What’s Wrong With the Cost of Health Care – A Tale of Two Cities

June 22, 2009

By John Newcomer:

money & stethescopeThe crazy world of health care costs can best be illustrated by the “Tale of Two Cities.”  Health care spending varies wildly based on no logical measure.  The absurdity of it all came to light in a recent study on Medicare reimbursements for 2006 (the latest data available).

According to the study conducted by the Dartmouth Atlas Project and published in the New England Journal of Medicine, the 2006 national average for Medicare spending per enrollee was $8,304.  This is Medicare not Medicaid. Medicare is for U.S. citizens over the age of 65.  Medicaid is the U.S. health program for low income citizens who qualify.  Hawaii, a state that has a very high cost of living has the lowest reimbursement, $5,311.  New York has the highest $9,564.

The amazing thing about the study is that the spending varies so widely with no apparent rhyme or reason.

Spending By the Numbers

The real shocker is when you drill down to the 306 local health-care markets.  The most expensive market is Miami. Average cost per enrollee — $16,351. That’s right, almost twice the national average.  Are seniors less healthy in Miami than Hawaii? Or are they just more demanding for more medical tests and medical specialists. After all, Miami is a very affluent, well educated population.

But then you look at the second most expensive city.  It is the dusty rural town of McAllen, Texas. Average annual income is approximately $12,000 per year. Yet the average annual Medicare reimbursement per enrollee is $14,946. Yes, more than $6,000 above the national average and only 14 years ago McAllen was $300 below the national average.

Neighboring San Antonio’s average cost was only $8,793.  Did the seniors of McAllen somehow become very sickly over the last 14 years, and why are the good senior citizens of San Antonio so much healthier?  The answer is simple and obvious.

If you Order It, They will Pay

According to the study, doctors in the high spending areas were much more likely to recommend expensive and discretionary services, such as non-critical hospital admissions, referrals to sub-specialists, and more diagnostic tests. But the study also concluded that all this extra medical care did NOT result in any greater survival rate.  It just cost more money.  To find out what the Medicare reimbursement rates are in your area,   click here for an interactive map of the United States.

Atual Gawande of the New Yorker interviewed doctors in McAllen.  They even admitted the problem was over-utilization.  That’s a fancy word for ordering unneeded tests.  Gawande came to the conclusion that about 15 years ago, a few McAllen leaders took profit growth to be perfectly acceptable in the practice of medicine.  He writes “a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers”

Here’s the real kicker!  According to the Dartmouth study, at current spending rates the Medicare balance sheet will be $660 billion dollars in the red by 2023.  But if we just contained costs like Hawaii and San Francisco (yes San Francisco!) in the year 2023 Medicare would be in the black $758 billion.

Maybe the answer is easier than we think.  Make hospitals and doctors act like they are in Hawaii.  Heck, I would even pay to send them to Maui for training if it would help.