2010 February 11 Thursday
Incentives On Doctors For Expensive Treatments

An article in the Wall Street Journal points to examples where scientific research finds more expensive treatments are no more effective but get used anyway.

The study, known as "Courage" and published in the New England Journal of Medicine in 2007, shook the world of cardiology. It found that the most common heart surgery—a $15,000 procedure that unclogs arteries using a small scaffold or stent—usually yields no additional benefit when used with a cocktail of generic drugs in patients suffering from chronic chest pain.

The article also points to examples of drugs that cost more, work less effectively than cheap generics, but get used more than cheap generics. This demonstrates the influence of pharmaceutical company marketing operations.

Stents are overused given their relative benefits.

Steven Nissen, then chairman of the American College of Cardiology, called the study a "blockbuster." Shares of leading stent maker Boston Scientific Corp. fell on the day the news broke, as many doctors and investors expected stent usage to fall off.

For a brief while, they were right. U.S. stent implants declined 13% in the month after the study's release. But as the headlines about Courage faded, stentings soon began to rise again, and are now back at peak levels of about one million a year, according to hospital surveyor Millennium Research Group.

"Most [cardiologists] haven't voluntarily incorporated the Courage criteria into their practice," says Dr. Boden. "What's going to continue to drive practice is reimbursement."

We can ill afford such waste. In the United States medical spending has now reached 17.3% of GDP.

Reporting from Washington - In a stark reminder of growing costs, the government has released a new estimate that healthcare spending grew to a record 17.3% of the U.S. economy last year, marking the largest one-year jump in its share of the economy since the government started keeping such records half a century ago.

The almost $2.5 trillion spent in 2009 was $134 billion more than the previous year, when healthcare consumed 16.2% of the gross domestic product, according to an annual report by independent actuaries at the federal Centers for Medicare and Medicaid Services, or CMS, scheduled for release Thursday.

Medical spending is projected to hit 20% of US GDP by 2020. It could hit 25% eventually. Though I expect by then the pressures to cut costs will grow too great. The US economy will probably be contracting due to Peak Oil and a US sovereign debt crisis will cause big cuts in many types of spending.

Next year the US government will pay more than half of total medical costs. The US government is on the road to a sovereign debt crisis and medical costs are one of the reasons why.

For the first time, government programs next year will account for more than half of all U.S. health-care spending, federal actuaries predict, as the weak economy sends more people into Medicaid and slows growth of private insurance.

In California one big medical insurance company just raised individual medical policy costs by as high as 39%. Astounding. People will start moving to states that have lower medical insurance costs. Anyone know a good ranking for individual medical insurance policy costs by state?

Anthem Blue Cross customers got a shock this week when the health insurer informed thousands of individual policyholders that their premium rates will jump as much as 39 percent on March 1.

I'd like to know how much of these rate increases are due to people aging into higher risk categories. The news stories on big rate hikes quote lots of people in their 50s and 60s who are also at much higher risk of getting sick.

John McClave of San Francisco opened his mail this week to learn Health Net had jacked up his monthly premium from $345 to $462 on March 1 - a nearly 34 percent increase. This was on top of an 18 percent increase he received last year.

"I do intend to shop around, but with others raising their rates at the same time I am not too optimistic," said McClave, 57, a freelance marketing and communications consultant.

The Democrats are demonizing the medical insurance companies. But when total medical costs are $2.5 trillion the $12.2 billion in profits for the top 5 insurance companies is chump change by comparison.

The report released Thursday said the five biggest insurance companies had an average profit last year of 5.2 percent — for a combined total of $12.2 billion.

Demonizing insurance companies avoids the real problems. One of the biggest problems is the total amount of medicine getting practiced and the lack of incentive to lower costs.

Share |      By Randall Parker at 2010 February 11 09:53 PM  Economics Health

Black Death said at February 12, 2010 10:10 AM:

Nobody likes the insurance companies - not doctors, not patients, not government bureaucrats. And they're easy not to like. But, as you say, the insurance companies' profits amount to about 0.5% of total haelth care expenditures. One of the reasons the insurance companies can get away with these huge increases #and, believe me, they're not increasing their payments to doctors# is that the market is rigged and they effectively have very little competition. Insurance companies have limited antitrust immunity, and it's generally not possible to sell insurance across state lines. Members of Congress and federal employees have access to a large number of plans that all compete for their business, but not the average citizens. I expect the Democrats in Congress and the Obama administration will demogogue this issue to death, but the health care plan that they use is much better than the ones their constituents have.

Among the cows in Iowa said at February 12, 2010 11:51 AM:
People will start moving to states that have lower medical insurance costs.
Too many people cannot shop for insurance because they have pre-existing conditions, or they cannot afford insurance at all. Many of the unemployed fall in the latter group, and some of the employed also.
Daniel said at February 12, 2010 12:05 PM:

Move to a state with a homestead exemption. Buy the largest home that you can afford for cash. Do without insurance. Pay as you go. If something catastrophic comes along at least you have a fighting chance to keep your major asset.

Clarium said at February 13, 2010 5:57 PM:


It is tempting for many leftist to blame to the profit motive for escalating health care costs; one entity does not necessarily contribute to health care costs, but an aggregate of middle men skimming some profit for themselves even though each middle man doesn't get much individually, but collectively it adds costs when services are finally delivered.

But, my main question is what happens to the health care profits from insurance companies and medical suppliers? Surely, some of their profits come from an inefficient use of health care that escalates costs currently, but they could be investing it on medical technology that would lower health care costs in the future resulting in more efficiency. In other words, the current inefficient nature of health care spending in the US system can potentially provide financing through the reinvestment of profits for more efficient medical technology. But if rationing occurs because insurance companies and governments realize that a given treatment does not yield enough QALYs (quality adjusted life years) per currency unit (a measure of the cost-effectiveness per treatment), then the returns on health care investment would not be high because these monopsonistic agents will reduce demand resulting in a disincentive to invest because of a low marginal return on investment relative to risks.

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