President Obama discussing health care, with doctors applaudingPresident Obama and his supporters have high hopes for health care reform. One of the most central goals of their plan is the reduction of long-term costs in the system, a much-needed change. But despite the promises and theoretical projections, it's not clear how those reductions will be accomplished. And the considerable power of the health care industry, which will remain in full force even with reform, may make those cost savings difficult if not impossible to achieve.

Part of the problem of health care reform is the nature of America's health care industry. At least to some observers, it's more of a cartel than a competitive marketplace. The health care industry is a highly profitable and politically powerful group of companies that operate in cartel-like fashion, using their clout to limit competition and establish highly profitable pricing.

Health care operates as a "cartel" not in the sense of a formal organization like OPEC (the Organization of the Petroleum Exporting Countries) or the criminal activities of drug cartels, but in the informal sense of a small group of companies that dominate specific markets and thus wield significant political and pricing power within those markets.

The health care reform bill does little to challenge this power. Indeed, it's a sign of the medical industry's enormous political power that the bill overlooked some of the biggest reasons for the high cost of American medicine.

And if costs don't go down, then the affordability and sustainability of the U.S. health care system become questionable over the long term. The U.S. already spends twice as much as other developed countries on health care as a percentage of GDP.

Shifting the Blame

When asked to identify the source of America's runaway health care costs, health care industries and trade groups excel at pointing to the next guy as the source. Doctors, hospitals, insurers, HMOs, pharmaceutical companies, malpractice lawsuits and the courts that award huge settlements, federal regulatory agencies, Medicare -- scapegoats abound, and so do rationalizations.

If no one group is responsible, then perhaps we need to look at the entire system of self-serving industries. The system profits from guaranteed payments to private-sector companies and is protected by special political dispensations. It's based on regional networks of providers negotiating with insurers to exclude competitors and set exorbitant prices that are passed on as insurance premiums. While insurers complain about rising costs, they're exempt from antitrust laws and thus have the power to consolidate smaller insurers within a region and then pass on price increases to consumers and businesses alike.

And if the health care reform bill doesn't really address the cost generators and the incentives built into the current system, then it's difficult to see how costs can decline.

A recent report by Massachusetts Attorney General Martha Coakley uncovered multiple forms of anti-competitive behavior among providers, including huge price disparities that had no visible relation to any free-market factors. The report concluded that this and other forms of collusive behavior were "pervasive."

Monopoly Pricing, Wasteful Spending

Once upon a time in U.S. health care, it was the norm to post prices for procedures and care. This hospital price sheet is from the 1950s. According to the Coakley report, this is no longer the norm.

Maternity price chart


Some local providers who post their prices openly, such as Keith Smith, an anesthesiologist with the Oklahoma Surgery Center, find that preferred provider organizations (PPOs) and insurance companies aren't interested in contracting with his group, even though their prices are 70% less than those charged by local not-for-profit hospitals. To Smith, that's strong evidence that medical cartels are making deals with insurers to monopolize services in their region.

To cite another example of the distortions that end up costing the nation twice as much for health care (as a percentage of GDP) as competing developed countries: Pittsburgh has almost as many MRI machines as the nation of Canada. Western Pennsylvania has about 140 MRI machines, while the 32 million residents of Canada share 151 MRI machines. And the U.S. machines are getting a lot of use: the number of CT and MRI scans (scans other than old-fashioned X rays) tripled from 85 to 234 per thousand insured people since 1999.

While proponents are quick to note that scans are cheaper than the alternative diagnostic procedures, one firm's research found that a doctor who owns his own machine is four times as likely to order a scan as a doctor who doesn't.

As if that wasn't enough to highlight the self-serving nature of the current system, MRI scanner manufacturer General Electric waged a two-year lobbying campaign to roll back cuts in Medicare reimbursements for scans. While the effort proved unsuccessful due to the intense political pressure to reduce soaring Medicare costs, some critics claim that providers simply made up the reduced reimbursements by increasing the number of tests administered.

Reform's Cost Reduction Strategy: Comparative Effectiveness Research

The heart of the health care reform bill's cost-saving strategy is called "comparative effectiveness research," which attempts to lower costs by establishing the most effective treatments via statistics-driven methodologies. The standard example is such studies might prove that cheaper generic drugs work as well in clinical trials as branded drugs.

But the flaw in relying on statistical studies is that marketing and lobbying can still sway policy decisions on which treatments will be judged "most effective." Take, for instance, the proposals to offer gastric surgeries to overweight teens and children as a treatment for childhood obesity, which is rising rapidly in the U.S.

The corporations which make gastric bands for the surgery are pushing for the Food and Drug Administration (FDA) to allow their use on teens as young as 14, which would open up a new market of 2 million prospective patients. If the devices and surgery are approved, then government programs such as Medicaid might be asked to approve payments for the procedure as the "most effective available" treatment for teen obesity.

The problem with claims about effectiveness is that there is little data which shows gastric surgery is effective in the long-term for either adults or teens, according to Dr. Edward Livingston of the University of Texas Southwestern Medical Center. Livingston, who has been performing gastric surgeries on adults for the past 17 years, reported that many patients regain weight after the surgery if their lifestyles haven't changed. The goal, he said, should be a public health approach that makes surgery unnecessary.

Public Health: Only the Public Profits

Dr. Walter C. Willett, chair of the Department of Nutrition at the Harvard School of Public Health, recently addressed the potential for highly effective, low-cost public health measures to reduce heart disease. Dr. Willett reported that modest changes in our everyday environments can encourage much healthier lifestyles which can reap huge benefits within months.

This is called "choice architecture" in the social sciences: establishing conditions which enable better choices. Examples include banning snack machines and eating in school hallways, making city centers more walkable and offering healthier choices on restaurant menus. Such modest changes resulted in a 32% reduction in one city's employees' health claims in just 10 months.

Dr. Willett offered a handful of common-sense national policy changes, including subsidizing whole grains, fruits and vegetables in the food-stamp program; setting targets for salt reduction; incorporating physical education into No Child Left Behind; and requiring that sidewalks and bike lanes be part of every federally funded road project

But who will push for these changes when the alternative treatments such as surgery are worth hundreds of millions of dollars in new revenues for medical device makers and providers? If the incentives built into the current system aren't changed, then the reform bill's promises of cost-reduction may well turn out to be hollow.

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