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Medical Innovation Saves Lives But Drives Price Spiral

Shelly K. Schwartz, |Special to CNBC.com
Friday, 18 Jun 2010 | 3:11 PM ET

Stem cell transplants, surgical robots, gene therapy drugs.

Cost of healthcare
Lilli Day | Photodisc | Getty Images
Cost of healthcare

Innovation in health care over the last two decades has been nothing short of awe-inspiring, delivering tools to treat injury and illness faster and with fewer complications than prior generations could have ever imagined.

Yet, the endless parade of technological upgrades has also produced a nasty side effect—a stratospheric rise in health care costs, pressuring the nation’s economic stability.

“It’s not the waste in the our health care system, but the stuff that really works that does us in,” says Daniel Callahan, co-founder of The Hastings Center in Garrison, N.Y., a research group focused on ethical problems in medicine and biology.

Citing procedures like routine stenting to prevent artery blockages, kidney dialysis and pharmaceuticals that cost $30,000 to $50,000 a year, he notes, such medical advancements are at once a life saver for individual patients and an unmitigated “financial disaster” for the health care system.

“Right now, we consider success extending life, and we’re very good at that, but it’s an expensive kind of progress,” says Callahan. “This is a war against death and in the end, it’s a battle we’re going to lose.”

Indeed, while the aging population or systemic inefficiencies are often blamed for rising health care costs, those with their finger on the pulse of the industry say the biggest factor by far is the insatiable appetite for the latest, greatest medical technology.

It helps not at all, of course, that health care is among the only industries in which innovation actually leads to higher costs.

“If you’re in the auto business, your initial costs are very high but after awhile you lower costs by selling more products,” says Callahan. “It doesn’t work that way with drugs or medical equipment. No company that sells a product without competition is going to gradually reduce their prices.”

According to the Congressional Budget Office, average annual health spending growth is anticipated to outpace average annual economic growth by 2.1 percent between 2008 and 2018, at which point health spending is likely to reach $4.4 trillion, and roughly one-fifth, 20.3 percent, of the projected Gross Domestic Product. (It was 5.9 percent in 1965.)

The Organization for Economic Cooperation and Development in Paris, an international NGO, estimates that the U.S. spends nearly twice as much as the 31 OECD-member-country average as a percentage of GDP, and yet ranks with Turkey and Mexico as the only OECD countries without universal health coverage.

President Obama’s reform legislation, of course, aimed at providing health insurance for all Americans, solves some of the problem, with a projected savings of $622 billion over the next 10 years but it fails to address the challenge of costly new technology, says Callahan.

Medicare, the federal health insurance program for the elderly, is a "perfect symbol of our problem,” he says. “That program has to make decisions frequently about what new technologies they will cover, but Congress has never allowed them to take costs into account. They, and various groups of doctors, have absolutely rejected that notion as immoral. So while everyone agrees we need to control costs, they refuse to consider costs.”

What Price Innovation?

Ironically, David Cutler, professor of economics at Harvard University, suggests the reason health care innovation is creating a cost containment crisis is because it has not gone far enough.

“We’ve figured out how to give people longer, healthier lives and that’s a very good thing, but we haven’t innovated in terms of organizing the system so it works better,” he says. “We keep developing new treatments for cancer, but we pile them on without ever inventing ways to help people make sense of what they need when they need it so they don’t get stuff when they don’t need.”

Researchers at The Dartmouth Institute for Health Policy & Clinical Practice estimate that up to 30 percent of medical spending is wasted. That's about $700 billion a year.

Cat scan image of human brain
AP
Cat scan image of human brain

Cutler notes those caring for an aging parent see countless healthcare providers, and generally decide for themselves when it’s time to take their parent to the doctor and which medicines they require.

“A vast majority of people are acting as their own doctor because there’s no one whose job it is to help you make the right decisions,” says Cutler.

“In other industries like finance, which is also complex, you have investment advisors to help you decide where you should invest, what mix of stocks and bonds you need and make sure the money goes to the right place.” As the industry evolves, he says, primary care doctors will increasingly act as a concierge, coordinating patient care among specialists and other providers to improve efficiency.

Insurance companies may also reorganize to help patients more efficiently meet their healthcare needs. A more immediate solution to the health care cost crisis, however, is to begin rewarding physicians for keeping patients well, says Callahan. At present, no one in the supply chain has an incentive to control their own costs.

Patients demand cutting edge (and frequently unnecessary) drugs and procedures, and physicians are reimbursed based on how much they prescribe. Likewise, medical device manufacturers and drug companies have a vested stake in keeping costs inflated.

Many suggest reimbursement models that pay doctors a fixed rate per patient would help contain costs, forcing doctors to consider cost-benefit before ordering tests or performing procedures.

U.S. Vs. Europe

True universal health care, which is managed by a central office, like that which exists in Europe, is another possible solution, says Callahan.

“Europe spends a lot less money and gets better outcomes,” he says, acknowledging those countries are also experiencing health care challenges amid the global economic meltdown.

“They set price controls on drugs and they have private insurance in many countries that control their premiums.” Sweden and Denmark, two of the best examples, he says, also control the availability of technology so “you don’t see a situation where you have five MRI machines in a single town” and they put caps on how much hospitals can spend.

Yet, Pierre Dupont, visiting professor of surgery at Harvard Medical School and pediatric cardiac bioengineering chair at Children’s Hospital in Boston, says public policy initiatives that stifle medical progress would do more harm than good.

“Our standard of care has increased tremendously as a result of technology,” says Dupont, who invents medical technology. “It’s an area where bureaucratic oversight has a lot of potential danger in terms of creating a one-size fits all solution. You need to foster innovation, not stifle it, but at the same time provide the financial incentives so the customers [patients] realize the costs of what they’re demanding. It’s a matter of getting all the incentives right.”

Significant savings could be garnered, he believes, by simply increasing the percentage of health care costs borne by patients—and it need not be punitive to be effective.

“Patients demand tests all the time, but if you charge even $100 for those scans [via co-pays], you’re not delivering bank breaking charges for services rendered, but it’s something that makes them think, ‘Huh, do I really want to do that or don’t I?” says Dupont.

While everyone agrees that controlling health care costs is a matter of national priority, getting there form here will require tough choices.

Ultimately, says Callahan, the public will have to alter its perception of medical progress, and decide where to draw the line on coverage for medical technology.

“It’s one of the great social crises of our time,” says Callahan.

“We need to have a very serious discussion in this country about the whole idea of medical progress and reassess what healthcare is all about. Our goal should be to have all young people become old people, but not have old people become indefinitely older,” he says.