Does the United States pay its doctors and hospitals too much?

To get control of health care spending, much effort of late has been directed at eliminating marginal, ineffective, wasteful and sometimes harmful care. Initiatives like the American College of Physicians' High Value, Cost-Conscious Care campaign and the American Board of Internal Medicine's Choosing Wisely campaign focus on developing clinical guidelines on diagnostic tests and medical interventions that are not justified or have little value to patients. But for all the good these efforts may do—potentially yielding better outcomes for patients and lower costs to the system—they do not address the single biggest reason why health care costs are going up, which is that we pay too much for medical care.

According to the National Institute for Health Care Management Foundation, “Rising prices per unit of service have played a larger role than rising utilization rates as a determinant of recent expenditure growth.” Its July 2011 data brief, “Understanding U.S. Health Care Spending,” points to the following evidence:

• A PriceWaterhouseCoopers analysis of employer-sponsored health premium data collected through the Kaiser Family Foundation determined that 75% of the 6.1% growth in premiums between 2006 and 2007 was due to price factors, and 25% was attributable to changes in utilization.
• The 2011 Milliman Medical Index attributes most of the growth in family medical spending between 2010 and 2011 to increases in average unit price in the inpatient, outpatient, physician, and pharmacy sectors.
• An analysis by UnitedHealth Group of its own claims experience for 2009 indicates that unit price pressures, especially for inpatient and outpatient services and some widely prescribed drugs, explained two-thirds of its increased medical costs.

The foundation also found that the U.S. pays its doctors and hospitals more than other industrialized countries. Private payers in the U.S. will pay an orthopedic surgeon almost $4,000 to replace a patient's hip, while the same procedure in Australia costs $1,943. A hip replacement in Canada, which pays for all care out of public dollars, costs $652. And it is not just highly specialized care that is paid more. Private insurance pays U.S. primary care physicians four times more for an office visit than French physicians receive.

In a different brief, the foundation also pointed out that American physicians, and especially non-primary care specialists, accordingly have higher annual incomes: Orthopedic surgeons in the U.S. make an average of $442,450 compared to $324,138 in the United Kingdom and $187,609 in Australia. Primary care physicians in the U.S. make $186,000, compared to $92,000 in Australia, $125,000 in Canada, $131,000 in Germany, and $159,000 in the U.K. Hospital prices in the United States are 64% higher than the average for other industrialized countries.

With health care spending rising at a rate that the country can't afford, it should be no surprise that policymakers are beginning to look at ways to bring down the “excessive” prices paid to physicians, hospitals, and drug and medical device manufacturers. Last year, the Medicare Payment Advisory Commission, which advises Congress on payment policies, recommended that Medicare freeze payments to primary care physicians for the rest of the decade and reduce payments to non-primary care specialists by 5.9%, followed by a seven-year freeze in their payments.

Cutting prices is very difficult to achieve, however. Members of Congress don't like to cut prices because they don't want to be blamed if patients can't find a specialist or if a hospital closes its doors, not to mention the fact that they get much of their campaign contributions from the health care industry.

But the health care industry won't be able to rely forever on the protection of friendly politicians. At some point soon, rising health care costs will cause the public debt to explode and place the economy in a stranglehold. If the choice at that time is between cutting health care benefits to hundreds of millions of individual Americans or reducing how much physicians, hospitals and manufacturers are paid, do you have any doubt which one Congress would choose?

Rather than sticking their collective heads in the sand and pretending that excessive prices aren't an issue, it would be better for physicians if their membership organizations examined ways to make pricing more rational and defensible. The following ideas are among those that have been examined by the American College of Physicians in recent policy papers:

• basing payments on evidence of the effectiveness of different interventions, so that treatments of higher clinical value to patients are paid more than those of lesser value,
• making improvements in the process for determining relative values and ultimately payments to physicians under Medicare,
• exempting physicians from cuts if they have demonstrated effectiveness in delivering good outcomes efficiently,
• introducing more competition into the pricing for medical devices, such as by a competitive bidding process, and
• allowing the federal government to negotiate Medicare drug prices.

Across-the-board price cuts are bad policy, because they treat the most effective and efficient clinician the same as the least efficient ones. But the United States likely won't be able to get a handle on rising and unsustainable increases in health care costs without addressing the excessive prices it pays for some health care services.

Wouldn't it be better for physicians to lead a discussion on how to rationalize pricing based on value to patients, rather than leave it to politicians to decide at a future moment of panic, when health care spending triggers a grave fiscal crisis?