years to see if ACOs will evolve to lower healthcare costs.  For the sake of a struggling economy, and consumers that are paying a larger share of their healthcare expenses, cost reduction must begin now.



Wilensky G, Lessons from the Physician Group Practice Demonstration -  A Sobering Reflection.  N Eng J Med, 2011; 365:1659-61.

Colla CH, Weinberg DE, Meara E, et al., Spending Differences Associated with the Medicare Physician Group Practice Demonstration, JAMA, Sept 12, 2012,  308(10):1015-23.

Christensen c, Flier J, Vijayataghavan V, The Coming Failure of Accountable Care, The Wall Street Journal, Feb 19, 2013, p A15.

Munro D, Healthcare Pricing Transparency Gains Momentum, Forbes, June 9, 2013.

Robinson JC, Brown TT, Increases in Consumer Cost Sharing Redirect Patient Volumes and Reduce Hospital Prices for Orthopedic Surgery. Health Affairs, 2013, Aug; 32(8):1392-7.  10.1377/hlthaff.2013.0188.

Daymore J, Champion W, The Pioneer ACO First Year Results: A Fuller Picture.

Harvey HB, Cohen IG, The Looming Threat of Liability for Accountable Care Organizations and What to Do About It. JAMA, 2013;310(2):141-142. doi:10.1001/jama.2013.7339.