In 1605, Miguel de Cervantes gave us Don Quixote, one of the most enduring characters in literary history. A hopeless romantic intent on proving that chivalry was alive and well, Quixote set off on his unsteady steed, Rocinante, in the hopes of defending the honor of Dulcinea, who appears to have existed only in his imagination. Accompanied by his portly squire, Sancho Panza, Cervantes’ protagonist conjures a world in his mind that is largely unanchored. Mistaking a cluster of spinning windmills for the flailing arms of evil giants, Quixote launches into an attack that is memorialized in the English idiom “tilting at windmills,” a reference to medieval jousting. The impact of this legendary character extends to the commonly used adjective “quixotic,” which means idealistic, impractical and – most descriptive – ineffectual, which itself means not producing the desired effect. There may be no better way to describe public and private sector policies aimed at reducing health care spending over the last 40 years than quixotic.
The fact that health care spending in the U.S. is completely out of sync with the rest of the western world is well-documented. In 2013, we spent roughly double the per capita expenditures in Germany, Canada and France. Equally incontrovertible, though far less widely acknowledged, is the underlying reason that spending here is so much higher. Virtually every initiative targeting health care spending – both public and private – over the last 40 years has focused on reducing utilization … on convincing or coercing providers to produce fewer units of service. For nearly half a century, we have been sure that the path to lower spending was through reduced utilization. We were certain … and we were wrong.
Germany uses more than two and a half times as many inpatient days of hospital confinement per capita as we do, but they only spend 60% as much. Canada uses the same number of hospital days, but spends only half of what we spend. The difference in spending arises from the prices that we pay ourselves; U.S. prices per day of confinement are two to four times the rates paid in other OECD countries.
Per capita expenditures for outpatient facility services average $1,000 per year in Germany, Canada and France, compared with more than $3,450 in the U.S. If our utilization was 50% higher than that of other countries, avoidable use rates would only explain a small fraction of the excess spending. The largest driver in the differential is price.
The U.S. has a lower ratio of physicians per 100,000 population than any European country, yet our per capita expenditures for physician services are nearly double the median for other OECD peers. Whether inpatient hospital, outpatient facility or physician spending, the variable around which the U.S. is an outlier is not utilization, it’s price.
I was in graduate school just a few years after the passage of the HMO Act of 1973. Health maintenance organizations were touted as the saviors of affordable care. Capitation – specifically the payment of the insurer’s hospital budget to physicians – was sure to solve the dilemma of excess utilization. Utilization review nurses were armed with criteria-based guidelines developed by actuaries and a telephone script borrowed from Nancy Reagan – “just say no.” HMOs gave way to PPOs, independent physician associations were replaced by IDNs, shared risk became shared savings and the Affordable Care Act introduced the latest in an endless line of three-letter acronyms … the ACO. Forty years of the same song sung in various keys and always with the goal of reducing utilization.
We use only 40% of Germany’s inpatient days per capita. With an aging population, how much lower do we think our utilization will go? We spend three and a half times what our OECD peers spend on outpatient facilities. Is it reasonable to expect our use rates to fall by 70%? And is it sustainable to have prices within the same metropolitan market range from $500 to $4,000 for the same diagnostic imaging study?
In 1965, “Man of La Mancha,” based on the timeless story of Don Quixote, won five Tony Awards on Broadway, including best musical. One of the signature songs of that show is “The Impossible Dream.” Unless we come to grips with the fact that price, not utilization, is at the root of our spending problem – and reconcile with the realization that 40 years of certainty has turned out to be wrong, no windmills will be safe.
About the author and the Vizient Research Institute™. As executive director of the Vizient Research Institute, Tom Robertson and his team have conducted strategic research on clinical enterprise challenges for 20 years. The groundbreaking work at the Vizient Research Institute drives exceptional member value using a systematic, integrated approach. The investigations quickly uncover practical, tested results that lead to measurable improvement in clinical and economic performance.