My daughter recently went to see a dermatologist, who prescribed a drug called clindamycin phosphate one percent foam. It is a generic drug but the version prescribed cost $484 for a small 50 gram tube. Different versions of the same drug cost far less and different drugs that are just as effective also cost far less. But nobody had any incentive to provide a less expensive option. The prescribing doctor likely didn’t know what the various options cost. Neither the pharmacist who filled the prescription nor the pharmacy benefit manager who paid the pharmacy seems to have had much incentive to suggest a less expensive option. And to be honest, I didn’t think too much about the cost because I have health insurance.

But when everyone behaves this way, healthcare costs grow. A large part of our healthcare costs are either paid for by somebody else (like employers) or paid for up front. When you have a situation where you are essentially giving health services away, it causes utilization to be higher. Recent studies of the Medicare program have found that when Medicare enrollees buy supplemental insurance (that covers everything Medicare doesn’t), utilization goes up by as much as 40 percent.

I’ve been working in the healthcare industry for over 25 years. I work with government agencies and am very aware of healthcare policy. Most cost-saving efforts are focused on incenting people to use less healthcare. There are a number of ways we do that — through things like managed care and accountable care — that effectively keep you from getting care you don’t need. Deductibles, copays, and coinsurance are all designed to incent people to use less care. And those things work to lower what we spend, up to a point.

What I don’t see much of is a focus on actually reducing the cost of providing a particular service. This is different than using less of a service. It’s about finding ways to do high-cost high-frequency services more efficiently. For example, in 2007, Medicare enrollees consumed $1.3 billion dollars on some 40,000 coronary artery bypass operations at a cost of $33,000 each. Can that procedure be done more efficiently? 

I originally come from the manufacturing sector. There, I saw lots of effort aimed at reducing the cost of producing products. Those efforts were driven by competition, profit motives, and even the need to react more quickly to the marketplace. In healthcare, there are individuals and companies working in hospitals to make them more efficient, but I believe it’s a very small effort (relative to manufacturing) because hospitals are not incentivized to focus on that very much. As long as payers are paying enough for them to cover their costs they are happy.

In many cases, services become less expensive by moving them out of hospitals into clinics. One example is joint replacement. Outpatient centers are doing hip and knee surgeries (arthroplasties) where the patient is walking six hours later. There is no expensive hospital stay and no skilled nursing facility recovery time. Improvements in surgical techniques, anesthesia, and pain control have facilitated this remarkable change. Of course, expensive hospitals are now facing a financial hurdle in that they have less business to cover their fixed expenses, so infrastructure adjustment is needed before total healthcare costs are actually reduced. Reimbursement rates must also be reduced before we actually see any healthcare savings.  All the same, I would like to see many more improvements like this.

To make these kinds of effort happen, there needs to be more incentive for healthcare providers to reduce the cost of services—and this will only occur through healthcare policy change. It might be through more structured competition on price, or through lower reimbursement to providers.

The bottom line: there is little or no intersection between the people that care about costs and the people who control costs. So while most healthcare policy makers are trying to incent people to use less healthcare, I would like to see more healthcare policy thinking devoted to incenting the healthcare industry (providers) to become more efficient. Or, to put it more simply, healthcare policies need to make the people that provide the care actually care about what it costs.