How the US heath industry is getting sick on treatments people don't need

An obvious way we might cut excess medical care is to change the way we pay hospitals and doctors. "Medicine is the only industry where high quality is reimbursed no better than low quality," says David Cutler, a health economist at Harvard. "The reason we do all the wasteful stuff is that we pay for what's done, not what's accomplished."

Although that's clearly the case, figuring out the right incentives for health-care providers is by no means easy. Let's say that Medicare decided to use low-cost regions as a benchmark and told providers in the rest of the country that their compensation would be capped at some level not far above the benchmark. Some doctors in high-cost regions would undoubtedly be encouraged to practice more conservatively but many others would maintain their incomes by either dropping Medicare patients altogether or giving them even more hysterectomies and CT scans they don't need (thus compensating for lower fees by simply performing a greater number of procedures).

Even if policymakers come up with the right financial incentives, restructuring compensation will constitute only one small component of the reform that's needed to turn medicine into an efficient, effective industry. Think of it this way: at 13 to 14 per cent of GDP, health care is the nation's largest single industry, and probably its most complex. Transforming this sprawling behemoth is going to involve a lot more upheaval than, say, the shift that took place in the auto industry when companies adopted the assembly line, or the shake-up that Hollywood and the music industry now face with the advent of Web entertainment.

Step No. 1 toward improving the quality of health care is reducing what the Dartmouth group calls "supply-sensitive" care - the excess procedures, hospital admissions, and doctor visits that are driven by the supply of doctors and hospital resources rather than by need. Organizations such as the American Medical Association and Kaiser Permanente will need to set standards for more conservative practices, and for measuring patient outcomes. Benchmarks are also needed to ensure that doctors deliver more "evidence-based" medicine: procedures and practices whose benefits are proven. Three recent studies, conducted by the Institute of Medicine, the Rand Corporation, and the President's Advisory Commission on Consumer Protection and Quality in the Health Care Industry, report widespread underuse of evidence-based treatment, such as balloon angioplasty to open blocked arteries in heart-attack victims, even among citizens with gold-plated health insurance.

Probably the hardest part of reforming health care will be persuading policymakers and politicians that improving the quality of care can also save money. The Medical Quality Improvement Act, introduced last July by Vermont Senator James Jeffords, is a step in the right direction. It would call on several medical centers around the country to model high-quality medicine that also reins in costs.

But evidence already exists that improving quality can hold down costs. Franklin Health, a company based in Upper Saddle River, New Jersey, manages so-called "complex cases" for private insurers. Complex cases are the sickest of the sick, patients with multiple or terminal illnesses, who are also the most costly to treat. They typically make up only one or two per cent of the average patient population while accounting for 30 per cent of costs. Franklin employs a battalion of nurses, who make home visits and spend hours on the phone, sometimes every day, to help patients control pain and other symptoms and stay out of the hospital. For this low-tech but intensive service the company charges insurers an average of $6,000 to $8,000 per patient - but it saves them $14,000 to $18,000 per patient in medical bills.

How much money is at stake? If spending in high-cost regions could somehow be brought in line with spending in low-cost regions, Medicare alone could save on the order of 29 per cent, or $59 billion a year - enough to keep the Medicare system afloat for an additional ten years, or to fund a generous prescription-drug benefit for seniors. And there's no reason to believe that doctors and hospitals behave any differently toward their non-Medicare patients. That means the system as a whole is wasting about $400 billion a year - more than enough to cover the needs of the 41 million uninsured citizens.

The last attempt at reforming the U.S. health-care system failed in large measure because of fears of rationing. Reform was viewed as an effort to cut costs, not to improve health, and voters believed, rightly or wrongly, that they would end up being denied the benefits of modern medicine. Future efforts at reform are going to have to persuade Americans and their doctors that sometimes less care is better.