The Healthcare Industry Maximizes Costs

Doctors, hospitals, diagnostic laboratories, and drug companies work together in ways that maximize healthcare costs. A few examples are given below.

After I had been working at a medical clinic for a couple of years and had begun to understand the mindset of medical doctors, I went to a neurology clinic to obtain advice and treatment for headaches (as discussed in other articles). The doctor listened to my symptoms and then began ordering a series of tests. When he instructed me to schedule a spinal tap, I said “I’m not doing a spinal tap.” He was relatively young and clearly surprised that a patient would refuse his order. He asked why I would not do the spinal tap and I replied that it was painful, invasive, and unnecessary. He commented “we do spinal taps here like drinking water.” He then conceded that with my symptoms it was virtually certain that I did not have the condition that the spinal tap would check and that it would be safe to not do it.

While working in a large medical center, I saw memos from upper management notifying all departments and doctors that revenues for certain diagnostic equipment, such as the MRI, had been down recently and needed to increase.  Such memos typically commented that “of course patient care is our top priority,” but then stated that the use of the equipment needed to increase.

In recent years, I had a condition with my eye that the doctor said was best treated with a surgical procedure. He performed the surgery on me. When the condition reoccurred, he performed the surgical procedure again. When the condition reoccurred again I pressed the doctor further for alternative treatments and he said that there was an injection treatment that is considered not as effective as the surgery, but is significantly less costly and less invasive. I opted for the injection at that point and it resolved the problem for me. If I would have understood all the options initially, I would have started with the injection and done the surgery only if the injection failed.

A few years ago I needed a medication and found that the prescription my doctor gave me would cost about $200. When I returned to the doctor and asked if there was a generic drug I could use, he said there was one that was nearly as good and gave me a prescription that cost $17. He had previously not mentioned this option.

 A friend recently was surprised to find that a prescription her doctor ordered cost about $150 for each of three bottles. She bought only the first bottle. I advised her to ask the doctor if there was a generic drug or other less expensive alternative. She said “the doctor would surely have told me if there was a less expensive option wouldn’t he?” I replied “absolutely not.” When she asked the doctor about it, he gave her a free bottle of the medication and told her she could reduce the dose so that she would need only two bottles rather than three.

As these cases illustrate, the healthcare industry seems to be in an autopilot mode that maximizes costs. It is essential to understand why this happens.

Why are Costs Maximized?

Several factors contribute to this maximization of costs. One significant factor is that making health insurance companies middlemen on virtually all healthcare transactions significantly increases healthcare costs. This important topic is discussed in a later article. Various other factors that contribute to the maximization of costs are described below.

Maximizing Costs Maximizes Incomes

The fact that maximizing the costs of healthcare also maximizes incomes for health professionals is clearly a major factor. Incomes increase as the number of office visits, tests, diagnostic procedures, and treatments increase. Doctors, hospitals, diagnostic labs, and drug companies benefit from the current lack of cost controls. They have worked to obtain this condition and have strong incentives and powerful lobbying to oppose any meaningful changes to the system.

Best Medical Care without Regard for Costs

The medical industry in the U.S. prides itself on providing the “best” medical care. Most doctors, clinics, and hospitals aspire to that goal and it is a major topic of healthcare marketing.

However, this goal also implies that the costs and the tradeoffs between costs and benefits are not considered. That can be seen in the examples given above. A drug that costs $200 will be prescribed without mentioning the fact that it is only slightly better than an alternative that costs $17. The “best” treatment is ordered with no consideration of costs. The doctors typically make the decisions without discussing the tradeoffs with the patients.

Of course, the “best” diagnostic procedures and treatments also maximize the income for the medical industry as well as the costs for patients. When costs are discussed with patients, it is usually in context of what insurance companies will cover and is detached from any meaningful consideration of how the patient views and values the costs and benefits in a particular situation.

At the same time, in life and death situations and other serious medical conditions, people typically want the “best” medical care and do not want to be constrained by costs. This provides justification for focusing on only the best, most costly care.

Lack of Knowledge of Costs

Doctors may not know the actual costs of the diagnostic procedures and treatments that they order. A doctor cannot reasonably know about the details for all the options for insurance coverage and for different providers of procedures and treatments. In general, the current medical industry has no good mechanism for patients or doctors to compare costs and make cost-effective decisions.

Lack of Enforcement of Medical Crimes and Patient Abuses

When I managed the patient-billing computer system at a medical clinic, I attended a meeting with the doctors to discuss some billing issues. Most of the doctors at the meeting were not interested in the process or details of billing and were not paying attention. However, one doctor was very interested in patient billing. He said that at another clinic he worked with he would see patients together in discussion groups and then bill the insurance companies and Medicare as if he had seen the patients individually. This resulted in a higher reimbursement. He proposed that the clinic I worked with start similar practices. To my surprise, no one seemed to be paying attention or having concerns about his proposal.

 When I was asked if there would be any problems implementing this with the new billing system, I said “If you do this and do not realize what you are doing, it is gross incompetence. If you do this and realize what you are doing it is overt fraud.” The doctor aggressively argued that I lacked creativity and a clinic needed to do this type of “creative billing” to be successful. After further discussion and my continued refusal to implement fraud with the billing system, his proposal was dropped. My impression was that the other doctors were not interested in the details of billing and would have gone along with the proposal if I had not objected.

At a later meeting, this same doctor proposed that the clinic routinely perform a new diagnostic procedure that was being developed by a company he was involved with. Some of the nurses thought the procedure was unwise for routine use because it caused unnecessary exposure to x-rays, which should be avoided. One of the nurses asked the doctor why the patients would submit to this and he said in full seriousness “I’m their doctor and they will do whatever I tell them because they are afraid they are going to die.”

While most doctors make decisions that tend to maximize costs, this doctor took it to a level of fraud and potential patient abuse. My experience has been that only a minority of doctors have his lack of ethics, but those doctors have a disproportionate effect on the costs of medical care.

Unfortunately, the healthcare industry does not effectively identify and deal with such doctors. This doctor was generally considered to be a prominent and successful physician. Other doctors and the clinic administrators do not want to expose such behavior because it reflects poorly on the clinic and on medical practice in general. There is negligible internal policing within the medical profession. Standard practice is to look the other way in such situations. In this type of environment, the lack of ethics tends to increase rather than decrease over time.

Competition is Not Effective in Healthcare

Several factors cause competition in healthcare to not operate as in other businesses. These factors include:

·        Competition to provide the “best” care without regard for cost drives costs up rather than down.

·        Other than managed care environments, doctors have financial incentives to maximize the number of office visits, tests, procedures, and treatments. There is no financial benefit in not doing that.

·        The high cost of an initial visit to a doctor prevents reasonable comparisons and shopping around for healthcare. In addition, information about the costs for the various services provided by the doctors is usually not available to potential patients for comparison.

·        Healthcare is generally a provider’s market and they have virtually no incentive to provide information that allows meaningful competition and informed decisions by patients.

·        Patients are often in a very vulnerable, worried state and are not in a position for effective negotiations about options.

·        The role of insurance companies as middlemen in healthcare makes the healthcare industry complicated and difficult to understand, and inhibits competition.

·        The high cost and effort to become a practicing doctor combined with the increasing shortage of doctors are the exact opposite of the conditions needed to promote competition.

·        The high cost of developing new treatments and diagnostic procedures inhibits competition.

·        Certain competitive practices would not be ethical for healthcare. Withholding knowledge about a new treatment in order to obtain a competitive advantage would not be ethical. The ethical requirement to share information with potential competitors is contrary to the basic nature of true competition.

·        The concern about the image of their profession that prevents doctors from exposing incompetence and fraud also limits competition.

·        Situations that may be emergencies are not conducive to competition and shopping around. A patient may not know if a situation requires urgent action.


I had a recent experience that demonstrates the lack of competitive practices in healthcare. I contacted several dentist offices and asked for a price list for their services for people without dental insurance so I could compare costs. None of them provided the price lists. If there was meaningful competition, these price lists would be available. They apparently realized that in the healthcare market they benefit from not being competitive.

If there was meaningful competition, something equivalent to Google Shopping would be available for healthcare.

Lawsuits and Defensive Medicine

The claim that lawsuits significantly increase the cost of healthcare is often heard. In addition to the high cost of legal insurance for doctors and other healthcare providers, the threat of lawsuits is said to promote unnecessary diagnostic tests and treatments as “defensive medicine.”

Although the threat of lawsuits increases the cost of healthcare, there are also significant benefits for patients. In the absence of other mechanisms for assuring ethical behavior, the threat of lawsuits is an important factor for dealing with incompetence and for limiting the effects of the strong financial incentives for excess and patient abuse in healthcare. Of course, the healthcare industry is lobbying hard to reduce the ability of patients to file lawsuits. However, my impression is that financial incentives and other factors drive the high healthcare costs more than the threat of lawsuits.

It is very difficult to find unbiased information on the actual effects of lawsuits in the healthcare industry. The relevant economic analyses are complicated and both sides, the lawyers and healthcare providers, have strong incentives to present biased information. If the healthcare providers prevail, I expect that lower quality healthcare and probably higher costs would result from placing limits on lawsuits without developing other methods for dealing with incompetence and with the strong financial incentives for excess.


[Version of 3/19/2013]