David Cutler: Can the U.S. Healthcare System Be Fixed?
No country in the world spends more on health care than the United States, or has less to show for it when compared to other wealthy nations. The U.S. spends nearly 50 percent more per capita than Switzerland, the second biggest spender among wealthy nations, but consistently ranks near the bottom on measures of population wellness and life expectancy. Is there a better system, and if so, what should it look like? What role does wasteful spending play in this equation? How much is attributable to administrative costs? In this episode, Eckstein professor of applied economics David Cutler considers these questions as we discuss the high price of American medicine.
Transcript (the following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview):
Jonathan Shaw: No country in the world spends more on healthcare than the United States, or has less to show for it when compared to other wealthy nations. Why? Welcome to the Harvard Magazine podcast, “Ask a Harvard Professor.” I'm Jonathan Shaw.
Marina Bolotnikova: And I'm Marina Bolotnikova. During today's office hours, we'll speak with David Cutler, who is the Otto Eckstein Professor of Applied Economics in the Faculty of Arts and Sciences, and a professor in the department of Global Health and Population at the Harvard T.H. Chan School of Public Health. From 2003 to 2008, he was dean for the Social Sciences within the faculty of Arts and Sciences. In the administration of President Bill Clinton, Professor Cutler was a member of the Council of Economic Advisors, and the National Economic Council. Later, he was the senior healthcare advisor to Barack Obama's presidential campaign. And he currently serves on the Massachusetts Health Policy Commission. He's the author of two books and many articles on the U.S. healthcare system. Welcome, Professor Cutler.
David Cutler: Thank you. It's great to be with you.
Marina Bolotnikova: First, why does healthcare cost so much in the United States? Nearly 50% more per capita than in Switzerland, which spends the second most among wealthy nations.
David Cutler: Yeah, one of the continual vexing points about U.S. healthcare is why it's so expensive. There are a few reasons why the U.S. spends more than other rich countries. Obviously, in poor countries, there's an enormous difference in the nature of medical care. Relative to other rich countries, I would say there are three principle reasons why the U.S. spends more. The first is that it's administratively much more costly. So we have lots of people involved in submitting bills, and adjudicating claims and figuring out what services someone is allowed to receive and not allowed to receive and what you need to do in order to receive those services. And all of that involves people, and people are very expensive. And so probably the biggest contributor to the higher spending in the U.S. is that.
I would say second is that the U.S. pays more for the same things than other countries do. An example is pharmaceutical prices, where the U.S. pays more than European countries or Canada or Asian countries. But that's also true about physicians. So physicians earn more in the U.S. for the same thing than they do in other countries as well. And so those price parts are a contributor. I should just say that part of the reason why the physicians earn more in the U.S. is because the other things that highly educated people can do in the U.S. also pay more. So if you want people to be physicians, you can say, "Well, you're earning more than your Canadian counterpart." They'll say, "Yeah, but I'm not earning as much as the lawyer down the street, the accountant down the street." So on. And so it's just a general feature about the U.S. income distribution is that it's much wider than other countries. And that shows up in higher spending for a skilled workforce like in healthcare. And the third reason I'd give is that in the U.S. we do more things than in other countries. Even for the same condition. So for example, if you have a sprained ankle, or a twisted knee or something, you're much more likely to get, say an MRI in the U.S. than you are in other countries. The U.S. has four times more MRIs than Canada does. If you have cardiac issues, you're much more likely to get invasive procedures in the U.S. than you are in other countries. And that's all very expensive. Sometimes it's worth it, often it's not particularly worth it. Other countries do a pretty good job of figuring out who to direct the care to, and that additional care is expensive for the U.S.
Marina Bolotnikova: And where does the U.S. rank internationally on measures of population wellness and life expectancy? For all that we're paying for health care.
David Cutler: Unfortunately the U.S. ranks very poorly. Most estimates suggest it's at or near the bottom among all the rich countries. A part of it is that the U.S. hasn't covered everybody. So there are people who are uninsured in the U.S. but that's only part of it. There's a lot, which is people who are insured are not doing particularly well in the U.S.. There's a phrase that was sort of developed a couple of years ago about deaths of despair, which are very, very high in the U.S.. Things like drug abuse deaths, alcohol related liver disease, suicide rates are very high in the U.S. compared to other countries, and that's contributing. It's not the whole part, but that's contributing to reduce life expectancy in the U.S.. So actually, despite all that spending, we don't have a lot to show for it.
Jonathan Shaw: Medical inflation is quite a bit higher than the general rate of inflation, and many economists have pointed out that healthcare costs are therefore consuming a larger and larger share of the nation's total economic output. What is the breaking point? How much can costs continue to rise?
David Cutler: It's a very good question. There's no speed limit that says you can't go above X. So the U.S. currently spends about 18% of GDP on healthcare, and nothing says we couldn't go higher than that. I think the real problem is... If we're all getting richer as a society, and we all decide we want to spend more money on healthcare, and that's great. I think the real problem is that while society is getting richer, not everybody is getting richer. So most of the income gains are going to high income people, and yet medical costs get distributed to everybody. So you have a situation where half the population is saying, "My medical care costs more than it used to, and my income is not going up, sometimes it's even going down. How am I supposed to make ends meet?" And then you say, "Well, the good news is, when you're 80 you'll get care for Alzheimer's disease that's better than it is." And people say, "Yeah, but I'm not to be around at 80. That's not the way that everyone experiences life."
So the fact that income inequality, and resource inequality, has increased so much means that what might be okay in an average society is not okay, because about half or two thirds of the population is not really experiencing those gains. And that's the real, real problems. We don't have the money for the public programs to help keep low and middle income families with access to sufficient medical care. Employer insurance is very expensive for low and middle income people, and their wages are not going up. And so, the whole system feels to people like it's stacked against them and they're not wrong to feel like it's not working for them.
Jonathan Shaw: Medical tourism used to refer to foreign patients who sought top level care in the United States, but now it encompasses Americans traveling to other countries to seek out lower cost procedures. Is this just an example of the globalization of healthcare, or does it underscore some of the strains in the U.S. system?
David Cutler: Medical tourism definitely shows some of the strains in the U.S.. We see it most acutely in the prescription drug area where you can literally receive the same pills as you get in the U.S. in another country for much cheaper, because they're sold for much cheaper in other countries. But sometimes, you're also starting to see it with respect to medical services, not just goods, but surgical operations or consultations or things like that. Partly it reflects good features, which is that there are a number of very good doctors and medical care capacity in lots of parts of the world. And so that's very... That's good for people. And then it also reflects the fact that U.S. healthcare is so expensive and people can't figure out how to make it work well. And the same people were talking about, low and middle income people, are the ones who really need access to the less expensive care. And so they're quite tempted to seek it out, which I think is probably good.
Marina Bolotnikova: If you were building the U.S. healthcare system from scratch, so starting from nothing, how would you design it?
David Cutler: There are really two dimensions of that question. The first one is how would you structure the basis of medical care that people receive? And the thing about the U.S. system that's always frustrating when you look at it is a good healthcare system is built off a really good base of primary care, and then provides increasingly more specialized care to people who need it. And it's a smaller part of the medical care system, because you're providing good primary care. And the U.S. system is just the reverse of that, which is we're shrinking our primary care and our preventive care, and we're investing all the resources in the specialty care, which is what happens when you can't take care of people at the primary level. So a better healthcare system in terms of the nature of care that people receive would be one with a much stronger emphasis on the primary care, on taking care of people at all stages of life, including when they're healthy, and then applies more sparingly, secondary, tertiary care because you don't need it as much.
And so that's how I think you'd think about the provision of medical services. There's then of course a separate layer, which is the insurance layer, and how one gets access to that. I think if you were thinking over, you would almost certainly have some type of single payer insurance plan that. The U.S. system where if you're employed by a good employer, you get one type of insurance, and if you're employed by a smaller wage employer, you get a different kind of insurance, and when you decide to change jobs then your insurance changes. Unless you're really poor, in which case you're on a public program or if you're in the military, you're on a different program. But that whole thing makes no sense at all. And the countries where it makes more sense to people are countries that have a single payer setting, a single payer philosophy there.
But that much said, getting there from here is really difficult. And I personally don't think the country is ready for it, nor it's necessarily worth the work to get there from here. So I don't know that I would do that given where we are. But I think if you were starting over, that's the kind of system you'd be tempted to design.
Marina Bolotnikova: And that leads naturally into the next question, which is, how do we build on our existing system where millions of Americans are still uninsured, to reach a goal of everyone being covered given the obstacles of in Congress and otherwise?
David Cutler: Yeah. The single most fundamental issue that drives the healthcare system is the cost of medical care. So if you say, "Why is it that people can't afford insurance?" It's because medical care costs too much. If you say, "Why is it that the government is limited in the subsidies it can provide to people?" It's because it costs so much that they just don't have the money for it. So how do we build on the existing system? We're ultimately going to need to reduce the cost of the system, take that money and invest some of it into helping people be able to afford better care, cheaper care, more medical care. There really is no alternative to that, because we can't just pull the money from elsewhere as we have done for a while. Like you see the federal government can do some, but state governments can't, local governments can't. And so the only way to prevent the deterioration of healthcare is to figure out how to make it be better and cheaper, and then use that money to say, "Now I'm going to give everyone access to it."
Marina Bolotnikova: Are there U.S. States that are particularly good at this, that have particularly good health care systems that could be replicated at a national scale?
David Cutler: I always find it very difficult to say something can be replicated. As one of my friends went said, "I would love the U.S. to have the Danish healthcare system, and I'd really love it if it came with the Danish population too." So it's very difficult to think about replication. If you said which state covers the most people, Massachusetts is probably the leader in terms of covering people. Massachusetts is also a very, very expensive healthcare system. I think what we see in healthcare is that there are pockets of excellence everywhere. So no matter where you go, you can find pockets of organizations that are doing really well, and side by side there are organizations that are doing less well. And the issue in healthcare I think is not so much, "Okay, we know what great is and all we have to do is transplant great from here to here and then we'll be fine." I think the issue is more that we need to go from good to great, we need to know how to take good and turn it uniformly into great. And we haven't figured out how to do that yet, so we haven't taken organizations everywhere that are good and say, "Now we want to be great."
Jonathan Shaw: Turning to the topic of waste, how much of what the United States spends on healthcare is waste? And how much of that waste is attributable to your earlier referenced administrative costs?
David Cutler: The best guesses that we have, are that the total amount of waste in the healthcare system is probably about a third of healthcare dollars.
Jonathan Shaw: Wow.
David Cutler: Healthcare is about three and a half trillion dollars, so it's roughly about $1.2 trillion of waste a year. A part of that is administrative costs. Not all of it obviously, but a reasonable part of that is administrative costs. And the administrative costs of the healthcare system as a whole are probably a little bit under $1 trillion a year. That much said, not all of that is wasteful. That is you need electronic records, so you have to have some investment in electronic records. And you need someone to be keeping track of things, so you need some of that. The guess is that we probably waste, as a country, on administration, maybe $200, $250 billion a year. To put that in a number that makes a little more sense, my guess is that the average American is probably paying five or $600 a year for administrative costs, which are doing nothing. Which is a lot of money, if you think about a typical American whose incomes are not going up and whose costs are going up.
Jonathan Shaw: You've written about “cowboy doctors” who've repeatedly prescribed unnecessary care to their patients, to the tune of hundreds of billions of dollars annually. How does the system allow that to happen?
David Cutler: One of the things about medical care is that there's an enormous gray area where you can believe different things. So if you look at any procedure, let's say, should we insert a pacemaker into someone? There're some situations where the literature is extremely clear, you should. There're some situations where the literature is very clear, it's of no use. And then there's a lot of gray area. What tends to happen is that you get doctors who have just differing perceptions about their own ability, or what they've seen in their example of patients where they say, "Oh, I think this thing works great." And so then they go ahead and use it. And there's nothing, financially or otherwise, that says You shouldn't do that, you can't do that.
So you wind up with doctors who say, "No, no, no. In my experience, I've done really well with this," even though there's no literature. Or you have doctors who say, "I'm out of other things to try, and I don't want to say I'm sorry, there's nothing else I can do." So they'll go ahead and try that. Or they'll try an off label drug or something, because it's both feels compassionate at the time and there's nothing that says slow down and it's going to cost someone money and stuff. So it winds up just going into the ether where of course we all wind up paying for it. But it's not... That's sort of secondary at the time. What a really good organization does is it says, "We have to think about all of us and so we have to say, 'Look, if this thing is really not doing any good or if we can do better, we have to do that.' And we're not going to tolerate a situation where we do things just because you don't know what else to say."
Jonathan Shaw: What are some of the factors that drive prices higher? For example, do you consolidate hospital markets get rid of price competition?
David Cutler: Yes. The consolidation of healthcare is a very big issue. In virtually every city you go to, there's one health system that's perceived as the superstar system, and that system gets much higher prices than the other places. In some cases, for some services, that system is absolutely great. That is, if you need a very specialized service that's not done frequently and there's an expert in town, you clearly want to go there. The difficulty is that those prices get charged for everything.
So you have, for example, in the Boston area, the price of getting, let's say a routine CT scan, routine abdominal CT scan may vary from $300 to $1,300. So may vary by a factor of four, with no difference in quality. But if your doctor refers you to the fancy teaching hospital and so on, then it costs a lot of money, and if you go to the outpatient MRI or CT scanner, it's costs very little money. Unfortunately, patients almost never are told that. They're never told, "Hey look, you can save yourself $1,000 in your out-of-pocket payment just by going over here and it's going to be as good," In fact, it's often the same doctor who is reading this CT. And they wind up just going to the place that charges a lot of money, because that place can, it can get away with it.
Marina Bolotnikova: When you talk about administrative waste, that's referring to things like the cost associated with having so many insurance companies and plans build for different procedures, as opposed to it all going through a program like Medicare for example?
David Cutler: Yeah, it's really quite complicated. So I'll give you an example. One example is exactly the one you gave, which is there are multiple insurers. By itself, that doesn't have to be so costly because you could just send a paper to a or two B. What's particularly costly about that example is that one insurer requires a different set of information than another insurer. So they might bill things a slightly different way, or they might want a different set of codes or so on. So the provider has to figure out how to bill every single insurer. And in fact, it may be even more than that, because each individual business buying insurance may have put different restrictions on it. So for example, when business says, "I'm really spending too much on mental health care, and so I want to put an additional restriction on what we'll do before we'll pay for the mental health care." And so the provider says, "Well, I think I just need to do X." And the insurance company says, "Well, they're actually insured by this business. And so therefore you have to prove to us that you've tried A, B, and C first." And then for another business. "Oh, but you also have to have tried D first." And so it's not just that there are different insurers, but that there's so much heterogeneity in it. That you're almost customizing a bill for every single patient, and that's really very costly. Whereas, if you could standardize it. And just say, "You do it this way, or you do it this way or," and it's all automated and stuff, then it gets to be much cheaper. So it's partly that there's unnecessary complexity that's introduced in it.
Marina Bolotnikova: How much does the discovery of new medical technologies and treatments raise costs? How does that figure into medical inflation?
David Cutler: It does. So new technologies and treatments raise costs, they can be good or bad. And we've seen examples of both. So there are some very new anticancer drugs that cost half a million dollars, but that seemed to be very, very effective. And they take people who are on the verge of death and give them a new life. And so that's quite valuable. And then there are anticancer drugs that seem to reliably extend life by about three weeks, and don't do it in great quality of life either. And they cost $150,000. And by no estimate is that what society should be paying for.
So now of course you don't always know whether everything is going to be worth it or not when you start off. That's true about everything in life. What the U.S. medical care system is very bad at doing is saying, "Okay, we're going to pay a lot for the things that are really worth it and we're not going to pay much for the things that just aren't worth it." So a very bad way of saying, "We're going to reward the really good stuff. And the stuff that didn't work out, we're sorry, but it just didn't work out."
Marina Bolotnikova: Oh, do I ask the next one about the declining health? Okay, yeah. What about the declining health overall of the U.S. population tracking the rise in obesity? To what extent did that contribute to higher medical spending?
David Cutler: So the U.S. population health trend is absolutely fascinating, and scary in parts. And it's... We were talking earlier about the heterogeneity, and this is an example of the heterogeneity. So you have, for example, infant mortality rates continue to decline as kids are living longer. And not only that, infant mortality rates are declining the most in the poorest areas, because things like pollution are getting better, and Medicaid coverage for kids has become more extensive. You have on the other end of life, mortality rates for elderly people are declining. Some split, more for higher SES folks than lower SES folks, but on average they're declining. And then you have mortality rates rising for the middle aged working age population, particularly less educated people, particularly people not in big urban areas, not in rapidly growing urban areas, particularly non-Hispanic whites. People who the economy has really done poorly by, people for whom obesity is rising.
Behaviorally, you have obesity going up, you have smoking going down, you have drug-related deaths going up. So you're seeing all this sort of turmoil. Some things very, very good, like smoking going down. Some things very bad, like obesity going up and people using substances and excess. There's no single factor that explains everything that's going on. In my mind I think about several competing factors. So on the one hand is medical technology's ability to help us when it's good. So we have drugs to help lower blood pressure and cholesterol and so on, and that's all very, very beneficial. On the other side, we have some things that are absolutely harmful, like opioid medications, which are just absolutely harmful. We have social changes, some of which are good, like we extend insurance coverage to more people. Some of which are bad, like a lot of middle income people lose their jobs and their income falls and, and their life loses a lot of meaning to it.
So you have these various things which are both good and bad, and depending on how they're affecting different groups, they wind up being good or bad for society. Sometimes they overwhelm us and, and, and things look very bad. And then sometimes we managed to do really well, like we reduce pollution and things look very good. And so I think... And then that shows up of course in medical spending, that is when you've got a bunch of sicker people, they spend more. I think we're really going to have to think about all the various factors that affect health as a whole, rather than saying we have one policy for drugs, and then one policy for pollution, and then one policy for obesity, and then one policy for smoking and so on because they're all together and we're being whipsawed back and forth.
Jonathan Shaw: How effective are cost sharing policies with a component designed to make Americans better healthcare shoppers by giving them skin in the game? For example, by providing online tools to find the best price for a procedure. Are providers even capable of providing patients with accurate cost estimates?
David Cutler: We observed that when you give people more cost sharing in their insurance, they choose to use medical care less, so it's very, very clear. When people are exposed to more costs, they consume less. People are not very good deciders as to what good judges as to what care they really need, so they use less randomly. They cut back on unnecessary images, and they cut back on really critical daily medications.
We have yet to figure out how to help people be good shoppers, both in the sense of which things do I really need, and which things do I not really need? And in the sense of which providers should I get it from. Where should I get my CT scan or my MRI, and where should I not... Where do I not need to go to? So on both of those dimensions, no one has figured out how to help people to become a good healthcare consumer. And that's very frustrating, because the share of people with high cost sharing has gone way up, and people have very little sense that they know how to navigate that system. And so they're very, very frustrated by it.
Marina Bolotnikova: How would you evaluate the impact, or the success, of policies intended to rein in spending if not on the consumer side, which you just talked about, at the level of hospitals and systems? An example is the hospital readmissions reduction program, which imposes financial penalties on hospitals if they readmit a patient within 30 days for certain medical conditions. Some evidence has argued that the policies associated with increased deaths.
David Cutler: So if you go back one step, there are a couple of ways. One can deal with excessive medical spending. One is to help consumers be smarter consumers, help patients be smarter consumers, giving them more price information, quality information, so on. We've yet to figure out how to make that be successful. The second one is to change the way that the providers operate, to try and change the incentives that they operate under. So say to them, "We're going to give you financial bonuses associated with coming in under cost," rather than coming in over cost, coming in under cost, "And we're going to put penalties on the things that are... That happened that we don't like." Like readmissions to hospitals and so on. As researchers, what the vast bulk of the research has found is that when you put these incentives in place, generally providers do respond to them. That is if you say, "We're going to put penalties... We're going to put incentives in place that encourage you to be more conservative in your practice." They'll generally be more conservative in their practice. Or, "We'll give you some share of the saving. If you come in lower costs," then they'll find ways to come in lower cost. And by and large they do that without compromising the quality of medical care. So when we look at the quality metrics, they seem to do fine. There are occasional things in the literature suggesting otherwise, they're not uniform conclusions of the literature. If you look as a whole, the literature seems to suggest that those work in a reasonable way. So far they haven't been as successful as we would like them to in the sense that you put them in place and you save a few percent on medical care, but you don't save massive amounts of money on medical care. The view of the literature is not so much that we need to go backwards from those programs, because on net they seem like they're valuable. But the question is, is that going to get us where we need to go? Or is that too modest and intervention? And we know where we need to go, but that policy only gets us a 10th of the way there, and so therefore we need to do something different. And so that's I think where, where a lot of the uncertainty is.
Jonathan Shaw: This may fall into the same category, but some systems have experimented with bundled payment plans, single lump sums paid to doctors and hospitals to cover an episode in a patient's care. Putting the spending decisions in the hands of immediate providers. Have those been effective?
David Cutler: Yes, they have been effective. So the bundled payment programs have been effective. Not as much as was hoped, but certainly better than was feared. So the fear is always that when you say, "Okay, here's a certain amount of money, treat the patient as they need to, but don't, but we're not going to pay for additional services." The fear is always that the providers cut out necessary care. They say, "Well fine, I'll take the money and I'll not provide the extra follow up here and so on." And we haven't seen that. What we have seen, when you do programs like that is the hospitals and the surgeons will get together and say, "Can we standardize which devices we use and maybe we can... If we're buying in bulk, we can buy them cheaper?" And, "Do we really need to send people to post-acute care everyone, can we send some of them home? Is there some way we can avoid some of these out of hospital costs?" So they tend to do that. They tend to do that really well. Genuinely successful. It's not the kind of thing that if you looked at it, you said, "Okay, just a little bit more of this and then we've solved our problems." It's still... It's not been as big as you'd like it to be, but it's absolutely been favorable.
Jonathan Shaw: So, incremental?
David Cutler: It's been incremental. And the question is, is that the right way to go? That is, keep doing more of that, and hopefully the impacts will grow and it'll spread to more areas and so on. Or do you feel like we've reached the end of the line with it, and we're just not going to get to where we need to go?
Marina Bolotnikova: What would you say to the idea that we shouldn't need to have so much complexity in our healthcare system at all? Why is it better to have a system like ours with different pricing schemes at different hospitals and different insurance policies, rather than just a standardized schedule that says, "This is how much a hip replacement costs in the U.S., or at the state level."
David Cutler: We have way too much complexity. So there is no reason why we should have a system that says depending on exactly who your employer is, this is what you have to do to get a knee replacement, or a hip replacement or an MRI or whatever else it is. The danger in just saying there's only one, is that the system then works better or worse depending on how well the regulator of that one system works. So for example, in the UK they go through phases where they like the NHS, they don't like the way the NHS is running. They want more money into it, then the government wants less money into it. And so it gets... It can get politicized in bad ways. Imagine whichever political party you like when the opposition party is in charge of running the U.S. medical care system, and they get to site to decide what services are covered and what services are not covered and what doctors can do and so on. That's a scary prospect. So there's certainly a benefit to pluralism. At the same time, things don't go well when there's so much pluralism that all it is complexity. Where you can't make your way through the system because there's just no way to figure out the maze. And so finding the place between, you get what you get and you don't get upset, and you can have whatever you want, just don't try and figure it out, is where we need to be.
Marina Bolotnikova: Great. Thank you for speaking with us, Professor Cutler.
David Cutler: My pleasure, thank you.
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