Why Market Approaches to Health Care
Are Failing So Badly--A Second Opinion

'U.S. health care expenditures rose 6.7% in 2006, the government recently reported. According to the Centers for Medicare and Medicaid Services, total health care expenditures exceeded $2.1 trillion, or more than $7,000 for every American man, woman, and child. Medicare costs jumped a record 18.7%, driven by the new privatized drug benefit. Total health care spending, now amounting to 16% of the gross domestic product, is projected to reach 20% in just seven years. Relentless medical inflation has been attributed to many factors--the aging population, the proliferation of new technologies, poor diet and lack of exercise, the tendancy of supply (physicians, hospitals, tests, pharmaceuticals, medical devices and novel treatments) to generate its own demand, excessive litigation and defensive medicine, and tax-favored insurance coverage. Here is a second opinion. Changing demographics and medical technology pose a cost challenge for every nation's system, but ours is the outlier. The extreme failure of the United States to contain medical costs results primarily from our unique, pervasive commercialization. The dominance of for-profit insurance and pharmaceutical companies, a new wave of investor-owned specialty hospitals, and profit-maximizing behavior even by nonprofit players raise costs and distort resource allocation. Profits, billing, marketing and the gratuitous costs of private bureaucracies siphon off $400 billion to $500 billion of the $2.1 trillion spent, but the more serious and less appreciated syndrome is the set of perverse incentives produced by commercial dominance of the system...The private insurance system's main techniques for holding down costs are practicing risk selection, limiting the services covered, constraining payments to providers, and shifting costs to patients. But given the system's fragmentation and perverse incentives, much cost-effective care is squeezed out, resources are increasingly allocated in response to profit opportunities rather than medical need, many attainable efficiencies are not achieved, unnecessary medical care is provided for profit, adminstrative expenses are high, and enormous sums are squandered in efforts to game the system. The result is a blend of overtreatment and undertreatment--and escalating costs. Researchers calculate that between one-fith and one-third of medical outlays do nothing to improve health.'
--from American Prospect co-founder Robert Kuttner's essay in the February 7th issue of the New England Journal of Medicine.