Exhale a sigh of relief at the climax of the reckless shutdown of our government. Shame on the United States. Now take another breath: Entitlement programs are on the verge of breaking the government bank. How much of the federal budget do you think they consume? Thirty percent? Forty? No, they're more than half of the federal budget. Major health care programs take the biggest bite. In 1992, they constituted 14 percent of all of our domestic spending; in 2012 they took 22 percent. In 2022, they are projected to represent 32 percent of all domestic spending, according to the Bipartisan Policy Center. Quite simply, this is unsustainable.

Americans are bewildered about why health care bills are so high. Certain kinds of cancer treatments run into the hundreds of thousands of dollars; an emergency room visit can exceed the cost of an automobile; dosages of the wonder drugs we're developing will run into thousands of dollars. In almost every industry, advances in technology drive cost down. Not so in medicine. Just think, we spend 20, 30, even 100 times as much on medical products and devices as what they would cost at Walmart.

This year alone, we are likely to spend over $2.8 trillion on health care. We spend more than twice as much on a per capita basis as other high-income countries such as England and France. Indeed, as an article in the Financial Times recently noted, the U.S. spends over 18 percent of its gross domestic product on health, compared to 12 percent by France, which comes next. Our system costs 100 percent more per capita than in Canada and 150 percent more than in the U.K. In exchange, you might expect to see longer life expectancy and lower infant mortality. Just the opposite. Fewer Americans live above the age of 70 and more American babies die at birth than in these other countries.

Why do Americans get such a lousy bargain? For a start, our hospitals seem to charge extraordinary rates, as Steven Brill pointed out in his remarkable analysis for Time last spring. They have "chargemasters," the list price of hospital costs. Certain patients, primarily those who have private health insurance, get discounts on the list price. How come? Their insurance companies have leverage in negotiating with hospitals. They identify the hospital in their network of providers. Insured patients can get discounts that are 30 to 50 percent above low Medicare rates.

On the other hand, the tens of millions of patients who have no health insurance have to pay full price. That is what bolsters the dramatic profits at nonprofit hospitals. Brill pointed out that the country's roughly 3,000 nonprofit hospitals, which are exempt from income taxes, average operating profits that are higher than those at the 1,000 for-profit hospitals. They argue that wealthy uninsured people from overseas pay the higher rates, which enables them to serve the poor. It's a dubious rationale.

Then there are bizarre drivers of costs. One is the prevalence of high-tech tests. Brill cited research showing that "the use of CT scans in America's emergency rooms has more than quadrupled in recent decades" in the name of safer and better care. And that's true up to a point. But many instances have been documented where patients have gone on to suffer needless invasive techniques or exposure to radiation, for instance. In-house laboratories are another major source of hospital profits. Patients are sent for testing so hospitals can charge the captive consumer more.

There's another impetus for testing: medical malpractice suits. Doctors are tempted to over-test so as not to be accused in malpractice litigation of omitting an allegedly important one. Hospitals and doctors often pay settlements to avoid being sued because it can be so difficult to successfully claim a "safe harbor defense," in which providers can make a case that their care was reasonable based on what was known.

Meantime, Medicare spends billions on patients who have been harmed or not fully healed in hospitals. Readmissions alone cost over $25 billion a year. Some 20 percent of Medicare patients are now readmitted to the hospital within 30 days of discharge.

Add prescription drug prices to this inflationary brew. As Brill noted, research by McKinsey & Company estimates that "overall prescription drug prices in the U.S. are 50 percent higher for comparable products than in other developed countries." If we had the same prices, it's estimated we could save close to $100 billion a year. Amazingly, the law "restricts the biggest single buyer – Medicare – from even trying to negotiate drug prices."

Obamacare contributes to the cost problem. True, it will restrict the use of hospital bill collecting and force insurance companies to be clearer in explaining their policies. This will be of benefit to the 30 million more Americans who can get insurance protection (supported by taxpayers), but the benefit certainly does not bend the health care cost curve or do much to change prices.

We have forever underestimated the cost of staying well. When President Lyndon Johnson signed Medicare into law in 1965, Brill reported, the estimate was that it would cost $12 billion in 1990. The actual cost: $110 billion. This year, it may well hit $600 billion. We could reduce these costs by insisting on payments from people with higher incomes or asset levels and by raising the age of eligibility for Medicare.

The fundamental fact is that providers deal in a life or death product, which cannot be left to its own pricing devices. By definition, this is not a free market.

Reformers have consistently sought to change how doctors and hospitals are paid, with the idea of rewarding them for quality and efficiency. Very little progress has been made. According to a March analysis by Kaiser Health News and USA Today, "only 10.9 percent of health care spending last year by employer-sponsored plans was based on 'value' as opposed to 'volume,' or the number of services performed." That's according to a study by Catalyst for Payment Reform, a nonprofit group representing 21 of the country's employers. The analysis quoted the head of the group: "Nine of every 10 dollars is paid into the health care system with no attention to whether the care provided was performed well or poorly, or whether it was appropriate in the first place."

The traditional fee-for-service model, which accounts for the other 89 percent, pays providers a fixed price for every service they deliver, the article noted, "with no limits on those services and without regard for results." Thus the current unsustainable growth in spending.

Value-based care would change the payment system "to remove the incentive for redundant and inappropriate care, now estimated to account for as much as a quarter of the nation's $2.8 trillion in annual health spending, according to the Institute of Medicine." The core idea is to maximize value for patients by moving away from a supply-driven system organized around what physicians do toward a patient-centered system organized around what patients need.

As Harvard Business School Prof. Michael Porter and Thomas Lee, chief medical officer at health care research and consulting firm Press Ganey, wrote recently in the Harvard Business Review, "we must shift the focus from the volume and profitability" of medical services "to the patient outcomes achieved." This will require restructuring how health care delivery is organized, measured and reimbursed. This transformation is happening, they say. Witness the Cleveland Clinic, where changes have already yielded "striking improvements in outcomes and efficiency."

Naturally, hospitals have resisted the value-based approach, which would pay them less to deliver better care. Sooner or later, though, there will be such a popular uprising over costs that change will be inevitable. Progressive hospitals will adopt the ideas and others will copy. Otherwise, the prognosis is grim.

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