The Cost of Health Care in America: System of Dilemmas

System of Dilemmas

Heart surgeon Mehmet Oz was set to go. On the operating table lay a 50-year-old man, dying from heart failure. He was anesthetized, out cold, and his chest was painted with sterile Betadine. In minutes, Dr. Oz and his team would implant a mechanical pump to keep him alive until a donor heart could be found.

All that remained was for Dr. Oz to scrub his hands. As he soaped up just outside the OR, he thought about the brief chat he'd had with the patient earlier that morning. The man, a mid-level executive with an agricultural company, was clearly terrified, knowing that he could die.

Just then someone called out. There was an urgent phone call for the surgeon. With suds dripping from his hands, Dr. Oz walked back into the OR and a nurse held the phone to his ear.

It was someone from the patient's health insurance company. His policy covered heart transplants, but not the cost of the mechanical pump. At the end of the operation, someone was going to owe a small fortune -- and the insurers were insisting that it would not be them.

Dr. Oz's mind raced. What was he supposed to do, sacrifice this man's life because no one knew who'd pay for the surgery? A quick follow-up call to his department chairman confirmed his own instinct: Ethical decisions trump financial ones. He would proceed with the operation. They'd figure out who'd pay later.

In the end, the surgery was a success, but the hospital got stuck with most of the costs, which ultimately ran into the hundreds of thousands. If it hadn't picked up the tab, the patient would be drowning in debt.

Millions of other insured middle-class Americans aren't nearly so lucky. Between 2000 and 2003, seven in ten adults who were driven into debt by medical expenses had insurance at the time. In 2001, 42.5 million people in insured households paid 10% or more of the family's net income in medical expenses. They are America's underinsured, caught in a Catch-22: too well-off to qualify for government programs that support the poor, while not nearly affluent enough to pay their health bills without wrecking the family finances. And there's no rescue in sight, for the system is broken at every link along the chain -- from insurers who protect profits by raising premiums and restricting coverage; to doctors who can't keep up with the skyrocketing costs of malpractice insurance as well as the burdensome paperwork that some carriers require; to companies whose soaring medical costs force them to push more and more of the expense onto their employees.

At the end of this chain is the hard-hit consumer. Premiums for family coverage in employer-sponsored health insurance plans have increased by 73 percent since 2000. Currently, they're rising three times faster than the average paycheck and more than twice the rate of inflation. The bills keep adding up.

Lynette's Story

They certainly did for Lynette Swartz. After marrying her 46-year-old husband, Rob, and settling into their Home in Freeman, Missouri, Lynette became concerned that he hadn't had a routine checkup in seven years. Because he played softball with guys half his age, Lynette talked Rob into scheduling a physical.

His doctor ordered a chest X-ray, which showed a growth on his lung. The diagnosis came days later: lung cancer.

Rob resolved to fight the illness aggressively and began chemotherapy that spring of 2003. Even with health insurance, the family quickly fell into debt. Each time Rob ordered medication, or had chemo, an X-ray, or even a biopsy, Lynette was hit with another co-pay. She kept their financial troubles from him by hiding the bills.

Things grew far worse when tests revealed that Rob's cancer had spread into his brain. Soon he shut down his printing Business, leaving Lynette as the family's sole source of income. "At the time I was so thankful that we still had health insurance," says Lynette, who covered both of them through her $30,000-a-year administrative job at a J.C. Penney department store. "I guess I was naive."

As costs mounted, Rob's doctor suggested a procedure called gamma knife surgery, which no neurosurgeon in their network performed. It would cost well over $15,000. Was she supposed to choose between her family's solvency and her husband's life? Of course, she okayed the procedure, and eventually talked the insurer into covering it.

Rob held on longer than expected, first one year, then two. But his medical expenses grew steadily. If Rob's parents had not helped out, they would have lost their Home.

He finally succumbed to the cancer a year ago. Now Lynette makes monthly payments to providers and to a collection agency that amount to one-third of her paycheck. "If Rob had had appendicitis or a broken leg, we would have been adequately insured," Lynette says. "But for something catastrophic like cancer, we weren't. I don't think anybody is."

It's not just catastrophic illness that can send consumers deep into debt. In a newly released Reader's Digest poll, two-thirds of adults 21 and older said they feel they "can't afford to be sick." Among those identified as middle class and "underinsured," one in three said that health care is "completely" or "mostly" unaffordable. About half say they've put off or refused medical treatment for a serious condition, or delayed taking or renewing prescription drugs; 46% have postponed routine annual physicals; and 27% have avoided surgery of some sort. In our poll, nearly a quarter of the underinsured say they currently have overdue medical bills, and close to half have used credit cards to meet their health costs. Nearly the same number have withdrawn money from their savings to settle their accounts.

That's not so surprising when you consider this: The Bureau of Labor Statistics calculates that America's health care costs have risen at twice the rate of inflation since 1970. Total costs amount to about $2 trillion annually, with almost half of that government spending. What's behind this enormous price tag? Here are the biggest components:

Hospital care: $571 billion

Doctors' services: $400 billion

Prescription drugs: $189 billion

Nursing-Home care: $115 billion

Private insurance: $96 billion

Dental services: $82 billion

Home health care: $43 billion

Driven partly by these increases, insurance premiums have risen at an even faster annual clip (9% in 2005) than health care overall. Consumers are hard hit by these escalating prices, but they are certainly not the only ones feeling the impact.

Insurer's Dilemma

Few people are pitying the nation's health insurance companies, whose profits have risen by double digits since 2000 (in 2004 alone, they shot up 32%). But the picture hasn't been entirely bright.

From 1997 to 1999, the health insurance industry posted losses, as the cost of developing new plans grew more quickly than premiums. And now insurers contend they're caught between steep cost increases in areas like new medical technologies and pharmaceuticals, and employers who insist they can't pay another cent for insurance. These pressures are part of the reason profit margins are stuck between 3% and 4%, less than half that of insurers in other industries. Like everyone else, health insurers are looking for a new Business model.

In the 1990s they thought they had found the answer -- the health maintenance organization, or HMO. "We provided first dollar coverage with an emphasis on prevention all the way to catastrophic," says Karen Ignani, president of America's health insurance Plans. But HMOs restricted access to certain doctors, medical tests, and hospitals, so they quickly met with loud disapproval. The plans responded by expanding networks and, predictably, costs shot right back up.

"The system in its current form really is unsustainable," argues Carol McCall, vice president at Humana, one of the nation's largest health insurance providers." Employers will say 'Look, we can't pay for this anymore. It's eating into our bottom line.' They set the parameters of choice." It is employers, increasingly, who are asking for plans that feature more cost-sharing and higher deductibles.

Employer's Dilemma

Don't blame us, say those running both large and small Businesses. They contend they must limit health care choices precisely because insurance rates are out of control.

For ten years, Richard Czarniecki has run a small metal-cutting Business out of Kentwood, Michigan. He says profits have declined while insurance prices have shot up "every single year." So three years ago, Czarniecki decided to replace his 100% coverage plan with 90%, asking his 12 employees to pick up 10%. "We want people on the floor to understand that costs do go up every year, and feel a little bit of the pain we feel."

In 1998, when one worker fell ill with kidney disease, costs jumped 32% across the board. "Every time a single person gets sick, your rates go through the roof," Czarniecki says.

Think big Business has it better? Take a drive from Czarniecki's factory across the state to Detroit, where GM employs some 150,000 people. Last year GM shelled out $5.4 billion in health care costs, up $200 million from the previous year. Those expenses account for about $1,500 of the cost of each vehicle produced in the United States. Sharon Baldwin, a communications officer for GM, says that health care costs, including extremely generous benefits for retirees, make the company less competitive. So GM plans job cuts affecting thousands of workers, and reductions in salaried employees' benefits.

Physician's Dilemma

Ask a doctor today about the satisfaction of practicing Medicine and you're likely to get a litany of grievances -- most of it about insurance.

For many, the burden of malpractice liability insurance tops the list. In 2004, the average jury award in a medical- malpractice suit reached $600,000, and awards exceeding $1,000,000 have become common. This "jackpot justice" slams doctors who are in high-risk specialties, like obstetrics and orthopedics, with exorbitant insurance rates -- in some cases as high as $200,000 a year. In the last few years, around 150 physicians in West Virginia have closed their practices in the state, and Philadelphia has lost some 450 doctors. The AMA says malpractice pressures have put 21 states -- among them, Illinois, Florida, Ohio, Pennsylvania and New York -- in danger of serious doctor shortages.

Then there are bureaucratic hassles. "Insurers deny claims for so many reasons. They need a treatment code num- ber, or the documentation wasn't right, or they didn't give prior authorization," says Dr. Jonathan Walker, a psychiatrist in Bethesda, Maryland. "It's a huge waste of time for doctors, and it's time subtracted from patient care." Dr. Walker has come up with a solution that more and more of his colleagues are embracing: He simply doesn't take insurance.

"The uninsured have always been a problem," says Bob Crittenden, a primary-care doctor at the University of Washington. "But the underinsured are a faster growing problem by far." Crittenden says he's been forced to compromise care -- from mundane to serious lapses. "We put off things; we don't order tests," he says. "It's terrible."

So doctors face an uncomfortable choice: Either turn away patients with outstanding bills, or see their income slide. Dr. Donald Sewell, a retired gynecologist in the Washington, D.C., area, saw his practice make no profit at all in 2001 and 2002, his final two years. He had to bill patients directly for their share of the cost of each visit, and often he'd never see the money. "You'd send out bills and get maybe 20 percent back," he says. "It almost wasn't worth the cost of postage."

Administrative costs also rise with complex cost-sharing insurance plans. (By the time he retired, Sewell needed seven administrative assistants for his one-man practice.) So some doctors now refuse to see patients with outstanding balances or ask for the co-pays upfront. As a result, a new phrase has entered the medical vernacular: "co-pay or go away."

Consumer's Dilemma

As consumers continue to fight for coverage while picking up more and more of the tab, they do the next logical thing -- delay. By the time they're compelled to seek treatment, they're far more expensive to treat.

Michelle Maclin discovered this the hard way. When her son Timothy, then 6, was diagnosed with severe asthma, her doctor produced a stack of prescriptions needed to keep him breathing. When the pharmacist came back with the price of her first co-pay, Maclin says, she just stared. "$348," she recalls. "I just sat there. $348." Then came the frequent doctor visits, at $25 a pop. Soon after, Timothy's 8-year-old brother, David, began having severe allergic reactions to everything from grass to pets to food. She was now buying Medicines, tests, and doctor visits for two.

Their condition, she says, was terrifying; in a split second, Timothy might be struggling for air, and David would become swollen like a balloon. Just as quickly, it seemed, Maclin had blown through her savings and found herself thousands in debt. Soon she was compromising on their care. Timothy required weekly allergy shots, which she discontinued because she couldn't make the payments. And if David had an allergic reaction in the middle of the night, she thought twice before taking him to the emergency room, the $200 co-pay looming large in her mind.

Both her boys are doing okay, but Maclin carries guilt for even considering her bank account before their well-being. "You start to feel like a bad mother," she says. are there answers?

Are There Answers?

Solution #1: Reduce Unnecessary Spending
Make no mistake, consumers will be paying more into the system. But they may have more control, too -- over costs, providers, and even treatments.

What divides experts is whether "control" would lead to wiser use of medical resources, or whether consumers would make agonizing (and perhaps uninformed) decisions about which treatments they really need and can afford. Both outcomes are possible. Advocates of patient control agree that consumers are usually clueless about the real costs of health care.

"Health care is the only industry where a consumer can walk into a doctor's office, not know how much it costs, and walk out without paying," says Beth Bierbower, vice president of product information at Humana. A 2005 survey by Great-West, a health care and financial-services company, found that consumers can guess the price of a Honda Accord within $300 and estimate the tab for a coast-to-coast round-trip ticket within $37, but they're off by $8,100 for a four-day hospital stay. Still, if they did know the typical cost of a procedure -- say, $3,300 for a colonoscopy -- would they be qualified to give it a green light or turn it down?

One high-profile idea, a key initiative of President Bush, is the health savings account (HSA). Available since 2004, these accounts work like an IRA. Almost anyone can set up an HSA, usually through a bank or credit union, as long as they link it to a high- deductible health plan. Each year you can invest dollars roughly equal to the deductible of your plan, but the money is yours, even if you change jobs. And you can spend it tax-free if you're paying for medical services.

The HSA plan assumes that people will use a portion to pay for routine care, keep the rest invested to build up a health care nest egg, and use the high-deductible plan for catastrophic care. Their premiums, meanwhile, will be less costly.

Young, healthy people could benefit from investment returns on the HSA money over the long term.

For the poor, the elderly and the sick, the math looks very different. Frequent doctor visits could quickly deplete the account, taking away the key investment benefit. Worse still, people might forego important tests and treatments rather than dip into their accounts.

For more information on these accounts, go to treasury.gov.

Solution #2: Stop Wasting Time and Money
All agree that the system is dangerously outdated and inefficient. "Paper kills," declares former Speaker of the House Newt Gingrich, now a vocal advocate for health care reform. While society has jumped into the Internet age, health care is using 19th-century systems, Gingrich says. Medical information is still kept on handwritten charts and in bulging files, a situation that encourages missed diagnoses, incorrect drug dosages, miscommunication between specialists, and frustration for patients. Gingrich estimates that electronic prescriptions could save over $25 billion a year and tens of thousands of lives now lost to medical errors. He and an unlikely ally, Senator Hillary Clinton, both argue for electronic patient records as well, not only for quick and error-free transmission between caregivers, but so individuals can access their own health files.

Software companies are beginning to realize that consumers need tools that help them organize their health records as well as their finances in order to track -- and, if need be, contest -- their health care expenses. software giant Intuit has created Medical Expense Manager, a program that helps patients manage their bills and payments, as well as take full advantage of tax benefits.

Solution #3: Focus on Prevention
Ron Bachman, a senior fellow at the Center for Health Transformation in Washington, D.C., says patients with chronic illnesses should join disease-management programs, treating illness early and often with a view toward long-term cost reductions. Since 20% of health care consumers eat up 80% of expenditures, reducing demand among this minority could reap big savings.

Lynette Swartz is already on board. Her husband, Rob, was a lifelong smoker. Lynette joined a smoking-cessation program at work. Her employer hopes that encouraging a healthy lifestyle will push down costs over time.

Finding ways to make our health care affordable means nothing short of re-engineering the system from the ground up. This can only happen if all the players -- insurers, employers, doctors and patients -- abandon the blame game and look for solutions. "We're all in this together," says Humana's Carol McCall. "There is no 'them.' Everybody in this ecosystem has a role to play in bringing costs down."