Reducing Healthcare Costs

Patients can take a few steps now that may significantly lower their healthcare costs. At the same time, basic changes to the healthcare industry are needed to address the excessive healthcare costs. One major problem is that the healthcare industry does not provide the type of information that would allow informed consumers and competition. Another problem is that the financial incentives for doctors and other medical providers are not aligned with the best interests of patients. These and other topics are discussed below.

Ask Questions and Participate in Decisions

One significant step in reducing healthcare costs is for patients to become much more active in questioning doctors and in expressing their values and goals for healthcare. Patients can ask about the need for and alternatives to any expensive or invasive test or treatment, and actively participate in the decisions about the tradeoffs with different options.

Some doctors will treat such questions as an insulting or irritating challenge to their authority. When that happens, it is definitely time to find a different doctor.

Seeking a second opinion can also be very valuable when decisions are being made about significantly expensive and invasive procedures or treatments.

If patients frequently ask about costs, doctors will eventually respond and become more knowledgeable about costs.

Make Information Available for Informed Consumers

As discussed in another article on this website, it is very difficult at present to obtain the type of information about doctors and other healthcare providers that would allow wise decisions and effective competition. The benefits of competition cannot be obtained unless this type of information is available. It appears that it will take government action to make this information available. Natural market forces have not been remotely successful in forcing medical providers to make this information available.

One option is for government agencies to publish comparative information. The Medicare Hospital Compare website ( provides information about the quality and success of care at different hospitals. This type of public information provides a very strong incentive for hospitals to improve their quality of care to be more competitive. This is an important first step that needs to be expanded to other types of healthcare providers.

Another option is to have a regulatory requirement that doctors and other healthcare providers make information about their fees and services available. Unfortunately, this is complicated because the actual cost that gets paid depends on the agreements with the insurance companies and can be different for each different insurance plan. The healthcare providers know the amount that will be submitted to the insurance company, but typically do not know the amount that will be actually paid. Adequate information for a consumer in a competitive environment must include information from both the medical providers and insurance companies.

Reasonable competition in healthcare can be considered to be established when a person can go to a website similar to Google Shopping and quickly see the fees for different services for the various healthcare providers, such as doctors, dentists, and diagnostic laboratories. With this type of competition, the providers with good success rates would probably want to publicize that information, which in turn would force competitors to improve their practices and publish the results.

Medical care could be divided into three separate steps: (a) initial examination and diagnosis, (b) more complex diagnostic procedures (if needed), and (c) treatment. Patients could shop around for the best value for steps (b) and (c). This would be particularly valuable for conditions requiring expensive, complex procedures or treatment.

More Appropriate Financial Incentives

As described in the previous article, doctors and other healthcare providers usually have strong financial incentives to maximize the number of office visits, tests, procedures, and treatments, whether or not these are in the best interests of the patients. This fee-for-service approach to healthcare is the result of the natural marketplace and produces high and rapidly increasing costs. Competition has not been effective at controlling costs with fee-for-service healthcare.

One alternative that has been tried is managed care that pays doctors and other medical providers a fixed amount for a patient with a particular condition and lets the providers spend the money as needed. However, this gives a financial incentive to provide poor care and has a reputation for producing lower quality care. Here too, the financial incentives for medical providers are not aligned with the best interests of the patients.

Another alternative that is now widely discussed is pay-per-performance, which attempts to pay medical providers according to the quality of the healthcare they provide. Quality can be based on factors such as the medical outcome of treatment, the absence of unwarranted side effects, and patient satisfaction ratings. Pay-per-performance attempts to more carefully align the financial incentives with the best interest of patients. However, if quality or outcome measures do not consider costs, pay-per-performance could also result in excessive costs.

Pay-per-performance is a relatively new approach and standard methods for practical application have not yet been established. The Affordable Care Act (Obamacare), has various provisions to promote the pay-per-performance approach to healthcare. This approach appears to be moving in the right direction, but it is also a new approach and effective methods remain to be developed. Some pitfalls will likely be discovered the hard way.

One fundamental and controversial question is the relative roles of market forces and competition versus government regulation. From my perspective, it is now an established fact that a completely free market approach to healthcare is not viable. One alternative is to have the government manage healthcare. Another alternative is a blended system that has regulated markets for healthcare. Pay-per-performance is a regulated market system.

Given my experience with healthcare (and I’ve also worked in government), I think a regulated market based on pay-per-performance or similar ideas is a good strategy to try now. We know that fee-for-service and managed care have non-optimal financial incentives that tend to produce undesired results.

I think it is possible that making information available for comparing options as described earlier would be more effective for maintaining the quality and costs of healthcare over the long-term than these financial incentives. The financial incentives may be needed in the short-term to establish conditions for meaningful competition.

More Medical Providers and More Efficient Use of Providers

The current healthcare system is highly inefficient because doctors with extensive, expensive medical training perform many routine medical services that could be done by someone with less training. Nurse Practitioners and Physician Assistants can provide a much greater role in healthcare and at substantially lower cost. The cases that require the additional training can be referred to medical doctors.

This more efficient matching of medical training with patient needs would significantly alter the healthcare industry and could bring the increased efficiencies of competition to primary care. In addition, I have found that Nurse Practitioners and Physician Assistants are often better than medical doctors at communicating with patients. The Affordable Care Act has provisions to increase the number and role of Nurse Practitioners and Physician Assistants.

At some point, it is virtually inevitable that computers will have a central role in diagnosing medical problems and prescribing treatment. The amount of relevant information is already more than any one person can be expected to remember. A person with much less training than a medical doctor currently receives will be guided by a computer to carry out the tests to make the diagnosis. Medical doctors will be more specialized focusing on treatment. My expectation is that the use of computers will provide much more effective, consistent, and economical healthcare. Making diagnosis a separate step from treatment and done by a different person will also open the door to more appropriate competition in healthcare.

Different Healthcare Goals for Different People

The healthcare system needs to recognize that the most costly “best” treatment is not optimal for every patient. Different people have different values. For example, some people want Do Not Resuscitate orders and other do not want them. In general, some people want the most costly best treatment in all situations, and others do not. These different values result in different costs for healthcare. The healthcare system needs to develop ways to respond to the wishes of patients and implement varying levels of costs and risks, and have individual patients pay accordingly.

Legal mechanisms need to be developed for these different levels of care that respect a person’s wishes while also protecting doctors from lawsuits—similar to Do Not Resuscitate orders. Patients will probably need to take the initiative in developing these alternative approaches to medical care because the medical industry has little incentive to change from current practices that maximize profits.


[Version of 11/14/2016]