Diagnosing the High Cost of Health Care: How Spending on Unnecessary Treatments, Administrative Waste, and Overpriced Drugs Inflates the Cost of Health Care in California

2008-07-09

Executive Summary

California spends billions of health care dollars on unnecessary treatments and services, administrative waste, and overpriced, sometimes harmful, medications. By finding ways to cut waste in its health care system and to reform an incentive structure that encourages overspending, California can reduce the burden that health care costs impose on our economy.

The high cost of health care in California imposes an increasing burden on households, businesses, government, and the state’s economy.

• In 2004, insurance companies, the state and federal government, individuals and other payers spent $167 billion on health care in California, equal to 11 percent of the state’s gross domestic product.

• Health care spending rose 56 percent from 2000 to 2006, versus an inflation rate of just 18 percent and wage increases of 20 percent, forcing employers to choose between reducing benefits, limiting wage increases, and hiring fewer employees.

Researchers, pundits and health care professionals have suggested possible causes for rising health care costs, from the cost of caring for an aging population to the price of malpractice insurance. These factors play a very small role in the cost of health care, and addressing them would not change the price of care. Nor would imposing “cost containment” or rationing of care be an acceptable solution. Rather, it requires reducing health care spending that fails to improve patient health.

This report focuses on three major categories of unproductive spending: overuse of invasive treatments, intensive services, and hospitalization; excessive administrative costs; and prescription drug marketing that encourages the use of more drugs, more expensive drugs, and drugs with a less established record of safety.

A major cause of high health care costs is treatment that does not result in better outcomes for patients. No matter who pays for this care, it does not help patients live better or longer, and thereby drives up health care costs without providing any corresponding benefit. In some parts of the state, patients are, on average, hospitalized too often and for too long, leading to unnecessary tests, procedures and specialist visits.

• Unnecessary care does not result in better health: patients who live in regions with above-average spending are not any healthier as a result and are less satisfied with the care they receive.

• Ineffective, costly care is driven, in part, by Medicare and private insurance payment policies that encourage doctors to order more tests and procedures. The greater availability of specialists and hospital beds also leads doctors to send patients to specialists or to the hospital more frequently than provides any value for patient health.  

Per-patient spending on health care in some regions of California is far higher than elsewhere, but this extra spending leads to no improvement in patient health or satisfaction. Eliminating these excess costs just for Medicare patients would save at least $700 million annually. Improving care for other patients with chronic illness would yield much greater savings.

• Medicare patients in their last two years of life who lived in Los Angeles from 1999 to 2003 had 2.3 times more visits to specialists than did comparable patients in Sacramento. They also spent twice as many days in intensive care and were hospitalized 1.6 times longer. Discrepancies exist in other areas of the state as well.

• Despite the fact that Los Angeles has a greater number of specialists and hospital beds per capita than most regions of the state, from 1999 to 2003, hospitals in Los AngelesSacramento were less likely to provide proper care for patients suffering from heart disease, congestive heart failure, or pneumonia than were hospitals in the far less expensive region. Los Angeles-region hospitals also ranked lower on patient satisfaction surveys.

• Were Medicare patients in Los Angeles and other high-spending regions to receive the same amount of care as patients in Sacramento, health care spending would decline by at least $700 million annually. Eliminating unnecessary care would cut spending despite the higher cost per unit of care in Los Angeles.

Many administrative costs within California’s health care system are the result of efforts to shift costs from one payer to another—from the insurance company to a hospital, or from a physician to a patient. This paperwork increases total costs without improving outcomes for patients.

• Complex billing and insurance requirements raise administrative costs. For example, the process by which physicians have to demonstrate to insurance companies and others that they are capable of providing high-quality care is time intensive and duplicative. On average, physicians submit 17 credentialing applications annually to insurance companies, hospitals, and other health care facilities, and completing each application requires nearly 90 minutes of staff time.

• Researchers have estimated that billing and insurance-related activities consume at least 5 percent of health care dollars in California, or more than $9 billion annually. This estimate excludes costs related to oversight and management that directly improve patient care.  

Californians spend millions of dollars annually on prescription drugs that are no better than cheaper alternatives or that may have dangerous or unrecognized side-effects. Heavy marketing to consumers and to physicians by pharmaceutical companies is a key reason that these lucrative, if not always beneficial drugs, get prescribed.

• Drug advertising generally encourages the use of newer, more expensive medications, even if they are no more effective than existing ones, because new drugs remain under patent protection and produce strong profits for pharmaceutical companies. The side effects of new drugs are less well understood and therefore patients who take them are exposed to greater risk.

• For example, Merck heavily promoted Vioxx as a superior alternative to other anti-inflammatory medications, despite a lack of evidence that it was more effective. Roughly 25 million Americans took Vioxx, bringing huge profits to Merck, before it was discovered that Vioxx causes heart attacks and may have killed 50,000 Americans. 

Pharmaceutical companies increased prescription drug advertising by more than 80 percent from 1997 to 2005. Their marketing includes direct-to-consumer ads and myriad outreach efforts to physicians, such as meeting with doctors and paying for meals. The pharmaceutical industry spends an estimated $2.5 billion on prescription drug advertising in California each year. In response, physicians prescribe and consumers purchase billions of dollars of potentially risky and unnecessary medicine each year.

• After seeing direct-to-consumer ads, patients ask their physicians for prescriptions, and doctors comply. An estimated 2 to 7 percent of consumers who see drug ads eventually get a prescription for the advertised drug.

• Direct marketing to physicians, which often includes misleading information, boosts the total number of prescriptions and increases the number of prescriptions for newer and more expensive drugs that are no better than old ones.

Any health care reform plan must address the high cost of health care in order to ensure that health care is affordable. Some of these reforms could happen fairly quickly; others will take years. But it is critical that we reform the elements of our health care system that promote spending that does not deliver results. Besides limiting costs, these changes will help, not hinder, doctors as they work to deliver the best care to their patients. The billions of wasted dollars currently spent by California’s health care system suggest that we can bring down the cost of health care, while at the same time ensuring high-quality care and allowing more Californians to have access to care.