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EVGENIY GENTCHEV

ASSOCIATE PROFESSOR OF MANAGEMENT


NORTHWOOD UNIVERSITY, CEDAR HILL, TX

GENTCHEV@NORTHWOOD.EDU

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HTTP://ATLEASTONEWHY.BLOGSPOT.COM

[REDUCING THE COST OF


U.S. HEALTH CARE – WHAT
DOES IT TAKE?]
Reducing The Cost of U.S. Health Care –
What Does It Take?

In a recent paper I addressed the issue of health care costs in the US. The conclusion was that the major
cause for the high costs was the inefficiency of medical services providers. Recent Congressional
attempts to reform the US health care system focused mostly on expanding access, while the cost
reduction provisions appeared to be mostly wishful thinking.

The fundamental problem of the US health care system is the high cost of services, which leads to high
cost of medical insurance, and results in a large number of people, who are mostly lower on the
economic scale, to have no insurance, and practically no access to health care. For those who have
access, the cost represents an increasingly heavier financial burden.

The real question is how to lower the cost of medical services. Lowering this cost would accomplish two
important goals – (1) it will lower the heavy and growing financial burden for those who currently have
access to health care and (2) it will make health care more accessible to people who currently cannot
afford it.

Does it take price controls to lower the cost of health care? Is it subsidies to the poor to purchase health
coverage? Is it new knowledge – better educated doctors, researchers, scientists? Is it better
technology or better pharmaceuticals?

Surprisingly, it is none of these. Some, like MIT economist Jonathan Gruber posit that lowering the
amount of money we spend on health care simply means cutting services, and that improving quality of
medical services must necessarily add to the cost of these services. Statements like these are solutions
to ill-defined problems.

First, with regard to lowering the cost of health care, it seems clear that total spending can be cut by
cutting services. However, considering that much of the cost of providing the health care services is
essentially fixed and that hospitals have low profit margins (on average, 2.4% after tax profit), cutting
services (telling a patient they cannot get some procedure) will lead to medical service providers
increasing the charge for the remaining services in order to cover their costs. This would increase the
cost per procedure while keeping total expenditures roughly the same. But the proper definition of the
problem is not simply cutting total health care spending, but lowering the cost of medical services in
order to make them more affordable and accessible. In other words, we need to figure out how to get
the same amount and quality of services we currently get for less money then we currently spend. We
don’t want fewer people to have medical care, and we don’t want people to have access to fewer
services. We want the services at lower costs.

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Second, with regard to the relationship between health care costs and quality, some evidence suggests
that increased quality and lower cost are correlated. A recent Wall Street Journal article titled Hospitals
Find Way to Make Care Cheaper – Make It Better points out that as hospitals in Pennsylvania competed
with each other over the past two decades on certain quality ratings, improving the quality (lowering
rates of hospital infections, for example) lowered the cost of their services. The article cites Dr. David B.
Nash, a medical quality expert and dean at Thomas Jefferson University’s School of Population Health in
Philadelphia: “High-quality care costs less—always.” Not only do we not need to spend more money to
raise quality, but evidence suggests that reduced cost of medical services may result from improving
their quality.

Dr. Atul Gawande, Associate Professor of Surgery at Harvard Medical School, wrote in a 2007 The New
Yorker article about the effect simple checklists used by doctors and nurses have on reducing hospital
infections and deaths. Applying checklists in their I.C.U.s, Michigan hospitals saved an estimated
fifteen hundred lives and hundred and seventy-five million dollars in costs during the first eighteen
months of their checklists initiative. To implement the checklist program, however, it had taken a slight
revision of the relationship between doctors, nurses, and administrators, and between hospitals and the
insurance companies that paid for the patients’ care. The result is unequivocal—improving the quality
of care saved lives and lowered costs substantially.

Providing world-class quality at very low cost or even free to the poor is entirely possible, as the
example of Aravind Eye Hospital in India demonstrates. The hospital has the most experienced eye
surgeons in the world, who are able to provide top quality eye surgery in their high-end clinic for
wealthy paying patients and at the same time to provide the same quality surgery albeit with less fancy
but sufficient post-operative care virtually for free to thousands of India’s poorest. The hospital gained
such a strong bargaining position with regard to its suppliers, that it was able to drive down the cost of
the technologies and inputs used. The hospital is self-supporting, with the profits from the voluntarily
paying customers covering the costs for the poor ones. The accomplish this, it has taken a
reorganization of the surgery process, leaving doctors to focus exclusively on performing surgeries,
while the nurses do all else.

The above examples demonstrate that it is possible to provide medical care of superior quality more
efficiently, to more people, at a lower cost, and that improving the quality of medical services can lead
to lowering their cost. Implementing such changes, however, takes changing the traditional
relationships among doctors, nurses, hospital administrators, and insurers. Even the World Health
Organization points out that while its key concerns in developing countries are substandard drugs and
inadequately trained medical personnel, in the developing countries (like the U.S.) key concerns are the
lack of communication and coordination within and across organizations involved in patient care, latent
organizational failures, and poor safety culture & blame-oriented processes.

In the United States we have highly trained medical specialists, high quality pharmaceuticals, advanced
technologies, reliable electricity, management and organizational expertise—all conditions for effective
and efficient medical care. In reality, the US health care system is very inefficient. As the Congressional
Research Service reported in a November 17, 2009 report, “Health costs appear to have increased over

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time in large part because of complex interactions among health insurance, health care providers,
employers, pharmaceutical manufacturers, tax policy, and the medical technology industry. Reducing
the growth trajectory of health care costs may require policies that affect these interactions. Policies
focused only on health insurance sector reform may yield some results, but are unlikely to solve larger
cost growth and limited access problems.”

In other words, the pattern of interactions and relationships among medical personnel, administrators,
insurers, etc., which, if revised, could lead to increasing the quality of care and lowering its cost is,
instead, the reason for the currently high costs. Therefore, to lower our medical costs we must enable
changes in these relationships. The next question is what motivates changes in these relationships,
which could lead to increased efficiency of medical services and to their lower costs?

There are, essentially, only two ways to affect these relationships. One is through increased regulation;
the other is through competitive pressures in the marketplace. There is only one crude parallel in
history of reforming a system which had become nearly bankrupt through its own inefficiency despite its
educated work force – it was the Soviet economy during the 1980s. The problem of the Soviet economy
was not the lack of resources, nor the lack of technical know-how, nor the lack of educated or skilled
work force. The problem was one of relationships among the players in the system. A very similar
problem plagues the U.S. health care system. The only viable solution for the Soviet Union was not
more regulation and central planning, but more competition and the formation of markets. The United
States supported the Soviet and Russian transition from a centrally planned and regulated economy to a
market-based system. While the transition was far from perfect, it resulted in a more productive
economy and a higher standard of living for the Russian citizens. If the U.S. transitions to a more
market-based health care system, the results would be parallel – increased efficiency, lower cost, and
broader access to health care than under the current system.

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Related Sources:

Economist Jonathan Gruber speaking at MIT—Health Care Policy and the Next U.S. Administration—
October 22, 2008. URL: http://mitworld.mit.edu/video/623

The Wall Street Journal October 8, 2009 – Hospitals Find Way to Make Care Cheaper – Make It Better—
by Thomas M. Burton, p. A14

Dr. Atul Gawande on the effectiveness of checklists—The Checklist—The New Yorker, December 10,
2007. URL: http://www.newyorker.com/reporting/2007/12/10/071210fa_fact_gawande

World Health Organization—Patient Safety Research—2009 URL:


http://whqlibdoc.who.int/hq/2009/WHO_IER_PSP_2009.10_eng.pdf

On Aravind Eye Care Hospitals

Harvard Business Review – Serving the World’s Poor, Profitably—by C.K. Prahalad and Allen Hammond,
September 1, 2002 URL: http://hbr.org/product/serving-the-world-s-poor-profitably/an/R0209C-PDF-
ENG

Profile on PBS—Two Decades On, India Eye Clinic Maintains Innovative Mission—September 2, 2009.
URL: http://www.pbs.org/newshour/updates/health/july-dec09/eye_09-02.html

Congressional Research Service—The Market Structure of the Health Insurance Industry—by D. Andrew
Austin and Thomas L. Hungerford, November 17, 2009. URL:
http://www.fas.org/sgp/crs/misc/R40834.pdf

My analysis of health care costs and reform: Evgeniy Gentchev—Health Care Costs And Reform – Missing
The Forest For The Trees: URL: http://www.scribd.com/doc/25090714/Health-Care-Costs-and-Reform-
Missing-the-Forest-for-the-Trees

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