Whether or not efforts to expand ac­cess to medical care succeed, healthcare spending as a share of GDP will continue to rise unless cost-cutting measures are put in place. One reason costs continue to rise is that many aspects of our medical system have “perverse incentives”—economic in­centives to provide less-than-optimal medi­cal care.

Fee-for-service
The current paradigm of paying physi­cians is “fee-for-service,” where a medical provider is reimbursed for their services rendered. This system gives providers in­centives to provide unneeded care (“over­use”) or deprive a patient of care he or she needs (“underuse”). For example, accord­ing to the US Department of Health and Human Services, the cost of treating bac­terial infections contracted while patients stayed in hospitals can add as much as $20 billion to healthcare spending each year.

Some hospitals have embarked on am­bitious and costly campaigns to reduce the rate of bacterial infection in their patients, disinfecting floors and testing new patients with nasal swabs. These hospitals end up losing money: although treating acquired bacterial infections helps their bottom line, instituting good hygiene is not compen­sated by the government. Fee-for-service also compels doctors to order unnecessary tests and unnecessary surgeries, especially if they have a financial stake in the imaging center or the surgery center.

The government is considering shifting this paradigm to a “pay-for-performance” metric that rewards providers for keeping their patients well and for having favorable outcomes to certain procedures. Also, insti­tutions that pay their doctors a salary rather than provide a commission for the medical services they order generally have fewer perverse incentives.

Comparative effectiveness research
The stimulus package provided $1.1 billion to test the effectiveness of some medical procedures. Congress asked the Institute of Medicine (IOM), part of the National Academies, to recommending medical treatments to research. Among the 100 research projects IOM selected are investigations into the best treatments for prostate cancer and the most effective im­aging methods for detecting breast cancer during mammograms. However, Congress did not require Medicare to fund only the established best practices based on the re­sults of the research. Requiring doctors to follow the findings of the effectiveness re­search would likely help drive down medi­cal spending.

Preventive care
Health insurers have a perverse incen­tive to scrimp on providing preventive care. If an insurance company invests in preventive care for its policyholders, those savings are passed on to competitors if the policyholder ever switches to a new insur­ance company. Insurance companies often do not cover the costs of testing strips for diabetics’ blood glucose readers or cover the cost of an early-stage diabetic’s counsel­ing with a nutritionist. However, insurance companies do cover surgery when a patient with unchecked diabetes requires amputa­tion on his gangrenous foot. Congressional legislation could mandate that insurance companies provide some forms of preven­tive care, helping drive down costs.

Administrative costs
As Reuters reported in May of this year, roughly 25% of all revenues collected by insurance companies go towards admin­istrative overheads. Insurance companies have large investigative teams of employees that search for pre-existing conditions that make a patient less enticing to cover. Some insurance companies practice “rescission,” where they revoke a policyholder’s cover­age because of a failure to declare pre-ex­isting conditions in their original applica­tion for the policy.

The grounds for rescission are often quite flimsy: in one particularly egregious case, a policyholder was dropped because she had failed to disclose that she saw a psychologist once after breaking up with a boyfriend. Insurance companies often wait until a policyholder files substantial medi­cal claims before combing their record for grounds to revoke their policy. Legislation eliminating these predatory policies, or leg­islation requiring coverage for anyone, re­gardless of pre-existing conditions, would help drive down these costs.

Primary-care physicians vs. specialists
Primary-care doctors are the most cost-effective type of doctor. They help iden­tify disease before it worsens and are well equipped to prevent their patients from contracting diseases. A good geriatrician (a doctor specializing in the elderly) might help reduce the number of medicines a pa­tient consumes to help prevent falls. An internal medicine doctor might counsel an overweight patient in proper nutrition be­fore the patient contracts diabetes.

However, primary-care doctors are paid markedly less than their specialist coun­terparts. The long hours that many prima­ry-care doctors pull have turned off new medical school graduates from the field: a study in the Journal of the American Medi­cal Association found that only 2 percent of graduates plan to enter general internal medicine, a 40 percent decrease from 1985 figures. More primary-care doctors than ever are retiring, just as fewer graduates emerge to fill their ranks.

Conclusion: A note of optimism
The Dartmouth Health Atlas has found that different regions of the United States provided similar-quality medical care for very different costs ($5,200 in some regions compared to $14,000 in the most expensive regions). Even without radical change, there is tremendous potential to drive down costs. Reducing costs even further is cer­tainly achievable. Getting there will require substantial legislative reforms.